Examination of Witnesses (Questions 1
TUESDAY 23 JANUARY 2001
1. Welcome everyone. Mr O'Donnell, I think you
would like to make a few opening remarks.
(Mr O'Donnell) Very briefly, Chairman;
I know that briefness is appreciated on these occasions. First
of all, may I thank you for your interest in this subject. We
hope you like this second annual report that we have produced.
It has been quite a busy year with a new managing Director at
the Fund, Horst Köhler, and has really been a year of implementation.
The points I would emphasise on HIPC are the fact that we have
22 countries through to decision point and, on codes and standards,
the fact that we now have 83 assessments under codes completed
covering about 33 countries. That is important for us. The announcement
by the Chancellor with respect to conflict countries on HIPC again
is a very important step and I think we are making some progress
in implementing private sector involvement framework that has
been agreed now. It started off at G7 level. That is very important
for us. On development, I think the bigger prize is moving towards
international development goals and I think that, looking forward,
will be the focus of our attention bringing in debt relief as
part of that but as only a part of what is needed to achieve those
goals. The other aspect and the reason I am here as well as Stephen
is that you need to think of all of these issues within the broader
context of the world economy and we are facing some challenging
periods in the world economy. In particular, the IMF have not
produced a new forecast but they have said that they will downgrade
their world growth forecast from around 4.25 per cent to 3.75
per cent. The US numbers will come down from around 3.2 to 2.5
per cent and this is a background against which we need to consider
carefully the implications for UK economy. We are doing that in
time for our forecast for the Budget and we think that is one
of the key issues which will be very important to the world economy
because the US has been a large driver and there have been quite
important implications for the way monetary authorities around
the world respond.
2. Firstly, can I say how pleased we are that
you are producing these annual reports on a regular basis. If
you remember, it was in response to a request from this Committee
because we think it is very important that our representatives
at the IMF should have an opportunity to account for their decisions
and for the policies in front of a Parliamentary Committee and
indeed in front of Parliament as a whole. Also, this report is
substantially larger than the one last year. May I begin by asking
you, in a way leading on from what Mr O'Donnell has said, how
you see the prospects of the world economy. How is that going
to influence the IMF and how is it going to influence our strategy
at the IMF and the World Bank?
(Mr O'Donnell) I think the best way for me to answer
that is to talk about the broader issues and to pass IMF specific
issues over to Stephen Pickford, our Executive Director. The biggest
world development is obviously the change in the US and I think
that there we are focusing on four issues. First of all, there
is the direct trading impact and that is important for us. The
UK exports to the US are around 4.5 per cent of GDP which is not
an insignificant number. To get it in context, our exports to
the US are around 17 per cent of the total compared to, say, 52
per cent for the EU as a whole. So, it is a significant element.
Sir Teddy Taylor
3. Is that for goods?
(Mr O'Donnell) For goods and services, I think, but
I am happy to check that.
Chairman: I think you are right.
(Mr O'Donnell) So, there is the trade connection.
Investment flows are very important. The US investment in the
UK was around £20 billion in 1999. It is a very large number.
If those investment flows reduce somewhat, there will be a direct
effect. Also, we would expect the balance of payments effect to
come through from our investments in the US. We are a very large
investor in the US so, to the extent that equity prices fall there,
dividends fall etc, there will be less of a flow back to our current
account, so we will observe that. On equity prices directly, there
is a very high observed historical correlation between the US
and UK equity prices, so one might expect UK equity prices to
respond as well as US equity prices. In addition, there is a direct
equity price effect through pension funds where UK pension funds
hold US equities, so there is an effect there. Then, the next
channel is interest rates and exchange rates whereand this
is really a keyif you expect, as the market seems to do,
an aggressive Fed response to what has happenedthey have
cut 50 basis points already and the markets are expecting quite
a lot more to comeif that were to lead to an increase in
the US/UK interest rate differential, that would have implications
for the sterling/dollar exchange rate. Obviously, the MPC will
take all these factors into account in coming to its decisions.
I think the final channel is the most important and that is a
question of confidence. If expectations about future growth come
down, then that confidence channel could be quite important. This
is the area where the models are hopeless, to be perfectly frank.
They do not pick up this effect well. We will only be able to
come to a view about it using a high degree of judgment and that
is where, I hope between now and when we have to produce our forecast
for the Budget, we will be able to think carefully about precisely
how significant the slow-down in the US is. So, those are the
issues that we are thinking about. Obviously with this decline
in world growth and world trade, the world is a less benign place
for the IMF to operate in. On the other hand, we are still talking
about quite significant world growth. You will remember that last
year was the best year for a decade in terms of world growth.
So, although there is a slow-down, a necessary slowing in the
US, it is actually still quite a reasonable growth and we expect
the euro area to still be growing quite well and, with the right
responses from monetary authorities, I would expect these necessary
slowings to be something which will create a world environment
that, whilst not as buoyant as last year, is not a bad one to
(Mr Pickford) Perhaps I could add a little more about
the specific implications for the IMF and World Bank as you suggested.
Obviously, the Fund has an overall role in terms of surveillance
in the world economy and is keen to analyse and identify the potential
risks from all of the routes that Gus outlined. More specifically,
I think the main implication for the Fund will be in terms of
whether the Fund has to step up its assistance for the programme
countries or the countries that are vulnerable. Also in that regard,
it is not clear as to the way in which the linkages will work
and it will vary from country to country. To take, for example,
Argentina which we have just agreed a programme for. Argentina
does have trade linkages with the US, which are not that important,
but it also is very heavily reliant on trying to get its access
back to private capital markets. It suffered during the latter
part of last year. It saw the spread at which it could borrow
in international financial markets go up enormously compared to
US treasuries. Then, with the combination of the program being
agreed and also the Fed cutting its interest rates, the spread
fell, so not only did Argentina see its borrowing cost fall by
as much as the 50 basis points of the Fed cut, but it actually
fell by considerably more than that. So, there are pluses and
minuses and it will vary from country to country, but it does
mean that the Fund will need to be quite alert to the risks and
also the risks of financial sector problems which can arise in
4. On the impact of the American scene on the
IMF, are there any indications that the new policies with the
new presidency in America will have any adverse effects on the
IMF and the World Bank?
(Mr O'Donnell) It is very early to answer that question.
We do have some information in that Mr O'Neil was asked about
the IMF in his hearings and he said that he thought that they
might have made some mistakes in the past but that, in general,
they did not have any large conflicts with them now. He did put
some emphasis on the need for better surveillance at the Fund
and indeed the US Treasury. That was the area he focused on.
5. Who has to be better at surveillance?
(Mr O'Donnell) Both the Fund and the US Treasurythat
is what he was saying, that these things do not happen overnight
and we should have early warning systems to make sure that we
pick these things up earlier and indeed that is one of the points
we have emphasised for some time, that actually you need to think
very early on about countries like Argentina and make sure that
you are on top of them.
Sir Teddy Taylor
6. I would like to ask a question about accountability.
A number of things are done in the IMF which affect us all but
a number of people ask how we can hold them accountable. These
days, there are a number of organisations which are not very accountable.
How do you think we can best do this? What is the best way of
making sure, for example, that we know what is going on and about
decisions taken which affect us? There is one particular matter
that I am going to ask Mr O'Donnell about because he knows all
these things but, in general, how can we best do it?
(Mr Pickford) In general, I think the approach which
we have tried to follow is to make the Fund more transparent and
open and I think there have been enormous strides made in the
last few years. Gus was my immediate predecessor and I suspect
that he will have seen an even bigger shift in the IMF's openness.
We publish a great deal now. We publish Article IV staff reports
for many countries; we publish the programme documents relating
to when countries are borrowing from the Fund; we publish the
Board's work programmes; we publish all the financial accounts
of the Fund on a regular basis. That, to some extent, helps to
increase accountability. I personally think that a report like
this, of which the Treasury has produced two now at your request,
is an enormous step forward in terms of presenting in a relatively
accessible form the operations of the Fund over the last year
and I hope you will agree that it has actually added to the general
understanding of the public as to what the Fund is up to. Obviously
in terms of the formal lines of accountability, the line operates
from the Fund staff to the Managing Director; the Managing Director
is appointed by the Board, ie the Executive Board on which I sit,
but the Executive Board only has its responsibility devolved to
it from the Board of Governors which is all 183 governors of the
Fundthe Chancellor is the UK's governorgiven that
I feel I am accountable to the Chancellor and the Chancellor is
accountable to Parliament, I think that gives you the formal linkage
of accountability. In practice of course, as I said at the beginning,
I think publishing information which allows you to ask questions
of people like me is probably a good route for delivering accountability.
7. We certainly have some information and the
annual reports are an example, but there is no reference as to
how the UK votes. There is a great deal of general philosophy
but we have no idea as to how the UK votes. Is that not something,
if we are going to hold you accountable, that should be published
in the annual report?
(Mr Pickford) We did cover this when I last appeared
and I said that this was a matter for the Chancellor. You did
in fact raise it with the Chancellor and I think I interpreted
his answer that he is very sympathetic but what he would actually
like to do is to try to move forward across the organisation.
In practice, with his permission, I will tell you how the UK votes
on individual items but that does not necessarily tell you a great
deal about the way the Board discussions went. I suspect that
providing more information about the totality of the Board's decision
making process would be more informative to you, but this is an
issue which I think we have under review.
8. Perhaps we could ask Mr O'Donnell to speak
(Mr O'Donnell) Certainly, but I should stress that
votes are incredibly rare on the Board and, quite often when the
discussion is taking place, everybody is aware of where a vote
would get to and therefore a vote is not taken. So, I think actually
giving you a record of votes you would find very disappointing.
May I come back to your point about accountability because it
relates to surveillance.
Sir Teddy Taylor: On this question of
voting, if there are very few votes, it would be quite nice to
tell us that.
9. I think you just said that you have no objection
to saying how we voted on individual issues.
(Mr Pickford) I said with the Chancellor's permission.
I suspect that he would have no problem in my repeating again
that there was a vote on executive directors' salary increases
and we voted against.
(Mr O'Donnell) I just want to make one brief point
on your point about accountability related to surveillance. One
of the things that we need the Fund to be accountable for is whether
it was keeping its eye on these countries doing appropriate surveillance
to ensure that it tries to prevent crises rather than deal with
them, prevention being far more important. There is a conflict
there between them, in all of the things Stephen was talking about,
being more transparent and saying how they think countries are
doing. If we can get countries to routinely publish all the information
relating to this surveillance, then we will not have such a difficult
problem when we actually face a case where we think countries
are going off-track and the Fund is somewhat reluctant now to
publish that sort of information because it is nervous about triggering
a crisis. If we could get into the routine of publishingit
is a standard annual surveillance exercise, you could publish,
as the UK does, the concluding mission statement, which we did
back in November of last year, the press information notice which
includes the full details of the Board discussion and all the
staff reports relating to the country in questionand if
we could get all of that information out there, then I think that
the surveillance process would work better and I think that that
would have quite important implications for crisis prevention.
Sir Teddy Taylor
10. My final point is that, in the report that
you put out "The UK and the IMF", I see that, on page
7, at article 3.3.8, it mentions that the Executive Board discussed
exchange rate policy in the euro area and I was fascinated about
what on earth that meant. I saw that, on 16 January, which was
last Tuesday, for the first time ever, the Bank of England put
out notes in a foreign currency in euros raising money in euros,
£500 million. Incidentally, it said that American firms were
not allowed to bid for them. I am just wondering what this is
all about because putting out notes in foreign currency is something
we have never had before. I am just wondering if this is something
that arose out of the IMF initiative which is mentioned here or
whether it is something which could be explored with them because
it could be quite exciting for the world economy if member states
or individual countries are going to be putting out notes of other
currencies. For example, the French could put out dollars or the
yen. Some people have argued that this article last Tuesday about
£500 million being raised for the Bank of England in euros
was just to try to prop up the euro but others think that it is
something far more significant. I wonder if Mr O'Donnell could
tell me because I know that he knows everything.
(Mr O'Donnell) I am happy to answer both matters.
On the issue of the IMF discussing the euro area, that is part
of its surveillance job now because obviously it does surveillance
of individual countries and, when it comes to doing surveillance,
it looks at monetary policy and fiscal policy. Monetary policy
is now set for the euro area by the ECB, so it has to do some
surveillance of the euro area as a whole and it is now starting
to do that. The ECB has observer status on the Fund Board and
is there for those occasions when the IMF, just as it does surveillance
of the UK, does surveillance of the euro area. So, the reference
in there is quite rightly informing you that that sort of process
is now starting. On the question of raising money, the UK and
indeed many other countries have always raised funds, borrowed
money in foreign currencies from time to time. I remember us raising
money through borrowing Deutschmarks; we did it through ecus,
you will remember, so it does not surprise me if . . .
11. Was it ever done outside the euro area?
(Mr O'Donnell) Yes. I think a number of countries
borrowed in yen thinking that Japanese interest rates were so
low that this was a good idea. They forgot about exchange rate
risk in general. Argentina is a classic example. Virtually all
of Argentina's external borrowing is done in US dollars.
12. Is this something that the IMF is interested
(Mr O'Donnell) Absolutely because it has implications
but, when you do the surveillance exercise, you want to look at
the risk to an economy from its external exposure, to foreign
13. They must think it is a good investment.
(Mr O'Donnell) They will be doing it for diversification
14. As I understand it, this is really because
the Bank of England has taken over from the Treasury and that
is why the Bank of England has done it for the first time.
(Mr O'Donnell) Yes. This is standard; we have been
doing it for a long time now.
15. Can I take you back to accountability and
pressure you a little more about where you see that improvements
could be made for the future. The UK Government have a long-term
vision of how the accountability of the IMF to the people of the
world could be improved.
(Mr Pickford) One very important step forward that
we have taken is to set up an independent evaluation office for
which the UK has been pressing for some time and we finally agreed
that in last September at the Prague meetings. We are in the process
of recruiting a director for this office, at the moment. The Board
is responsible for hiring this person and we have an executive
search firm that is going through an international recruitment
process at the moment. We actually put out the terms of reference
for the office. I do not know if you have seen but basically the
way in which the office is going to operate is that it will do
evaluations of Fund operations; it will be housed within the Fund
but it will be independent of the Fund, that means it is independent
of management; it operates at arm's length from the Executive
Board; it will set its own work programme, so it will decide what
it wants to evaluate and it will report regularly both to the
Board and to the IMFC. The terms of reference say that there is
a presumption that it will publish its reports regularly. I think
this is a large step forward. The World Bank has had its own independent
evaluation office for some time, several years, and it does very
good work in terms of looking with an independent but informed
view at the way in which the operations have taken place and have
learned lessons from that so that the organisation can improve
its effectiveness and we are very confident that the Fund's evaluation
office will do precisely that as well.
16. One of my colleagues might want to take
you up on that particular innovation. Does the Government have
any wider vision beyond this? For example, have you studied Charter
99 which is a whole series of proposals making global institutions
like the IMF rather more democratic and accountable? It has 15
principles of accountability. So, (a) are you aware of Charter
99 and (b) have you done any audit of how the IMF performs against
Charter 99's 15 principles of accountability?
(Mr Pickford) I am only aware in broad terms. One
of the issues that I think you run straight into when trying to
change the arrangements of accountability for such organisations
is that both the Fund and the Bank are member based organisations
which means that, as the articles say, they are responsible to
member governments through the Executive Board. The UK is a shareholder
of the organisation, it has a share of the vote; we have a director
on the Board and all the lines of accountability at the moment
go through member states and then, from that, out to parliaments
and the wider public. Many of the suggestions that I have seen
would actually change that fundamental arrangement so that the
link between the IMF and the member states/member countries would
be weakened in some way and that has huge implications for the
organisations. I do not know if my shareholder wishes to comment
(Mr O'Donnell) I think Stephen is right. It is quite
difficult to get general agreement given the voting structure
that exists within the Board to change that structure in some
way away from the member country principle. So, our focus has
been to operate within that structure, and to try and encourage
greater openness and transparency is the best way to improve accountability.
I think we are making some progress there and I think that measures
like the independent evaluation office are a welcome step forward
for the Fund. Also, it is changing the climate within the Fund
towards releasing informationthat needs to change and it
is getting better. Certainly they have looked again at their external
relations department and there have been quite large changes there
over the last couple of years which have tended to result in greater
release of information in general.
17. I accept that there might be some practical
difficulties. You have to negotiate with every member of staff
if you are going to alter particularly any structure of accountability
that exists at the moment but, given the UK's Government's fairly
good record of trying to push for this, I am trying to see if
you have a wider vision longer term, if you would like to see
some of the global institutions like the IMF adopting a more rigorous
form of accountability than it currently does and would you be
interested in those more radical, far reaching ideas?
(Mr Pickford) As I say, most of those more far reaching
ideas do actually break the link in some way or another or attenuate
the link between institutions and member states. There have been
suggestions, for instance, that the Executive Board should not
be appointed by individual countries which would be a pretty fundamental
shift in the relationship or there have been suggestions that
the IMFC should become a council, a decision making body sitting
in between the Board of Governors and the Executive Board. The
IMFC is an advisory body at the moment but there have been suggestions
around for quite some time that it should be a decision making
body. The only thing that I want to say in addition is to point
out that the Fund and the Bank are actually, in my view, two of
the more successful international organisations in the sense that
they have decision making processes within them that allows them
effectively to take decisions. As Gus said, most of the decisions
that we take actually end up being taken by consensus or a large
degree of agreement, despite the fact that you often have many
different points of view represented on the Board from the various
countries and I think the fact that the organisations can actually
bring together all of those different interests for the wider
goal of the organisation is a large strength of them and I guess
I just raise the issue as to whether changing those accountability
structures might make those decision making processes more difficult
and hence the organisations less effective.
18. You mentioned the increase in transparency;
would you like to summarise any of the other measures that have
been taken that you think have increased the transparency.
(Mr Pickford) In the Fund itself, the main areas where
we have increased transparency and openness are in terms of publishing
Board documents, of publishing the forward work programme and
publishing information about the Fund's financial arrangements.
I would argue, as I think Gus has done already, that the first
group is by far the most important in terms of getting information
out on the Fund's regular surveillance activities and also on
programmes it has with countries because I think producing that
information is extremely helpful in terms of allowing the public
generally to know what is going on within the organisation. We
publish these press information notices after each Article IV
discussion and after each programme is agreed. It also allows
the markets some greater information concerning the information
that we have about these countries and it helps them to make a
better assessment of the risk they might face in investing in
particular countries and it also helps to avoid surprises in the
sense that, if you have a regular flow of information, commentators
can see the trends in a particular country and I think this is
a very important role for the Fund and I would not at all under-estimate
the impact that, over time, publishing these staff reports and
programme reports will have in terms of introducing some stability
through greater information.
19. Why will the Executive Board not publish
its minutes in this climate of transparency?
(Mr Pickford) We publish what we call summings-up
and so, for each Article IV discussion and for each programme
discussion, we will publish usually half-a-dozen pages of the
Chairman's summing-up of the discussion and, where there is a
disagreement, individual directors will not be named but it will
give an indication of the balance of the argument, so it will
say that most directors took one view and a few directors took
another. The Fund has always steered away from naming what director
takes a particular position on a particular issue and there we
are coming back to the question that Sir Teddy raised. That, I
think, is a fundamental point of principle that the whole Fund's
membership would have to be comfortable with before naming names,
but we actually do go quite a long way in terms of putting out
minutes, anonymised minutes if you like, which give you the flavour
of the discussion of the Board. If the Board takes a different
line from the staff report so that having that information whereby
you read the staff report on the website and you can also read
what the Board said about is, I think, an additional tier of information
which is useful for people.