Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 161-179)


11 MAY 2006

  Q161 Chairman: Chancellor, good morning to you and your colleagues. We are very grateful for you coming along to speak on this issue of globalisation. Could you introduce yourself and your colleagues for the shorthand writer and then make your opening statement?

Mr Brown: Yes, thank you very much. Jon Cunliffe, who is the head of the macroeconomic and international side of the Treasury, and the Second Permanent Secretary, Tom Scholar, who is our Executive Director on the Board of both the IMF and the World Bank. If I may say so in advance, last month in Washington at the spring meetings we did agree to make 2006 a year of reform for the IMF itself and for the international economy. Faced with the changes that are taking place in the global economy and with protectionist sentiment rising as well as the problem of oil prices, we resolved to make the IMF more fit-for-purpose and more able to address the challenges that are quite different from those of the 1940s when the IMF was created. We agreed that the IMF should focus more on crisis prevention as well as on crisis resolution, and we agreed also that there should be a new focus on surveillance. The International Monetary and Finance Committee set out a new framework for surveillance and, therefore, for the future of the role of the IMF. The IMF should set an annual remit for its work on surveillance; it should identify the risk to the global economy and ask the Fund to report on them and the individual or collective policy actions necessary to address the challenges ahead. That would be what the IMFC would do at its meetings. Multilateral surveillance would be strengthened. The IMF should not only now assess risk to individual countries but also focus on the spill-over effects and the linkages between individual countries' policies and the global economy. Member States should reaffirm the commitments on which IMF surveillance is based and this should include that there be surveillance of monetary, fiscal and exchange rate policy. There should be a strengthening of the independence and the transparency of surveillance work and of the role of the Independent Evaluation Office, and we have put quite specific proposals about the independence of the surveillance work from the other activities of the Fund. We also agree that, to reflect changing times, a country's voice, votes and quotas should reflect the changing international economic weight of these countries in the global economy. The IMF's effectiveness and credibility should be safeguarded and its governance further enhanced to ensure a fair voice and representation for all its members. Fundamental changes in the Fund's governance, therefore, needs to be addressed and we must respond to changes in the structure of global growth and allow increasing involvement in the decision-making process of emerging and developing countries, who are the most under represented today. In Singapore, when we meet in September at the annual meetings, we will now make concrete decisions on how to tackle this, and so the annual meeting in September, which this discussion prefigures today, will be indeed a reform summit both for the IMF and for the structure of economic management in the international economy. Thank you, Chairman.

  Q162  Chairman: Thank you, Chancellor. In your foreword to the Treasury's annual report and its dealings with the IMF in 2005, you called for the IMF to become independent of governments in a similar manner to the Bank of England. How do you see this working in practice and what benefit will greater independence bring to the IMF? Do you mean this solely in relation to surveillance or greater aspects?

  Mr Brown: I think a lot of this goes back to the original structure of the International Monetary Fund. When it was set up there was one set of proposals, that were actually from Keynes representing the British Government, that suggested the IMF be more like an independent central bank, and there was a second set of proposals that suggested, given the politicisation of the world economic powers, that you would essentially have a political board that would be responsible for the management of the IMF. I think, because the function of the IMF is changing, and it will be increasingly about surveillance instead of dealing with the balance of payment problems of individual countries—and that function of surveillance is best carried out by people who have not the direct responsibility of making allocation decisions about how the resources of the IMF are used—that we should move towards a situation where there is a separate management or a separate structure for the surveillance work of the IMF, and that, I think, is a long-term objective. It may be, of course, that some of the financial allocations that are made by both the World Bank and the IMF could then be brought together, but that is another part of the equation for later. Generally, if we are right that crisis prevention is where the IMF should be, surveillance, transparency, reporting on what is happening in individual countries and the spill-over effects of what they do to the world economy are crucial to that. But we need a new structure in which surveillance can take place where the people who do the surveillance are more independent of the political process in being able to make the judgments.

  Q163  Angela Eagle: Chancellor, what opportunities do you think are presented by this vision that you have outlined in the run up to Singapore? Could you give us some idea of how you would see the international financial architecture, particularly the IMF, being structured and actually existing if there is a total success for your vision?

  Mr Brown: The first thing, I think, is quite practical. We have got to bind in and give representation and voice to large numbers of countries who are increasingly a big bloc in the world economy who are certainly under represented. There is no doubt that the emerging market countries and developing countries do not have the quotas and the voice that their present economic weight should allow. I think, in a sense, countries that have moved forward very quickly over the last 20 or 30 years have not got the representation. It is quite difficult for African countries, with the structure of governance at the moment in the IMF, to see their views fully represented, and so I think we have got to show that we can deal with these issues. It may be that this will be a two-stage process rather than a one-stage process, but I believe now we will make significant progress at Singapore and there is a will that I found in April, when I was chairing the meeting of the IMFC, to make progress very quickly; so that will happen, in my view, over the summer. There is a second set of issues that are more fundamental, and that is how the international economy is going to respond to these huge changes of globalisation and how we can manage the international economy better to secure growth. There is an obvious thing that is failing at the moment. We do not have a trade agreement. That is under the organisation of the WTO, of course, but it has a spill-over effect to everything that is happening. There is another set of issues about how the World Bank should work for the future and how its work in developing countries can be extended and can be more effective. But as for the IMF itself, it seems to me that we have been slow to recognise that, an organisation with international status that can pinpoint what is going wrong and can send warning signals about what ought to be done and can even bring about a co-ordination of policy to be able to do something about it. That is where we ought to be. In the past, in the 1940s onwards, the IMF would step in to deal with the problem countries that developed, and, of course, most recently, it has been countries in Latin America. It would use most of its funds for only a few countries now dealing with their particular problems. It is under huge political pressure, of course, to do something about these countries when a problem arises, but that is only a small part of what should be the work of an international economic organisation. We have country to country imbalances right across the world, of course. We have problems that, of course, affect the rest of the world because of high deficits in some countries, but there are high surpluses in others.

  Q164  Angela Eagle: Is it your view, because of some of the mistaken policies, especially in the Asian economies, that were pursued in the past, that Asian economies have now started storing up their own surpluses in dollars, which has actually added to the problem of imbalances, and do you think that this kind of reform and the move to crisis prevention will actually solve that situation as it has emerged, partly in response to the IMF and its Washington consensus style policies, I think, being seen as illegitimate in some emerging countries, such as in Asia?

  Mr Brown: I think you may have seen that there have been a number of proposals being put. Most recently there was a speech by the Governor of the Bank of England, and by Larry Summers, a former Treasury Secretary, about whether, if you had better international arrangements for dealing with imbalances, some countries would need to have such big reserves in future. That is an issue that is raised and I think could be answered. I think there is a more general question about the lessons we have learned from the Asian crisis in the late 1990s, which was, indeed, a very severe crisis, because we found out that at least one country was going virtually bankrupt and yet none of the international community, who should have known, had a great deal of knowledge of what actually was going on within the reserves position and the central bank of that country. That leads me to the conclusion that the one thing that you need to start with is greater information, transparency and, therefore, better surveillance, but, more generally, I think there is a potential coming together of people's views. It is not true to say now that people undervalue the importance of public investment as well as private investment. I think people now throughout the world see that, if a country is going to move forward, it is going to have to invest in education and in infrastructure and in science. I think people are far more aware now that, just as countries need to have proper financial, fiscal and monetary regimes, they need to have good systems of public law, they need to have mechanisms that will deter corruption, and you need all these changes also in civil society in the way countries function if they are going to be successful economies and capable of attracting investment from round the world. I think there is a new consensus developing that an emerging market country and a developing country responding to globalisation will need to have stability, will need to have private as well as public investment, will need to have good systems of commercial and civil law, will need to have transparency and accountability in the way they make their decisions; and that is a shift, I think, from what was called the Washington Consensus in the 1980s but, if that is true, you need an international organisation that takes that seriously and monitors what is happening, reports where things are going wrong and can do something about it. One good model is the Financial Stability Forum, which Britain decided to propose a few years ago, after the Asian crisis, and we see it evolving into an early warning signal where there are potential financial crises in the world economy.

  Q165  Chairman: Chancellor, I am looking for sharp questions and sharp answers. I want all my colleagues to get in and I want you to get away by 1.30.

  Mr Brown: I take that as a signal to have short answers!

  Q166  Mr Fallon: Specifically on the Quota Review, Tom Scholar told this Committee four years ago that the UK position was that voting should still reflect to some extent the size of contribution. I do not know whether Tom wants to answer this. Is that still the British Government's position?

  Mr Brown: It is our position, and if Tom wishes to say why it is a consistent position, I am very happy that you say so, Tom.

  Mr Scholar: Yes, it is still our position. I think the issue that we see now is that there are quite important divergences between the actual quota shares of various countries and the share that they would have using the formula we use to accurately reflect their latest economic situation, and, of course, that is something that also has changed over the last four years.

  Q167  Mr Fallon: The other issue is the selection of the next Managing Director. The Governor told us it was a good time now, when there was not a vacancy, to get a process established away from the old kind of European cabal system. You have spoken just now about transparency; you have always championed transparency. Do you think we should be making this process more transparent?

  Mr Brown: It was, in the last case, far more transparent. I do not think what was done in the process of selecting Mr Rato has been fully recorded, and this was not a European cabal, as you suggest. It is true that he emerged from Europe as a candidate, but it is also true that there was consultation with every continent. There was detailed consultation with particular countries who were important: members of the IMFC, in other words represented constituencies on the IMFC, and, as the Chairman of the IMFC, I spent a very considerable amount of time consulting round the world about his acceptability. I think Mr Rato would be able to report to you that he met the African constituencies before he was even in a position of being nominated, and he answered questions from them and Asian members were able to talk to him; so it was not a question that we did it in what was the old way 20 or 30 years ago where simply Europe was given the power to nominate and it did not matter in the end who Europe nominated, he or she would be acceptable to the rest of the world; so there is more transparency now, and I suspect it is possible to imagine more transparency in the future, and this is something that we will look at, but it is undoubtedly the case that is a far more transparent system than it was.

  Q168  Mr Fallon: The Governor told us it is most important to put this in place now "while there is no vacancy". I wonder if you could look forward to the day when perhaps the Director of the IMF was an African?

  Mr Brown: There is no doubt that when we look at the international institutions—the World Bank, the IMF, the United Nations and the WTO—people will increasingly want to have the best candidate from whichever continent they come. Of course, because the IMF and the World Bank are based in Washington, there is clearly a demand that all continents be represented in the initial stages, as you probably understand. The original proposal in 1945 was that the IMF would have a Chief Executive, Managing Director who was an American and the World Bank would have a Chief Executive, what is now called the President, who would be a European, and that was changed at the last minute so that the IMF had a European Managing Director (and there is a very big and interesting historical story about why that happened) and then the World Bank President was to be an American. Over time I think this will change, but I think you have got to take into account all the international institutions that have an impact on the world economy and not just one.

  Q169  Mr Newmark: Chancellor, you have welcomed the opportunity for a more fundamental review of the Fund's internal governance. Charles Dallara, the Managing Director of the Institute of International Finance, has said that for Europe to give up some of its voting share in the IMF would not only be in line with the progress on European integration but also help increase the voice of emerging markets. Are you prepared to accept that the price of management reforms will be paid with a dilution of European and British influence over the Fund?

  Mr Brown: I think there are two proposals here. We must not conflate them both together. One is what is the appropriate quota and level of representation of Europe? The second thing is do the international institutions want to take more account of the fact that there is a Euro currency and should there be more integration of the European position or the Euro area position in the IMF? I think the second one is, to a large extent, answered by the views of individual countries in Europe, and while the Managing Director of the European Central Bank is in attendance at the International Monetary and Finance Committee, I think there is a general view still that the individual countries—Germany, France Italy—will retain their separate seats in the IMF. That is one issue, but I think it is quite separate from the other issue. The other issues is: can you see a situation where Asia can get more quota and more representation and so can Africa, particularly, get more representation, and does that mean that that is at the expense of Europe? If I put this to the Committee, because these are obviously discussions that are taking place in the run up to Singapore, my own sense is that it is possible to imagine a situation where there is a bigger influence of Asia while at the same time Europe maintains a very considerable amount of its position. I think that is probably what the initial result will be, but I do not think it would be helpful to propose a settlement at the moment, I think we have got to listen.

  Q170  Mr Newmark: But you are prepared to defend Britain's interest and influence as it currently stands?

  Mr Brown: No, Britain's position is not at issue.

  Q171  Mr Newmark: It is as part of an overall European influence.

  Mr Brown: No, I think you are wrong here.

  Q172  Mr Newmark: I do not think I am wrong here.

  Mr Brown: Britain's position is not an issue. Even if there was a Euro-seat, Britain, not being a member of the Euro, would have its own position, and I do not think you should make any suggestion it would be anything other than that.

  Q173  Mr Newmark: So we will maintain our influence; thank you. My second question is this. There is speculation that you might replace Horst Köhler as Managing Director of the IMF when he stepped down in 2004 to stand for the German Presidency. Do you believe that the fundamental reform of the IMF could have been achieved sooner had you been at the helm from 2004?

  Q174  Chairman: Would you concentrate on the second part of the question!

  Mr Brown: I think this is probably the year, if I may say so, and the Committee may wish to reflect on whether they agree with this, where reform of the IMF has moved faster than at any point for decades, because there is a growing recognition that, in a sense, two issues have come together. One is that global economic change and certain insecurities about change forced the IMF to act differently and to realise it must have been wrong, and the second thing is the changing structure and composition of the world economy put on the agenda the voice, quota and representation issues for Asia and Africa. I think the two things have come together and there are the makings of a major reform agreement at Singapore in September as a result of that. If you like, for 60 years now the IMF has essentially been an organisation that has focused on crisis resolution, where countries, and it was Britain's fate in the 1970s, have a huge balance of payments problem that has got to be addressed, sometimes arising from fiscal difficulties. Now I think people see that in the future, if the IMF is going to be as effective as it should be, it has got to deal with crisis prevention, and that is about surveillance and not just about individual countries, and that is a big shift-change that we have been arguing for some time in the way the IMF should think of itself, but we are nearer to agreement on these changes than I think we have ever been.

  Q175  Mr Newmark: Your point brings me to my third question, which is on the issue of surveillance. You have said that in a modern rapidly changing global economy the Fund's surveillance role is critical. The Governor of the Bank of England agrees, but adds that, "Balance sheet analysis should be at the heart of the surveillance process." Do you believe that more rigorous balance sheet analysis by the Fund should be confined to the developing world or will the UK's national accounts also benefit from a beefed up surveillance remit for the Fund?

  Mr Brown: I would put this another way round, if I may. Every country must be prepared to be part of similar processes. It is clear that the results of any investigation would probably focus on different aspects of policy in developing countries and emerging market countries than in advanced industrial economies, but monetary, fiscal, financial policy, all these things, I think, have got to be part of IMF surveillance; and I think what the IMF has recognised is that these financial sector issues are more important than they used to be, not least because in Asia in the late 1990s the failure to do surveillance on these problems was one of the reasons why nobody spotted that Korea, in this case, but also other countries, were in severe financial problems.

  Q176  Mr Todd: The Governor has made some intriguing and revelatory remarks about the operation of the Executive Board of the IMF in which he disclosed that typically Board members might have 300 pages of reading material each and every working day. Do you believe that his remarks perhaps suggest a need for a dramatic reform in the way in which the Board functions?

  Mr Brown: Or a speed-reading course for the members!

  Q177  Mr Todd: Indeed.

  Mr Brown: There is no doubt that reforms are evolving in the way the Board operates, but where you have country by country reports being done, you would be the first to complain if they were not detailed and substantive, and where you have an Executive Board that is looking at these issues, particularly if money and allocations are going to be involved, they have got to take these things seriously.

  Q178  Mr Todd: Does not micromanagement distort the accountability of those—

  Mr Brown: Is it micromanagement? If it were, I would agree with you, but the Board has a responsibility for the allocation of what are essentially public funds, and while one wants the reports to be precise and as concise as possible, I do not think when you are allocating public funds you should fail to go into detail of some of the issues which are raised by country investigations, but maybe Mr Scholar will explain some of the issues that demand a level of detailed investigation.

  Mr Scholar: I think it is absolutely true that on the issues of allocating public money the Board plays a very important part in the accountability of the Fund, so the people that take the decisions are the representatives of the countries of the world. In the case of the UK, that is me, and I am accountable to the Chancellor, and the Chancellor is accountable to Parliament and the British people, and that is the way it should be. At the same time, as the Chancellor has already mentioned, there are other areas, such as surveillance, which are essentially technical areas, and I think that could be an area where there could be quite significant economies in the use of Board time.

  Q179  Mr Todd: The Governor did not confine his remarks to the Board. He also commented on the IMFC, "I would have said that one of these meetings where you have got a Saturday afternoon sitting there in this windowless room in Washington thinking, not only, `Is anyone else outside the room taking any notice of this?'", not a particularly flattering description of this important function. Do you share his view? He did make a laudatory remark about the most recent IMFC meeting.

  Mr Brown: That is because we met in a new room actually. I know the Governor would prefer to be at an Aston Villa football match than at the IMF, even with the season that Aston Villa have had. When I first attended the meetings of the IMFC, they could go on, because the communique had to be agreed, sometimes until two, three, or four o'clock in the morning because each country had to agree the communique« that was being issued on behalf of the world economies. Now I think we operate to a fairly tight procedure where the meetings last, I think, five or six hours and, by the time the meeting is finished, you have agreed the communique«, which, if I may say so, is having an increasing influence on the way the debate is focused in the world economy. If we, for example, set an annual remit at the meeting in the autumn for the surveillance work of the IMF and we say to them, "Look, there is an issue about oil prices. We want you to report over the next year both on the effect of oil prices on individual economies and what can be done to get greater stability in the oil market", there is no organisation internationally that is doing that on behalf of the world economy successfully at the moment, and that would be a major shift and make the work of the IMFC, as well as the IMF, far more relevant and more focused on what I think is a modern remit for an international economic organisation.

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