House of Commons - Treasury

Select Committee on Treasury Ninth Report

3 Governance

16. We examined the governance of the IMF. A clear, focussed role for the IMF in the world economy would enable it to deal more effectively with some of the major issues currently facing it, such as global economic imbalances. However, along with clear objectives must come a more inclusive governance structure, so that all countries feel that the IMF is a representative institution.

Quotas

17. Quotas lie at the heart of the governance structure of the Fund. An increase in the quota allocation to an individual country increases that country's voting power and 'voice' within the organisation. However, votes are taken rarely. According to HM Treasury's report on its dealings with the IMF:

The IMF's Articles of Agreement and by-laws specify the issues which require a vote by the Board of Governors. These are relatively few and include subjects such as changes to quotas, remuneration of Executive Directors and the Managing Director, decisions on the allocation and cancellation of Special Drawing Rights, amendments to the Articles of Agreement, election and changing the number of Executive Directors, forcing the withdrawal of a Fund member and liquidation of the Fund.[34]

The report also notes that most of the IMF's decisions are taken in the IMF Executive Board, "which usually works on the convention of consensus, without recourse to formal voting".[35]

18. Mr David Woodward pointed out that "the weighted voting system of the IMF, coupled with the shift in its role since 1944, means that the votes that each country has in the IMF are inversely proportional to the impact the IMF has on them".[36] He cited as an example "countries in Africa, in particular, [where] the IMF plays a major role in all of their economic and social policies and yet, for example, Mozambique, with 16 million people, has fewer votes [in the IMF] than Iceland, which has about a quarter of a million".[37] Ms Greenhill told us that "you have got the IMF which at the international level is very undemocratic and it lacks basic accountability. We think you really need quite fundamental reform. You cannot really tinker at the edges."[38] However, Professor Portes highlighted the basic conundrum at the heart of voting in the IMF: "There is the problem here of saying that those that tend to need borrowing facilities should have tremendous control over the way in which those borrowing facilities are used, especially when it is, for the most part, the taxpayers' funds of the big and rich countries".[39] However, the NGOs preferred a different system of voting, and Ms McDonald, of Christian Aid, suggested to us that "ideally [we] want one member, one vote because rather than being seen as a shareholder institution, it should be seen as a part of global governance and that should be based on much more egalitarian principles".[40] However, they were conscious of the political reality, and Ms McDonald suggested as an interim: "There are ways of readjusting the voting formula within the institution to get a much better balance of power, to have a 50:50 say with lower income countries having a much greater input".[41]

19. The Governor of the Bank of England told us:

If there really is to be an institution where people have trust in the neutrality of the management and the fact that it will be objective in its analysis, it must be willing to change the quotas in line with the changing importance of countries in the world economy. It is important in terms of establishing the overall trust and confidence of members in the Fund, but if we had made quite significant changes in quotas I doubt that you would see that reflected in changes in decisions or attitudes, and so on.[42]

He went on to cast doubt on how much changes in quotas would alter the actual workings and debate within the IMF, saying "The fact that China has a small quota now relative to its calculated quota does not mean to say that people take China less seriously now than they would 12 months from now if the quota were increased".[43] The Chancellor of the Exchequer, in his opening statement to the Committee, said "We also agree that, to reflect changing times, a country's voice, votes and quotas should reflect the changing international economic weight of these countries in the global economy. The IMF's effectiveness and credibility should be safeguarded and its governance further enhanced to ensure a fair voice and representation for all its members."[44] He went on to say "We have got to bind in and give representation and voice to large numbers of countries who are increasingly a big block in the world economy who are certainly under-represented" but also highlighted that "It is quite difficult for African countries, with the structure of governance at the moment in the IMF, to see their views fully represented, and so I think we have got to show that we can deal with these issues".[45]

20. The Committee regards it as important that the governance of the Fund is made more accountable and transparent if it is to be able to meet the challenges of the changes in the world's economy. While we note that changing the quotas may have no discernible effect on how the Fund operates, there is a good case for reforming the quotas to improve the Fund's governance by increasing the accountability to its members and the wider international community. There is a balance to be struck between the rights of those that provide the Fund's resources, and the needs of those that utilise those same resources. We recommend that the UK Government should look at whether any more innovative solutions, beyond reform of the quota system, are possible to try ensure the competing needs are met.

THE US VETO

21. For all key votes in the IMF, such as those on quota allocations, changing the number of executive directors or forcing a member to withdraw from the Fund, a majority of 85% is required for the vote to pass.[46] The United States currently has a quota of 17.4% which means that it has an effective veto where the 85% majority is required.[47] David Woodward explained the problem as he saw it to the Committee. "The biggest potential financial crisis is a collapse of the dollar. The IMF is not in a position to do anything about that because the US has a vested interest and has a veto. That raises fundamental issues."[48] Professor Portes told us: "The US is not going to give up its blocking veto and that is clear. That is just not on the table. We cannot expect that."[49] The Governor of the Bank of England also suggested that the US would always have a unique position with the IMF, and that there may be other changes to be made first, such as the selection process of the Managing Director.[50] The Chancellor of the Exchequer appeared not to accept the case for reform, saying "It is never normally a case of the US with a huge vote against the rest".[51] We note the political difficulties in achieving reform of the voting structure, bearing in mind the need to maintain a close US involvement with the IMF, but the current voting arrangements do not sit well with an international organisation that sees itself providing impartial worldwide economic advice in the future. We recommend that the UK government seek a reduction in the scope of the veto so that surveillance matters are no longer included.

THE EUROPEAN DIMENSION

22. One area of governance reform discussed was that of the position of European countries. Nevertheless, as the Governor of the Bank of England pointed out, "it is important to distinguish between the European Union, on the one hand, and the euro area, on the other".[52] He went on to say that "There is quite a good argument for suggesting that the euro area has to think quite hard and deeply in the years to come about how it is represented at the IMF".[53] He described the present arrangement whereby European countries in the euro area continue to be well represented despite not having separate currencies, as causing "significant friction" in international organisations, such as the IMF.[54] Professor Portes also described Europe as "hugely overweighted", but said this particularly applied to the euro area, with its single currency and monetary policy.[55] He went on to say "The countries in the eurozone cannot have it both ways. They cannot say the euro is this wonderfully important international currency and then not behave as if it were a single currency and have a single monetary policy and a single presence in the international foreign exchange markets and so on and so forth."[56] However, the Chancellor of the Exchequer appeared to suggest that the chance of reform was limited, telling us: "I think there is a general view still that the individual countries—Germany, France, Italy—will retain the separate seats in the IMF".[57]

23. On the European Union side, the Governor of the Bank of England felt that there was significant cooperation and, when it coincides with UK interests, then a "harmonised" view is presented.[58] However, since the UK is not part of the euro area, he felt that the UK could not, and would not, merge its position in the IMF with other European countries.[59] This position was also strongly endorsed by the Chancellor of the Exchequer.[60] There are two issues involved in European representation at the IMF. Although not a matter directly for the UK government, it appears sensible that the UK should encourage its euro area partners to combine their representation at the IMF. More importantly for the UK, the UK government should actively seek to try and ensure there is a harmonised EU view when dealing with IMF matters, where this is possible.

THE QUOTA REFORM PROCESS

24. The Managing Director's Report on Implementing the Fund's Medium-Term Strategy outlined a two-stage process for reforming the quota structure, to try and achieve some progress by the Singapore meetings in September 2006.[61] The Chancellor of the Exchequer told us that "It may be that this will be a two-stage process rather than a one-stage process, but I believe now we will make significant progress at Singapore and there is a will that I found in April, when I was chairing the meeting of the IMFC, to make progress very quickly; so that will happen, in my view, over the summer."[62] However, in a press conference of African Finance Ministers, Mr Mulongo, Governor of the Central Bank of Congo, said of the two stage process:

"The African countries don't like that strategy, that two-step procedures. We prefer that the re-structuring of the shares be done in one, single time instead of first solving the problem of the underrepresented countries, the Asian countries, and then a change, an amendment, to the statutes to allow the African countries to increase their share. We think that the whole thing should be done one, single time, so that, since we are the ones that contribute the most to the IMF's income and use most of the Fund's lending, we believe that we need to have broader representation within the IMF."[63]

25. The Committee is encouraged by the view of the Chancellor of the Exchequer that there may well be quick progress in the reform of the quota system. However, we note the concerns expressed by African representatives about being left behind in a two-stage process, and call on the UK Government to ensure that all countries are better represented in the governance structure of the IMF after the Singapore meetings.

Appointment of the Managing Director of the IMF

26. The Managing Director of the IMF is generally selected by the western European governments, while the World Bank President is selected by the United States of America. The current Managing Director, Mr Rodrigo de Rato, previously Spain's Minister of Finance, began his five-year term on 7 June, 2004. In the course of his evidence to us, the Governor of the Bank of England described Mr de Rato as a major driving force for reform at the Spring meetings.[64] However, the Governor highlighted the process of selecting the replacement for the Managing Director of the IMF as an area of potential reform.[65] He told us that "I think that what is most important is to put in place a process which is acceptable to the membership overall. It is not at all clear what the present process is. The most important thing is to write down what that process is before there is a vacancy…"[66] The Chancellor of the Exchequer, however, felt that the selection of the current Managing Director had been more open. "I do not think what was done in the process of selecting Mr Rato has been fully recorded, and this was not a European cabal, as you suggest. It is true that he emerged from Europe as a candidate, but it is also true that there was consultation with every continent."[67] While he noted that there would be a desire to move towards a meritocracy for appointments, the Chancellor of the Exchequer suggested that perhaps the IMF ought not to be dealt with in isolation, telling us, "I think you have got to take into account all the international institutions that have an impact on the world economy and not just one".[68] The Committee notes the Chancellor of the Exchequer's view that the selection of the current managing director was more open. However, even the Chancellor stated that not all that was done in selecting Mr Rato was recorded, suggesting the process in future could be less opaque. We therefore support the Governor's request for an open selection process for the IMF's managing director, and recommend that the UK Government prepare, publish, consult on (including with its European partners) and then support at the Singapore meeting a transparent process for selecting the next IMF managing director. While this may mean that the IMF has a more transparent procedure than other international organisations, we believe that it is right that the Fund, with its new focus, should be the first in achieving reform in this area.

The Executive Board

27. The issue of representation on the Executive Board is similar to that of the quota allocations. Part of this has to do with the level of European representation, which has been dealt with above. The Governor of the Bank of England told us: "I think that we need to make the Board, which represents all 184 member countries, an effective Board which is capable of holding the management accountable".[69] As part of this, the Governor in a recent speech in India had suggested that the Board should become non-resident, with part-time Executive Board members providing "an essential link between the Managing Director and the national treasuries and central banks from which they were drawn".[70] In his oral evidence to us, he went on to say "This general problem of a very expensive, very time-consuming, full-time Executive Board, staffed at middle level … not by senior officials from capitals, has made it, in my view, in many organisations, more difficult to hold the senior management accountable, as well as embroiling the senior management in a massively expensive bureaucratic exercise".[71] The Chancellor of the Exchequer disagreed with this position when he gave evidence to us: "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".[72]

28. Another of the Governor of the Bank of England's concerns had arisen from the amount of information passing in front of the Executive Board. He told us that the Board receives over 300 pages of text every single working day.[73] However the Chancellor reminded us that "the Board has a responsibility for the allocation of what are essentially public funds, and while one wants the reports to be precise and as concise as possible, I do not think when you are allocating public funds you should fail to go into detail of some of the issues which are raised by country investigations".[74] Tom Scholar added that "there are other areas, such as surveillance, which are essentially technical areas, and I think that could be an area where there could be quite significant economies in the use of Board time".[75]

29. On the representation of the IMF's members on the Board, the Committee stands with its earlier conclusions on quotas, in that there should be movement to allow a fairer representation of the newly emerging economies, as well as the main recipients of the Fund's expertise and resources. We support the Chancellor's view that there needs to be a resident board, to allow effective oversight of the Fund's activities. This underlines the need to ensure proper representation of all the Fund's members. We also note the Governor's concern as to excessive information flow through the Board, and therefore recommend that the UK Government try and ensure that there is reform of the processes of the Fund, which would then allow the Executive Board members to properly discharge their duties in overseeing the Fund. In the area of surveillance, and given the need for independence, we would not expect there to be heavy influence from the Board in this area.

The International Monetary and Financial Committee (IMFC)

30. We also sought evidence as to the effectiveness of the IMFC, which the Chancellor of the Exchequer currently chairs. According to the IMF, the "the IMFC has the responsibility of advising, and reporting to, the Board of Governors on matters relating to the Board of Governors' functions in supervising the management and adaptation of the international monetary and financial system, including the operation of the adjustment process, and in this connection reviewing developments in global liquidity and the transfer of resources to developing countries; considering proposals by the Executive Board to amend the Articles of Agreement; and dealing with disturbances that might threaten the system."[76]

31. Mr Woodward raised the issue of representation on the IMFC, telling us "I think there are issues about the composition of that body [the IMFC] which reflects the composition of the Executive Board".[77] When asked about the effectiveness of the IMFC in providing oversight of the Fund, Ms McDonald told us "I am not clear how something that meets so infrequently and is more an opportunity to state our policy preferences can be an oversight body".[78] When we asked the Governor of the Bank of England, the current UK representative on the IMFC, about how effective he thought the IMFC was, he told us that "Up until now I would have said it is one of those meetings where you have got a Saturday afternoon, you would be sitting there in this windowless room in Washington, thinking … 'Is anybody else outside the room taking any notice of this?'"[79] However, he considered that the last meeting had been very useful, and he said the reason for this was a combination of the work of the current Managing Director, the US Treasury Secretary John Snow, and the Chancellor of the Exchequer.[80] The Chancellor of the Exchequer himself said that the meetings had in the past been unduly long, but, he told the Committee: "Now I think we operate to a fairly tight procedure where the meetings last, I think, five or six hours and, by the time the meeting is finished, you have agreed the communiqué, which, if I may say so, is having an increasing influence on the way the debate is focused in the world economy".[81] We welcome the moves to make the IMFC more effective. It is important that, as a high level body of the IMF, it is particularly cognisant of its role in providing guidance and oversight of the work of the Fund. We therefore recommend that the UK Government do it all it can to ensure that the procedures of the IMFC are effective in helping the IMF develop its role in the global economy, and in ensuring that it provides significant oversight of the work of the Fund, especially considering the IMFC's new remit in setting the surveillance objectives for the year.

Transparency within the IMF

32. One repeated theme in the written evidence submitted to us was the need for greater transparency in the workings of the IMF. The Bretton Woods Project felt there was a "long way to go" on transparency. They suggested the current IMF policy of not allowing access to IMF board minutes made "a mockery of the public's right to access information in a timely fashion".[82] This call for greater transparency was also seconded by Action Aid.[83] David Woodward, of the New Economics Foundation, told us that he thought "a major step forward would be, at the very least, the release of the UK Director's statements in the Executive Board and preferably the full minutes of all meetings, unless there is a specific reason for confidentiality".[84] Professor Portes also agreed that it would be useful to have a less opaque decision-making process.[85]

33. The Governor of the Bank of England, while supporting the need for transparency, noted that there would be always be issues of the timing of such transparency. He told us that "There have to be opportunities for having meetings where you are not committed to a communiqué at each and every meeting but where the Fund, at the end of this process, has to make a clear public statement of its analysis and its views on where the consultation has got to".[86] He used the example of closed MPC meetings, but a timetable for publishing the minutes, to show how you "get transparency, but it has to be designed carefully".[87]

34. Transparency is a necessary part of any public institution's maintenance of accountability to its stakeholders. We recommend that the UK Government work with other member countries to persuade the Fund to release more material, including Executive Board minutes. We would like to see the IMF publish the Board's minutes as soon as is advisable. In doing so, the UK Government should bear in mind the view of the Governor of the Bank of England that transparency, has to be 'designed carefully' if it is not to prevent free and frank discussion.

34 Meeting the challenges of globalisation for all: The UK and the IMF 2005, HM Treasury, March 2006, para A.2 Back

35 Ibid., para A.1 Back

36 Q 49 Back

37 Q 49 Back

38 Q 56 Back

39 Q 49 Back

40 Q 76 Back

41 Q 76 Back

42 Q 136 Back

43 Q 135 Back

44 Q 161 Back

45 Q 163 Back