Select Committee on Treasury Written Evidence


Memorandum submitted by the Bretton Woods Project

INTRODUCTION

  1.  The Bretton Woods Project is an independent NGO established by a network of UK-based NGOs in 1995 to take forward their work of monitoring and advocating for change at the World Bank and IMF. See www.brettonwoodsproject.org/about for more details.

  2.  Past Treasury Committee inquiries (January 1999 on Fund reaction to East Asian crisis; February 2000 on the challenges of a globalised economy; and January 2001 on IMF accountability) have provided useful opportunities to better develop UK policy approaches to the IMF as well as increase UK accountability for its actions at the Fund. The current inquiry comes at a particularly opportune time, coinciding with the IMF medium-term strategic review and the early stages of discussion for the IMF's thirteenth quota review.

  3.  The IMF faces challenges on all fronts. Most visibly, its governance structure is in desperate need of reform. More fundamentally, the dwindling of the Fund's lending portfolio at a time of rising (and unnecessarily costly) levels of national reserves, denotes recognition that de-linking from the Fund and the financial costs that entails, is superior to submitting a country to the exigencies of its economic prescriptions. Having abandoned its role in regulating wealthy countries, and with middle-income countries now turning their backs, the Fund could soon be left with only the poorest countries as its clients—those who can least afford to pay. Steps taken by the Fund to prevent and manage financial crisis in the wake of the East Asian Crisis are widely seen as inadequate.

  4.  The Fund must take bold steps to end the democratic deficit in its governance structures and "go back to the drawing board" in terms of its functions. This should include a re-think of its surveillance and exchange management role vis a" vis wealthy countries; the elimination of all but fiduciary conditionality on its lending to middle-income countries (returning to its initially envisioned role as a quick-disbursing fund in times of balance of payments difficulties); and the adoption of more flexible macroeconomic policy advice in low-income countries.

IMPACT OF GLOBALISATION ON THE ROLES OF THE IMF

Crisis management

  5.  The flagship role of the IMF is the prevention of financial crises, and the mitigation of the impact of crises when they do occur. The Fund's actions have—in many cases—contributed to the frequency of financial crises and aggravated their impacts.

  6.  The pursuit of rapid financial liberalisation, primarily through the liberalisation of the capital account, has led to increased financial volatility and vulnerability. This was conceded in a paper co-authored by the Fund's former chief economist Ken Rogoff. [8]According to a study by the Independent Evaluation Office, IMF management, staff and board were "aware of the risks of premature capital account liberalisation", such awareness "remained at the conceptual level" and did not lead to operational advice on preconditions, pace and sequencing of parallel reforms.

  7.  The Fund's best attempts to prevent future financial crises have centred on the establishment of standards and codes. In its third report of 1999-2000, [9]the Treasury Committee urged the government to ensure input from developing countries into the development of such standards, to make certain that the costs of implementation did not exceed the benefits of having the standards in place. We support the use of standards which have been adopted with the full involvement of developing countries in their design and cost-benefit assessment. However, the ability of such standards to prevent future financial crisis should not be overestimated. Financial crises can and have occurred in countries with sound financial regulatory regimes.

  8.  Similarly, reliance on so-called "early warning systems" is predicated on the false belief that the mere provision of information will lead investors to behave in ways which stabilise the economy. For these reasons, we would support a "trip wire—speed bump" approach such as advocated by Grabel and Chang. [10]This would require the Fund to assist developing countries in preparing a range of policy measures, including capital controls, to manage the challenges associated with increasing financial integration.

  9.  Often missing from the discussion of financial crisis is the need for greater attention to the role played by the policies and institutions in rich countries in triggering financial crises. The G4 group of Belgium, Netherlands, Sweden and Switzerland, agrees: "surveillance of larger developed countries should include more analyses on aspects of global financial stability". Yilmaz Akyz, former director of UNCTAD's globalisation division, in a technical briefing prepared for the G24, supports previous British calls for a greater separation of surveillance and lending functions. However he concludes that asymmetry in surveillance between borrower and creditor countries can only really be reduced by "minimising conditionality for borrowing countries and increasing the degree of automaticity of access to Fund resources".[11]

  10.  Resolving sovereign debt issues in the wake of a financial crisis is an integral part to burden-sharing and minimising the impact of the crisis on the most vulnerable. In its third report of 1999-2000, the Treasury Committee urged the UK to take a stronger lead in pushing for the private sector to take responsibility for high-risk loans. [12]The UK support the IMF's defeated proposal for a Sovereign Debt Restructuring Mechanism, and continues to support the development "of a practical operational framework for the restructuring of unsustainable sovereign debts".[13] The SDRM proposal was fundamentally flawed in placing the IMF in a hypocritical position as both creditor and arbitrer of debt workouts. The UK should consider supporting the proposal for a Fair and Transparent Arbitration Procedure. [14]

Poverty reduction

  11.  The Fund has begun to realize that, in low-income countries, the policies it supports should place greater emphasis on attainment of human development objectives. Matthew Martin of NGO Debt Relief International, has urged the Fund to "start from GDP growth rates needed to attain the MDGs". This would mean a reversal of its traditional logic of "designing programmes on the basis of inflation targets and availability of financing." [15]Martin argues that the Fund's stabilisation targets—primarily inflation rate and fiscal deficit targets—could be made more flexible in a number of ways: by greater emphasis on growth where it will not undermine stability; by allowing countries to propose alternative means of achieving targets; and through the inclusion of programme "adjusters" which would allow higher expenditure if more aid or revenue materialises than expected. Adopting alternative macroeconomic policies would help to end what ActionAid has described as the Fund's undermining of the achievement of MDGs in education and health. [16]

  12.  Any major shift in macroeconomic policies which low-income countries adopt should be based on evidence of its distributional impacts. For this reason it is important that the Fund mainstream Poverty and Social Impact Assessments (PSIA) in its work. A recent study from the European Network on Debt and Development[17] finds that the IMF's commitments to evidence-based policy making are not translating to action: "The IMF has failed to take the PSIA approach seriously. The small PSIA team established in September 2004 is poorly resourced and has produced extremely limited research." Further, it finds that of what little PSIA has been done by the Fund, "macroeconomic frameworks continue to be off the agenda despite the increasing debate around the impacts of stringent IMF policies on growth and poverty reduction."

IMF STRATEGIC REVIEW

  13.  We have significant concerns about the process of the Fund's strategic review. It is not clear how shareholder governments or civil society will be able to input, evaluate or influence the review process. It is not unreasonable to assume that the process for a medium-term review of the structure and functions of a critical institution in global financial architecture would have been consulted upon and clarified before it was undertaken.

  14.  As for the substance of the review, we see no convincing argument as to why the Fund's institutional purposes should be changed. Under the Fund's articles of agreement, [18]its main purposes are to facilitate the balanced growth of trade (in order to maintain high levels of employment), to promote exchange stability and to lessen the duration and degree of disequilibrium in balances of payments. We find these purposes both concrete and still relevant for today's economy. Conversely, "helping members meet the challenges of globalisation", as suggested in the review—particularly in the absence of a clear definition of what is meant by globalisation—is unfocused and open to interpretation.

  15.  Our specific concerns about the direction that the review is taking include:

    —  the failure to sufficiently address the need for greater surveillance of the policies and institutions in wealthy countries which trigger financial instability;

    —  the failure to take bold steps to address the need for a debt arbitration procedure; and

    —  the assumption of a role in promoting capital account liberalisation in the face of empirical evidence which suggests that such measures make developing countries more and not less susceptible to financial crisis.

The full commentary of the Bretton Woods Project on the strategic review can be found at: http://brettonwoodsproject.org/article.shtml?cmd[126]=x-126-438665.

UK AND EUROPEAN POLICY TOWARDS THE IMF

UK accountability at the IMF

  16.  Scrutiny of the government's activities at the IMF by parliamentary committee is a critical measure of accountability. The annual hearings of the International Development Committee on the World Bank and IMF play a central role. However, due to the natural focus of the IDC on issues which relate to the World Bank, there has been less attention given over recent years to the IMF. In the last six years, Chancellor Gordon Brown has only appeared once in front of the annual IDC session on the World Bank and IMF (in November 2003, while the Secretary of State for International Development has appeared at every such session). Similarly, after a series of regular hearings between 1999 and 2002, culminating in the appearance of IMF Managing Director Horst Koehler before the Committee, interest of the Treasury Committee in IMF issues in the last four years appears to have tailed off. For this reason we particularly welcome the current inquiry.

  17.  The Treasury Committee played a key role in convincing the Treasury of the importance of an annual report on its activities at the Fund. The Bretton Woods Project has been monitoring these annual reports since their inception. The reports have improved over time in the breadth and depth of coverage, and we believe they continue to serve an important function. To further improve the reports, more could be done to detail who within Treasury is leading on which issues, how policy positions were arrived at (and especially why civil society consultation was or was not taken into consideration) and how Treasury and other government agencies are collaborating on relevant issues. Greater attention should be given to the evaluations of the IEO in the report.

Bretton Woods Project commentary on the UK and the IMF 2005:

http://brettonwoodsproject.org/article.shtml?cmd[126]=x-126-298644.

European policy towards the IMF

  18.  The Bretton Woods Project, along with many of its partners in the EuroIFI civil society network, have been closely monitoring developments in European countries' relations with the international financial institutions. We view as positive the continuing trend towards greater cooperation of European representatives. This has taken the form of the Sub-Committee on the IMF (SCIMF) under the Economic and Finance Ministers' Council in Brussels; and an informal body called EURIMF which meets regularly in Washington.

  19.  Research co-commissioned by the Project[19] concludes that, especially given the ratification failure of the draft EU Constitution Treaty, European power in the IFIs will remain, in the short term, in national administrations. However, in light of increasing calls for a re-structuring of IMF governance (see below), European countries would be better to address the issue of European coordination in a forward-looking manner. We believe a number of steps would usefully advance European cooperation at the IMF:

    —  European member states should agree to a list of countries of common interest for Article IV review where they would commit to coordinate;

    —  EURIMF should be strengthened through the creation of a coordination office in Washington. This office would be responsible for liaising between European EDs and other member state representatives at the IMF, and profiling the EU at the IMF; and

    —  European EDs at the IMF should hold an annual visit to the European Parliament on the model of what currently happens for World Bank European EDs.

It is vital that transparency be a priority in any such developments. This would entail public access to EURIMF and SCIMF documents.

GOVERNANCE AND MANAGEMENT OF THE IMF

  20.  It has been recognised by all sides that the future legitimacy of the Fund rests at least partially on fundamental reform of its governance structures.

  21.  The thirteenth review of IMF quotas, to be completed by January 2008, opens up a window of reform. The UK has supported calls for enhancing the voice of developing countries in the IFIs. It has very usefully backed suggestions for both an increase in the basic vote and an additional chair for African countries. However, further steps may be needed if the legitimacy question is to be addressed. The UK should clarify its position on:

    —  separate formulas for contribution and voting power (while access should be determined by an assessment of need, as de facto occurs currently); [20]

    —  the use of purchasing-power parity in the calculation of voting power; [21]

    —  a voluntary reduction in the UK quota (for ad hoc distribution to countries which are especially under-represented);

    —  the selective use of double majority voting;

    —  the re-alignment of constituencies to ensure a maximum number of countries in any one constituency; and

    —  a consolidation of European representation.

  22.  On the question of leadership selection, the status quo (whereby the leadership of the Fund is in the gift of the EU) must be rejected. In its response to the TSC's third report of session 1999-2000 (paragraph 19), the government committed to "work with other members to consider whether changes should be made to the selection process". The UK took some initial steps during the nomination of Rodrigo de Rato, but should work with European finance ministers to ensure a truly open and meritocratic selection process for all positions at the IMF.

  23.  On the question of board effectiveness, there has been no announcement of whether there will be an assessment of the impact of the Analytical Trust Fund established to increase the capacity of African EDs on the board. [22]The UK is the largest donor contributing to the Fund. Further research and a public UK position is sought on the recommendation of the Commission for Africa to replace the current Board of Governors with decision-making councils made up of elected representatives. [23]

  24.  We support previous calls by the Treasury Select Committee for the full disclosure of board minutes and we appreciate UK government advocacy on this issue. Experience with the World Bank pilot of disclosure of board minutes which has not proved very revealing, has led us to request transcripts. Currently the IMF allows access to board minutes (which includes transcripts) after 10 years, making a mockery of the public's right to access information in a timely fashion.

  25.  We welcome improvements to Fund transparency more generally such as increased rates of publication of Article IV reports. [24]However, we feel there is still a long way to go. Draft policies and strategies are not disclosed; [25]more consistent and timely disclosure of letters of intent, PRGFs and PSIA is needed; and publication of the board's work programme is extremely limited (the executive board calendar only gives the agenda for the next week, as compared to the World Bank calendar which gives the agenda for the next month). We would encourage the IMF to change its approach to transparency, as advocated by the Global Transparency Initiative. [26]This would involve the adoption of the presumption of disclosure. Disclosure of information at the IMF is currently presumed in some situations, but voluntary in many others. There may be narrowly defined exceptions to the presumption of disclosure, but importantly, there should be an appeals mechanism to ensure that these exceptions are not abused.

  26.  We support previous calls by the Treasury Select Committee to have senior Fund officials appear in front of parliaments. The issue of parliamentary accountability is central to increasing the voice of developing countries and their citizens. The International Parliamentarians' Petition, [27]signed by over 1,000 MPs in over 50 countries, calls for greater parliamentary scrutiny of IFI activities and an end to IFI board sign-off on national development strategies. Further steps are needed, such as those being taken by DFID to support the formation of parliamentary oversight committees such as the Malawian Parliamentary Committee on Oversight of the IFIs. [28]Recognising the necessary confidentiality of some of the Fund's work, suggestions have been made for increasing the role of cross-party parliamentary committees operating under confidentiality arrangements, or institutions such as Public Accounts Committees or Auditors General. [29]Finally, there is a need for better guidelines for IMF staff interaction with parliamentarians.

  27.  The UK played a key role in the establishment of the Independent Evaluation Office. The IEO has provided insightful analysis of Fund activities, however, neither Fund management nor shareholders have put sufficient effort in to following up on its recommendations. As the IEO begins the second round of evaluations of topics which it has already covered, this will provide an ideal opportunity to determine why previous recommendations either were or were not adopted. This will require that the IEO has both the necessary financial resources and sufficient political backing to do its work. The work of the IEO has not received sufficient attention in the annual UK and IMF reports. This point is especially important considering that the IMF is not included in most evaluations of multilateral organisations, such as DFID's assessment of Multilateral Organisational Effectiveness (MEFF), or the like-minded group's Multilateral Organisations Performance Assessment Network (MOPAN).

  28.  Professor Daniel Bradlow at American University has raised a critical gap in the IMF's governance structure. He points out the absence of any mechanism at the IMF for dealing with cases of staff or management non-compliance with applicable policies and procedures. This becomes critically important as the IMF consults with a broader range of government officials, parliamentarians and civil society. He recommends the creation of operational policies and procedures supported by the establishment of an independent ombudsman. [30]This recommendation deserves further investigation from the government.

January 2006



http://www.jubileeresearch.org/analysis/reports/jubilee—framework.html

Available at: http://www.eurodad.org/articles/default.aspx?id=650

http://www.imf.org/external/np/pp/eng/2005/052405.htm

http://www.ifitransparencyresource.org/en/InstitutionsDetail.aspx?id=10

http://www.ippinfo.org/documents/MAPCOIREPORT2005.doc



8   Effects of Financial Globalization on Developing Countries: Some empirical evidence, Prasad et al., available at http://www.imf.org/external/np/res/docs/2003/031703.htm. Back

9   Treasury Committee third report 1999-2000, paragraph 42. Back

10   Trip wires and speed bumps: Managing. Back

11   Reforming the IMF: Back to the drawing board, Yilmaz Akyuz, G24. Available at: http://www.g24.org/Akyu0905.pdf. Back

12   Treasury Committee third report 1999-2000, paragraph 48. Back

13   The UK and the IMF 2004-05, HM Treasury. Back

14   Jubilee framework for international insolvency, available at: Back

15   "A Changing Role for the IMF in Low-Income Countries", Martin and Bargawi, in Helping the Poor? The IMF and Low-Income Countries, Teunissen and Akkerman (eds.), FONDAD, 2005. Back

16   Changing course: Alternative approaches to achieve the MDGs and fight HIV/AIDS, ActionAid International, available at: http://www.actionaidusa.org/pdf/Changing%20Course%20Report.pdf Back

17   Open on impact? Slow progress in World Bank and IMF poverty analysis, EURODAD, Sept 2005. Back

18   Article 1, IMF Aricles of Agreement: http://www.imf.org/external/pubs/ft/aa/aa01.htm. Back

19   European Coordination at the World Bank and at the IMF: A question of harmony? ADS insight. January 2006. Back

20   "Reforming the IMF: Towards Enhanced Accountability and Legitimacy", Kelkar et al, in Reforming the Governance of the IMF and the World Bank, Buira (ed), Anthem Press, 2005. pp 54-55. Back

21   "Purchasing Power Parities and Comparisons of GDP in IMF quota calculations", John McLenaghan, in Buira (ed) 2005, Anthem Press, 2005. pp 171-194. Back

22   African directors' capacity fund underway: http://brettonwoodsproject.org/article.shtml?cmd[126]=x-126-62981. Back

23   Africa Commission: World Bank and IMF "increasingly irrelevant" http://brettonwoodsproject.org/article.shtml?cmd[126]=x-126-150399 Back

24   Staff review of the Fund's disclosure policy, available at: Back

25   IFI transparency resource database on IFI disclosure requirements, available at: Back

26   Global Transparency Initiative (GTI) is a network of civil society organisations promoting openness in the IFIs. http://www.ifitransparency.org. Back

27   International Parliamentarians' Petition, http://www.ippinfo.org. Back

28   Malawian Parliamentary Committee on the IFIs, details available at: Back

29   Democratizing the IMF, Woods et al in Accountability of the IMF, Carin and Woods (eds), IDRC, 2005. pp 52-61. Back

30   "Operational Policies and Procedures", Daniel Bradlow, in Carin and Woods (eds) 2005. pp 88-107. Back


 
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