Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 63-79)


31 JANUARY 2006

  Q60  Mr Love: There are always a lot of accusations that the IMF is ideological in their approach in the sense that they talk continuously about free markets and global trade and opening countries, including Third World developing countries, to trade. Do you think that is too much of an emphasis? Are they getting it wrong there? Should they be much more pragmatic in trying to gain the objectives that are set by the international community in their Millennium Development Goals?

  Ms McDonald: We take a pragmatic approach to the pros and cons of liberalization within developing countries, but we really believe that those choices should be based within developing countries themselves. The IMF has a very pro-liberalization stance, but because of its power in developing countries through its lending and its advice, the fact that they have to take the advice to get the money from other people, they are basically locked in to following those policies when countries like the UK can take that advice, pro-liberalization or not, and say, "We're not going to do that". We would also argue that these decisions should be taken through the form that is appropriate for this, which is what the WTO has been set up for. To an extent we would say the IMF is moving out of an area that it should not be working in by promoting liberalization so aggressively.

  Q61  Mr Love: In the previous session with the experts we had a clear difference of views about what restructuring of the IMF would be appropriate, ranging from the fairly radical, which would be bringing a fairly substantial voice for the Third World into the internal workings of the IMF, to those that were much more conservative in the sense of recognising the power structures that already exist there. If you are to maintain the commitment of the developed nations and particularly the US, how much reform will take place at the IMF?

  Ms Greenhill: The question really is not necessarily about the developed countries but I think it is more about the developing countries. You have seen some of the big Latin American borrowers, particularly middle income countries, starting to want to repay back their loans to the IMF. Increasingly, we are going to get a situation where borrower countries are saying we do not want to take the IMF's advice on these terms, we do not want to take their money or we are very concerned about the kind of policies that we are having to take. I think all of us on this panel would agree that there needs to be very, very significant governance reform to the IMF, but in terms of where that is going to come from, I would see increasingly over time it might be that poor countries are going to be standing up more to the IMF and being more assertive and that means that the IMF will have to change both in terms of its governance and in terms of its practice.

  Q62  Angela Eagle: You are not against conditionality per se presumably because conditionality, if it is not the Washington Consensus conditionality on liberalization, might be about ensuring that the money that is lent is not completely misused. Is this an issue about what kind of conditionality is appropriate rather than about conditionality itself?

  Ms Greenhill: I would say that that is exactly right. I think you do need to have some conditions to ensure that money is well spent. We are not advocating writing blank cheques to the Mobutus and Mugabes of this world. Our really big concern is around the policy of conditionality. We are concerned partly about the mix of policies that has been promoted in the Washington Consensus but we are also concerned about the way that policy conditions undermine democracy and undermine local accountability in countries. Even if they are the right policies that the IMF is demanding from the countries, we think it should be up to the country, the local people, the parliaments, etcetera to make those decisions. We think there should be some very minimal conditions, mainly around fiduciary accountability, rather than this very intrusive raft of policy conditions that we see at the moment.

  Q63  Angela Eagle: So it is liberalization that is the problem?

  Ms Greenhill: From an Action Aid perspective, even with the right policies, we do not think that it is up to outsiders to impose those policies. We have two criticisms. Firstly, we do not like the policies that are there at the moment, but, secondly, even if there were the better policies from our perspective, we would still be concerned about the impact of that on accountability within the country.

  Dr Tembo: World Vision have conducted research on conditionality itself in relation to poverty reduction strategies where we think it would be more useful to go for strengthening domestic accountability which will have very positive knock-on effects on issues of fiduciary accountability and that is something which donors are concerned about. If we take conditionality in the way the IMF would put it, it would look at systems but it would not be able to handle political relations and views in the way the countries handle it. It is the domestic systems that have those powers to be able to change how things work at a more social or political level which conditionality cannot do. The way to do it is by strengthening domestic capacity and making sure the conditionality that you have strengthens those processes. Tony Illick of the Overseas Development Institute also alluded to the fact that conditionalities only work when they tilt the balance towards what citizens want. Unless citizens want something and they are well aware of what that conditionality in that country is supposed to deliver, it cannot deliver any change.

  Q64  Angela Eagle: There is another issue that I asked the experts about which was off-shoring and the holding of now US$11.5 trillion of assets in tax shelters, which obviously impacts on some of the poorest countries if there is the corrupt moving of assets outside of the country in that way. When the IMF was originally set up John Maynard Keynes, it was so that bank secrecy should be dissolved and there should be much more transparency about where assets are kept. Do you think that that would impact, if there was a change there, on this problem of off-shoring colossal amounts of monies and the consequent loss of tax revenue which apparently could achieve the Millennium Education Goals with the financing on a tax revenue from the money that currently escapes national taxation in this way?

  Ms McDonald: Christian Aid has been looking at this area of taxation and offshore accounting and we definitely think that this is a vital thing that needs to be prevented, but we also think it is important to look at how that can happen and that is partly due to the taxation regimes that the countries are using themselves.

  Q65  Angela Eagle: Bank secrecy?

  Ms McDonald: We have not worked necessarily on bank secrecy. One of the things that we have been looking for is an international taxation authority which may be a body that could look into those things.

  Q66  Mr Todd: I just wanted to explore the conditionality point a little further. This is money loaned and so a principle of the conditionality is that there should be mechanisms to give a very high chance that it will be repaid and that includes a variety of mechanisms which will improve the sustainability of the economy. Surely you accept that someone loaning money has some right to say they want to make sure their money comes back?

  Ms McDonald: I think it depends on what the starting point is.

  Q67  Mr Todd: You have used the word donor quite often in this discussion. There is a distinction between a loan and aid. I recognise they are tied together very often, but the principle is that this money is loaned and then repaid.

  Ms McDonald: In theory, the IMF's poverty reduction growth facility is a facility to bring poverty reduction and growth. Some of the policies and income that a country might need to do might be very, very long-term policies that might take a time to start really bringing in the benefits. Having a loan with a relatively short turnaround to get it back in might encourage a recipient country to adopt different policies. Is that what the loan is for? Is it to make sure that the short-term problems are resolved and the money comes back in or is it to get long-term poverty reduction?

  Ms Greenhill: Increasingly now what we are seeing with the IMF is that they are not lending large volumes of money, particularly to the low income countries, and that is because IMF monies is really quite expensive. IMF loans do not count as aid because they are so expensive. Their role is increasingly about that seal of approval which will allow the bilateral donors to come in and very often that is in the form of grants. The role that they have, the singling function, is not necessarily about their own money, it is about telling donors this country has the right mix of policies. You can then come in and bring your grant financing.

  Q68  Mr Todd: So your dispute is less with the conditionality attached to a loan, which you are saying is relatively trivial, but more with the economic advice that it gives and the message that gives to others who may be wishing either to make other forms of loans or donations to a country, that this is a green light so to do?

  Ms Greenhill: They go together. You have your PRGF programme which will involve you borrowing and that is generally a small amount of money, but the fact that you are borrowing that money acts as a signal, it means you are deemed eligible for budget support, for HIPC debt relief. One of our key concerns is the lack of choice that countries have. If I want to borrow money for a mortgage, for example, I might be able to go to a range of different banks and look at their conditions and see which mortgage I want to take, whereas a poor country really has no choice but to go to the IMF if it wants access from other donors, often from private sector finance as well. That is one of our key concerns around this issue.

  Q69  Peter Viggers: I would like to ask about the IMF's medium-term strategic review which was produced towards the end of last year and the extent to which you are able to comment on this either direct to the IMF or through the UK government. Broadly the strategy took account of the fact that the institution was originally created to support international monetary stability and the financing of temporary balance of payments problems and then it looked at the different aspects which have come to bear on this strategy. To what extent did you study this and comment on it to the IMF or to the UK government?

  Ms McDonald: Is that question about our opinions on the strategic review or what we have done about the strategic review?

  Q70  Peter Viggers: What did you do in response to the strategic review? Did you consider it and did you put forward representations of your own and to whom?

  Ms McDonald: We have not engaged in the strategic review apart from reading it and commenting on it within the NGO community when we received it.

  Ms Greenhill: I do know that there have been some concerns from our organisations and from others that we work with that the process has been quite opaque. There have not really been opportunities for us or particularly for our counterparts in Southern countries to engage with the review, to make submissions or to make our voices heard. It seems to have been quite an untransparent process and not a very participatory one.

  Dr Tembo: We still have comments on the IMF review. We do not have a process in which we can get those comments through so that the IMF includes them at the next annual meeting.

  Q71  Peter Viggers: So you are really saying that it was not particularly consumer friendly in the sense that it sought responses from bodies like your own?

  Dr Tembo: Yes.

  Q72  Lorely Burt: I would like to ask each one of you about your views on the current UK policy towards the IMF. If there was one thing that you would like the UK government to push for in its policies towards the IMF, what would it be?

  Ms McDonald: I think it would have to be taking a stand at a country level, in the multi-donor budget support framework, in how that integrates with the IMF, particularly because the UK on the one hand has got this new position on conditionality where they are saying conditions should not be used to force countries to adopt certain economic policies and on the other hand the PRGF is very central to the multi-donor budget support systems that have been spearheaded by the UK government. I think it would be helpful to have not only some form of clarity but also to see the UK government in certain countries supporting the development and use of macroeconomic frameworks by groups other than the IMF.

  Dr Tembo: One issue that I would wish the government to take a stand on with regard to the review is the power that the IMF has through the instruments that they use. Even though they have embraced the issue of diversity that different countries would need, it is very much supply led rather than demand led. If you take the Policy Support Instrument that has just been introduced, for example, and if you read the clause in the UK document, it is saying that this would have an effect on what donors do with those countries. That is a position that leans towards the IMF continuing with this role with too much influence on countries. If there is an issue, it has to do with helping the IMF to stand back from putting too much weight on lower income countries, to allow for domestic processes, including that part of society to come up.

  Ms Greenhill: I would agree with Olivia, the UK needs to show leadership following its position on conditionality, which is something that we very much welcomed, but it needs to be working with other donors and critiquing the IMF's approach internationally but also at a national level and particularly the IMF's approach to these fiscal ceilings and limits on public expenditure.

  Q73  Mr Newmark: The UK government, in its report on relations with the IMF, strongly endorses the Independent Evaluation Office. Is the Independent Evaluation Office a great success? Do you think it is sufficiently well resourced? Do you have any idea of where it should be turning its attention to next?

  Ms McDonald: The IEO has come out with some very good reviews that have been very critical of what happens in the IMF. For instance, there was one last year on the PRSP process which really condemned the IMF, so in those terms it is a success. It does seem to have quite a lot of resource in terms of capable staff to do this and investment to do field cases. The questions are: what resources does it have; what is invested in it in terms of making sure its recommendations are followed up, and what teeth does it have?

  Ms Greenhill: I would agree with that point, that we have seen some very good analysis, but it is not clear what the responsibility of the IMF is then to take forward any of those recommendations. How do they feed back whether or not they have adopted the recommendations? If not, why not? At the moment it seems a bit like the IEO produces reports and all the NGOs say "What a great report" and then nothing happens.

  Dr Tembo: For instance, on the IMF lack of participation on the Poverty Reduction and Growth Facility, failing to link it properly with the poverty reduction strategy papers, it was very articulate and it recommended what the IMF should do, but we have not seen any change. When the PRS review was done last year by the Bank and funded together those views were not accommodated adequately. There is no mechanism for seeing that.

  Q74  Mr Newmark: Does the International Monetary and Financial Committee, of which Gordon Brown is currently the Chairman, provide enough oversight of the IMF's activities?

  Ms McDonald: As far as I understand it, the IMFC meets once or twice a year and it largely seems to be an opportunity for people to give general policy statements. So Gordon Brown will make a policy statement and that will largely guide the UK Executive Director in what he then does on a day-to-day basis on the Executive Board. I am not clear how something that meets so infrequently and is more an opportunity to state our policy preferences can be an oversight body.

  Q75  Mr Newmark: My sense is it does give some direction on prioritizing and so on. It is more than simply a static reporting of something that has happened. I think they do give a little bit of guidance. It been said that the voting arrangements of the IMF reflect the distribution of world wealth. On the other hand, there is a good reason why those who supply the money for the IMF to lend should have a larger say in how it is run. How do you feel the balance between lender and borrower should be struck, and how can the competing needs of both borrowers and lenders be adequately addressed?

  Ms McDonald: It is not necessarily correct that the current voting structure represents world wealth when, if I remember correctly, Canada and China have the same voting share but China has a GDP that is twice the size of Canada. As it stands, there are inequalities within it and this is what is putting pressure on the next quota negotiations. There is pressure coming from middle income countries who are saying, "Our GDP is so strong, why do we not have a share of the power that recognises that?" That is not necessarily true anyway. What we would like is that, when these discussions are happening, we should look beyond a reform package that bases itself just on economic wealth and looks at something much more egalitarian, as is befitting of such a multilateral institution.

  Q76  Mr Newmark: I think the concept has to do with a shareholder structure, ie he who is the largest shareholder, he who is lending the most money should be having a larger say than others who do not give as much. Clearly someone who is a borrower should be having some say in what is going on. I know you have been trying to address this as well. How does one adequately balance those two tensions there?

  Ms McDonald: We would ideally want one member, one vote because rather than being seen as a shareholder institution, it should be seen as a part of global governance and that should be based on much more egalitarian principles. However, we recognise that that might not be something that happens. There are ways of readjusting the voting formula within the institution to get a much better balance of power, to have a 50:50 say with lower income countries having a much greater input.

  Ms Greenhill: We should not see the IMF as a bank or like a private sector institution where the shareholders have voting rights depending on their shareholdings, we need to see it as part of the international organisation and so we should have a similar system to the one we have in the WTO, which is one member, one vote, or the UN. Neither of those institutions are perfect in the way they represent the views of poor countries, but in terms of the way we think about the IMF, that is the direction that we should be going in bearing in mind that some of the issues that it deals with are genuinely about the organisation global financial stability, international economic integration and so on.

  Q77  Mr Newmark: Are there concerns that the skills mix of the IMF staff is not sufficiently well aligned with the work they undertake, especially in development issues? Have your institutions any particular experience of this, and what do you feel the IMF is doing to address this? It is those who have direct experience with poverty issues versus those coming in as pure economists in trying to deal with that and there is that tension between having those with economics expertise and those with real life experience in poverty economics.

  Dr Tembo: There is an issue there. That is why in our submission we mentioned that within the capacity development-type of approach other than capacity building, where the IMF wants to develop the skills, should be in working with developing countries. The IMF also has to learn about the contextual issues in which it is placed. It is not as straightforward as the conclusions appear because there are underlying issues there. For instance, we pointed to the issue of the Poverty Social Impact Analysis which shows that when implemented there is a whole set of changes in favour of poor people which, by looking at it through an economic lens only, you could not achieve. I think that is something that needs to be done.

  Q78  Angela Eagle: Are we not in danger of mixing up the World Bank's role with the IMF's role and ending up with one agglomerated international body here? Do you see merit, even if you do not like the Washington Consensus, as many of us do not, in having a body which is about macroeconomic stability and finance over there and then a body such as the World Bank which has different governance in things, which is really much more about development and the social issues? Do you think the system ought to be all mixed up or you ought to try to specialise in the international architecture that we have got even if it has not been perfect so far?

  Ms Greenhill: There is a role for the IMF to be quite focused on macroeconomics as an institution, but in terms of the staff and the skills that they have, I do not think that one can be an economist in isolation. The sort of macroeconomic policy you have is going to have a fundamental impact on social and political dimensions. There is a lot of research showing that the Washington Consensus policies have been very detrimental to women. So you have to be able to think about all of those things and I think that is the real problem with IMF economists, that they see things very much in purely economic terms and they do not have any basis to think more broadly. It is not saying that you should merge the IMF and the World Bank, but you need to be thinking about the very particular training that IMF economists will have.

  Angela Eagle: Perhaps better economic theory to apply rather than the rather narrow theory they do apply!

  Q79  Chairman: We are meeting both the IMF and the World Bank next week. What is the first question we should put to them?

  Ms Greenhill: I would ask them about conditionality. The track record of the Washington Consensus really is not a success.

  Dr Tembo: It would be to do with how they would change their behaviour to embrace the diversity that they have pointed to, which includes development, so they do not have a one-size-fits-all kind of economic approach to development, especially in relation to low income countries.

  Ms McDonald: If after having been able to ask both of those questions, I would probably want to ask a question following up on this IEO issue, which is why, when they come out with critical evaluations and recommendations, they have been so slow to implement them and what is going to change in the future.

  Chairman: Thank you for your time this morning. We will be using that information next week when we go to Washington.

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