Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 20 - 39)



  20. You have already covered a large part of the evaluation office with my colleague but do I understand that the evaluation office will now come into being in the next 12 months?
  (Mr Pickford) We hope that it will be up and running by the spring meetings which is at the end of April this year. That might slip by a month or so but essentially we have the processes in place. We have to get a director first because he will have to choose his staff and set up the work programme for the office. As I said, we are in the midst of an international recruitment process at the moment. I would hope that we would have the director in place within the next couple of months and he can then very quickly appoint staff so that in effect it is up and running by the spring meeting.

  21. To whom will the director report?
  (Mr Pickford) He will make his reports to the Executive Board and also to the IMFC but we have tried to set it up in such a way that, as we have put it in the terms of reference, the office will operate at arm's length from the Board which means, as far as I am concerned, that the Director himself will have the final say on who he hires, what programmes he evaluates and what reports he makes and he will essentially have total operational independence.
  (Mr O'Donnell) Can I just add that the Chancellor, as Chairman of the IMFC Committee at the moment, will obviously take a very great interest in how the office operates and will ask the Director, he or she, to keep the IMFC well informed about what is happening.


  22. Just on that one point, for how long is the Chancellor in office?
  (Mr O'Donnell) There is not a fixed term for these things.

Mr Beard

  23. The picture that has earlier been drawn is one of quite substantial autonomy from the mainstream of the IMF; is that justified?
  (Mr Pickford) Independence in its thinking. It will probably draw some of its staff from the Fund. This worked very successfully in the bank equivalent because I think you need a mix of people who know intimately how the Fund actually operates on the ground because I think otherwise the learning process for people coming into the office would be really quite large, but also outsiders. We expect the majority of the staff will be drawn from outside but there will be internal Fund people seconded to the office as well. So, yes, a high degree of autonomy but with a base of understanding about the Fund's operation so that they are not starting from scratch.

  24. Just as an illustration for instance, if there were an argument over one of the Article IV rules between the country involved and the IMF and the evaluation office looked at this and came down on the part of the country, would that be allowed?
  (Mr Pickford) Certainly; I can see no reason why the office should not investigate something like that and produce its report, and its conclusions will be out there for the public to see and to draw conclusions from.

  25. So the evaluation office can publish whatever conclusion it arrives at even if they are not entirely concurrent with the IMF policy?
  (Mr Pickford) Absolutely. We have hedged our bets slightly by saying that there is a strong presumption that the reports will be published. In practice, I think the motivation for putting it in that way was to ensure that market sensitive information was not released, for instance, but there is no intention of trying to censor the reports. If they are critical of the Fund, my expectation is that they will still be published.

  26. Were the United Kingdom Government satisfied with the processes that went before the appointment of Horst Köhler as the Managing Director of the Fund?
  (Mr O'Donnell) The appointment of the Managing Director, as you know, has gone back a long way and there has always been a kind of implicit presumption that the Managing Director of the Fund would be European and the President of the World Bank would be an American. What we said on the White Paper on globalisation is that we actually favour more open processes which will help ensure that the best people get these jobs. Obviously it is a political process; we will have to work with G7 and with EU partners etc to understand where they are coming from on this process and to try and come up with what we regard as the best candidates for these jobs, but certainly this time round it was not ideal.

  27. What, more particularly, have the Government in mind for improving the process in the future?
  (Mr O'Donnell) Already some processes have been set up and, since Stephen is on one of the committees, I will let him explain.
  (Mr Pickford) After the Managing Director was appointed, we set up, in both the Fund and Bank, board/committees/working groups to look at ways in which the selection process might be improved on both sides of the street.

  28. Both sides of the street?
  (Mr Pickford) 19th Street is the street which divides the two institutions. The reason why we obviously want to consider both those together is that the two institutions work very closely together as do the selection processes, and the articles of agreement and so on mirror each other pretty closely, so there would be implications for changing the process in one institution for the other. What the IMFC said in its communique in September was that it expected that the two groups would report together and indeed the work process for those two groups is converging now. I am actually a member of the Bank working group and not the Fund working group, nevertheless we do try to keep the two processes on a convergent track. We have been considering all sorts of options including setting up search committees and having executive search firms and trying to integrate the sort of approach that Gus has outlined the UK favours in terms of setting in place open and competitive processes while recognising that there will be some political input at some point in the process and it is trying to marry those two aspects which is proving a difficult process but that is what we are aiming towards.

  29. Why does the IMF process and the World Bank process have to be considered together? Is this because there is going to continue to be some divvying up between Europe and the United States in this respect?
  (Mr Pickford) I think it is the sheer politics, to be honest. You can imagine from a European point of view, if in general the IMF has had a European candidate, let us say that the Committee came out and said OK, let us open it up to the world including a US candidate, yet the situation with the World Bank is that the World Bank would only be a US candidate, so you can see why it makes sense for a number of us to consider the two issues together.

  30. The Fund's review of the quota system recently, somewhat perversely I should have thought, came up with the idea that the US quota should increase and those of the United Kingdom and developing countries should decrease. Is that thought to be a satisfactory exercise?
  (Mr O'Donnell) No, most certainly not and it just illustrates the difficulty of trying to come up with a solution to the quotas problem. I have been through a number of quota reviews and, believe me, they are the most complex negotiations imaginable. The problem really is that quotas were set a long time ago, post Second World War, reflecting international conditions at the time and have changed somewhat since then. The principle we would like to get established is that quotas should reflect economic weight in the world but also ability to contribute at times of crisis to the Fund to helping the Fund resolve crisis.

  31. Do you mean contribute in the sense of providing solutions or contributing money?
  (Mr O'Donnell) Money, to be brutally frank. That is an important issue and that has been very important in crisis handling during the Asian crisis where a number of the richer countries in the world had to actually stand ready to provide extra funds through the GAB. I think those quota issues are important. The Cooper Report, which I think is the one you are referring to, basically did a mechanistic exercise of saying, let us update it for economic formula and it produced the rather bizarre result that developing countries ended up with less and we ended up giving more to the US, Japan and Germany, and slightly less to the UK. Not big changes but these were not the kinds of changes you could see leading to a consensus which would be needed to get agreement.

  32. They were not in the expected direction?
  (Mr O'Donnell) Absolutely not and indeed there are issues about quotas which generally relate to the fact that you are trying to give developing countries a bigger say but it is quite obvious that, if you go down a mechanistic route of using the Cooper formula, you will come up with an answer which I think none of us found particularly attractive. Therefore, we need to consider it again and that is the work that is actually ongoing now.

  33. What has been done?
  (Mr Pickford) The Board has had one discussion of the Cooper Report, the formal title is "The Quota Formulae Review Committee", and has asked the staff to provide more information and do more work basically to try and explore changes to these formulae to see whether there is a more systematic process that produces results that are more attractive. Strictly speaking, that report has no status anyway.

  34. You mean the Cooper Report?
  (Mr Pickford) That is correct. It is an external advisory report. The Board has to decide whether it wants to change the formulae and even when the formulae are agreed, the final decision on quotas themselves will be taken again by the Board and that is when this political process will be brought fully into play. I do not regard this as an issue which is going to be solved quickly. We have to have a review of quotas I think by 2003, but I do not expect a quick resolution of this issue because, as Gus says, it is one of the most difficult issues that face the Board.

  35. Is it the United Kingdom's view that the developing countries ought to have greater representation on the Executive Board?
  (Mr O'Donnell) There are two issues here, one about quotas and one about representation. The quotas give you the voting share. The point about representation is how many seats they have round the Board. If you looked round the IMF Executive Board there are two representatives from Africa.
  (Mr Pickford) Three.
  (Mr O'Donnell) North Africa as well, that is right. In terms of representation at Board level, although their quotas are quite small, the number of people around the table is not that out of line. The main thing you would find is a very large number of EU countries represented round the Board, rather more than you would expect given their quota percentage. So I think when we come to representation at Board level that will raise issues where certainly we are very keen to make sure that the developing countries have an important voice there. I think Board representation is not too bad. Quite often the problem is the constituency system which means that there is a constituency represented but they are not actually the person at the Board, and that can create some problems. In particular, the issue I would say is a problem in terms of important emerging market countries that are not there that perhaps one would like to be there, and I think that is one of the reasons, for example, why groupings like the G20 have some advantages in that they do have countries like South Africa and Mexico represented there.
  (Mr Pickford) Perhaps I could just add a little to that. If you take, for instance, the two sub-Saharan African constituencies, one Francophone and one Anglophone, you have two directors there who are representing 20 plus countries each, and the issue there is in large part how we can help him or her be more effective in the way that he represents those countries. Often they are countries that have programmes and therefore there is a lot of work involved in that respect as well. And what we have done to try and help that is to increase the number of staff that they can have so that they will have many more advisers and assistants than we do, for instance. That helps. The United Kingdom has been talking with the Anglophone office recently through DFID to try and see whether there are ways we can provide concrete assistance, for example, in terms of perhaps funding visiting assistants from the constituent countries who will spend a few months in the office which will help the director to do his work but it will also have, we think, good spin-off effects in terms of sending people back to the countries who have the experience of institutions and therefore can be more effective in their own administrations. So we are taking some rather detailed practical steps, but I hope that we will be able to help make those constituencies be more effective.

  36. Is it possible to change the structure of the Board or the distribution of seats on the Board without considering the distribution of votes at the same time?
  (Mr Pickford) In theory it is possible to. In practice I suspect that the number of seats round the table is going to be even more of a political process than the votes involved. The number of seats actually specified in the Articles is 18 or 20 and the fact that there are now 24 has to be ratified every few years, and that requires an 85 per cent vote.
  (Mr O'Donnell) The United States is in a position (because they have a block 17 per cent) that they could block that. If the US wanted to force a realignment of representation they are technically in a position to do so. The issue really for them is what that would do and they weigh up whether they think using that blocking portion would result in a better result. Again, that is an issue that we will need to consider with the new US administration. I should stress that not all of the people we would normally speak to in the US are yet in place and there is some uncertainty about what their position will be on issues like this.

  37. So the issue of quotas and this issue are inextricably linked?
  (Mr Pickford) Yes, I think they are very much linked.

  38. Moving to codes and standards against which countries have got a benchmark of behaviour, how successful has implementation of these codes and standards been so far?
  (Mr Pickford) I think they have been very successful. We have now got 11 core codes and standards which are seen as relevant to the institutions. The FSF put out their Compendium of Codes and Standards and the IMFC has agreed that the primary way in which we will assess countries against those codes is through the Article IV process because the Article IV process in the IMF is a universal process, it applies to every country. We think that that is a very good mechanism to try to assess how countries are performing against those standards. As Gus said in his opening remarks, we have completed a large number, if you will forgive the terminology, of ROSC models. ROSCs are Reports on the Observance of Standards and Codes. They are our mechanism for seeing how countries measure up against these codes and standards and we have different modules for the different codes. That process has only really been going for about a year or 18 months and we have had 83 modules produced covering 32 countries. Not all of the modules have been published but about 80 per cent of them have been. Then when those ROSCs have been produced they feed into the Article IV process so they get summarised in the Article IV reports.
  (Mr O'Donnell) And the UK has taken a lead. Our view is that if we are trying to get other countries to do these we should go through them ourselves, so we have been assessed on data dissemination, fiscal transparency, monetary and financial policy, banking supervision, and we are going to do another one on the financial sector this year, or early next year.

  39. How well have these codes and standards gone down with the developing countries? Have they welcomed them or is there an adverse reaction?
  (Mr O'Donnell) It is mixed to be honest. For a large number of countries they see them as helping to give them a good benchmark review of how well they are doing in areas. It is not a pass/fail thing and you would not expect exactly the same standards of different countries because it depends on their level of development. We really regard them as a tool to show them how well they are doing in certain areas. They are very useful. South Africa has gone through some of the transparency ones to show to the market, the private sector investors, that this country is confident of its position and has the procedures in place, and the IMF accepts that, and that is quite useful to reassure private sector investors. The area where it gets difficult, to be honest, is where we get into the area of whether they are imposing an extra level of conditionality. We have been at pains to get the best of both worlds really by encouraging countries to go down these routes but, where assessments show there are failings against benchmarks, trying to encourage them to improve in those areas. Really we have got to try and get this sufficient carrot from saying, "If you do these, they are good for you and the IMF will respond better to you at times of crisis if it has gone through this process and knows exactly where you are, and so will the private sector feel more confident about your basic position." On the other hand, where they show up deficiencies, in areas like financial sector regulation, these are things which countries should work on and we are trying to encourage them to do that. That is where some of the tensions arise.

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