Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 200-219)

RT HON GORDON BROWN, MR JON CUNLIFFE AND MR TOM SCHOLAR

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 this.

  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 right?

  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 disaster—oil 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 about it.

  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 funds?

  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 issue.

  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 circumstances?

  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 world economy.

  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[2]

  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.


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