Examination of Witnesses(Questions 60-80)|
TUESDAY 21 MAY 2002
60. What about the Russian crisis?
(Mr Pickford) The Russian crisis, casting my mind
back, was actually largely to do with the underlying structural
problems in that economy and the overall problems on the fiscal
side. In that case I think the benefits from transparency would
have come from requiring changes to those policies at an earlier
stagechanging the arrangements under which the industrial
structure was organised and changing arrangements for the banking
sector and so on. I think in that case transparency could have
led to earlier changes in policy.
61. How would you see the balance between the
role in crisis prevention, which is really what we are talking
about, and crisis resolution which has been the traditional role.
How would you see the balance between those two roles developing?
(Mr Scholar) What we are very keen to do, and the
management of the Fund is also keen to do, is to sharpen the focus
on crisis prevention. Prevention is obviously better than cure.
It is very difficult to resolve these crises once they have occurred.
It is much better to prevent them happening in the first place.
We are pushing forward a broad agenda to strengthen crisis preventionthe
codes and standards on policy frameworks, better surveillance,
the contingent credit line, and so on and so forth. We are doing
work on crisis resolution, which is very topical at the moment,
and there is a lot of discussion about sovereign debt restructuring
and so on and so forth. It is very important in its own right
to get that framework in place, but I think it will also very
much strengthen the crisis prevention framework as well because
if it is clearer ahead of time what the roles of different players
will be if there is a crisis that can very much help to incentives
behaviour and help to avert it.
62. The consequence of this new role of crisis
prevention is that you have to intervene in a country's policy
when things are calm as opposed to when things are in crisis.
Are you likely to have more impact at that point than you might
otherwise have? Is that not one of the weaknesses of the present
(Mr Scholar) That comes back to what I was saying
earlier in response to Mr Tyrie, the importance of the persuasiveness
of the Fund's advice. It is certainly true that in one sense the
Fund has more levers at its disposal when it is in crisis because
it is then in the business of lending it money and it is then
in a position to ask for certain things in return for that. But
we need to move increasingly to a position where the Fund's surveillance
work is recognised as being authoritative, expert and independent
and where countries recognise that increasingly the results of
the work are available for all to see, and that takes us back
to the transparency we were discussing earlier. It is obviously
a difficult thing to pursue and it will take some time but we
must keep pushing at it. If we can move forward to that position
there will be much stronger frameworks in place for preventing
63. What evidence have you so far of that activity?
(Mr Scholar) There have been a lot of improvements
in recent years in the policy frameworks in a number of countries.
One thing that we have seen over the last six to nine months is
that the world economy has stood up much better than many people
expected, first of all, to the impact of the slow down which was,
of course, exacerbated by the 11 September shock and, secondly,
to the events in Argentina. One of the reasons why there has been
less contagion than some people were expecting is that there have
been stronger policy frameworks in place in some countries, and
that is partly due to the codes and standards. That shows that
the system is working better, but of course there is quite a long
way to go.
(Mr Pickford) What has happened also is that over
the last year or so the financial markets have been able to discriminate
better between different countries and the risks associated with
those countries. That is reflected in the interest rates which
those countries are paying on their borrowing. One reason for
that is that markets simply have more information on which to
make those decisions. It is arguably a very good thing that markets
are able to discriminate in that way.
64. One of the factors in the crisis prevention
is the IMF establishing the contingency credit line providing
concessionary emergency financing for countries that pre-qualify.
Why have no countries taken this up?
(Mr Scholar) One thing which the Chancellor called
for in the Spring meetings which will be happening later in the
year is a review of the contingent credit line to look at precisely
this question. When it was established in 1999 its purpose was
to act as an insurance policy for countries and the hope was that,
first of all, it would incentives good policy by countries because
countries would have to follow good policies to be pre-approved
and they would only be approved if they had strong economies and
if they were not expected to need Fund resources, and only in
those conditions would they qualify under the CCL. Secondly, it
was hoped it would be taken as a signal of confidence that the
international community had in a country and that in turn would
help prevent or minimise the risk of crisis. The experience we
have had is that it has not been taken up yet. We made various
changes to it last year to make it more attractive as a crisis
prevention tool. As you say, so far there are no countries who
have applied for it. That could be for one of a number of reasons.
It could be to do with the terms on which it is available or the
cost of that type of borrowing as compared to the costs of other
types of borrowing. It could also be that there is a collective
action problem, that no particular country wants to be the first
to take up what is a new tool in the system. It could even be
that countries have felt sufficiently secure from the risk of
contagion that they have not felt that this is something to which
they need to have recourse. That would be a positive sign that
the other elements of the crisis prevention strategy were working.
As I say, we do not know exactly why countries that are eligible
have not yet sought to take advantage of it. There is a review
going on over the course of the year. One of the things that would
be beneficial to do is to see what comes out of that.
65. Could one of the reasons be that countries
feel they may be showing they are anticipating a crisis and therefore
stigmatising themselves in the international communities?
(Mr Scholar) That is a possibility. This is a new
facility and so I think it is understandable that countries will
want to think very carefully before being the first to take advantage
of it. It may be that there is a collective action problem and
if we moved to a state where it was a part of the international
regulatory system that countries have CCLs and that was part of
the normal function, it would then achieve its desired purpose
which would be very much as an insurance policy signalling confidence.
We are not there yet. The question is how to get from here to
there and that is what the review will be looking at.
66. On the issue of the sovereign debt restructuring
proposals Anne Krueger from the IMF has been putting her proposals
and John Taylor, the Under-Secretary of the US, has been putting
his proposals. Anne Krueger is saying there remains a gaping hole
in the system and she would like incentives to help countries
with unsustainable debts resolve them properly and in an orderly
way, and what she is suggesting is almost like a domestic bankruptcy
court, whereas John Taylor is saying that the most practical and
broadly acceptable reform would be to have sovereign borrowers
and their creditors put a package of new clauses into their debt
contracts and debt contracts are defined very precisely. What
is your opinion on the merits of those arguments? Where does the
UK come down, on whose side?
(Mr Pickford) There has been a fair degree of convergence
in thinking over the last six months since Anne Krueger first
floated the idea in November. I think that in theory the voluntary,
contractual approach is capable of producing a more effective
and better crisis resolution system. Indeed, collective action
clauses are already part of a large number of bonds issued under
English law. They have never been part of bonds issued under the
New York jurisdiction and there are cases where the existence
of those clauses has helped. I think there are limitations to
that approach. Even if you had a 100 per cent take-up of clauses
in bonds you would still have a problem of collective action in
relation to bank lending and other forms of investment. Nevertheless,
I think our view is that having a much more widespread introduction
of collateral bonds would be distinctly advantageous. That is
one of the reasons why the United Kingdom, along with Canada,
has put collective action clauses in its own foreign currency
bonds for the last couple of years. We have been trying to encourage
other countries to do precisely that. Also, though, it is quite
possible that the contractual approach will not be fully effective,
in which case we very much welcome the work that is being done
now, stimulated by Anna Kreuger's previous speech back in November,
to try to develop a more statutory approach to this. As you say,
what she envisaged initially was very much a bankruptcy court
type mechanism. Her thinking has moved on somewhat to a lighter
hand but still maintaining the same overall structure. She thinks
now that more of the features could be developed in co-operation
between the debtor and creditor. I think there has been a very
significant convergence of views. As a result the G7 and IFC communiques
in April both talked about moving forward on both of these strands
of work seeing them as complementary and mutually reinforcing.
I think that is now the priority for work both in the Fund and
outside over the next few months to try to really move forward
in terms of resolving the legal problems associated with clauses
and the design problems associated with the statutory approach.
67. So you are saying the difference between
those two views is merging?
(Mr Pickford) I think so, yes.
68. And the United Kingdom is doing work on
that specifically to ensure that outcome?
(Mr Pickford) Yes, we are working actively on this
whole agenda. The G7 has a working group in which we are actively
participating and obviously Tom in his dealings with Fund staff
is actively involved in pushing for that.
69. How far will the concept of special drawing
lines, as illustrated by George Soros, take off? Is that something
that you do not accept?
(Mr Pickford) George Soros presents that primarily
as a way of increasing resource flows to developing countries.
The Chancellor makes no secret that he would consider any mechanism
that would increase resource transfers. Soros in particular suggests
that firstly the Fourth Amendment to the Articles should be passed,
of which we are very supportive, but this is an example where
the United States Congress has not ratified it. That would give
a much more equitable distribution of SDS. He then goes on and
suggests there should be a general allocation of SDRs which rich
countries should then donate to developing countries. Again, as
I said, if there were more support for that view then we would
consider it very carefully.
70. To what extent do you think better sovereign
debt restructuring procedures could have averted the Argentinian
crisis? Also making a comment to you for your views, is it not
the case that the Argentinian situation has shifted the template
in the way in which the IMF does business with developing countries?
We have had the shambles of the peso and the United States dollar
being linked since 1990 and then different regions of that country
producing their own currencies. It seemed it was a mess in which
the IMF was complicit.
(Mr Scholar) If I may take the sovereign debt restructuring
first and then move on to the wider case of Argentina. In the
case of Argentina the SDRM could have had two different effects.
First of all, had it been in place it would certainly have helped
to resolve the crisis and to provide a mechanism whereby the Argentinian
Government could come together with its creditors to work out
a write down of debt and work out the crisis. That is one reason
why we think it is so important to press forward on this work,
so that if there is a similar crisis in the future that mechanism
will be available. Secondly, I think it would also have helped
avert the crisis because by making it clear ahead of time who
would be playing what role and what funds would be available from
the Fund and what would be the responsibilities of private sector
creditors, that would have helped condition behaviour in a way
that would have made the crisis that much less likely. On the
question what does the Argentinian crisis tell us about the approach
of the Fund, the Fund supported Argentina under a programme from
January 2000 right through to the end of last year. This was a
programme which had very strong ownership in Argentina. It was
the Argentinian authorities' own programme. It was a country which
was in recession and it had already been in recession at that
point for a couple of years. The programme which the authorities
had put together was based on the Currency Board. That was right
at the centre of it and was something that had very strong support
in Argentina. The Fund supported that programme right up until
the end of last year. The position we find ourselves in now is
because of the crisis in confidence last year and the decisions
of the Argentinian Government leading it to, first of all, abandon
the Currency Board and then forcing it into defaulting on its
debt. The IMF is now working with the authorities to put together
a programme which will enable the resumption of growth as soon
as possible. I can talk more if you like about the various things
that the Fund is looking for, but the basic condition that has
to be met before a programme can be put together is that there
must be an environment in which it is possible for normal economic
activity to resume. That means various changes to legislation
and also the implementation of the fiscal agreement with the provinces.
The Fund is working very closely with Argentina. They have got
technical missions down in Argentina discussing at the moment
how to do that and the Fund is now waiting for an invitation to
go and negotiate. The last thing to say is the Argentinian Finance
Minister is in Washington tomorrow or Thursday, which will be
his first opportunity to meet the Fund management and managing
director, and I am sure that will be a useful meeting.
Chairman: There is a long way to go on
that aspect. Kali on the issue of loans versus grants.
71. I was very pleased with your answer to David
Laws that the United States does not always necessarily have to
have its own way. Given that George Bush has said that he would
like to see 50 per cent of the World Bank's IDAs funds converted
to grant rather than loans and John Taylor's assertion that these
could easily be linked to measurable goals of their own, we might
say that these measurable goals should be the Millennium Development
Goals or PRGF or macro economic stability or some other desirable
goals such as that, but others might say these could be politically
driven agendas that tie countries into less desirable goals which
the IMF itself might not share. How resistant are you to the move
to grants rather than loans and what would be your assessment
of other members' views on this? What impact do you think that
would have on the IDA's future as a whole? Would it not drive
a coach and horses through the Fund overall and fundamentally
change the relationship not just of the IMF but of the World Bank
to developing nations and really change our long-term relationships
with developing countries and perhaps knock them off course from
becoming full world players?
(Mr Pickford) There are a number of elements to that
72. Sorry about that.
(Mr Pickford) I will try and take each of them. One
point you made first was whether we should be linking IDA to measurable
goals. As you said, that could be a good thing if the goals are
set in an economically sensible way. As to your suggestion that
they might transform into political goals, I think the risk is
quite low in the sense that IDA itself, because it is a multi-lateral
organisation focused on the World Bank, is much more resistant
to those pressures and, indeed, the Bank's Articles prevent political
issues intruding into the decision making. On the issue of grants
specifically, I think it is worth pointing out that grants can
play quite an important role in development as a whole and indeed
most bilateral donors now give a large proportion of their aid
in the form of grants. United Kingdom IDA is all in the form of
grant and has been for years. Grants have an important role to
play for the poorest countries. The question is really whether
it is appropriate to extend that principle into IDA. IDA 12, which
is the current replenishment, does have grant-making facilities
for post-conflict countries, and I think the question is how much
further we would want to go in terms of extending grants into
IDA 13. The policy lead on IDA is in fact with DFID rather than
the Treasury and the Secretary of State talked about that to some
extent in the International Development Committee. The discussions
are on-going. We are trying to reach a resolution whereby everybody
is comfortable with the outcome. Ultimately the IDA 13 replenishment
will not happen unless there is consensus on this issue and we
are all hoping these intensive discussions which are under way
at the moment will result in something that everybody can live
with and is comfortable with, preferably before the period of
IDA 12 runs out at the end of June.
(Mr Scholar) I think it is important to distinguish
between two things, the US proposals for IDA, which is a multi-lateral
matter and part of the World Bank, and their proposals for how
to deliver their own aid and the extra 5 billion a year which
they announced on that. On the first of those, as Stephen says,
since this is a multi-lateral effort we know very much the types
of purposes for which the money is going to be supplied and that
will all fit very squarely within the World Bank's poverty reduction
mandate. As far as the way in which the US disperses its increased
aid, they have announced they are going to put it into a Millennium
Challenge account. The UK Government (DFID rather than the Treasury)
is discussing with them various ways in which they could do that
so we hope to have some influence on that.
73. It is making grants sound like a fluffy
bunny answer to everybody's problems, but that is not necessarily
the case, is it? Does it not depend really on what these measurable
outputs or goals are? What would be our influence on that, if
any, if the United States insisted on taking that particular route?
(Mr Scholar) It is right that grants are not always
the answer. If you look at the system as a whole taking in the
Fund, the Bank, the UN, the EU and bilateral donors, you have
got a large number of people providing grants, you have got a
large number of people providing loans on different terms, and
depending on the country's state of development one or the other
or a mixture might be the best way forward. To take one example,
when Korea joined the World Bank in 1962 it was a very poor country
and it took a lot of money from IDA in the shape of loans, as
well as grants from other sources. By 1978 it had had such success
in reducing poverty and raising growth it became a contributor
to IDA. What we would like to see is countries moving through
a process where the poorest countries start with grant and gradually
move into very concessional loans and over time become able to
borrow on the market more generally. You are absolutely right,
there is a broad spectrum of approaches. The point in the American
proposal last year which concerned us and a number of other people
was that 50 per cent was such a high figure for the grants share
within IDA. It would very much change the character of the Bank's
relationship with countries and would lead possibly to a problem
of overlap with other organisations. That is why we have been
discussing with them ways in which the grant element can be properly
targeted, because we think there is a case for a grant element.
As Stephen says, there is an existing one already, the question
is to try and find something that, first of all, will not in any
way put the financial strength of IDA at risk, so that is another
important consideration and, secondly, will enable IDA to go on
playing the role it is currently playing within the overall system.
74. I am happy with those answers overall. A
point of caution, you implied that it was certainly impossible
to have a political agenda but I have seen cases where a political
agenda can be dressed up as an economic agenda or an aid agenda.
I am not entirely satisfied that politics can be kept out of such
(Mr Pickford) I think that is fair. In a multi-lateral
setting the safeguards are greater.
75. I hear what you say.
(Mr Scholar) Just to add to that, the World Bank has
an independent evaluation department and one of the things it
does is look at all this and reports quite independently of management
and publishes its report, so that is another safeguard we have.
76. Could I just ask you Mr Pickford does the
British Government have a view on whether a currency transaction
tax might increase transparency and assist in the detection of
(Mr Pickford) One by-product of a financial transactions
tax such as a Tobin Tax, which I think you are referring to
77. There are all sorts of variations.
(Mr Pickford) One by-product might be that the information
you acquire is greater. I think you have to balance that off against
other questions about the efficiency of a tax like that because
it would require every jurisdiction to introduce the tax at the
same time at the same rate otherwise you would end up risking
diverting finances into unregulated or untaxed jurisdictions.
But I take the point you are making entirely which is that the
Government is very, very concerned to try to do whatever it can
in order to fight money laundering and fight terrorist financing,
which is why we have been very much in the forefront of efforts
to use the multi-lateral system to strengthen it. The IMFC itself
has been part of that process in terms of calling on the member
countries to ratify the UN conventions. The IMF also has a work
programme to extend its money laundering investigations into terrorist
financing. We put an awful lot of weight on making more effective
the procedures we have in place to stop financial abuse.
78. The IMF's reviews of offshore financial
centres have been going on. How has this fed through into the
British Government in terms of assessing how the offshore financial
centres for which Britain has a general responsibility perform?
Do they meet those standards?
(Mr Pickford) Most of them are certainly improving.
I doubt if any jurisdiction, offshore or onshore, entirely meets
all of the desirable attributes. The United Kingdom Government
has been trying for a number of years to ensure that the offshore
centres for which it is responsible directly or indirectly improve
their regulatory structure and supervision structure. Back in
1997 we commissioned a report by Edwards into the Channel Islands
and the Isle of Man and then in 1999 or 2000 we commissioned KPMG
to look into the Crown dependencies and look at their supervisory
system. So we have had this on our agenda for some time.
79. What actions have resulted?
(Mr Pickford) What has happened is most of the jurisdictions
have taken active measures to improve their supervisory and regulatory
80. How has that been reported to Parliament,
do you think?
(Mr Scholar) We would have to come back to you on
that. The IMF is involved in looking at all these things but a
different bit of the Treasury takes the policy lead on this.
(Mr Pickford) Could we give you a note on that?
(Mr Scholar) Could we let you have a paper on that?
Chairman: We have exhausted our questions.
Can I thank you on behalf of the Committee for appearing before
us this morning and being very open with us. You have been very
helpful to us in our inquiry and in particular to Tom I would
like to thank you for the efforts you made on our behalf in the
United States in January when the Committee visited. We had some
very helpful meetings with the IMF and the World Bank. Following
that and with your assistance I am delighted to be able to announce
this morning the welcome decision of the Managing Director of
the IMF, Dr Horst Kohler, to accept an invitation to appear
before our Committee on the morning of 4 July. We thank you for
your efforts and we look forward to continuing this inquiry.