Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 220-230)

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

11 MAY 2006

  Q220  Angela Eagle: There are some NGOs that say that the move to independence, which Britain has led and I can accept the technical reasons for it in surveillance, actually make the institution even more remote and decrease its legitimacy. What would be your comment on that?

  Mr Brown: I just give you the example of monetary policy in Britain. Because monetary policy is operated technically by the Bank of England that administers our monetary policy—we set the inflation target but the Bank of England administers it—I do not think that monetary policy is seen as more remote or that interest rate decisions are seen as more remote. I think they are seen as more credible and legitimate as a result of the changes we made. Equally, I think that would happen with the IMF, that people would see a coherent and comprehensive system of transparency arising from surveillance and it would be credible and more legitimate to people because of that. Remember also that the IMFC, which is the committee of the stakeholders that I have the privilege of chairing, will guide this process, so there is political representation. It is not, if you like, moving out of the ambit of representative government at all. In fact, under our proposals and the agreement that we had in April the IMFC, which is the representative committee, would have a bigger role in shaping the agenda for the surveillance work of the IMF.

  Q221  Mr Gauke: Can we briefly return to the issue of lending conditionality? One area that has been controversial has been when the IMF has imposed cost recovery programmes on borrowing governments that have required schools and hospitals to charge fees. As far as you are aware has the UK representative at the IMF ever supported such conditions in the period that you have been Chancellor?

  Mr Brown: I shall ask the representative because he makes the rules.

  Mr Scholar: On the one hand the IMF has a responsibility to give its best advice on fiscal sustainability, but on the other hand it has a responsibility to respect country sovereignty over choices as to how it achieves that. One thing we have been very much at the forefront of stressing in these last few years is that it is very important for the Fund not to get too much into, but the detail of micro-managing countries' choices rather try to explain to them what the choices are, and also wherever possible to respect attempts to preserve fiscal space for public services, whether it is education or health or social safety nets. That was one of the lessons of the Asian crisis, that if the social safety nets are abandoned in an attempt to reach a fiscal target it is not a sustainable solution. We of course support best advice on sustainable solutions but we also think it is very important that the IMF recognises the right of countries to choose themselves how they do that.

  Mr Brown: Specifically on fees, on education, which is primarily the work of the World Bank, there is an agreement now that we support this (and the World Bank advocates this), that we should provide support for education so that for primary schooling there should be no fees. I think that is generally the view of most countries that are donor countries around the world. On the general issue of conditionality and how the IMF should proceed in the future, and this affects the World Bank and the IMF, the UK policy paper that was produced in March last year, Partnerships for Poverty Reduction, Rethinking Conditionality, I would recommend to the committee. Here the emphasis is on less conditionality from the IMF and more on accountability of governments to their own people so that they have to answer to their own people for how they are spending the money.

  Q222  Mr Gauke: I am grateful for those answers but I am not sure I have got an answer to my specific question as to whether we have ever supported those conditions. I accept the position as to where we stand now but historically have we ever supported imposing fee-charging conditions?

  Mr Brown: I do not think we are supporting fees in education in votes on the IMF board but I do say that these are fees that primarily come up in the discussions of the World Bank, and health charges are a much more controversial issue, but I have just seen in the last few days that Zambia, as a result of our debt relief package of about six billion, has been able to abolish health charges, so the debt relief that has been provided is enabling countries to move forward on these issues.

  Q223  Ms Keeble: I just want some clarification, Chancellor, of something I thought you said earlier, which was, do you not accept the assumed IMF convention that there is a ceiling on the amount of development assistance that developing countries can absorb because of the impact that the inflow of hard currency has on local currency and exchange rates? Are you specifically rejecting the notion that there should be a ceiling?

  Mr Brown: That is part of the strategic review. I think I was answering a rather different question about a fiscal—

  Q224  Ms Keeble: That is why I was asking for clarification as to whether that was what you were specifically saying.

  Mr Brown: What you are asking about now is part of the strategic review in which there will be conclusions drawn soon. The fiscal ceilings, so to speak, that had prevented countries investing in education are a matter that I think our proposals on education for long term finance can deal with. If the IMF can see that the guarantees are there anyway, that money will be provided over the next 10 years for education, it removes much of the problem.

  Mr Scholar: There has been some criticism of the Fund in recent years, that it has not paid sufficient attention to the achievement of the Millennium Development Goals and—

  Q225  Ms Keeble: I do not want to interrupt but it was just a specific point about the ceilings on development assistance because of the impact on exchange rates.

  Mr Scholar: It is precisely on that point. They will now in each and every country look at the macro implications of increased aid flows and they have done a research programme on that which we have been very much pushing.

  Q226  Mr Newmark: I want to touch briefly on debt restructuring just to get a better understanding of where the Chancellor's thoughts are on this. None of us likes to see particularly the poorest of developing countries having bad debt and we want to try and resolve that by coming up with solutions up front and resolving those problems. Therefore, I am curious to hear: do you see any role for the IMF in the area of debt restructuring and should it be promoting either collective action clauses or resurrecting sovereign debt restructuring mechanisms?

  Mr Brown: I probably should send you a note on this. We have been debating these issues since 1997 and, particularly as a result of the Asian crisis, we did make some progress, but remember this has got to involve the private sector as well as the international institutions. A private sector advisory forum was created by the last Managing Director, Mr Ko­hler. I note that those new proposals have come from the IIF, from Charles Dallara, and we would be very happy to look at it, but this is a long-running issue and progress is going to be gradual rather than dramatic.

  Q227  Mr Newmark: So effectively the whole Chapter 11 process bringing best practice from the private sector studio you would be supporting?

  Mr Brown: We have been very supportive of the changes. Perhaps I should send the detailed proposals that we have made[3].

  Q228 Mr Newmark: I would love to receive them, Chancellor.

  Mr Brown: I may say they were made six or seven years ago.

  Mr Cunliffe: The IMF is supporting collecting collective action clauses, particularly in the US markets. It is also supporting the private sector and emerging market governments' voluntary code on debt restructuring.

  Chairman: We look forward to that, Chancellor, as well as the one on IMF funding.

  Q229  Mr Love: A lot of the media comment following the spring meeting of the IMF in relation to multilateral surveillance was about how implementation of the recommendations that were made for those meetings would occur. The Governor of the Bank of England has got a whole series of issues relating to greater independence and transparency. What is the Treasury take on how we ensure that when these multilateral meetings take place any agreements are actually implemented?

  Mr Brown: That is going to be an increasing role of the IMFC as well. Basically you are going to have to persuade countries. There are certain sanctions you have, there are certain incentives you have. Part of the power of this comes from the power of information, people seeing the consequences of their actions, but in the end you are going to have a far more cohesive international community so that they recognise that what affects one continent also affects another and therefore reciprocal actions or sometimes joint actions are totally necessary.

  Q230  Chairman: Chancellor, this is the initial phase of a wider inquiry into globalisation and we hope that when we come back in the autumn you can give us evidence on that. Ahead of that are there any issues that we should focus on that merit particular scrutiny in the wider issue of globalisation?

  Mr Brown: I think particularly the inter-relationship between all the institutions is an important issue, and that includes the United Nations and the World Trade Organisation, and where there are gaps I think we should look at that, but also where there are overlaps and the unfortunate resulting waste of resources we should be pretty keen to look at that as well. If the committee wishes to follow that through we could have some private discussions on it where we could provide papers for you. On the overall question of globalisation I would just say this: unless there is a debate about the impact of globalisation the natural result in some countries is going to be more protectionism, because people can see what is happening to an individual manufacturing company and whether it is going to, or it is losing jobs. People cannot so easily see the general benefits that are flowing either to the consumer or indeed to potential or actual employees as a result of global changes, so unless you have a debate explaining what is happening the danger is that people see the down side and they do not see much of the up side. The danger then is that protectionist ideas—and sometimes it is called economic patriotism but certainly xenophobic ideas—develop and these are prejudices that can mean that people see globalisation as a threat when it is also clearly an opportunity as well as something that we have got to beat rather than think it can be wished away.

  Chairman: Chancellor, we hope to produce our report ahead of the Singapore meeting and it would be helpful if we could. We are grateful to the Governor of the Bank and yourself for giving us evidence on this and we look forward in the autumn to coming back on that. Thank you very much.





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