Select Committee on Treasury Minutes of Evidence


Examination of Witnesses(Questions 1-19)

MR STEPHEN PICKFORD AND MR TOM SCHOLAR

TUESDAY 21 MAY 2002

Chairman

  1. Good morning, gentlemen, and welcome to the Committee. Can I thank you for appearing before us today and would you please introduce yourselves.
  (Mr Scholar) Good morning. I am Tom Scholar, the UK's Executive Director at the IMF.
  (Mr Pickford) I am Stephen Pickford. I was the UK's Executive Director of the IMF until December last year and now I am Director of International Finance in the Treasury.

  2. Thank you very much. Would you like to make an opening statement?
  (Mr Scholar) Yes, thank you. Stephen Pickford is going to say a few words about the Report we have provided to you, but just before that I would like to say a few words, if I may, about the main issues that we are dealing with at the IMF at the moment and the positions that we are going to be taking on them over the next few months. There is strong continuity since the agenda of the IMF at the moment is largely implementing reforms which have already been introduced and in certain places taking them further and into new directions; and we can talk about that. The main areas are, first of all, continuing the process of global co-operation through the IMF and also through the IMFC, the IMF's Ministerial Committee which of course is chaired by the Chancellor of the Exchequer. We see that as very important in setting the conditions for stability and prosperity in the global economy. Secondly, we will be taking forward the work on crisis prevention which we see as a key function of the IMF. There are several strands of that which we can discuss further: first of all, codes and standards to strengthen policy frameworks in countries across the world; secondly, stronger and more transparent surveillance by the IMF; and, thirdly, greater transparency by all member countries and by the IMF its own activities. We are also looking at strengthening the framework for crisis resolution and that in itself should be a crisis-prevention tool. We want to make much clearer to everybody the respective roles of debtor countries, their creditors and the official sector. That will include access limits on IMF resources and their use in resolving crises. Next, there is a big programme of work on tackling money laundering and the financing of terrorism. Again that will involve surveillance of countries' financial systems, publication of those results and advice from the IMF to countries on how they could strengthen their systems against those threats. Finally, there is a big programme of work for low-income countries where we want to learn and implement the lessons of the PRSP and PRGF reviews which look at the work of the Fund and the World Bank in very poor countries. We want further to streamline the conditionality which applies to Fund programmes in countries. We have also got concerns about HIPC where we want to look at debt sustainability of countries and what more could be done there. Finally, although this is not central to the IMF's work, another important part of this will be increased aid and greater trade liberalisation and we in the IMF and of course the Treasury in its other areas of work will be pushing that forward as well.
  (Mr Pickford) Perhaps, Chairman, I could just add a little to what Mr Scholar said about transparency in particular. This Committee has been very interested, and rightly so, in increasing transparency in the IMF and increasing transparency of the UK's dealings with the IMF. As you know, the IMF has made a really major change in terms of transparency, transparency in terms of the papers and reports that it published over the last few years; and the Independent Evaluation Office at the IMF is now up and running which should also be an added impetus to transparency. We have also tried in our Report, and this is the third Report to Parliament, to improve and increase the transparency in that Report and this year, at the suggestion of the Committee, we are setting out for the first time the voting record in the Board of Governors and details of the positions taken by the Executive Director in the Board. I think also you are aware that we have been pressing another recommendation, an earlier recommendation from the Committee about the appearance of Fund management and staff before parliamentary committees and Tom, I think, has provided you with the letters we have received back from Mr Wolfensohn and Mr Ko­hler.

  3. Thank you. You mentioned the Report there and there has been criticism that the Report is insufficiently forward-looking in terms of providing any details on the UK's agenda for the year ahead, and indeed the objectives which are outlined by both the Chancellor and the Secretary of State for International Development appeared in a backwater of the DFID website, so it does not seem as if you are airing your objectives and bringing them to public prominence.
  (Mr Scholar) I think what the Report does is set out the objectives that we have been working towards over the last year. It is a Report on the work of the UK at the IMF in the year 2001 and so it does inevitably dwell on the particular policy developments and issues that came up over that year and the way in which we dealt with them, and it includes of course the communiques from the two IMFC meetings. That said, we do pursue very consistent policies towards the institutions and although things have moved on a bit since the Report was written and published, of course since then we have had the spring meetings of the IMF and the World Bank and new proposals which have come out both from the Chancellor and the Secretary of State for International Development at those meetings. I think when you see the report that we publish next year where we will cover these in more detail, you will see that there is continuity of approach there. So what we tried to do in this Report is both comment in detail on what happened last year, but also to give the overarching themes that we are pursuing with the institutions to give people context to whatever happens during the course of this year.

  4. There has been criticism of the IMF in its macroeconomic policies in a number of submissions put forward to us. In fact one by one they indicated that they do not believe that the IMF is a qualified organisation to serve the interests of the world's poor. Another theme that a number of NGOs have been making to us is the disbelief that the IMF has anti-poverty strategies at the heart of its approach and also that it is not tailoring its approach with the World Bank. What response do you have to those criticisms?
  (Mr Scholar) I think there are a number of criticisms which have been made of the actions of the IMF in the past and I think many of those have been very fair criticisms. I think many of them have been recognised by the IMF, and indeed the IMF's reform agenda, which it has put in place and which the UK has been very actively pushing, is a response to those criticisms. They centre on whether the IMF sufficiently well understands the needs and economies of poor countries, whether they have a sufficient poverty reduction focus in their work and whether or not they are able to work with the World Bank in dealing with that. I think what we should look at here is what has happened in the last year through the reviews of the two new ways in which the IMF is engaged in low-income countries, which are, first of all, the poverty reduction strategy process and, secondly, its new facility for lending to low-income countries and the poverty reduction and growth facility. Now, both of those were designed as ways of improving the performance of the IMF in low-income countries. With the poverty reduction strategy process, you have got low-income countries themselves setting out their priorities for reducing poverty and for bringing growth to their economies. Those are policies that they set themselves and the IMF then comes in and works with them on what kind of macroeconomic frameworks they can best put in place and how they can tailor their policies to produce growth; and that is why you have got that poverty reduction and growth facility, which replaces an earlier facility and which has explicitly as its objectives promoting growth and reducing poverty. Now, this is a fairly new departure and that is why there was a review last year which was completed earlier this year. The conclusion of that review is that it is a good start, the principles are endorsed, the IMF is moving in the right direction, but there is definitely further to go and implementation has not always been consistent. So what the IMF now needs to do, and this is part of its implementation agenda, is to learn the lessons and to try to apply them more consistently across the board.

Dr Palmer

  5. The World Development Movement brief[1], which we have received, quotes from UNCTAD's report last year saying that the incomes of the poorest 20 per cent of the population in Africa had dropped by an average of 2 per cent per year during the time of IMF and World Bank structural adjustment programmes, and the UNCTAD report says, "experiments in structural adjustment programmes have not been successful in establishing the conditions for sustained growth. There has been a remarkable failure to take proper account of external conditions in policy design". Do you not think that is a pretty strong indictment from a UN agency?

  (Mr Scholar) I think there are some very valid points there. I think the structural adjustment policies in the past have not always been the best policies for the countries; there was insufficient attention paid by the IMF to the social impact of some of its policies; and also there was perhaps a narrow focus upon structural adjustment where what was really needed was a much broader approach and attention given as to how to restore growth to these economies. That is why the IMF has moved beyond what used to be the structural adjustment facility and is trying this new approach which relies much more on collaboration with the World Bank and of course partnership with low-income countries themselves. So I think that is a very fair criticism and there is a programme of work in hand now to try and address it.

  6. Thank you for the very open-minded response. On the 18 April, the US Congress passed a Bill to propose additional sustainability criteria to HIPC. They propose that a proportion of government revenues spent on servicing external debt could be an additional criterion, apart from the debt export ratio, and that countries with a severe health crisis should have governments pay no more than 5 per cent of government revenues for debt service. What do you think about this proposal? Would the UK support it if it comes up before the IMF?
  (Mr Pickford) Perhaps I could answer that. The concept of linking debt relief to some measure of debt service burden has been obviously under consideration for some time. HIPC itself has not only a debt-to-export ratio, but also a fiscal sustainability window to it which covers some of the same features as this proposal from Congress. I think the Government is prepared to look at any way of increasing the flows of debt relief to countries and indeed it is very concerned at the moment about the latest projections which show that an increasing number of countries going through the HIPC process are facing unsustainable positions, which is why the Chancellor proposed in New York a couple of weeks ago some additional measures to deal with the topping-up process. HIPC is a programme that has had a wide degree of consensus. The enhanced HIPC initiative was introduced in 1999 following on the initial HIPC in 1996 and the process to agree those enhancements was a difficult, long and tortuous one. We will look at any proposals for changing the structure of HIPC. This would be a fundamental change, but if there is widespread support for a process for adopting measures like this, then I think the Government would be prepared to consider it very positively.

  7. So your position on that is basically that you are not against ideas like this in principle, but you have not got a position on this concrete proposal at the moment?
  (Mr Pickford) That is correct.

  Dr Palmer: I think there would be very widespread support for Britain taking an active role in supporting this proposal.

Mr Plaskitt

  8. Coming back to you, Mr Scholar, I was interested to hear you say that low-income countries set out their own priorities, and you said that in the context of working with them. Can you explain to us how that fits with this concept of "sequencing"? The Treasury's document The UK and the IMF 2001, for example, says, "Proper sequencing of capital account liberalisation is critical to maximising the benefits and minimising the risks . . ." If one of the low-income countries comes to you with its priorities set out, but they do not fit with what you understand by sequencing, how do you sort that out?
  (Mr Scholar) It is obviously something we have to look at case by case, but there are two general principles which overarch the whole thing, and I will explain how they can be combined. The first principle is countries setting out their own approaches to development policy and the principle which underlies that is that programmes have been shown to be much more effective and successful in countries where the government and the international community, the IMF, the World Bank and donor countries, are working together in the same direction and that it is not a question of conditions being imposed and countries being forced to do things that they do not want to do. That is the first thing. On capital account liberalisation, our position there is that we think it is very much in the interests of all countries to have access to the international capital markets as a source of investment, to increase productivity and to increase growth over the long term. That is in some cases very much a long-term objective. An essential corollary of that is to have the systems that will enable countries to deal with an open capital account, and that means macroeconomic stability, financial stability, sound and well-regulated financial systems which can then support its good governance and so on and so forth. Obviously in some countries those conditions are not yet in place, so I think the way we would look at sequencing in a low-income country would be to look at the range of things which would need to be done before it would be ready to open its capital account and then work with the country to bring those reforms into being.

  9. Sequencing suggests there is a certain order and, therefore, there are priority things which have to be done. Can you walk us briefly through an example of sequencing so that we can understand more clearly what this concept is?
  (Mr Scholar) I think, firstly, we would need to look at the macro condition of the economy and see whether there was a stable policy framework and stable economic developments over time: so inflation stable and low, positive rates of growth and reasonable external balance and a generally sustainable position. So that is the first thing. Secondly, you need to look at the financial system and to see whether there is proper regulation in place, and thirdly, standards, as I have said, of corporate governance, auditing and accountancy and so on and so forth. These are all conditions which need to be in place. Now, in terms of liberalising capital flows themselves, the sequencing would depend very much on the particular circumstances of the country. I think the general principle would be that you would open it up to long-term flows before opening it up to short-term flows, so you would allow long-term foreign direct investment to come in first. Obviously foreign direct investment will only come in if there is a climate in the country where investment is productive and successful, so that is why all these things have to be pursued together. I think as you got macro stability, structural stability, and foreign direct investment coming in, then you could look at the particular nature of the capital controls and try to work out with the country a process whereby they can actually be lifted.

  10. They are really big hurdles, are they not? They are really substantial, structural things that they have to get in place. At what point does the anti-poverty requirement kick in? Incidentally, before you answer that, I listened very carefully to your introductory statement and you did not actually mention anti-poverty in the course of listing all those objectives. You came to it in subsequent questions, but I was a little bit concerned that it did not feature in your own willingly provided list. Coming back to this point, all of these hurdles, and again I would like an example, can you give us an example of where you have used sequencing, how long did all this process take and how much did the country itself, for instance, bring to the party as opposed to how much was it you laying down conditions and saying, "All these must be in place before anything can happen"?
  (Mr Pickford) Perhaps I can interject here. I think it is worth thinking back a little in terms of the debate on capital account liberalisation because up until around 1997, before the Asian crisis, the Bretton Woods institutions in particular were accused of forcing capital account liberalisation on unwilling countries. This actually was quite a fair criticism and it became apparent in the Asian crisis the dangers associated with open capital accounts before countries had the infrastructure in place, as Mr Scholar said. It is generally agreed now that sound macro policies, sound financial systems in particular are important if a country is going to minimise the risks and maximise the benefits from an open capital account. In practice, there are very few examples that I can think of countries wanting to open their capital accounts more quickly than the IMF wants them to do so. A good example of well-sequenced capital account liberalisation is Chile which through the 1980s and 1990s basically opened its capital account in a fairly gradual fashion and, as Mr Scholar said, they started with the more long-term investment flows, foreign direct investment in particular, and then opened it more to long-term portfolio flows and indeed for a large period of time they had taxes on short-term flows to try to minimise the risk that they would entail for the country.

Kali Mountford

  11. I am a bit concerned about flexibility in all of this and I welcome your very open answers so far and your acceptance of some criticism, but looking at what Oxfam has had to say about macroeconomic planning and also the goal of achieving the Millennium Development Goals, I understand from the Chancellor's evidence to the International Development Committee on the May and his speech on 10 May that he wants countries to speed up and do better in their Millennium Development Goals. Where do countries stand with these different objectives which are not always absolutely consistent with each other? They are trying to decide their own sequencing, their own planning for their own country and they have an objective to deal with of the Millennium Development Goals, to fit those criteria, which may not be entirely consistent with the macroeconomic planning for their own country to meet the profitability and growth that you are requiring. What would you say to the criticism of Oxfam, that we are putting countries in impossible positions in some circumstances?
  (Mr Scholar) In answering that, could I also deal with some of the general points on poverty made by Mr Plaskitt. I think that a key part of the way in which the IMF is changing in its approach to poor countries is to recognise that kind of potential tension upfront and to incorporate a look at poverty and poverty reduction into everything it does in these countries; and so in the case of the poverty reduction and growth facility, which is its main way of lending to poor countries, with 36 programmes currently in place and put together with the authorities of the countries, very careful attention is now paid to the poverty and social impact of those policies. Now, that relates both to the overall macro-framework and also, within that framework, to the priority that is given to the social expenditure; and the IMF people that go out and negotiate are now asked to pay particular attention to social spending, spending on health, spending on education and other spending that can help countries meet those Millennium Development Goals. Whereas perhaps in the past there was a look at just the macro, at just the totals, now the IMF is much more engaged in looking at the breakdown and making sure that spending is allocated to sectors where it can have the biggest effects on poverty reduction. That said, all is not perfect and I think one of the main conclusions of the review of this facility—which has taken place over the last year and which has involved a lot of contact with NGOs right across the world—one of the main lessons of that is that there is a need for greater flexibility. For example, if a country has a programme agreed with the IMF for a particular path of spending and borrowing and then they want to attract greater resources from a donor, the question is how does the framework deal with that, and I think in the past there has been a tendency to regard the spending total as sacrosanct. Now, there may be cases where there is an argument for that, but there may be other cases, I think, where the IMF wants to talk to the countries and say, "If there is a way to deal with debt resources, let's find a way in which we can make the programme flexible to deal with that".
  (Mr Pickford) I just wanted to add that the relationship between the Millennium Development Goals and a country's own objectives is an interesting one. The Millennium Development Goals are set up at the UN level and they are supposed to be applicable across the global economy as a whole. Clearly some countries are much closer to achieving those goals than others and we would clearly hope that the countries which are close can get there much more quickly than 2015. Other countries, the poorest countries in particular, have a long way to go and it may well be that in some cases they fall short of achieving the goals in that country. The framework which Mr Scholar has outlined of the country deciding what is the appropriate speed and objectives for it in the situation at this particular point in time is embodied in the poverty reduction strategy which the country sets out. Now, it will talk to the World Bank and the IMF about what are the appropriate goals over the next three to five years, but in the end it is for the country through a consultative and participative process to set its own goals for poverty reduction.

  12. You bring me neatly on to the poverty reduction strategy papers. Oxfam believes that they should include a comprehensive assessment of the impact on trade liberalisation. What is your view on that?
  (Mr Scholar) I think it is absolutely essential when the IMF is recommending trade liberalisation that it does look at the impact that would have and I think one of the things that they want to do—and we encourage them to do more and more of—is to develop with the Bank and with other donors a comprehensive analysis of poverty and social impact, looking at policies right across the board, and I think trade has to be a part of that.

  13. They also say that the IMF is not best placed to deal with liberalisation in any event and they believe that the World Trade Organisation is the best place. What is your view in your spirit of openness?
  (Mr Pickford) I think the way in which trade liberalisation will come about is through, in particular, the Doha process now and there are two aspects to that. It is clearly very important for developing countries that developed countries open up their markets as quickly as possible and that is why the EU's Everything But Arms Initiative, for instance, is, we believe, a very good initiative which will provide much greater and freer access to developing countries' exports. We also do think that in the longer run it is in developing countries' interests to open up their own trade accounts. Intra-regional trade can actually be a powerful engine for growth and we think it is a good thing that the countries do move in that direction. There are clearly risks and you do need to take account of the dislocations and risks that trade liberalisation implies, but in terms of implementing it, I think you are right. I think the natural home for it is through the WTO and the Doha Round.
  (Mr Scholar) If I can add just one thing to that, the IMF and particularly the Managing Director, Mr Ko­hler, have been very persistent in saying that industrialised countries have to open up their trade more to developing countries and that this is a very important way in which the richer world can help the developing world develop. Now, the WTO is the main framework for that, but one thing the IMF can do is to draw attention to trade policies of developed countries which harm developing countries and there is actually a commitment now following the IMFC meeting in Washington last month that the IMF will pay more attention to that and draw attention to it as a way of encouraging more countries to open up.

  Kali Mountford: Well, I will resist commenting on whether the USA is a developing country in terms of textiles, but hang on in there.

Mr Ruffley

  14. I have a very well informed electorate in my Bury St Edmunds constituency and a lot of correspondence on aid to developing countries. One of the things that crops up in correspondence is the speed with which poverty reduction strategy papers are prepared. Perhaps I could just read one comment from the IMF in a review on the PRSP approach: "The pace at which countries have completed full PRSPs has been much slower than originally expected . . . reflecting . . . the inherent complexity of the task of preparing PRSPs in a participatory manner and the capacity constraints that countries face in doing so". I just wonder whether you think there is any streamlining that can be applied to the PRSP process that will make sure that developing countries get the assistance they need more quickly.
  (Mr Pickford) You are right that the development of PRSPs has taken longer than we envisaged when this process was first introduced. We recognised that in the enhanced HIPC initiative the PRSP is a trigger for debt relief. We recognised that by saying that, in practice, certainly in the early years of the process, countries will not have the time and space and the capacity in some cases to develop their full PRSPs as quickly as we would want. That is why we allowed countries to go into the HIPC process on the basis of interim PRSPs. The PRSP Review, noted the experience with the early interim PRSPs was that they were in some cases rather sketchy. However, the UK feels that it is important not to rush the development of poverty reduction strategies because ultimately this is a way for the government and the country to work out its own strategy and objectives and if you rush it, and in particular if you do it in a non-participatory way, then the risk is that you end up with a strategy which does not have buy-in from a wide section of the population. So the compromise reached is that we would allow less than complete poverty reduction strategies as a basis for getting into the HIPC process, but that did not mean to say that we did not think it was a good thing that they then moved on and developed those poverty reduction strategies into a fuller document.
  (Mr Scholar) The only thing I would add to that is that we also very much recognise that there are capacity constraints in some countries and it is quite a difficult exercise to do to carry out an exercise right across the country to secure consensus on the strategy for reducing poverty. So the Fund has a new plan to enhance capacity-building in Africa. Mr Kohler has announced the creation of two technical assistance centres and if they are successful, there will be more to follow. One of the things they will be doing will be helping governments in carrying out these poverty reduction strategy processes; and a number of bilateral donors, including of course DFID, also work in countries helping them carry out these processes.

  15. In the 2001 Treasury IMF Report, and I think you have mentioned this figure, it says around 36 interim PRSPs have been completed and eight full ones. You say on page 59, "The UK . . . is keen to ensure that the lessons feed into IMF policy design and practice", and I think you have given a helpful account of the nature of the compromise and I understand that, but what specifically are the lessons that you talk about in the quotation I have read out? You have talked about technical assistance units which presumably will be expert help, assisting the civil servants in various countries work out these papers, and I understand that, but what else is there that the UK is pressing for in the IMF policy design and practice which will make sure that this process is speeded up without compromising the accountability that you obviously need?
  (Mr Scholar) I think the figures have now moved on a little since the Report was written, so there are now, 42 interim PRSPs in place, and that includes those which have been agreed in the last month or so, and nine full PRSPs. As I have said, there is a capacity-building exercise to help countries move from an interim paper, and here I should explain that an interim paper does not need to have full and widespread consultation right across the country. In many cases it will take an existing set of policies and try and adapt them to make sure that they are comprehensive and look at poverty reduction across the board, and then explain how a process of consensus-building and consultation across the country is going to happen, and then that process happens and out comes the full paper. So there is help being given to ensure that that can happen. As far as debt relief goes, as Stephen said earlier, we were very keen that this process should not hold up debt relief and I think the position we are in now is that countries which are still waiting to come through the process are really waiting because they are either in or recently emerging from conflict in their countries. Now, a country which is just coming out of conflict is obviously a particularly difficult country in which to conduct this wide process, going right across the country, so what we are urging there in particular is greater flexibility by the Fund when it looks at the interim papers that are being prepared, to make sure that the particular conditions of that country are recognised and taken account of.

Mr Mudie

  16. I noticed, Mr Pickford, when you referred to the Millennium Development Goals, you said that they were UN goals. Are they accepted by the IMF?
  (Mr Pickford) Yes, indeed the IMFC, last November endorsed the Millennium Development Goals.

  17. When were they agreed by the UN?
  (Mr Scholar) I think they were endorsed by the UN in 2000.
  (Mr Pickford) It was at the Millennium Conference.

  18. And they have got set objectives by 2015?
  (Mr Scholar) That is right. The IMF participated of course in the Monterrey Conference in March, and that was a conference which put together a development agenda with Millennium Development Goals very much a part of that and the Fund fully supports them.

  19. I wonder if you can reconcile the reference to countries that lead their own goals rather than Millennium ones and I wonder whether your strategies, IMF strategies, are geared to meeting these 2015 targets because I got from you, Mr Pickford, that this is one area where you would let countries agree their own poverty objectives, but do you see them eventually within the UN timetable reaching the targets?
  (Mr Pickford) The UN targets are set at the global level, so, for example, the overarching goal is the halving of world poverty by the year 2015. Some countries will be able to achieve that more easily than others depending upon their starting circumstances. It is also clear that given the distribution of the world's population, getting progress in China[2], in particular, will be perhaps really crucial to meeting the overall Millennium Development Goals. Having said that, I think what we would like to see is that all countries set themselves challenging targets to contribute to the Millennium Development Goals. Let me give you one example, if I may. One of the goals is the achievement of universal primary education by, I think it is, 2005 and Uganda, which is in many respects a country which has been doing the right things for the last ten years, actually embarked on its own universal primary education campaign in the mid-1990s and has by and large achieved it already. So they have already got to this point in advance of the timetable set out in the Millennium Development Goals. By the same token, some countries will lag behind, but the way I think one reconciles this is to say that Millennium Development Goals are set at a global level and they would be the average of countries.



1   See Appendix 4. Back

2   Note by Witness: and India. Back


 
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