Select Committee on Treasury Written Evidence


Memorandum submitted by Jubilee Research at nef (the new economics foundation)

INTRODUCTION

  1.  In the light of the short time-frame allowed for submissions for this inquiry, our submission consists of this covering note and a number of attachments prepared for other fora.

  2.  We have concentrated on the following elements of the request for submissions:

    —  the impact of globalisation on the current and future roles of the IMF; and

    —  governance and management of the IMF.

    Other members of the Bretton Woods Project are making submissions on the other elements.

  3.  The attachments consist of:

    (a)  "The IMF and the World Bank in the 21st Century: the Need for Change" (written submission by Jubilee Research at nef to the European Parliament on "Strategic Reforms of the IMF", 9 May 2005);

    (b)  "The IMF: the Wrong Business Model—or the Wrong Business?" (Jubilee Research at nef, 13 January 2006); and

    (c)  an extract from "Chapter 9/11: Resolving International Debt Crises—the Jubilee Framework for International Insolvency" (Jubilee Research at nef, 2002).

[these articles are available at http://www.jubileeresearch.org]

THE IMPACT OF GLOBALISATION ON THE CURRENT AND FUTURE ROLE OF THE IMF

 (a)   Current Role

  4.  As our submission to the European Parliament observes, the international financial environment has changed radically since the foundation of the IMF in 1944. It was designed to provide occasional and temporary support to its (mainly developed) member countries in balance-of-payments difficulties within a fixed exchange rate system, with capital controls. By contrast, the international financial system is now characterised predominantly by floating exchange rates, capital account liberalisation, and commercial capital flows which are both much larger than in the 1940s and of a nature not envisaged at that time. However, the Fund has failed to adapt adequately or appropriately to this fundamentally different context.

  5.  As the developed countries' need for recourse to the Fund has disappeared, the IMF has become involved exclusively in developing countries, and at a policy level undreamed of in 1944. Balance of payments problems have often been general rather than country-specific, and either chronic in nature (such as the debt crisis) or arising from types of capital flows that did not exist in the 1940s. The IMF's policy interventions have been inappropriate, both in the 1980s debt crisis (contributing to its continuation in low-income countries after more than 20 years), and, as is recognised even by the Fund itself, in the succession of financial crises from Thailand in 1997 to Argentina today. In the latter case, the modalities of Fund programmes and support are also clearly inappropriate to the nature of the crises, primarily because of the delays and uncertainties involved.

  6.  However, there is no sign that the Fund has developed either more apt policy prescriptions or more appropriate financing mechanisms to respond to similar circumstances in the future. Taking into account the Fund's role in promoting the dismantling of capital account controls—now widely seen as damaging in many circumstances—it is highly questionable even that it is making a net positive contribution to international financial stability.

  7.  The IMF is now heavily involved in directing economic policies in developing countries using its role as gateway to debt relief and aid, as well as its own lending, to dominate policy making on behalf of the developed country governments, and enforcing the "Washington Consensus" agenda of trade liberalisation, privatisation and globalisation. By largely removing control of large areas of policy and seriously limiting political choice, this undermines sovereignty, democracy and the legitimacy of national institutions, actually encouraging the poor governance which the Fund ostensibly deplores. It also perpetuates an unjust international economic order that condemns large proportions of the world's citizens to poverty, disease and hunger.

  8.  The second attachment discusses the implications of the dramatic fall in the loans outstanding to the IMF (from $107 billion in 2003 to $50 billion at the end of 2005, and an expected $33 billion during 2006). It argues that this is a result of the developing countries becoming polarised between two groups: "emerging market" economies, who are following in the footsteps of the developed countries in making the transition away from reliance on the Fund, partly in response to the Fund's failure to deal with financial crises effectively; and most poorer countries, who cannot now afford to borrow from the IMF, at least partly because of its failure to resolve their debt crises. Since the IMF relies on the interest on its lending to fund its own operational costs, this poses a critical problem for the institution, and casts further doubt on the appropriateness of its current role in the 21st century.

 (b)   Future Role

  9.  In our first attachment, we conclude that the signal failure of the IMF in recent decades demonstrates the need for fundamental changes in the international financial system—not least the nature and role of the Fund itself—and recommend alternative mechanisms for dealing with international financial problems.

  10.  For dealing with debt crises, we call for a Fair and Transparent Arbitration Process (FTAP), independent of both debtors and creditors. The current mechanisms and institutions for dealing with debt (such as the Paris Club and IMF) allow creditors to be judge and jury in a process in which they are also plaintiffs. They also put no onus on creditors to take any responsibility for the consequences of their own reckless lending; and they fail to protect the economic and social rights of the population of debtor countries (who often had no say in selecting the government that contracted the loans, and little or no benefit from them). The role of the FTAP would be to establish the legality and legitimacy of any debts where this was in dispute, and to designate a debt work-out based on the human development approach to debt reduction[44]. Its very existence should discipline both lax lenders and reckless borrowers.

  11.  The third attachment (Chapter 9/11) makes the case for an FTAP in greater detail, and presents a specific proposal based on Chapter 9 of the US bankruptcy code, which deals with local authority insolvency. The essential components of an FTAP are its independence of both debtors and creditors, and the protection of the rights of citizens to participate in, and if necessary object to, the outcome of the insolvency process. Its proceedings should be transparent and accountable both to creditors and to the citizens of debtor nations.

  12.  To deal with financial crises such as those of the late 1990s, we propose a system based on a "crawling peg" exchange rate system, to promote economic stability, backed by a global intervention fund to deter and/or counter speculative pressures[45]. This would place much greater emphasis on the prevention of crises rather than resolving them when they arise, and ensuring an automatic response at a speed and on a scale commensurate with the nature of such crises.

  13.  In this proposal, developing countries would set their own exchange rates, with a pre-announced rate of gradual appreciation or depreciation, according to their needs and circumstances. These would be backed by appropriate use of capital controls; a two-tier currency transactions tax (also raising funds for development); and a global intervention fund. In the event of acute balance of payments problems in a particular country, for example arising from a speculative attack on its currency, the intervention fund would automatically intervene to support the currency, while the rate of exchange rate depreciation would automatically be adjusted to allow a sustainable and benign rate of adjustment. This should both deter speculative attacks and avert crises which might otherwise arise from them.

  14.  These proposals would largely remove the need for IMF involvement in the international response to debt and financial crises. While some role might remain in providing policy advice, capacity-building and other forms of technical assistance, it is essential that this should be impartial and pragmatic, and should be provided in a way that left developing country governments, in tandem with civil society, clearly in control. This would require very different approaches from those which currently operate.

GOVERNANCE

  15.  There is a lack of transparency, democracy and accountability in the IMF's governance which would not be contemplated for a moment at the national level. Its voting structure is heavily skewed in favour of the developed countries, being weighted according to the size of their economies. This means that the developed countries, with just 14% of the world's population, and not directly affected by the Fund's activities, have 60.4% of the votes. This is compounded by a constituency which means that some developing countries are "represented" by Directors from developed countries. As a result, only 10 of the Fund's 24 Executive Directors are from developing countries, casting just 28% of the votes. Moreover, the Directors are considered employees of the Fund, not of their own countries, and what they say on behalf of their respective countries in Board discussions is confidential. (UK interventions are not even available under the Freedom of Information Act.) The Managing Director of the IMF is always nominated by its Western European members.

  16.  Coupled with the developed country governments' apparent determination to retain and exploit their political privileges within the Fund, this undemocratic and unaccountable system serves to ensure the continuation of the existing global economic order; and it casts serious doubt on the Fund's capacity to remould itself as an institution suited to the 21st century. The World Bank's World Development Report 2006[46] observes that:

    Economic and political inequality tend to lead to economic institutions that systematically favour the interests of those with more influence . . . . There is unequal capacity to influence the policy agenda: the interests of the disenfranchised may never be voiced or represented[47].

While this is directed at the national level, it would be difficult to find a better description of the iniquities of the existing international economic order, or a better demonstration of this than the IMF's system of governance.

CONCLUSION

  17.  The IMF has singularly failed to perform its core functions, and the developing countries have suffered considerably as a result. This failure reflects its inability to adapt to a changing global economic environment, or even to the changes in governance standards associated with the passing of the colonial era. The proposals summarised above are intended to offer some initial ideas as to how these functions could be better performed through an alternative institutional structure.

  18.  There are three critical needs:

    —  to remove the IMF (and the World Bank) decisively from the policy-making process in developing countries, where their activities have been damaging economically, socially and politically;

    —  to institute more effective mechanisms to prevent and resolve debt and financial crises at a lower social cost; and

    —  fundamental changes to the Fund's system of governance, to ensure that it is genuinely accountable to the people of its member countries, and that developing countries have an influence within the Fund commensurate with their share of the world population and the impact Fund policies have on them.

  19.  There may be some residual functions which could usefully be performed by a much smaller IMF (possibly merged with a similarly reformed World Bank) in such a scenario. These include policy review (such as the IMF's Article IV Consultation process), data collection and dissemination, and possibly some analysis. Even with such a reduced role, however, it would be essential to ensure that the organisations' governance structures were democratised, and their approach non-ideological, particularly in policy-related analysis.

David Woodward

Head, New Global Economy Programme,

nef (the new economics foundation)

January 2006










44   For details of the human development approach to debt reduction, see Henry Northover, Karen Joyner and David Woodward (1998) "A Human Development Approach to Debt Reduction for the World's Poor". CAFOD, London, http://www.csae.ox.ac.uk/conferences/1999-cpa/Papers/SessionA/Northover.PDF Back

45   For details of this proposal, see David Woodward (1999) "Time to Change the Prescription". Catholic Institute for International Relations, London. Back

46   For a more extensive discussion, see Physician, Heal Thyself! The World Bank's World Development Report, 2006: Equity and Development, Jubilee Research at nef, September 2005, www.jubileeresearch.org/analysis/articles/worldbank280905.htm. Back

47   World Bank (2005) World Development Report, 2006: Equity and Development. Washington DC: World Bank. Back


 
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