Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 40-52)

PROFESSOR MARCUS MILLER, MR DAVID WOODWARD AND PROFESSOR RICHARD PORTES

31 JANUARY 2006

  Q40  Peter Viggers: As the IMF examines its options for broadening its income base and has been looking at its reserves and its goal, what would be the effect of another revaluation of the gold held by the IMF both on its ability to Fund further lending and on its credibility and the managing of its own financial affairs?

  Mr Woodward: For me it seems fairly strange for the IMF still to be holding so much gold now that we have moved away from gold playing a central role in the international financial system. In a sense gold is becoming a bubble asset in much the way same way as the dollar is, or in parallel with the housing crisis. To a great extent it is only worth something because people think it is worth something. We have literally tonnes of gold sitting in central banks around the world, some of it held by the IMF and the main reason for anyone to hold onto it is because they know if they start selling it on a substantial scale the market will collapse because the market will potentially be flooded with gold. It is becoming only worth something because people think it is worth it. So I think there needs to be an exit strategy both for the Fund and for central banks as to how they can translate that gold into assets which will retain their value.

  Professor Miller: Let me respond on something that has not been mentioned, namely capital controls because if capital is part of the problem, what about controlling it directly? I think there is a role for in-flow controls. Letting countries not expose themselves too much to lots of short-term in-flows that may rush out in a crisis if they are converting these into long-term investments I think is something the IMF should contemplate in practice and I would encourage that. Out-flow controls are not so ideologically pure but, nevertheless, in a crisis, as in the case of Korea, one can have out-flow controls as well. My feeling is that, rather than look for another source of money like raising the price of gold, it is more creative finance, it is things like the new arrangements to borrow, it is things like getting creditors to roll-over in a crisis, having sensible capital controls on short-term flows ex ante and regional swaps. It is a whole set of mechanisms that it seems the world is moving into and also promoting efficient ex post negotiations, the debt restructuring negotiations. I think the Argentine ones were quite successful at the end but it took about four years. I feel it is about improving the financial mechanisms rather than suddenly finding a pot of gold.

  Professor Portes: I notice that Marcus did not refer to a new allocation of SDRs. We have got plenty of international liquidity out there. There one great function of gold that is very important. If any of you has ever taken a tour of the Federal Reserve vaults or the Bank of England vaults you will know it gives great pleasure, it is very enjoyable just to look at the stuff. After that, why should the Fund hold any gold at all? There is an agreement among central banks about disposing of their gold holdings. That agreement was reached some years ago and it has been going on steadily since then. They have been selling in such a way as not to disrupt the market excessively. Why should the Fund not be part of that?

  Q41  Lorely Burt: I would like to ask you about your views on current UK and European policy towards the IMF. A Treasury report is produced on the IMF every year. I just wondered what your thoughts were on that report, whether you think that it has changed over the last few years and whether you think that improvements should be made.

  Professor Portes: That is presupposing that one has read all those reports, and I have to say I have not. In preparation for coming here, I did look at the latest one and I did not find it something that I should occupy myself with every year. I think that is my best answer.

  Q42  Lorely Burt: Would anyone like to elucidate further?

  Professor Miller: I think it is an important part of transparency. Before what the Executive Directors did or did not do was a matter of mystery. Now we do have much more transparency. Whether it is a matter of profound interest is another question.

  Q43  Chairman: It was a recommendation of this Committee, Professor Portes. Thank you very much. We would be delighted to invite you along again!

  Mr Woodward: It is a useful contribution to transparency but it is a very, very small step. We have statements being made on our behalf in the Executive Board at every meeting pretty much and we have no idea what is being said. We cannot get hold of those even under the Freedom of Information Act and I think that raises real issues.

  Q44  Lorely Burt: Let us move on to European policy. Professor Portes has already suggested the need for some sort of a joint monetary policy for Europe at the moment and made the point about the number of seats that the different European countries occupy. I just wondered if you would like to elucidate on that a bit more, please.

  Professor Portes: The countries in the eurozone cannot have it both ways. They cannot say the euro is this wonderfully important international currency and then not behave as if it were a single currency with a single monetary policy and a single presence in the international foreign exchange markets and so on and so forth. It is an anachronism to have as we do now, Belgium, the Netherlands, Italy, France and Germany sitting there, it just does not make sense. At some point international pressure plus, one hopes, some seeing of sense inside the euro area will lead to a consolidation there.

  Q45  Mr Newmark: Previous Treasury Select Committees have pushed for greater disclosure on the workings of the IMF. Do you feel that these calls have been heeded at all? What further work can be done to improve this?

  Mr Woodward: As with the Treasury report, I think there have been a few steps in this direction but they have been very, very small steps. I think we need to look at the whole process of transparency for the IMF. I think a major step forward would be, at the very least, the release of the UK Director's statements in the Executive Board and preferably the full minutes of all meetings, unless there is a specific reason for confidentiality.

  Q46  Mr Newmark: I think they are dealing with releasing the board's minutes. It is the Board's transcripts that people are pushing for. Do you think it is worth having the full transcripts released?

  Mr Woodward: Absolutely.

  Q47  Mr Newmark: There is also this huge time-frame of about 10 years. Should that be accelerated?

  Mr Woodward: The minutes do not say very much. I worked in the British Director's office 17 years ago now. Normally the Executive Director goes into the board meeting with a fully written verbatim note which he reads out. He may make manuscript changes on the way to the meeting, but that is something that exists on a piece of paper. The World Development Movement tried to get access to that through the Freedom of Information Act and it was denied on the grounds that the Executive Director is an official of the IMF rather than being a UK public servant, even though when I was in Washington my understanding is that he was paid as a British diplomat and not by the IMF, unlike the other IMF Executive Directors. I think there are issues there that need to be looked into.

  Q48  Mr Newmark: Given the thirteenth review of IMF quotas is currently upon us, what reforms of the IMF governance structure would you like to see made? I know Professor Portes has touched on one or two of these.

  Mr Woodward: In a sense there are two questions. One is what would we like to see and the second is what might we possibly get out of this process?

  Q49  Mr Newmark: Or what would the US agree to as opposed to what other people ideally want.

  Mr Woodward: Exactly. We have a situation where the US and the US alone has a veto on all the major policy decisions of the IMF. At the moment we have an institution responsible for international financial stability. The biggest potential financial crisis is a collapse of the dollar. The IMF is not in a position to do anything about that because the US has a vested interest and has a veto. That raises fundamental issues. More generally, the weighted voting system of the IMF, coupled with the shift in its role since 1944, means that the votes that each country has in the IMF are inversely proportional to the impact the IMF has on them, so the developed countries are at the top. It really makes very little difference to people in the UK. Since the 1970s what the IMF does impacts purely indirectly. For countries in Africa, in particular, the IMF plays a major role in all of their economic and social policies and yet, for example, Mozambique, with more than 19 million people, has fewer votes than Iceland, which has less than 300,000. I think there is a fundamental problem there which has to be addressed and as long as it is addressed only through discussions within the IMF we cannot resolve it. I think what we need to do 60 years plus on is we need a new Bretton Woods conference to think what we really need in the 21st Century rather than having a governance structure and functions and modus operandi which were established in the 1940s during the colonial era for a fundamentally different world.

  Professor Portes: I would note that the eurozone also has veto powers if you aggregate its quotas. I expect that if it were to be a shift to single representation it, too, would not be willing to give up a blocking vote and perhaps quite rightly. After all, the question is at what point you say that there are too many representatives of the borrowers and debtors on the board of a bank. There is the problem here of saying that those that tend to need borrowing facilities should have tremendous control over the way in which those borrowing facilities are used, especially when it is, for the most part, the taxpayers' funds of the big and rich countries. This is a political reality. One cannot get away from that. Any restructuring of governance will necessarily take that into account. We cannot be unrealistic about it.

  Q50  Mr Newmark: It has been said that the voting arrangements of the IMF reflect the distribution of world wealth. On the other hand, there is a good reason as to why those who give the money—the gold makes the rules effectively—and those who are the borrowers both need a say and there needs to be some reconciliation on the balance between the two. How can the competing needs of both borrowers and lenders be adequately addressed?

  Professor Portes: Negotiations.

  Mr Woodward: By taking the decisions out of the IMF itself into a broad international body on a democratic basis.

  Q51  Mr Newmark: Finally, do you believe that the International Monetary and Financial Committee, of which Gordon Brown is the current Chairman, provides sufficient oversight of the IMF's activities?

  Professor Miller: I think it is a useful strategic body to look at the big issues. I guess it is still in business so let us see what comes.

  Mr Woodward: It certainly provides some oversight, but again I think there are issues about the composition of that body which reflects the composition of the Executive Board.

  Q52  Chairman: Next week we are off to Washington and we will be seeing both the IMF and the World Bank. If we had one question to put to them, what should it be?

  Professor Portes: I would ask, "What are you doing about the current global imbalances? What is your analysis, and how do you propose to get anybody to listen to that analysis and do anything about it?" I am very worried.

  Mr Woodward: I would say, "How can you justify the governance structure which not only gives the weighted voting but also allows the US to appoint the Head of the World Bank?" This was particularly controversial in the case of Paul Wolfowitz and it was far easier to do than for the US administration to appoint John Bolton as UN Ambassador and, similarly, the IMF Managing Director being appointed by the EU.

  Professor Miller: I would ask, "How can you help to make the ex post debt restructuring procedures more efficient than they are now, as in the case of Argentina for example?"

  Chairman: Your evidence has been very valuable. We will certainly be using it next week. Thank you very much for your time.


 
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