Select Committee on Treasury Ninth Report

2  A role for the IMF

A clear role for the IMF

5. In the popular mind, the IMF is mainly linked with the lending it undertakes to bailout member countries with balance of payments problems. However, the Fund undertakes a wide range of other activities of which lending is, in fact, a diminishing part. We discussed with witnesses the main role for the IMF in the future. Any organisation needs a clear role by which to determine how to allocate its resources, and by which to measure its success, and the IMF is no different to other organisations in this regard. The Governor of the Bank of England told us that he thought that "the main mission of the Fund is to focus on its role as guardian of the international monetary system. Its job is to ensure the smooth workings of the international economy…"[3]. The Chancellor of the Exchequer told us that, at the Spring Meeting, "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 [the IMFC] 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."[4] This idea of the IMF focussing on crisis prevention rather than crisis resolution was also endorsed by the Governor of the Bank of England.[5] In line with his thoughts on UK monetary policy, he thought the IMF should be a "boring" institution: "It is very important to have an institution like the IMF which does not benefit from financial crises, either financially or in terms of the culture and excitement of the work".[6] The Committee supports the move to focus the IMF's work on crisis prevention, rather than crisis resolution, as well as the decision to make sure the Fund can fulfil its new role.

Global economic imbalances

6. One feature of the evidence we received was the focus on a particular danger presented to the smooth functioning of the international financial system by global economic imbalances. The United States has maintained a strong dollar, despite a 7% current account deficit.[7] This has been achieved by other countries, especially in Asia, buying dollar-denominated assets. The risk is that this may unwind extremely quickly, with a rapid fall in the value of the dollar, causing import prices in the US to rise. This increase in inflationary pressure may lead to US interest rates rising. This would lead to slower growth in the world's largest economy, which would then have knock-on effects for the global economy. Professor Portes told us "I believe that in a better world the IMF would be coordinating those efforts [to tackle global imbalances]." However, he warned that the IMF "does not now have the status, or stature if you like, to do so".[8] He described himself as "very worried" about this issue.[9]

7. We took evidence about whether a lack of trust in the IMF has resulted, in part, in the build up of global imbalances. We heard that Asian countries have built up huge foreign currency reserves to ensure that, in the case of a domestic crisis, they would not have to turn to the Fund for emergency financing, and the conditions on policy that would entail. Professor Miller told us that "there has been a lot of do-it-yourself insurance by countries, especially in east Asia. To that extent, they are finding a substitute for the IMF."[10] David Woodward also regarded the failure of IMF policies as a reason for the build-up of Asian reserves.[11] The Governor of the Bank of England agreed, and said that he thought that "the decision by countries in Asia to build up large foreign exchange reserves undoubtedly, in part, is a result of the experience of the Asian crisis in the late 1990s, when they got into difficulty partly because they did not have large dollar reserves of their own". In part, he felt this was due to Asian countries experience of dealing with the Fund. [12]

8. More recently, we have again received warnings as to the potential disruption from a disorderly unwinding of global imbalances. In evidence we took on the May 2006 Inflation Report, Professor Quah, London School of Economics, referred to the risk from a disorderly unwinding of the imbalances as "huge"[13], while Professor Muscatelli, University of Glasgow, regarded it as his "biggest risk"[14] to the UK economy.

9. The Spring meetings saw some welcome signs of movement on the issue of global imbalances. A multi-lateral consultation procedure has been recommended by the IMFC, and the IMF has recently announced that the first one will be on global economic imbalances.[15] We discuss multi-lateral surveillance and consultations in Chapter 4. A disorderly unwinding of global imbalances poses a real risk to the UK economy. It is therefore important that the IMF take an active part in providing both independent analysis of, and potentially a solution to, the risks posed by a disorderly unwinding of global imbalances.

Reducing the number of extraneous roles of the IMF

10. With a clear remit, there may come the realisation that some roles currently undertaken by IMF may no longer be appropriate. Professor Portes was quite firm in his conviction that the IMF had incorrectly widened its scope. He told the Committee: "It has been a mistake to widen the range of activities of the Fund, both in terms of poverty-reduction programmes in various countries and, to the extent that we have seen with its involvement over a huge range of ROSCs (Reports on Standards and Codes)".[16] He went on to say: "I do not think the Fund should be a money laundering policeman. I do not think the Fund should be a ratings agency."[17] His views on the inappropriateness of the IMF's role in money laundering was also supported by Professor Miller.[18] Echoing this criticism the Governor of the Bank of England told us: "I think that if you want to have policemen it makes sense to hire professional policemen. They are not in the IMF, they are in national capitals; it is a question of political will."[19] He then also went on to criticise any further widening of the IMF's role, saying "I think one of the big mistakes is to try to ask the Fund to do too many things; in recent years the Fund has been asked to be a fireman, a policeman".[20] The IMF has, in recent times, taken on too many roles. As part of the need to create an IMF able to meet its responsibilities, we recommend that the UK Government support a greater focussing of the IMF's work, which may entail identifying another organisation or body better suited to carry out certain activities, including work on terrorist financing and money laundering.

The World Bank and the IMF

11. The World Bank was set up in 1944 and, like the IMF, is a Bretton Woods institution. Its role is to promote "global poverty reduction and the improvement of living standards".[21] The division of responsibilities between the World Bank and the Fund is a key issue, because it determines both the future role of the IMF and its relationship with low-income countries.

12. The Treasury Committee has previously looked at this issue. In 2000, the Committee recommended that the IMF should pull back from debt relief programmes in developing countries as this would "help clarify the roles of the IMF and the World Bank. If it is not done, the level of overlap increases the argument for a merger."[22]

13. We received evidence, both written and oral, suggesting that the IMF has not dealt particularly well with low-income countries and emerging market economies, exemplified in the build-up of reserves by the Asian economies, as insurance against future IMF intervention.[23] Some of our witnesses criticised the IMF's role in these countries, with Dr Tembo, of World Vision, calling for "the IMF to stand back from putting too much weight on lower income countries".[24] While the staff of the IMF were considered excellent, Ms Greenhill, of Action Aid, told us "I think that is the real problem with IMF economists, that they see things very much in purely economic terms and they do not have any basis to think more broadly".[25] However, she did not necessarily agree with merging the IMF and the World Bank.[26] Dr Tembo also told us that World Vision had found that social impact analysis, with its wider scope than purely economics, achieved more changes in favour of poor people.[27]

14. In his evidence to us, the Chancellor of the Exchequer stated that "there is a new sense … that it [the IMF] has got to work far more closely with the World Bank, and … the United Nations agencies that are operating in some of these countries as well".[28] He said that "there have been quite difficult examples of the World Bank giving with the one hand, the IMF taking with the other".[29] However, the Chancellor was also adamant that the IMF should not move away from working with low-income countries. He told us that, as the "IMF becomes a very specialist organisation that is dealing with surveillance … 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".[30]

15. The Managing Director's Report on Implementing the Fund's Medium-Term Strategy announced a review into the concordat that defines the working relationship between the World Bank and the Fund.[31] The Governor of the Bank of England referred to this review as a "welcome development" to make sure there were no "unnecessary overlaps" between the IMF and the World Bank.[32] Tom Scholar, UK Executive Director to the IMF and World Bank, thought it would be a "a very important and welcome review" that would be "looking precisely at [the] collaboration between the two institutions, ensuring that there is complete coverage of all issues but without duplication".[33] On our visit to Washington D.C., President Wolfowitz told us that in the past there had been supposed tension between the IMF and the World Bank. But, he said, to counter this there was currently a high level of engagement with the present review of the relationship between the two institutions. We welcome the IMF Managing Director's announcement of a review to examine the relationship between the World Bank and the Fund. Given the concerns expressed to us by NGOs, we recommend that the UK Government ensure that the Fund utilises the expertise of the World Bank in social and poverty issues, to augment the Fund's more macro-economics based analysis. The IMF should remain within its remit of crisis prevention, not extend its activities into areas of social policy and development it does not appear to be equipped to deal with.

3   Q 81 Back

4   Q 161 Back

5   Q 88 Back

6   Q 88 Back

7   Treasury Committee, minutes of evidence (May 2006 Inflation Report), 6 June 2006, Q 8 Back

8   Q 4 Back

9   Q 52 Back

10   Q 30 Back

11   Q 39 Back

12   Q 85 Back

13   Treasury Committee, minutes of evidence (May 2006 Inflation Report), 6 June 2006, Q 8 Back

14   Ibid., Q 47 Back

15   IMF to Begin Multilateral Consultations with Focus on Global Imbalances, Press Release No. 06/118, 5 June 2006 Back

16   Q 2 Back

17   Q 12 Back

18   Q 14 Back

19   Q 87 Back

20   Q 87 Back

21   World Bank Website, Back

22   Third Report from the Treasury Committee (1999-2000), The International Monetary Fund (HC 72) Back

23   See para. 7 Back

24   Q 72 Back

25   Q 78 Back

26   Q 78 Back

27   Q 77 Back

28   Q 198 Back

29   Q 198 Back

30   Q 205 Back

31   The Managing Director's Report on Implementing the Fund's Medium-Term Strategy, 5 April 2006, IMF, para 31 Back

32   Q 113 Back

33   Q 205 Back

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Prepared 13 July 2006