Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 180-199)


11 MAY 2006

  Q180  Mr Todd: A brief comment on the role of the United States in the IMF. Should we not just face facts that the US will always have a dominant and veto position in the IMF and that debates about its position are redundant?

  Mr Brown: I do not think that is the way the IMF works, if I may say so. It is never normally a case of the US with a huge vote against the rest. It is usually countries working together for a common purpose by the dialogue that is achieved through the Executive Board. For example, I would not suggest that the Executive Board should be removed at all, I think it does an important piece of work, and while diplomacy can be carried out by telephone and by video conferencing, I think the detailed work of having an executive for this organisation probably does still need resident directors.

  Q181  Mr Gauke: Can I return briefly to the issue of the impact of the Euro zone on voting rights. You have been very clear that you do not think there should be a merger of all EU countries and their voting rights and that Britain, maintaining its own currency, must stand outside. That was the view that the Governor of the Bank of England gave to us as well. The Governor of the Bank of England did, though, say that those Euro zone countries might be well placed to merge their voting rights. I would be interested to know your attitude on that specific point.

  Mr Brown: I think you have got to recognise that at the moment the German representation of the IMFC is held by the Bundesbank and not by the German Government; so even within the European area there are different practices and different ways of doing things. If the euro area were to press this, then we would obviously have to take it seriously, but I go to meetings of the European finance ministers and there are still a large number of people who wish to have separate representation through constituencies in the way we have at the moment. This may change, and obviously this is an opportunity for everybody to put their views, but I do not think we are near reaching agreement on that.

  Q182  Mr Gauke: You have placed, indeed, this morning the need for reform of the IMF in the context of increased protectionist sentiment throughout the world. You have spoken in Treasury Questions about the need for Europe to open up its markets more?

  Mr Brown: Absolutely.

  Q183  Mr Gauke: To what extent are you dissatisfied with the EU's trade policy, particularly in the context of the Doha trade round?

  Mr Brown: I think there is a general drift towards protectionism, and I think international institutions like the IMF should play their part, alongside the WTO, in resisting that. I think you can see protectionist sentiment in almost every continent of the world, and, therefore, it is not restricted to Europe. The problem in Europe is not just external trade, and we are not talking about this specifically today, but the operation of internal trade within the European Union and how fast we can liberalise the markets in utilities, energies, services, financial services, those areas which have been focused upon by setting timetables in the past, so that we have an energy timetable for the domestic and business market for liberalisation by 2007; but, generally speaking, what has happened is that this is a political agreement which, if a country does not adhere to it, it is difficult to see what to do other than reach a new agreement. What we are proposing is that you use the competition authorities to carry out independent investigations into those areas, with not only powers of investigation but powers, in the end, of enforcement. I think that may be a way forward to dealing with recalcitrant areas where we have not made the progress that we should. Certainly, if you combine internal inflexibility with external risk of protectionism, then the world economy could slip back, and, although growth is relatively high this year, there is no doubt that if there were a trade agreement it would be higher and in future years we would be able to guarantee it would be higher through the liberalisation of trade.

  Q184  Mr Gauke: I am interested to hear that you are keen on timetables.

  Mr Brown: I actually said that the timetable in Europe was not actually working, because basically the truth is that the liberalisation that is promised, if you do not succeed to another political agreement, would probably need the competition authorities working.

  Q185  Mr Gauke: I get the impression, although I am sure there is no doubt, that you would have a much more liberal approach to trade barriers than the European Union is seeing at the moment.

  Mr Brown: There is no doubt that many of us want to see more progress, particularly on those areas of agriculture where we have not yet got an agreement. I had hoped, and it is still possible, that India and Brazil would lead one set of countries in the world by making concessions at the same time as America and Europe could come together to produce a new agricultural deal, and I think there is still the possibility of that. We talked at some point about there being a heads of government meeting to look at these things. It will certainly be on the agenda of the G7 meeting in St Petersburg in a few weeks' time, and I think there is a letter in the newspapers today about the progress that the European Commissioner wants to see in the trade round as well.

  Q186  Mr Gauke: Peter Mandelson?

  Mr Brown: Yes. There are a lot of people who now recognise that a stalled trade round is something we wish to avoid and we want to take initiatives to move it forward.

  Q187  Mr Gauke: Do you not feel that the European Union is not delivering at the moment on this and, when it comes to free trade and globalisation, there is a hesitancy there, there is a desire to hold on to what we have got rather than take risks and go for a greater prize from which we would all benefit?

  Mr Brown: We published a document, which I will send to the Committee, about open markets in Europe[1], and one of the benefits of a more liberalised attitude to trade, I think, would be an improvement in the trading and commercial relationships between the United States of America or the NAFTA area and the European Union. We have commissioned, with other countries, a study which shows that there would be a very substantial impact on the national income of both Europe and America if we could remove the remaining tariff and non-tariff barriers between America and Europe. There are issues in financial services, in regulation, in attitudes to mergers and everything where, if we had a more common position, we might be able to see huge advantages in trade, in prosperity and particularly in jobs.

  Q188 Peter Viggers: In trying to develop a better relationship between the European Union and the United States in terms of trade, does it help to have Peter Mandelson there as the Commissioner responsible?

  Mr Brown: Of course. He is the British representative who was chosen to be the Trade Commissioner. He is the British nominee.

  Q189  Peter Viggers: So it helps having a British person in post?

  Mr Brown: In such an important job as trade, it is good for our country that the Commissioner is British, yes.

  Q190  Peter Viggers: You referred to the IMFC communique« and the focus on surveillance. One aspect of this is multilateral surveillance. How will this change the focus of the work done by the IMF in terms perhaps of the Article IV studies, the detailed studies of each economy?

  Mr Brown: I think, as regards the individual studies, the emphasis will be not only on what is happening within the borders of an individual country but the spill-over effects of what is happening in the biggest economies as well as the categories of economies, like developing country economies and emerging market economies, but I think we should put emphasis on another aspect of this. Every year, I think, we will focus on issues of anxiety or of worry about how the world economy will develop, and I gave an example this year of oil prices and what we might be able to do create greater stability. You can imagine reporting on the effect both for the countries that are the borrowers and the countries that are the lenders for the deficits and the current account imbalances we have round the world at the moment. You can imagine studies also on environmental issues. There is a range of cross-country studies where, if you could look at the effects on all continents and different types of economies, the IMF might produce recommendations which could lead to an agreement that, if one continent or one set of countries did this, the other set of countries would do that.

  Q191  Peter Viggers: If this is extra work, is some work currently undertaken superfluous? I am thinking particularly of the work done on the financial sector assessment programme in the United Kingdom, for instance?

  Mr Brown: The reason that the United Kingdom volunteered—if I am right they volunteered—to be one of the first financial sectors to be assessed is not because we thought we were a particular case of difficulty but we wanted to show that all major economies were prepared to open up their financial sectors to the investigation that we thought should be taking place generally as part of Article IV assessments. I do not think that was a waste of money. I think that was the United Kingdom, which has a strong financial sector, showing that we were not afraid to be assessed and we thought that other countries should then follow and invite the assessment. If countries that are some of the best performers were prepared to be assessed, then we could persuade other countries, where there were risks and instabilities that might lead to damage to the world economy, to volunteer, to come forward; so I think that was an important study.

  Q192  Peter Viggers: The recent Managing Director's report suggested that, "More emphasis must be given to the original goal of surveillance, i.e. assessing the consistency of exchange rate in macroeconomic policies with national and international stability." Is that global approach the area where the IMF should focus or should it be looking at domestic policies?

  Mr Brown: I think your question puts the challenge very well. If the IMF were only to look at what was happening inside the borders of an individual country and not even look at the spill-over effects of policies in one country or one continent to another, it would be failing in its duty. The IMF is essentially an international economic body that is charged on behalf of the economies of the world with looking at the overall performance of the world economy as well as individual national economies. If it says there are current account imbalances that have got to be addressed, inevitably its recommendations will mean, for example, that America should look at its deficits, Europe has got to grow faster so that it can play a bigger part, therefore, it has got to have a good structural form, Japan has had a period where financial sector reform has been too slow and, therefore, it ought to speed up its financial sector reform, and it may be it would wish to comment on the Chinese policy in relation to currencies. That is how I see an international body looking at how, by one set of countries taking some actions, they could persuade other sets of countries to take reciprocal actions, and you need an international body that is capable of both recommending that and having some authority to persuade people to take these actions. This is the modern role for the IMF, that it will do these things and also have the credibility and the legitimacy to be able to see, as a result of its recommendations, people prepared to come together to take action.

  Q193  Peter Viggers: One aspect of globalisation seems to be the manner in which private investment, through PFIs, PPPs, has enabled some countries to move forward and move to a kind of post nationalisation phase, which was commented on by your colleague Alan Milburn in a leading speech recently. Do you think the IMF should get involved in that area?

  Mr Brown: You are talking about the growth of public/private partnerships, where Britain has a particular expertise, which is actually at the moment being marketed round the world very successfully by organisations like Partnerships UK. Many people come to us and ask for advice about how, for major infrastructure projects, they can follow some of the guidelines that have been developed in the Treasury and elsewhere around government. That is a more likely way in which people will move forward, they will take the successful countries or the countries that are doing these things and look at whether they are relevant to their countries, but there is no doubt that a body of expertise could be developed at an international level as well. However, I suspect that the IMF would not see that as its primary job. I may add, we are talking about the IMF here, but the World Bank may see this as something because it is involved in major infrastructure projects and it is involved in advising on structural reform.

  Q194  Kerry McCarthy: You have already talked about the need to ensure that the IMF is independent from political influence in its surveillance activities, but in the Treasury's report on the IMF you highlighted the fact that often the intertwining between surveillance and lending activities can sometimes cause complications in that respect, particularly in terms of giving policy advice to surveillance reports. Could you comment on that? I think you suggest that institutional reform is needed to bring about clearer delineation between surveillance and lending activities?

  Mr Brown: There are two issues here. The IMF, until recently, would not publish what it thought was the effect of a set of policies that individual countries could perform, and so you would recognise that the financial sector is in difficulty in one country, you would realise that that could cause a major crisis, but, because of the sensitivity of markets, you would decide that it was not relevant to publish that sort of information. I think these days are over. I think, in informed and educated markets, the IMF has a major role to play. Then there is a second set of problems. If you take a country that is running major deficits or is in real fiscal trouble, inevitably the IMF is asked to move in. The IMF wishes to make certain recommendations but, because of the politicisation of the process, inevitably you have got pressure groups, press statements, public lobbying and the IMF is constantly being forced to yield more resources to solving the problems of that country than it may wish to or may think is wise as a result of its surveillance and, even then, the IMF is usually blamed by populist elements in the country to which it is allocating resources but not giving enough to solve these problems. You must find a way of separating the advice that is necessary to be given, which can be public in most cases, from the allocation of money and, if you had an authoritative set of advice being given about what should be done, then I think markets, citizens within countries, would look at this advice and see whether it was relevant and it would form a subject of debate and then, quite independently, you would decide "is there a case for giving money?" rather than merging the two processes so closely together I think there are real advantages in the separation.

  Q195  Kerry McCarthy: There has been a suggestion by some groups that the surveillance role has a negative impact on other donors that are giving money. The Bretton Woods project, for example, cites AFRODAD reports on the IMF poverty reduction and growth facility in Malawi and Zambia, where the signalling role of the facility sent out negative messages and donors and other people giving aid were adversely influenced by that.

  Mr Brown: You are absolutely right that you have got to recognise there is balance, but the important thing is that we have realised over many years that to be silent where there is not sufficient transparency and, in some cases where there is corruption, is the wrong thing. I am not talking about individual countries here, but to be silent is the wrong thing. To insist on transparent structures based on the codes and standards of the international community that would guarantee there would be greater stability in these countries is in their best long-term interests; so I think it is important that we say that we do not only believe in surveillance, we believe in openness and we believe, as result of that, in the need for good governance.

  Q196  Kerry McCarthy: In terms of identifying appropriate policy prescriptions for countries, the Treasury report says that the IMF currently lacks a framework or methodology for assessing this, and certainly Christian Aid has said, "In pushing structural reform in particular the IMF is stepping beyond its mandate into an area in which it does not have a clear competence." Would you comment on that?

  Mr Brown: We are dealing at the moment with a quite specific problem, and I will give that as an example, where I think we wish to persuade the IMF to act differently. If you take any one of the African countries that is trying to expand their education system, to make a decision to spend money on teaching and education may breach the limits of the IMF's recommendations about what borrowing there should be and what the public sector decides if the public sector needs to deal with other issues of reform in that country. We have got to recognise that some of these arbitrary limits on, for example, the amount of investment that can be made in education, is not necessarily the best way to help some of the countries. We are looking at this at the moment, and one way round this is through the Education For All initiative that we have just announced where we can guarantee countries long-term and predictable finance. On that basis, I think the IMF's assessment of what countries ought to be able to invest publicly in their education system would change, but these are specific problems that I think people are now raising in a way that can be dealt with. I think Oxfam, and Christian Aid, who also do a great job, have raised these issues. I was in Mozambique a few weeks ago. The amount of resources that could be invested in education was raised with me directly. The answer is partly that we provide, as we are doing, quite specific resources to help the investment in education, and the rest of the world community joins in. The other answer is, of course, that the IMF would look at the limits that it sets on investment in education.

  Q197  Kerry McCarthy: What role do you see the Independent Evaluation Office playing? Particularly in terms of its role as an independent monitor, my concern is that it only produces about three or four reports a year at the moment. Its work programme is decided in collaboration with the Executive Board, and I think its new Director is actually a previous employee of the IMF and the World Bank. Do you think it is independent enough? Do you think its work programme needs to be expanded?

  Mr Brown: Yes. We proposed the IEO. They are currently working, if I may tell the Committee, on evaluations on the role of structural conditionality, which is the issue that I think you were hinting at. They are also looking at the IMF's role in the determination of the external resource input of sub-Saharan African countries and at the advice and exchange rate policy, and so these are some of the most controversial issues. They are consulting publicly on the work programme for next year for 2007. Again, for this Committee and others who wish to suggest what might be done, I think that would be very useful. I think where the IEO has done work it has actually been quite effective. I think the Committee will have a note of the previous reports, and the most recent ones were on support to Jordan, capital account liberalisation, IMF technical assistance, and these are all areas, again, where some of the NGOs that you have quoted have rightly raised issues that have not been properly addressed.

  Q198  Ms Keeble: I want to ask some questions about the IMF and developing countries. Assuming that the requirement is for 7% basic year on year economic growth, which is what underpins all the MDG targets, you said previously that there was a requirement for some quite substantial systems improvements, for example, dealing with corruption, tax reviews and so on. How do you get both developing country governments and the international community, including the NGO community in particular, to accept the legitimacy of the IMF in insisting on, or requiring, those systems to be put in place which are perfectly obvious systems to be put in place if you are going to get 7% year on year growth? How do you get the legitimacy accepted and what kind of sanctions should the IMF have in terms of lending?

  Mr Brown: The first thing, I think, comes back to an earlier set of arguments. If you are going to have codes and standards that we believe contribute to the stability of individual economies; and the fact that transparency as well of the regime itself will help attract a flow of funds to invest in your country, all countries should accept obligations, including the richest, including countries like America, Britain and the rest of the European Union. We should accept that we too are subject to the codes and standards and will try to do our best both to abide by these codes and standards and to ensure that there is proper transparency and reporting upon them, the publicity of the reports as well. That is the first thing that can persuade developing countries that this is not a regime that is a new form of colonialism that is trying impose some new regime that is against the interests of the people of the countries. We know that in a global economy, if you as an individual country are incapable of generating economic stability for your domestic economy, you will be incapable also of being able to attract investment funds, and I think it is a very important message that every country is subject to the same rules. On the introduction of the Policy Support Instrument and the Shocks Facility, but also an adequately financed PRGF (Poverty Reduction and Growth Facility), I think the IMF is trying to show that it can actually be at the service of low-income countries. Mistakes have been made in the past. There have been quite difficult examples of the World Bank giving with the one hand, the IMF taking with the other. There have been some controversial issues, like imposing charges where people are unable to pay them. I think these days are now recognised as what happened in the 1990s and 1980s. I think there is a new sense in which the IMF has got to be at the service of the developing countries, and there is a new sense also that it has got to work far more closely with the World Bank and, if I may say, the United Nations agencies that are operating in some of these countries as well.

  Q199  Ms Keeble: The legitimacy of the IMF in either having conditions or in having frameworks for economic development is not accepted, is it? There is a basic issue about the legitimacy of it.

  Mr Brown: The IMF?

1   H M Treasury, Long-term global economic challenges and opportunities for Europe, March 2005. Back

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