Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 40-59)



  40. Should it be on the table?
  (Mr Scholar) What we are trying to do is strengthen the voice of developing countries and we need to look at ways in which we can do that. There is a serious problem in the IMF and World Bank Boards where you have two directors representing the whole of Sub-Saharan Africa which is 42 countries; and those are countries with very substantial involvement with the Fund and the Bank, so the director representing them has not just the responsibilities of engaging in policy discussions at Board level, but he or she has also got to deal with the programmes and operations in the countries they represent, and that is an extremely heavy workload. One thing we could do in the short term to address that is to help them carry out their duties more effectively.

  41. It sounds like you might agree with War on Want and their views on the IMF. They say they do not believe that "the IMF is a qualified organisation to serve the interests of the world's poor. We believe they would be better served by an organisation that more fully represents them and that takes policy eradication as its starting point." You were saying earlier on that you did not feel the IMF had done that enough in the past. You have got quite a lot of sympathy with the War on Want view, have you not, this is not entirely an organisation where the representation is fair and it has concentrated in the past too much on things other than poverty reduction.
  (Mr Scholar) Certainly there needs to be a continued and strengthened focus on poverty reduction. The Fund has moved but it has some way to go. Certainly in the case of representation, we think there is a need to strengthen the voice of the poorest countries.

  42. Is it true that at the moment that the largest country within the IMF, the United States, is able to block and essentially veto some decisions because they require a majority which their own share of the votes can block?
  (Mr Scholar) Most decisions are taken by majority. There are some decisions, and these tend to be decisions on the structure of the organisation or large financial decisions, that do require a super-majority of 85 per cent. The United States has 17 per cent, so that is correct.

  43. So on those really huge decisions one country out of the 182 can block the decision of the other 181?
  (Mr Scholar) Where a super-majority is required that is the case.

  44. Do you think that is right?
  (Mr Scholar) Again it goes back to the nature of the organisation. The USA is the largest shareholder and its voting weight reflects its share.

  45. Are you suggesting to the US that they should take a more charitable big picture view and give up their blocking majority?
  (Mr Scholar) I think that is a matter for them. I do not think I should comment on that.

  46. You do not have a view on it?
  (Mr Scholar) It is a matter for them.

  47. I certainly expected for you to come here and say how misunderstood the IMF was and that the people in the world outside—Andrew's people, pelting your board meetings—have got that all wrong, but you have not said that at all. You have admitted to the chair and to others that not enough attention was given to poverty reduction in the past. In answer to Andrew you said the voting arrangements are all wrong and you have implied you do not think it is right that the US has this veto. You do not seem to have a very high degree of confidence in the organisation as it is.
  (Mr Scholar) I have said it is an organisation doing a lot of things right. Like any organisation it has to learn from its experience and it has to continually find ways to improve its performance. There is a reform agenda under way which has been going for the last three years. There have been some good results from that but there is further to go.

  48. Would you describe the United Kingdom as radical modernisers within the IMF?
  (Mr Scholar) We tend to be in the forefront in pushing it forward.
  (Mr Pickford) I think that is right. If you take a number of the changes that have occurred to the IMF over the last few years—the PRGF, the Independent Evaluation Office, the enhanced HIPC initiative, moves towards greater transparency, attempts to improve surveillance, attempts to improve the efficiency of crisis resolution mechanisms, the contingent credit line—all of those were issues that the United Kingdom has pushed for and pushed hard. I think to some extent the time was right and the circumstances were favourable for our views to have some weight, but I certainly think what you suggest is true.

  49. How much of the project is completed?
  (Mr Pickford) The Chancellor has announced further measures that I think will be desirable, for instance, as Tom said earlier, in terms of making the surveillance process more independent from programme decisions. We have concerns about the way in which the HIPC initiative is delivering sustainable exits from debt problems. So there are continuing efforts and things that we would like to push and will continue to push.


  50. I do not think the rest of the Committee can imagine Andrew Tyrie as a good Conservative pelting your windows with rotten apples! Has the US ever been on the losing side of any board in the past number of years?
  (Mr Pickford) As Tom said, most decisions in the Board are taken by simple majority, so even if the votes were counted—and they very very rarely are—the United States will sometimes not see the decision going the way it would like. And on some occasions it asks to be recorded as voting against.

  51. On the point David Laws made about Sub-Saharan Africa with two representatives representing over 40 countries—and these are debt ridden countries, war torn countries, countries that are just making their way democratically, in fact the poorest countries in the world almost—the need for us to do something in that area is urgent. So it certainly does not seem adequate that there is that level of representation. Again I think it is something that would help the IMF if moves were made to ensure that there were more executive directors in that Continent.
  (Mr Scholar) That is a proposal that has been put recently by both the directors representing Sub-Saharan Africa. It is something we will discuss during the course of the year and we have an open mind on that. We are looking at it. It is not something we have reached a view on yet. There are various ways in which you could strengthen representation. There is the possibility of an extra chair or chairs, as you say, there is the possibility of changing the voting shares, and there is the possibility of strengthening the capacity of the countries themselves to engage in IMF work through their representatives in Washington. These are all things we are looking at.

Mr Cousins

  52. Could I just ask has the IMF discussed the United States' proposals for increasing farm subsidies?
  (Mr Scholar) Not yet, but we will do soon because the regular annual surveillance of the US economy, the Article IV surveillance is due to be discussed in July and I am sure that will be part of that discussion.

  53. And that will be published?
  (Mr Scholar) The United States publishes its Article IV report—that is right.

  Chairman: On surveillance and standards and codes, Nigel?

Mr Beard

  54. The report at paragraphs 3.11 and 3.12 says: "The Government welcomes the steps taken by the Fund to strengthen their surveillance of the financial sectors", and goes on later to say an important step was the establishment of the new International Capital Markets Department. Could you say how that new department and the Financial Stability Forum, which is also reflected in that part of the report, are working together to carry out regulation and publish international comparisons?
  (Mr Scholar) The Capital Markets Department was established last autumn and it is doing a number of things. It is producing its own surveillance of the global capital markets and it publishes every quarter a global financial stability report. Another thing it does is work with other departments in the IMF, in particular the country departments to add a greater degree of capital markets focus into the regular surveillance work and programme work of the Fund. On the question how does it relate to the work of the Financial Stability Forum, the director of the capital markets group sits on the Financial Stability Forum and is able to give that group the benefit of the surveillance work that the Fund has carried out in these areas and, equally, is able to report back to the Fund on discussions; so there is a direct link there.

  55. What are the main means of surveillance? Are they still the Article IV reports from different countries?
  (Mr Scholar) Yes, there are three levels to it really. There is the Article IV report which focuses on individual countries. There are then occasional looks at regional surveillance, but most importantly I would say, apart from the Article IV, is the global surveillance twice a year on the world economic outlook, and that is a very substantial piece of work which surveys economies across the world, both recent development and prospects. We also have the new quarterly report on financial markets.
  (Mr Pickford) If I could add specifically on the financial sector, of course the Fund also has a very extensive financial sector assessment programme where it supplements the Article IV surveillance for individual countries by looking in depth at the health of that sector, the regulatory regime and so on. Indeed, the United Kingdom is in the process of having one of these assessments done to its financial sector. I think there are 20-odd financial sector assessments complete and another 40 or so planned. So this is a very, very extensive programme coming out of the lessons we learned from the Asian crisis which is that the health of the financial sector is very important.

  56. How do you overcome the problems you have of Article IV reports with certain countries not wanting information on their financial sector economy published?
  (Mr Scholar) The IMF's surveillance applies to both the Article IV reports and financial sector assessments. The basis of it is that while having the surveillance done is a condition of membership of the IMF, the decision on whether to publish or not is voluntary. There has been quite a change in the last few years in that until 1999 none of these documents were published. There was a pilot in 1999 to allow some to be published, and the United Kingdom was one of the first countries to volunteer for that. That policy was confirmed in 2000 and now the IMF encourages countries to publish and we at the Board, and those of other countries too, encourage countries to publish. It is something though that can only move forward by consensus with the agreement of the country concerned, because the IMF relies on the co-operation of countries and it is their right to have the decision whether or not to publish. We are very keen to push it forward and what we and others do is to explain to countries the benefits of greater transparency and greater publication.

  57. How many countries at present will not allow publication and which are the main ones of them?
  (Mr Scholar) I think the current figures are that roughly two-thirds (60—65 per cent) of Article IVs are published.

  58. Would it be a fair assumption that amongst the other third who do not there are likely to be some of the future crises?
  (Mr Scholar) No one knows where the future crises are but of the countries that do publish and the countries that do not there are some in each category. For example, one country that has had a very serious crisis recently is Turkey and Turkey is one of the countries that is very transparent in the publication of its documents. One thing we are trying to persuade people of is that greater publication is itself a very effective crisis prevention tool. This applies to surveillance documents and also to reports on standards and codes that look at the policy frameworks in place in countries. What we say to countries is, first of all, having these reports on codes and standards done is a very useful way of guiding them towards best practice but, secondly, publishing the results does a great deal to strengthen market confidence. For example, countries that subscribe to the special data dissemination standard, which sets out quite high standards of requirements for the publication of financial and other information, tend to find on average their borrowing costs are 200 to 300 basis points lower than those that do not subscribe. There are clear benefits and we are looking all the time to encourage countries to participate in that.

  59. Are you satisfied that had these arrangements been in place at the appropriate time you would have been able to identify the emerging crises in Asia or Russia or do you not interpret them?
  (Mr Scholar) There are two elements to spotting crises through surveillance. First of all, there is the work of the Fund itself in its dialogue with the membership and it is the responsibility of the Fund to spot emerging problems and to provide advice to countries on how to deal with them. So that is one thing. Secondly, the greater the degree of transparency the stronger the crisis prevention framework.
  (Mr Pickford) If I could give you just one example. Thailand went into crisis in 1997. It was the first country that led the Asian crisis and with the benefit of hindsight one of the problems in Thailand was that the true position of the Central Bank's foreign exchange reserves was not obvious either in public or indeed to the Fund with sufficient frequency, and that is one reason why we have put a lot of weight in terms of trying to encourage countries to sign up for better data standards to produce more, and more timely, information. It may not have averted the crisis but we certainly would have known earlier what the scale of problems facing that country were.

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