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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