Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 60 - 79)



  60. You are giving the impression that the British Government is leaning rather more towards dealing with this on the basis of agreed rules in advance than the Fund as a whole?
  (Mr O'Donnell) We are exploring the area of how far one can go in establishing clearer presumptions.

  61. Members of the Committee will have had the opportunity of seeing the expression on your face there and will draw their conclusions. That is helpful.
  (Mr O'Donnell) It is constructive but it is an issue where we have to move forward with the other countries and, again, the US position will be crucial on this.

  62. If one takes the example of Russia, there has been a huge capital outflow from Russia. I do not know whether one wants to dignify that with the term "private sector" capital outflow but let's call it that, and there has been a huge outflow of capital from Russia which has drained and undermined the Russian economy and weakened its ability to respond to new situations. Do you think there is a role for a tighter organisation of international capital flow controls to deter that or to affect the behaviour of individuals to control rather better what individuals are doing?
  (Mr O'Donnell) You are arguing for external capital controls.

  63. I am asking a question, not making an argument at this stage.
  (Mr O'Donnell) I think as soon as you start to go down that route you risk damaging flows into the country because if they feel once they are in they cannot get out then that may well result in private sector simply staying away from that country for a longer time, so it is a possibility but it is not something that I would recommend.

  64. Do you think that the proposals that you have set out to some degree in this report—and this is one of the very few Parliamentary perspectives on what the Government is doing in terms of the Financial Stability Forum and the Financial Action Task Force—and the controls on offshore tax havens, money laundering, the kinds of private capital flows I have just referred to in the example of Russia, are at all effective? Do you think we are moving towards a system in which controls of these kinds of capital movements (which in themselves can create a stampede) will be more effective?
  (Mr O'Donnell) Certainly on money laundering I think we are making significant progress.
  (Mr Pickford) What all of those initiatives are trying to do is to improve the rules of the game. They are not directly imposing controls as such. What they are trying to do is improve the quality of regulation and supervision of financial centres, they are trying to strengthen the regulations that all banking regulators have on money laundering flows, and my suggestion is that going down that route of improving the use of the system rather than imposing controls which will catch the good flows as well as the bad is certainly the route we have been going down and may well be more effective.

  65. Do you not think that the case for international currency flow controls, either on a national basis or area basis, has to some degree been made by events in Chile, Malaysia, India, and so on and so forth?
  (Mr Pickford) What I think has happened is that over the last few years since the Asian crisis struck there has been a change in sentiment away from a strong presumption that countries should open up their capital accounts as quickly as possible. There clearly are benefits for countries in terms of having open capital markets because they can get access to private capital which, as we have already explored, is the primary financing for many of these countries. What I think has happened has been a much more cautious approach about how far and how fast that process should happen. It was quite clear in a number of the Asian cases that having too quick capital account liberalisation was a contributory factor to the crisis, and there is common understanding I believe now that you have to have certain preconditions in place before you start opening up a capital account and that is partly about the macro framework that the country has and it is partly about the strengthening of the financial sector in the country. Without that I think you run into all sorts of problems.

  66. Let me be clear about this. What you are saying is that United Kingdom at the IMF and the IMF as a whole might be willing to accept that countries move more slowly towards capital account liberalisation than some economic text book floating round the average British university might require, but that is entirely different from saying that you would be prepared to accept active measures of control introduced in the context in which some measure of capital account liberalisation already existed. The implication I am drawing is that you would be hostile to that.
  (Mr O'Donnell) Can I expand on this? It is certainly true that we learned a lot during the Asian crisis and we learned that sequencing of capital account liberalisation was important. Korea was a classic example where they deregulated short-run capital flows but had enormous restrictions on long-term flows so long-term money came in as short money and when there was a crisis that all went out and exacerbated issues. Sequencing is very important and that is what the Fund is talking about now. If in a crisis situation you are saying, in the armoury of tools the Fund has, are capital controls one of them, then I think the answer has to be yes, they are not ruled out for ever and that there are circumstances in which they may be the least bad option.

  67. Thank you. That is helpful. My last question really relates to the poverty reduction strategy procedure in which you say there is a high degree of national ownership of poverty reduction strategies. I must say there is an increasing amount of evidence that countries subjected to poverty reduction strategies in fact feel that the whole thing has been carried out very abruptly and without proper discussion within those societies.
  (Mr Pickford) I think there are a range of experiences. Certainly in some countries we also hear those stories that the process has been rushed and that comes out at the Board discussion. To be blunt, that is partly of our own making because we have required interim PRSPs for decision point and final PRSPs for completion point, and to the extent to which countries are keen to get debt relief they are also keen to put their PRSPs in place. There is a danger in that. There are other countries that have had very good experiences and they are the cases generally where (they did not call them PRSPs) they had their own national process in place for the last few years to try and have a dialogue more generally within society about what are the goals of the government and what are the ways in which it can deal with poverty. Uganda, for instance, had its equivalent. I think it started in about 1997. We invented PRSPs in 1999 so this is not new, it is just building on what seems to have worked in countries. It is true that some countries do not have a strong history of participatory processes and consultative mechanisms and it is hard. We are getting cases in the Board where staff assessment of the process is less than glowing, and we have to take a decision as to whether we accept something that is not up to what we would like to see and to still go ahead. And the way we have approached this generally is to say that we do require interim PRSPs at decision point but rather than penalising the country and holding up on the decision point and the interim relief that can flow from that, we will take interim PRSPs that are less than perfect, but what we will do is have a strong requirement that the full PRSPs, as they are developed and which are a condition for completion point, are going to have to be good quality. That is really part of our agenda for taking the debt relief initiative forward. We have got to make sure that the quality of PRSPs, as they become the full PRSPs, really are up to standard because only in that way are you going to link effectively debt relief to poverty reduction, which is the whole point of the initiative.


  68. Before I move to Mr Davey can I get on the record your position on the Tobin tax. I notice it is mentioned, you have got a little box on it.
  (Mr O'Donnell) We have got a little box on page 13. We do not believe the Tobin tax would work and the primary problem is the one about the practicalities imposed in some areas. Flows would simply move. These are highly mobile flows and they would go somewhere else. They would probably also go to a market that was much worse regulated and I think that would increase the volatility of financial flows around the world. Also, if you impose a tax on short-term financial flows, I do not think it will do much to deter speculation because speculative flows happen because they believe they are going to get a massive gain from a regime switch in an exchange rate case, and a small tax would not deter those. However, it would also deter standard economic flows that are important for market adjustment mechanisms. So for all those reasons that are set out there we remain opposed to the Tobin tax.

Mr Cousins

  69. If you could close some of the holes of the poorly regulated financial structures of the world, would your view be different?
  (Mr O'Donnell) For the other reasons I have given, probably not. I cannot see that it would gain much. In general, taxes on transactions tend to reduce market efficiency.

  Sir Teddy Taylor: Hear, hear!

Mr Cousins

  70. Like stamp duty in this country which raises £32 billion for the Government?
  (Mr O'Donnell) That is why I said "in general". You have to have the trade-off of revenue gains and there may be some efficiency losses. All taxes create distortions.

  71. So there might be some argument, if it could be delivered in a practical way, for such a thing as a revenue raiser like stamp duty?
  (Mr O'Donnell) All I am saying is like all taxes it would create certain distortions and you have to weigh up the costs against the benefits.

Mr Davey

  72. Can I bring you back to poverty reduction strategies and ask about the experience IMF has had in different countries as they have introduced them. Have you gained the support of the politicians and wider society for this approach? Do they think it is better than what has gone before? In general is there an acceptance that this is the right way forward?
  (Mr Pickford) In general, yes. I think the experience varies from country to country. I will not repeat what I said in answer to the earlier question, but there are some societies and some governments that are more ready and willing to embrace the participatory process than others. We are convinced in the institutions that getting broad ownership of policies is a good thing because it is likely on the basis of our experience to improve the results from these programmes. Time and time again you see countries where you have very poor ownership, either within the government or more widely, programmes breaking down because there is not a degree of broad political consensus behind the programmes and they fail. So I think we definitely see that the approach of trying to build up that consensus within a country behind an adjustment programme is worth the effort, but it is certainly true that in some countries it is a lot harder process to sell.

  73. If you compare them to the structural adjustment programmes of the past, are you finding that politicians in these countries are more happy with this approach than the previous approach of the IMF, or do some politicians in some countries prefer the old approach?
  (Mr Pickford) I guess there will be a few politicians or political leaders who will prefer to have closed decision-making processes, but I think in general the experience we have had is that countries do tend to appreciate the processes once they have started going down them. Take Kenya, for example, where up until a couple of years ago you could correctly characterise the political process as pretty closed. The report and assessment we had on the process they went through in terms of producing their interim PRSP has actually been very positive. Both the Fund and the Bank have got resident representatives in the country and they go along to the meetings that are organised by the government to discuss PSRPs. They report back that civil society organisations, faith groups, and so on, have been pleasantly surprised by the process and also that the government seems to have been pleased with the results. You will not get that experience everywhere but nevertheless there are examples where more closed governments have ended up seeing the benefits of a more open programme.

  74. So people do see the difference between this approach and the other approach? It is genuine?
  (Mr Pickford) Yes.

  75. You will be aware, and Mr Cousins touched on this, that there are some in this country, NGOs and more widely, who are slightly worried about whether the actuality of these poverty reduction strategies is meeting the rhetoric. There have been criticisms, for example, that some of the strategies do not have an assessment of potential impact before they are agreed and implemented. Would you like to comment on that criticism?
  (Mr Pickford) That criticism is fair in some cases. I think that reflects the breadth of experience we have had. The interim PRSPs are variable in quality, as I have said, and a lot of them do not match up to what we would have liked to have seen.

  76. What is the United Kingdom doing at the IMF to try to put that right?
  (Mr Pickford) What we have done within the IMF is to accept somewhat lower quality in the nature of interim PRSPs for decision point but to be quite insistent that the quality has to improve by the time they get to full PRSP. Also bilaterally DFID has a big programme of support to help countries to initiate and improve their PRSP processes. It is such a very big priority for the United Kingdom government (because we are so firmly behind the PRSP process) that we put in some practical support for countries.

  77. That is good to hear. Looking at those countries who have started receiving some of the debt relief, I think it is 22 by the end of last year, I am slightly concerned to read that on average that is still a reduction of under a third in average—some are a lot higher than that, some a lot less. This is not near to some of the aspirations that were set particularly by some of the Drop the Debt campaigns. I have got an average figure of 30.7 per cent—you may have a different figure—do you see that increasing significantly in the next few years?
  (Mr Pickford) I think that goes back to the original design of HIPC. What it was designed to do was reduce each country's level of debt to what we define as sustainable—and you can argue about what is sustainable and what is not—and the definition we chose, which is that the value of the debt to export ratio should be no more than 150 per cent, is lower under HIPC II than under HIPC I, but of course some countries have only a little bit more debt than that, others have huge amounts of debt, so the ones with the huge amounts of debt have seen much bigger reductions. For example, Mozambique has seen its debt cut by two thirds. But it will vary from country to country simply because some countries started off with unsustainable but relatively low debt and others had huge amounts of debt. That is I think why you are getting the difference from country to country. As to what will happen in the future, you need to look at the individual countries case-by-case.

  78. Could I ask then about those countries that have not yet qualified. How many do you think by the end of this year will have qualified of those remaining?
  (Mr Pickford) It is a good question and I do not think there is an easy answer. We set the target of 20 and, in fact, we exceeded that, we got 22 through to decision point by the end of 2000. If you look at the cases still to come, I have got a table here which goes through the various countries. Would you like me to go through numbers? There were 41 HIPCs in the first instance, of which four were defined to be sustainable. Of the 37, 22 have got through to decision point, so there are another 15 still to go. Two are not seeking debt relief, Ghana and Laos, and of those 13 remaining, nine of them are actively involved or affected by conflict, and the other four have other problems. The other four are Chad, Côte D'Ivoire, Ethiopia and Togo. Ethiopia has signed a peace accord but is clearly only just emerging from conflict which is why the cases coming up are likely to be much more difficult than the cases we have dealt with over the last year. The problems are very different because a large part of them are to do with either conflict or governance issues. Conflict is not something the IMF or World Bank deal with directly although we have asked them to come up with some proposals on how they can be more effective in terms of engaging in post-conflict cases. That is a paper we hope to discuss at the spring meetings. It is a big issue going forward in how we deal with the conflict situation and Gus may want to say a little more about the United Kingdom's attitude to conflict.
  (Mr O'Donnell) It has got to be two-fold here. Basically the thing to remember is that HIPC II has been enormously more successful than HIPC I. It has been much quicker and there has been more money. We are now hitting really difficult cases and they are nearly all conflict cases, as Stephen has pointed out. What can we do about conflict situations? There are some direct things about trying to come up with conflict resolution processes. What we decided as a Government is to say in those cases where countries are in conflict and they pay us debt repayment, we will put that aside, and we will give that back to them for use in reducing poverty for their poverty reduction programmes when they come to the decision point, so from now on we will put all of that money aside. And we are trying to encourage others to go down that route.
  (Mr Pickford) Also you have set up a multi-departmental budget and process.

  79. That is the United Kingdom. How flexible is the IMF going to be in those conflict cases? We all appreciate how difficult it is and that it is going to require a degree of imagination and innovation now and possibly flexibility on the rules that were set up for the first 22 that got through last year. Can you say a bit more about that? Would you be able to tie it to conflict resolution negotiations? Would you be able to do it within regions within a country? What sort of things are you looking at to make sure that we can move quickly in these extremely poor countries?
  (Mr Pickford) These are precisely the issues we are trying to work through at the moment and, as I say, staff are working on a set of proposals which hopefully will come to the spring meetings to try to see whether we can change the procedures to make the Fund more flexible and quicker coming in in support of post-conflict proposals. I cannot say all that much more usefully at this stage but this is actively on the agenda and we should be getting a paper within the next month or two.

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