Examination of Witnesses (Questions 200-219)|
11 MAY 2006
Q200 Ms Keeble: Yes.
Mr Brown: You used to call it
structural adjustment, then we called it sustainable development,
but I think what we have now recognised is that you have got to
work with countries who develop their own programmes, and it is
not a question of the IMF coming in and imposing a programme so
much as the IMF working with countries with their own programmes
and using their own targets as their conditions, and I do think
there is a growing recognition that externally imposed change
will bring far fewer beneficial results than internally generated
change with the support of the international institutions.
Q201 Ms Keeble: What do you do about
the sort of deals and the events that go on outside the consensus?
Probably the most obvious one is China and its role in Africa,
particularly in relation to Zimbabwe. How do you start to try
and bring those inside the loop?
Mr Brown: I think Zimbabwe is
a very difficult case. Do you want to say something on what is
happening here, because it is a very difficult case for the IMF?
Q202 Ms Keeble: Particularly the
role of China. It is not just Zimbabwe.
Mr Scholar: Perhaps I may comment
on the general policy issue. It is a very big issue, which we
see now: a number countries who are new to the business of sovereign
lending making quite big loans, sometimes non-concessional loans
to countries, including those that have recently benefited from
debt relief. What, of course, nobody wants to see following debt
relief is re-accumulation of unsustainable debt, and so what we
have asked the Fund and the Bank to do on this is to develop a
new framework for assessing debt sustainability, and that has
been done and it is now being put in place. What is essential
is that we can reach an international consensus on how to avoid
the re-accumulation of debt. That would include, in part, decisions
of the IMF and the World Bank but also, very importantly, other
countries, and it is through this process of reaching consensus,
both through the IMFC and the development committee and the two
Boards, that we hope to reach agreement on a framework which will
be respected widely.
Q203 Ms Keeble: That is how you deal
with developing countries, in particular those that have had debt
relief, but what do you do about China, which is in a position
to be able to extend these kinds of facilities and which have
a profoundly distorting impact?
Mr Brown: I think we should also
look at, not just the IMF and the World Bank, but the Paris Club
and how it operates in relation to debt, and Jon is involved in
Mr Cunliffe: There is a general
movement to work with the Chinese and a number of others to try
and give the sort of consensus that Tom Scholar was talking about.
Actually, it is an unhelpful step for developing countries to
lend money to countries that are not sustainable and their lending
and their aid programmes need to be more integrated in what is
happening through the World Bank and with other donors; and that
effort is going on in the IMF and the World Bank and it is going
on through the Paris Club of Official Creditors that has now made
contact with the Chinese; so there is a job of persuasion and
consensus building there to do, which has started.
Q204 Chairman: I think that focuses
on the multilateralism and the bilateralism which seems to be
happening just now. It is a bigger question. We are looking at
that in the wider globalisation economy.
Q205 Mr Breed: Chancellor, a couple
of times you have touched on the relationship between the IMF
and the World Bank and clearly co-operation is vital. Is there
now a requirement to get greater clarification in terms of their
roles and responsibilities, and in particular is it now time perhaps
for the IMF to leave the development work almost exclusively to
the World Bank?
Mr Brown: I think myself that
would be a mistake. There is a review taking place about the relationship
between the IMF and the World Bank and the joint work that they
should undertake, but let us remember that if we are setting the
IMF a task of surveillance and saying that it is to the benefit
of the world economy that we examine both at a national level
and for continents and the global economy as a whole what is happening
within these economies and what recommendations we have, then
the IMF becomes a very specialist organisation that is dealing
with surveillance and it is not necessary then to say that the
IMF should be out of developing countries; it should be involved
in surveillance of developing countries. Where I think you are
raising an important point is where there is an overlap in the
allocation of resources. I am finding, because I am a member of
the UN Commission that is looking at the UN organisations and
their relationship between the World Bank and the IMF, that you
can have in some countries, such as in Africa, a situation where
you have IMF involvement with some resources, you have the World
Bank with some resources and you could have 20 UN organisations,
some of them giving as little as two million dollars each to that
individual country, which clearly is a signal that what is being
paid for by that two million is maybe staff rather than services,
so there is indeed a need to examine how in the provision of services
in particular, like education, capacity building and health, the
international organisations can work far more effectively, and
where overlaps happen you either say that this is good because
it is competition between networks and you are finding who is
the best provider, or it is simply a waste of resources. There
is a need for an investigation in that way but I would not say
that the work of surveillance should simply be for the advanced
industrial economies and for the emerging markets. Increasingly
we are going to understand the importance of transparent systems
of monetary and fiscal policy operating in developing countries
as well where there is a need for advice and the IMF would be
the expert organisation providing it.
Mr Scholar: The review has been
commissioned jointly by the Managing Director of the IMF and the
President of the World Bank and there is a high level panel, including
the finance ministers of Nigeria and Indonesia and the former
Chairman of the New York Federal Reserve, and they will be looking
precisely at collaboration between the two institutions, ensuring
that there is complete coverage of all issues but without duplication.
I think this is a very important and welcome review that is going
on which will report later in the year and will be discussed both
in the two boards but also at the committees.
Mr Brown: And I think we should
applaud the Managing Director, Rodrigo de Rato, and President
Wolfowitz for deciding that this was necessary, and, of course,
Mr de Rato has brought forward a number of the reforms that we
are talking about today in surveillance.
Chairman: We were in Washington last
time when President Wolfowitz gave us ample time and we had an
excellent discussion with him on the role of the World Bank and
how things are changing.
Q206 Mr Love: In his recent evidence
to the committee the Governor of the Bank of England said that
one of the good news stories over the last five years was that
the IMF was lending less. What role should the IMF have in lending?
Mr Brown: As little as possible.
Its role has been traditionally where there is a crisis that it
has got to be managed and therefore the fewer the crises the less
the lending and the better the situation is. This is something
that you would say for the IMF in operating in that capacity,
yes. I do not know what the figures are for recent years, Tom,
but it has mostly been concentrated on two countries; is that
Mr Scholar: Yes. Until the end
of last year 70% of the IMF's outstanding credit was concentrated
in the three biggest borrowers and they were Brazil, Argentina
and Turkey. As the committee knows, both Brazil and Argentina
repaid their loans earlier so there is a very low level in historical
terms of outstanding credit and, as the Chancellor says, that
is a very welcome thing.
Q207 Mr Love: Implicit in what the
Governor said to us was that if the focus of the IMF is to be
the avoidance or prevention of financial crisis does it really
need to lend at all?
Mr Brown: In an ideal world you
would not want to have to lend to get countries out of crisis,
but the purpose of an international institution should be to prevent
crises where possible but also to deal with them where it becomes
necessary. We have seen advanced industrial economies have balance
of payments problems that have had to be dealt with and that has
affected European economies. We are seeing Latin American and
Asian countries that have a mixture of these problems and financial
sector crises. You cannot exclude the possibility that crisis
resolution will have to happen in relation to economies in the
future but you wish to minimise both the crises and the liabilities
or the loans you have to make to deal with them.
Q208 Mr Love: I think we all accept
that on the committee. I was just asking a theoretical question.
If I can press you just a little bit on particular facilities,
in your recent press conference at the IMF you welcomed the new
shocks facility, yet there have been some reservations expressed
about the variety of facilities that are now available to the
IMF. Is there a need for rationalisation of all the facilities
that currently exist?
Mr Brown: I think this committee
might wish to comment on this because it is wider than simply
a financial shock. When Pakistan had its terrible earthquake,
when the tsunami hit so many different countries, you had a mixture
of emergency relief required, reconstruction investment needed
and financial support because of the effect of these crises on
the general economy of these countries. Before the tsunami there
was no emergency relief fund held in the United Nations or anywhere
that was available for countries where they had immediate needs
and what happened was that you had to phone round different countries
and essentially ask for donations after the crisis had hit you.
Now we have a situation where, thanks to Hilary Benn's initiative
in New York we have the UN Central Emergency Response Fund, but
we still do not have a dedicated reconstruction force or team,
so where a country needs specialist help for reconstruction I
think we can make progress on that and more needs to be done.
Then there is this issue of how you deal with shocks that are,
if you like, the economic effects of a physical disasteroil
price rises or any other commodity shock, and that is why Rodrigo
de Rato recommended the shocks facility. We have contributed to
it and other countries like France have contributed recently.
The oil producing states are being asked (rightly so) to make
a contribution because one of the shocks we are talking about
is the effect of high oil prices on poor countries. The shocks
facility is in being but it will be up and running with a wider
range of funding pretty soon and we are pressing other countries
to make a contribution to it. Again, it is an example of how the
international community is realising that the institutions that
were developed for the problems of the past are not fit for purpose
given what we now know. We ought to be able to get disaster relief
to a country quickly because (a) we know about it and (b) we have
the engineering, the technology, the science, the medicine and
the general physical ability to do it. What we need is the political
will to have the sorts of resources available so that we can act
instantly. It was a tragedy that we could not act instantly in
certain recent natural disasters, so we realise we have to do
more on that, more on reconstruction and more on the economic
effects of a natural or physical crisis.
Q209 Mr Love: You have made a very
good case for the shocks facility but I read in our report that
the contingent credit line facility introduced in 1999 has never
been used and has been allowed to just fade away. Is there a role
for further rationalisation of funds within the IMF as some of
these funds have no real purpose at all and they could be got
down to a relatively small number of facilities?
Mr Brown: Yes. I think I remember
this facility. It was time limited and nobody had the need to
use it, which is not the same thing as saying it was unnecessary.
We are looking at a new facility and maybe Jon will say something
Mr Cunliffe: The CCL had a sunset
clause so it came to an end at a certain date if there was not
support in the membership to renew it and that is why it ended.
It had some design problems because you had to find a way of designing
an assurance for countries that the Fund would step in with potentially
large amounts in the event of a crisis while maintaining the Fund's
ability to set some conditions on the use of its funds, and that
is quite a difficult problem to solve. However, there is a lot
of pressure from emerging market countries for a facility of that
sort and it would give the Fund a relationship with countries
before a crisis because they would have this facility and they
would have to discuss with the Fund their programme in order to
maintain it, and I think there is going to be quite an effort
over the next year to try and solve some of those design problems
to see if it can be made to happen.
Mr Brown: And it is very important
that it is done right because the signal that is sent out by your
application for help from this fund has got to be one that is
stabilising rather than destabilising, and it is also important
that the terms on which it is available are not too onerous, so
there are difficult issues but I would not say that the lack of
use of the contingent credit facility proved that there was no
need for it. There was no specific need at that time and some
of the terms on which it was available were disputed by the countries
that might have used it. I met a number of countries who had considered
making an application to it but had decided that it was not appropriate
for them to do so because it would send out perhaps the wrong
signal and be too expensive. This is what we have to look at.
If we are in the business of crisis prevention then we ought to
be in the business of making it possible to draw on the support
of the IMF to avoid a crisis.
Q210 John Thurso: Chancellor, we
have talked a lot in this session about the changing role of the
IMF and I am interested in the impact that that could have on
its own finances. It seems that there are two factors here. One
is the globalisation of the capital markets and therefore the
availability of capital and the fact that middle income and rich
countries do not need to access the IMF funds. The second is the
changing role of the IMF itself, and we have all, I think, agreed
that it should be more of a proactive institution, preventing
crises and into surveillance and less reacting to crises. Will
these two factors actually lead to a shortfall in the IMF's own
Mr Brown: Undoubtedly, if there
is no interest being paid on IMF loans, which was the most important
source of income to the IMF then that creates a funding issue,
so we will have to make a decision that the surveillance work
of the IMF is important enough to the international community
that we, the international community, are prepared to make it
possible for it to be funded. There are various ways of doing
this that do not involve considerable public expenditure, at least
in the short and medium term, by a country like ours, but these
are things that have to be addressed. In a sense it is a good
situation that loans have been repaid and therefore there is no
interest being paid to the IMF, but it does create the shortfall
that you are talking about and that will have to be addressed,
and actually we have set in motion a process to help address this
Q211 John Thurso: Can I ask you about
some of those? For example, the IMF is examining options for broadening
its income base, I think, through investment of the Fund's reserves
or revaluing its gold reserves. Do you think that is an appropriate
way for the Fund to go forward?
Mr Brown: I will ask Jon to answer
that because he is dealing in detail with this and he might be
able to give you more detailed information of the process as well
as the proposals.
Mr Cunliffe: We do think it is
appropriate for the Fund to make the best use of resources that
are deposited with it, and therefore to invest those resources
we think it is appropriate for the Fund to look again at the rate
at which it is building up reserves and precautionary balances.
Clearly if you are lending less that changes the picture. It needs
to look at some of the services it could charge for and also the
balance of how much is paid for by debtors and creditors.
Q212 John Thurso: So it is quite
possible that we could move to a model that was more in the way
of being fee based where it was paid for for surveillance and
things like that?
Mr Cunliffe: It is possible. With
some of the Fund's activities, surveillance and technical assistance,
one has to be quite careful because the countries that want and
need it most, I would say technical assistance to developing countries,
cannot pay and so you do not want to go a system that is fee based.
Mr Brown: You are not hiring a
consultant. This must be independent authoritative surveillance,
but I do not think we should forget that the Fund has considerable
assets, which is again one of the ingenious proposals that Lord
Keynes made after the Second World War.
Q213 John Thurso: Would the UK Government
support an endowment to provide a separate funding stream for
surveillance by the IMF in general?
Mr Brown: That is one of the things
you should consider but obviously you need a consensus for this.
Let us be clear: surveillance cannot be individual countries commissioning
their own reports from people who are then paid for the work that
they do on a direct basis, and nobody is suggesting that. There
would have to be some consensus.
Q214 John Thurso: It would be more
along the lines of an insurance premium?
Mr Brown: Yes. You could get a
consensus on this but clearly that is one of the ways forward.
Q215 John Thurso: Another aspect
is that having it abandon its role, in a way, in regulating the
wealthy countries, which is the way it should be because the economies
have moved on, with middle income countries now turning their
backs on the Fund to a certain extent, the Fund could be left
with only the poorest countries as its clients. Do you believe
that the IMF has enough resources to mount a large scale lending
operation in its financial crisis management mode, given those
Mr Brown: I do not accept your
first premise precisely because of what we have been saying today.
If the IMF was simply intervening to deal with balance of payments
problems or some financial crisis in an individual country, then
as the world economy moved on you might expect that the focus
of its activity would move to the countries that were emerging
and the countries that were most likely to experience difficulties.
We are saying the opposite. We are saying that the Fund has as
big a role with the advanced industrial economies as with the
emerging markets and developing countries because the surveillance
of the world economy will lead the IMF to say, "Look, this
continent [America or Europe or Asia], here are changes that it
is necessary for you to consider making if you are going to contribute
to the stability and growth of the world economy". I think
it is that vision that they had in 1945 that prosperity was indivisible,
that unless you had continents working together to agree what
was best for the world economy you would have lower growth and
less prosperity than was possible. It is that vision that is being
resurrected by the idea that it is surveillance and acting upon
the results of that surveillance that is the proper direction
of the priority work of the IMF in the future. It will not be
a Fund that is less relevant to Europe or America than to Asia.
It will be a Fund that will be relevant perhaps in different ways
to some countries because of the allocation function, but it will
be relevant to all countries because each country should operate
according to codes and standards that are internationally agreed.
Each country should be examined for the stability of its system
and its financial sector and the transparency of its work and
that is why I think it is incredibly important that we endorse
this positive vision of an international economic organisation
moving forward. I repeat what I said, that if the codes and standards
and the transparency are seen as a new form of colonialism that
would be the worst possible outcome because the countries that
would need the benefit of opening up to transparent systems would
use that as an excuse for not doing what is essentially the right
thing to make their contribution to their own continent and the
Q216 Chairman: In light of John's
point, Chancellor, how will the IMF fund itself in light of its
diminishing lending book?
Mr Brown: The IMF is not without
assets; I will just repeat that. It is not without resources.
Q217 Chairman: It is still a big
question to be addressed.
Mr Brown: Yes. Jon is involved
in the group that is looking at this in some detail, and you may
want a written note as well
Mr Cunliffe: There is no immediate
problem. The Managing Director is now working up proposals and
there are a number of different options that can be looked at.
The membership is agreed that we have to find a stable, long term
source of finance.
Q218 Chairman: To go back to Kerry's
question about the Independent Evaluation Office, would there
be a need to provide that with a firmer basis in the articles
of agreement of the IMF to provide for its operational independence
both in selection of staffing and in funding?
Mr Brown: That is obviously an
issue that arises from the degree of independence that exists
and perhaps Tom might say something about that.
Mr Scholar: The reference in the
articles of agreement is to the Managing Director being appointed
by the membership through the Executive Board and the Managing
Director then having the authority and the responsibility to make
his or her own decisions about staffing. That is something that
is very important. In the case of the IEO, the Independent Evaluation
Office, the head of that office is appointed by the board rather
than by the Managing Director because it is an independent office,
it examines the working of the Fund and it reports to the membership
through the board. The IEO is not formally speaking part of the
staff of the IMF. It is a separate and independent body reporting
to the board.
Q219 Angela Eagle: There is an interesting
balance developing, I think, in the shift away from crisis management
to crisis prevention and Sally Keeble referred to it earlier,
this tension between legitimacy and being able to have enough
legitimacy in the new world to leave behind some of the culture
and perhaps mistakes of the past if it is going to work. How do
you think that legitimacy can be built in the run-up to the Singapore
meeting and how can the whole world, rather than just those that
have been involved in the past or have been seen to be involved
in the past, be confident that an institution such as this can
emerge from some of the mistakes of the past and do a good job
for us in the future?
Mr Brown: It is partly that we
have to find an agreement on quotas of representation, so the
legitimacy of the IMF moving forward is enhanced by it being more
inclusive and more representative and taking into account the
changes in the world economy. It is partly, as I said before,
that all countries subject themselves to the surveillance and
the transparency that is necessary and it is partly that the IMF
shows clearly that it is shifting its role to crisis prevention
and therefore people see it as serving them as they try to avoid
a crisis rather than imposing its will when a crisis develops.
It is mainly fiscal. The idea that all the IMF did was deal with
fiscal crises has developed over a period of years but once you
see the emphasis on surveillance and that it is about crisis prevention
the IMF then seems less of a threat than people had seen it to
be when it came into the country with its programmes and more
of a service to prevent there being a crisis in the first place.
2 Ev 88 Back