Select Committee on Treasury Written Evidence


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

  1.  Further to our submission of January and my oral evidence to the Committee on 31 January, we would like to submit the following as supplementary evidence for the Committee's consideration. It comprises commentaries, in the context of our previous evidence, on three recent documents: Mervyn King's speech to the Indian Council on International Economic Relations on 20 February 2006; HMT's report on the UK and the IMF in 2005, published in March 2006; and the IMF "Managing Director's Report on Implementing the Fund's Medium-Term Strategy" of 5 April 2006.

  2.  The discussion in this submission leads us to three key conclusions:

    (a)  that it is vital to establish genuinely democratic decision-making in the IMF if it is to fulfil its purpose effectively, whatever other reforms might be implemented;

    (b)  that it should be incumbent on the IMF, as a specialised agency of the United Nations, to prioritise the achievement of economic and social rights over commercial and financial interests; and

    (c)  that IMF member governments, including HMG, are reneging on their responsibilities under Article 28 of the Universal Declaration on Human Rights by failing to act to establish "an international order in which the rights and freedoms set forth in this Declaration can be fully realised".

Mervyn King: "Reform of the International Monetary Fund". Speech to the Indian Council on International Economic Relations (ICRIER), New Delhi, 20 February

  3.  Mervyn King's speech accurately identifies many of the problems now confronting the IMF: that its remit is unclear (p2), that it has failed to adapt itself adequately to the fundamental changes in the global economy of the last 30 years (p2), that it is failing to fulfil its founding purpose of promoting international monetary cooperation (p11), that "it lacks the legitimacy to be an effective secretariat" (p11), that it needs greater focus and independence (p12), and that "it is not best served by its current governance arrangements" (p13). These points add up to a damning indictment of one of the central institutions of the global economy; and the fact that they are being highlighted publicly by the Governor of the Bank of England is a serious danger signal.

  4.  We would also share King's view that we need to consider "the fundamental question of what the Fund is for" (p2), and that "fundamental reforms" (p12) are required. In view of his comments, this conclusion would seem inevitable. However, his proposals fail to address the problems adequately or, in some cases, appropriately, and in some instances stride confidently in the wrong direction.

  5.  The Fund's central role in recent decades has been to provide financial support for countries with foreign exchange shortages. As King observes, this "has not been the role for the IMF vis-a-vis any developed country for many [more than 20] years. Moreover, nor is it likely to be true of many emerging market economies in the future." As discussed in our earlier submission, the latter is the case, not because the underlying causes of financial crises in emerging markets have been resolved, but rather because the nature of the Fund's response and the form of support provided seriously limit its effectiveness as a safety net, so that emerging markets are forced to make strenuous (and expensive) efforts to avoid reliance on it.

  6.  This leaves, essentially, low-income countries. However, the financial position of most such countries has now been so severely damaged by the Fund's incapacity to deal effectively with the debt crisis for the last quarter century that they will not be in a position to make use of conventional IMF resources for the foreseeable future. Their need is not for the "temporary balance of payments support" which forms part of the Fund's mandate, but for debt cancellation and long-term grants in response to fundamental solvency problems.

  7.  By far the greatest threat to international monetary stability in the foreseeable future is the need to manage what King acknowledges as an "inevitable correction" to the rise in the US current account deficit to its current unsustainable level, and to do so in such a way as to minimise its impact on the most vulnerable economies. However, the Fund is unable to do this effectively because of the disproportionate influence of the US on the Fund's decision-making. The US, with just 4.6% of the world population, has 17.14% of votes in the IMF—more than the total combined votes of China, South Asia, Sub-Saharan Africa and Latin America, which together account for 63% of world population.

  8.  This is the perhaps the most urgent issue around the Fund's independence—that its voting structure leaves it impotent in the face of the greatest financial threat in its history, because of the level of control it gives to the one country which poses the greatest challenge in its area of responsibility. Dealing with this issue effectively would require much more than the "cricket umpire" King envisages—not only is the US not "walking" (and unlikely ever to do so), but it is in a position to tie the umpire's hands behind his back.

  9.  This is highlighted by the recent news that the IMF is to undertake "multilateral surveillance" between countries with large imbalances—essentially to address the US deficit with the Asian emerging economies. With anything resembling the current voting structure, the Fund cannot play a neutral role in these proceedings. At present, the US has nearly two-thirds more votes than all developing countries in Asia combined, although the latter have more than eleven times the US population. The result will inevitably be that the process will emphasise actions by the Asian economies to reduce their surpluses (eg through exchange rate appreciation) rather than actions by the US to reduce their deficit.

  10.  This is the polar opposite to the approach to the debt and financial crises of the 1980s and 1990s, when pressure was applied exclusively on (developing) deficit countries. The IMF's distorted voting structure makes such blatant and systematised double-standards inevitable. It means that the Fund can never be more than a mechanism of control by which the developed countries can exert pressure on the developing world to correct imbalances—whether surpluses or deficits—so as to minimise the adjustment required of themselves.

  11.  The result of the virtual disappearance of the Fund's core activity is to reduce the role of the IMF to little more than a talking shop. This appears to be what King envisages: an institution which will "provide and share information", "encourage countries to abide by their commitments by promoting greater transparency"" and provide "a forum for national authorities to discuss risks to the world economy".

  12.  Such a reduction in the IMF's role would clearly leave a gap in terms of the Fund's role in dealing with debt and financial crises—but this is a gap which the Fund has proved itself ill-suited to fill. Debt work-outs need to be genuinely independent, not creditor-controlled, and based on the need to minimise the adverse impacts of crises on the rights of people in the affected countries. Given the Fund's apparently insoluble problems in rectifying the shortcomings in its anachronistic governance structure, as discussed below, it seems preferable to establish a new institution better-suited to the task.

  13.  However, the Fund's governance structure, which is at the heart of its lack of legitimacy, also seriously impairs its capacity to perform even the more limited "talking shop" function. Besides the issue of the US veto, the developed countries as a whole, with just one-seventh of the world's population, have more than 60% of the votes, to the developing world's 40%; and the position of Managing Director is almost entirely in the gift of Western European governments. While King notes that "all members must feel that ownership of the Fund is shared and that all have a voice", this seems almost an afterthought, and stops far short of calling for the application of basic democratic principles; and he fails to mention the selection process for the Managing Director at all.

  14.  King's other proposals actually make the problems of democracy, legitimacy and voice worse rather than better. He envisages a massive reduction in the Board's role, reducing it from three meetings per week to just six per year. Its responsibilities would be partly devolved to the Fund's Management; and partly fragmented between discussions among "more flexible" sub-groups of the membership to discuss particular topics, so that "the big members . . . [can] meet at a relatively small table" (p12).

  15.  However, shifting responsibility from the Executive Board to the Manager is unthinkable as long as the position of MD is in the gift of a small sub-set of the membership. And, while King states that "India and China have to be at the table", it is far from clear that smaller developing countries can be incorporated in this approach effectively, although in many cases they will be impacted by the issues under discussion far more seriously than larger economies, relative to their capacity to cope. Far from resolving the grotesque power imbalances in the Fund, King's proposals thus seem more likely to take away what little voice the developing countries now have, making the Fund more than ever into an exclusive club for the rich and/or powerful. In effect, it is a further step away from controlling the economic "law of the jungle" at the global level.

HM Treasury: "Meeting the Challenge of Globalisation for All: the UK and the IMF, 2005", March 2006

  16.  The Treasury report is a useful, if small and belated, step towards increasing the transparency of the UK's role in the IMF. However, while it is useful in providing information on HMG's position in relation to certain issues within the IMF, it falls far short of the standards of transparency one would take for granted in national or local government. (It is noteworthy that its discussion on transparency is limited to the publication of IMF documents, ignoring the secrecy of Board discussions, and the inability of UK citizens to find out what has been said on their behalf.) Perhaps unsurprisingly, given its nature, it addresses the fundamental problems highlighted by Mervyn King to only a very limited extent. And the views it presents on the one issue it does address—representation—are extremely questionable, and largely sidestep the issue.

  17.  The Treasury opens its discussion on "Quotas and Voice" with the extraordinary assertion that "There is broad agreement . . . that members' representation should broadly reflect their economic weight". We would contend that the validity of this statement is wholly dependent on whose views are considered, and what weights (democratic or "reflecting economic weight") are given to them. It may well be the view of the governments of developed and better-off middle-income countries; but the general view within civil society is that the governance structures of international institutions should be based on democratic rather plutocratic principles.

  18.  Equally, the report presents the issue of developing countries' voice as reflecting "the fact that these countries form the bulk of the call on Fund resources and the commitments made in the Monterrey consensus". This seems perverse. The primary reason to see the current level of representation for poor countries as inadequate, and for this to undermine the Fund's legitimacy, is that it is inconsistent with the fundamental democratic principles which are expected at the national level. The damage to the Fund's legitimacy does not come primarily from the relatively limited (though increasing) under-representation relative to economic weight of rapidly growing countries as their economies expand. Rather it comes from the vast disparity in representation between the people of rich and poor countries highlighted above; and the conspicuous iniquity of an institution which has been largely running the economies of much of the developing world for a quarter of a century (and doing so with a spectacular lack of success) being run by the world's rich minority, who are themselves virtually unaffected by its policies. It is, in short, the fact that the Fund's voting system has allowed it to be transformed into little more than an instrument and embodiment of neo-colonial power.

  19.  In this context, the Treasury's proposals do not even scratch the surface of the problem. Increasing basic votes can do no more than dilute the effect of economic weighting to a very limited extent, and seems unlikely to do more than neutralise the effect on poorer countries of increasing the weight of middle-income countries. (It is ironic that the declining economic weight of the poorest countries, which underlies their declining quota share is itself largely a result of the IMF's failure to deal effectively with the debt crisis, and the adverse effects of its policy prescriptions, which are at least partly a product of the power imbalance within the institution.) The Treasury's other proposals, though potentially helpful in other respects, do not help to rectify the imbalances in voting power.

  20.  Perhaps the most serious aspect of the problem is that of inertia—that the power given to the richest countries enables them to prevent that power being taken away from them. The result is that—barring an improbable act of unanimous self-sacrifice on the part of developed country governments—the Fund can never undertake a genuinely democratic reform, or, therefore, establish the genuine legitimacy it needs to perform its role effectively.

  21.  In this context, the only way to establish the legitimacy essential to the Fund's effectiveness—which even Mervyn King recognises to be lacking—is to take the reform process out of the Fund's own undemocratic and illegitimate decision-making processes. In our view, this can only be done through a transparent, inclusive, participatory and genuinely democratic global process to establish an international economic order designed to meet the needs, objectives and standards of the 21st century.

IMF: "Managing Director's Report on Implementing the Fund's Medium-Term Strategy", 5 April 2006

  22.  The Managing Director's Report highlights a second problem with relying on the IMF to reform itself—that of institutional (as opposed to political) inertia. As one might expect, given its source, the Report is less a recipe for meeting the profound global challenges we now face than an attempt at damage limitation from the perspective of the Fund's own institutional interests.

  23.  Rather than starting from the needs of the 21st century, and considering how they can best be met, the Report starts from the Fund's current nature and activities and considers only incremental changes, within its own institutional mind-set. This falls far short of what is needed if the Fund, or an alternative institutional framework, is to contribute positively to the achievement of 21st century objectives, such as poverty eradication and climate change, within the context of the contemporary global economy.

  24.  Like the Treasury, the report refers to the need for "a fair distribution of quotas, reflecting the important changes in the weight and role of countries in the world economy", with no acknowledgement of the institution's democratic deficit. And, while the issue of selection of the Managing Director is raised, the call is only for an increase in the transparency of the process, with no mention of the application of democratic principles, or even the inclusion of the membership as a whole in the selection process. Once again, this appears to indicate a failure even to recognise the nature of the problem of the Fund's democratic deficit.

  25.  Equally, while the report highlights the need for "more effective engagement in low-income countries", this is seen as requiring the Fund only to "marshal the expected increase in aid flows" and "new understandings with the World Bank and other agencies on the division of labour", with no recognition of the Fund's failure of the last 25-30 years in terms of resolving the debt crisis and in terms of its policy prescriptions. The emphasis remains firmly on the design of policies which enable countries to live within their means, rather than ensuring that the means are available to pursue policies which would enable governments to fulfil the rights of their populations.

  26.  Even within these constraints, the Report's attitude to national economic policies is epitomised in paragraph 12 of the report: "Building consensus around Fund policy advice requires more active outreach". This suggests that it is for the Fund to determine what policies are appropriate, and that it merely needs to persuade governments (and others) that the policies it prescribes should be implemented. This belies the Fund's rhetoric about country ownership and the supposedly participatory approach of Poverty Reduction Strategies.

  27.  Beyond the Fund's own lending, little role is seen in expanding the resources available for developing countries as a whole to relieve the financial constraints within which policies need to be designed. In particular, there is no indication of any role for the Fund in persuading donors to fulfil their 36-year-old commitment to provide aid equivalent to 0.7% of their national income, although the $125 billion annual shortfall in aid from this level is a major reason for the financial imbalances afflicting a major part of the Fund's membership. The Report also asserts that "the Fund must be neutral between sovereign debtors and private creditors". (There is no mention of the position vis-a-vis official creditors—a much more problematic issue as the IMF is both controlled by bilateral official creditors and is a multilateral official creditor in its own right.)

  28.  The insistence on putting the financial interests of commercial entities on an equal footing with the needs of national governments is, in our view, wholly inappropriate. Apart from the fact that they are members of the Fund, national governments are legally responsible, under international conventions, for the rights of their populations, within the resources available to them. By giving equal priority to private creditors, the resources available—and therefore both the ability and the obligation of the government to fulfil its citizens' rights—are diminished.

  29.  As a specialised agency of the United Nations, under whose auspices the human rights conventions have been signed, it should be incumbent on the IMF to prioritise the achievement of economic and social rights over commercial interests. It is still more important, given the amounts involved and their focus on countries where needs are greatest, that the Fund should take an active role in ensuring that the 0.7% commitment (also made under the auspices of the United Nations) is fulfilled.

  30.  While the obligations of international organisations themselves under the Declaration are a matter of legal dispute, there would appear to be a clear obligation on IMF members, as signatories, to ensure that the IMF acts to promote UN human rights standards. The objective of the Universal Declaration on Human Rights, as stated in its Preamble, is that "every organ of society . . . shall strive . . . by progressive measures, national and international, to secure universal and effective recognition and observance" of the rights and freedoms it establishes. Article 28 states explicitly that "Everyone is entitled to a social and international order in which the rights and freedoms set forth in this Declaration can be fully realised".

  31.  It is beyond question that economic and social rights fall far short of the standards established in the Declaration across much of the developing world; and there can be little doubt that various aspects of the international economic order—not least the continuing failure to resolve the debt crisis—are a major reason for this. It is clear, therefore, that the international economic order is not conducive to the universal achievement of the rights established in the Declaration; and that signatories are therefore in breach of their legal obligations under Article 28, and will remain so until they act to establish a world economic order consistent with this Article.

David Woodward

Head, New Global Economy Programme,

nef (the new economics foundation)

27 April 2006





 
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