Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 81-99)




  81. Good morning, gentlemen. May I open the meeting by welcoming you to this Inquiry into the UK and IMF and thanking you for your presence this morning. May I ask you to introduce yourselves, starting with Professor Miller?
  (Professor Miller) Marcus Miller, Professor of Economics and Associate Director of the Centre for the Study of Globalisation and regionalisation at the University of Warwick.

  (Professor Vines) David Vines, Professor of Economics at Oxford University and Balliol College. I am adjunct Professor of Economics at the Australian National University in Canberra.
  (Mr Wallis) Stewart Wallis. I am Deputy Director and also International Director of Oxfam GB.
  (Mr Wilks) Alex Wilks. I am the coordinator of the Bretton Woods Project which has been since 1995 a watchdog on the World Bank and the IMF set up with the support of 30 UK based non-government organisations.

  82. If any of you wish to make a quick introduction, I would be happy to do it now.
  (Professor Miller) I did circulate some notes on responding to challenges of globalisation. I quote at the beginning George Soros's view that there are big benefits to globalising capital markets but there are these instabilities that he has emphasised. The task is to create the institutional response that exists at a national level that has to be replicated at an international level. I guess I am saying the obvious when I say that this is an incredibly important time. Earlier this year, we had the Spring meetings of the IMF and just before them there was this interchange between Anne Krueger with her new Sovereign Debt Restructuring Mechanism, which seemed to be challenged by John Taylor of the US Treasury and for a moment it looked like there was going to be a complete head to head between these two sets of players. I think it has been reconciled now and I am sure it is one of the ideas of the Committee to find out just how the IMF stands on this and where the US is standing, because it looked like there were mixed signals.

  83. You say in your paper that they seemed more complementary than different now.
  (Professor Miller) That is the party line.

  84. Professor Vines?
  (Professor Vines) It seems to me that there are three crucial issues facing the Fund at the minute. The first follows on directly from what Marcus Miller has said and is to do with the management of solvency crisis. There are on the table the Anne Krueger proposal from the Fund and the John Taylor proposal from the US Treasury. It is essential that preferably both, and certainly some, process in this area is agreed soon. A world in which there is not a better procedure for dealing with this will be an unsatisfactory world. Secondly, there is the issue of how the Fund deals with the liquidity crisis. There is a great danger that you can only get the proposals that have been described, the sovereign debt reduction mechanism and the John Taylor one, if you declare, "I am bankrupt and I am going to have my assets written down. Now let's get on with doing it." There are other crises and the Fund needs to be able to be involved in supporting standstills on repayments and in lending into arrears regularly in crises which are liquidity crises and will end up with assets not being written down and without bankruptcy. Thirdly, there is the question of how the Fund deals with all the rest. There is a small handful of financial crises every few years. For example, there are 25 countries where the Fund has been having programmes for 30 of the last 50 years. There are 16 countries where the Fund has been having regular programmes for 12 of the last 18 years. These countries have lost control of their macroeconomic management completely. It is not clear that the Fund's advice on how to run their macroeconomic policy, helpful in a crisis, it is not clear that the Fund is a good institution now for working with countries under the discipline of a "You do what I say" programme. Fourthly, the Fund dealing with countries who are not in an immediate crisis but have the task of building a coherent macroeconomic strategy. Think of how proud we are of what has been done in Britain in the last five years in reconstruction of macro strategy. Think of an international institution, partly the fund, partly a bigger global agency, that assists countries to rebuild their macroeconomic policy. With great respect to what the other two are going to say to us, I think there is a too great concentration on the Fund and poverty. If the Fund is dealing with the three things that I have talked about, it will be dealing with a minority of crisis countries and with a hands off approach to a majority of countries in helping build better macroeconomic and financial frameworks. To have a Fund one of whose central strategies is to do with poverty reduction is not to have the right Fund because such a Fund would not be involved in telling the majority of countries what to do. Th is a Fund doing macroeconomics and finance in alliance with others who do poverty and that alliance is important, but the key issues are these three questions of solvency crises, liquidity crises and the long run reconstruction of macroeconomics.
  (Mr Wallis) Oxfam's comments would follow very closely from there. We have three areas we want to make clear to the Committee today. One is that we urgently need to call on both the Fund and the bank to stop imposing liberalisation and conditionality on developing countries and that is not just for the effects I will spell out in terms of poor people in those countries but because of what is happening in the trading system as a whole. When you add opening developing countries markets to continuing barriers in developed country markets and to the commodity price crisis that has affected many agricultural commodities and add that to the continued subsidisation of agricultural products by the UK Common Agricultural Policy etc., you add up to a crisis in food security and agriculture affecting most developing countries and a massive increase in poverty as a result of that. Those policies are forcing open developing countries markets and not decreasing poverty; they are increasing poverty and they need to stop. That is the first thing. Secondly, while we welcome PRSPs, poverty reduction strategy papers, and want to show that they are still being done from the wrong starting point, involvement of some of the most marginalised poor people is happening patchily and impact assessment really is not happening, so there are still considerable improvements that need to be made there. Thirdly, on the HIPC, the highly indebted poor countries, the commodity crisis is leading to an ever increasing burden of debt, is not always being picked up fast enough and there is an urgent need, not just for the billion top-up which is being discussed at the G8 at the minute and hopefully will be taken through—we do not know yet—but much more realistic forecasting of what is leading to developing country exports and a much more realistic, much faster approach to debt relief. It is not happening fast enough. It is slow. It is not keeping up with what is happening to the downward escalator of commodity prices. It is not really aiming to meet the millennium poverty targets, so we have a crisis there. Those are the three areas: stop the conditionality; make PRSPs function even more effectively and sort out the crisis in the HIPC debt relief process.
  (Mr Wilks) I would like to start by welcoming this Committee's interest in the IMF. I think it is very important that we have been encouraging parliamentarians here and through our colleagues in other countries to take a view on this important institution for global governance. We also welcome the IMF's moves to be more transparent on a number of fronts as well as the UK Treasury to publish the report annually which has become longer and somewhat more comprehensive. I would like to bring you back to the report of your predecessor Committee in the last Parliament which I think had a number of very useful recommendations on further accountability and transparency, particularly relating to the agenda of the IMF board and minutes of the IMF and the UK's position on that board. It seems to us that some of those recommendations still have not been followed up by the UK Treasury, the Chancellor and perhaps the IMF. The division of responsibilities is a little unclear and I would urge you to come back to the those points and push Mr Ko­hler as well as the relevant UK people on that. On the more substantive side, the question of who is responsible for which bit of advice, which bit of conditionality which gets imposed or foisted on the developing countries, is very important. We have heard already that there is concern about the IMF over-stretching itself by dealing with a lot of complex governance and public administration issues as well as poverty issues. In other words, issues well beyond its macroeconomic competencies. As a single, very practical proposal, there has been a call for a timetable and a clear publication of who is taking responsibility for which bit of advice and which bit of conditionality. There is a lot of analytical work done by the IMF, the bank and bilateral agencies. It will be very possible to pull all that together so that interested parties could find out who is responsible for which bit of advice and which bit of conditionality.

  85. We have the managing director, Mr Ko­hler, before us next Thursday and that is a great opportunity for us to question him about it. We are grateful that he has accepted our invitation. The IMF was established in 1946 to manage fixed exchange rates and it has come a long way since then. However, one of the questions that is uppermost in our mind is: is the IMF still a relevant, valid, global institution? What changes are required in the IMF as an institution and also will there be any changes in the staff? What is your assessment of the calibre of the IMF's own staff? Is it an efficient bureaucracy or are more fundamental changes required in that?
  (Professor Miller) On the first question, is the IMF still relevant, I tried to give an answer in the annex to the notes I circulated. The way of doing that was to indicate the institutional features of the nation state (that is to say, a central bank, an insurance agency like the FDIC and a bankruptcy court); and then to say, "What goes on at global level?" The IMF does tend to act as the international lender of last resort. It often has to come in with money and it has this new CCL facility to provide money, and a Supplementary Reserve Facility to provide it quickly. The IMF is in some ways forced to act as the international lender of last resort at a global level. There is not an obvious regulator; it seems to be the BIS. The bankruptcy court you do not have at the global level. There is a role and one role could be the bankruptcy court. This is what Anne Krueger, soon after her appointment, realised, that the IMF could do this job. I guess the controversy is should you have the same agency doing both jobs. After all, the IMF is a lender so there may be a conflict of interest there. On your other point, do you trust the IMF in the first place, do you trust their decision making before you give them more power, we have to ask that question. The calibre of the staff is widely thought to be very good. They can select personnel from universities and walks of life all over the world. They pay well and one is given a lot of responsibility. I have often been a visitor there and been very impressed with the quality of the staff.
  (Mr Wilks) It is often said that the IMF is much more centralised than its sister institution, the World Bank, so that if a change is agreed at the top the instructions can be issued throughout the organisation and implemented much more quickly than the World Bank which is said to be more decentralised and sclerotic sometimes in its responses to changes in mandates and approach. I do not think the IMF is very balanced in working in partnerships with other organisations. It is not very good at listening to others. It is quite dismissive often of other people's analysis and opinions. Are you taking this question also to deal with the governance issues?

  86. We will come back to that.
  (Mr Wallis) As somebody who was responsible for a couple of years of recruitment of economists to the World Bank, I know quite a bit about IMF staffing from a long time ago. The calibre of staff is excellent. The problem is that they mainly come through a fairly limited number of economics schools and practical experience of, say, the poverty issues that they are dealing with is very limited indeed. It is not the calibre; it is the exposure and understanding of staff that is the problem. They do tend to come with a particular economic lens of how they think and therefore even though you see sometimes the top of the bank and the Fund changing their views about poverty the bulk of staff are often in the car behind in terms of their views on the role of the organisation and what is needed now in the world. There is a basic problem of lack of understanding, not of calibre.
  (Professor Vines) I support what is being said about the calibre of the institution and of the staff there and of the difficulty of imagining a world without the fund. If the Fund was abolished tomorrow, we would be at much greater risk of seeing more countries in worse positions than Argentina is in at the moment. But the institution is not well enough focused. It needs to focus on preventing and solving financial crises and on training countries and assisting them in better structuring their macroeconomic and financial policies. At the moment, it goes much too widely into a range of countries and its interests often seems as wide as possible and in a range of countries; with detailed intervention of the management of their policy from Washington; a focus on solving crises and arm's length training and assistance would be much better for the institution.

Mr Mudie

  87. You suggest a changed focus and a more limited role. Do all the members agree? When you were giving your introductory statement, you seemed to suggest there might be disagreement with the people on your left so on that specific thing is everyone in agreement?
  (Mr Wallis) Broadly, yes.
  (Mr Wilks) We are fully in agreement. It is a question of the IMF providing balance of payment support, for example, to a very poor country, to look at the poverty issues and the millennium development goals which most countries have signed up to, but not to take a lead in analysing it, not to take a lead in specifying the solution to all of these issues but to respect it and take a look at it.

  88. Who would take a lead?
  (Mr Wilks) This is where the timetable of who is responsible for what comes in. The best situation is if analysts in the country concerned are generating the suggestions and there is a debate going on in the country. Sometimes, it may be outsiders, maybe the British Government or the World Bank or others, who are in a better position right now to do some of that analysis but often it is very clear that the buck is passed around. Is it the government? Is it the bank? Is it the IMF? The IMF gives the impression that it is not only cognisant of these problems but it is able to take a lead on looking into them and advising remedies.
  (Professor Miller) Before she took office in the IMF, Anne Krueger did discuss this issue of allocation of responsibility between the World Bank and the IMF. At the time, the World Bank was in charge of structural changes which included financial structure and that seemed really odd. Why not have the IMF looking at the financial structure? Also at the time, the IMF was making a big play on poverty. She was arguing that these allocations were the wrong way round. More work on poverty should go to the World Bank and the countries concerned and more on financial structure should go to the IMF. I agree with that reallocation of roles.

  89. It would be financial structures at given points, with a heavy emphasis on the country doing it themselves?
  (Mr Wallis) The key thing that has to be remembered is that it is crucial that there is real dialogue going on so that what the Fund is wanting to do is not cutting across what the government or the bank is trying to do in poverty reduction terms, so not leading on that but taking it very strongly into account. We want them to look at the poverty policy issues but not drive them themselves.

Kali Mountford

  90. Professor Vines touched on training. You mentioned two situations, one where out of 50 years countries have needed help for 30 and out of 18 years for 12, which suggests there are internal problems in any event. Are we asking the right people to do the right job at the right time? How would we move from one situation to the other because we could not leave countries abandoned, without the skills in place to deal with it.
  (Professor Vines) Clearly, that is a risk, in walking away tomorrow, but the response to this risk for these quite significant range of countries is that domestic politics loses control of macroeconomic policy and financial policies. This is just not the right way to deliver democratically accountable and institutional building within countries. This could come from a Fund taking a much more helpful approach to its role in countries where it does not have a Programme or it may need to come from another international institution developing policy competence in countries. However we are not in the business of inventing new institutions this morning. Thus it would require the Fund to be much more available to working with countries whose macroeconomic policies it does not control through a Programme in developing how policies are run and in training the staff in doing them. The only relationship they have at the moment is in a Programme and if you have one then your policy has to be agreed with the fund. That is not exactly the right way in which to train people to be responsible for their own management. It is not a movement to tomorrow that you could do but this is the long run objective. Fund Programmes with lending would be short but Fund assistance would be long term in training and development of policies.

  91. That is not just going to happen organically, is it? There would need to be some transitional arrangement because a change like that could easily lead to risk.
  (Professor Vines) Of course. You are absolutely right but to use that as an argument against not having this as a long run objective seems to me not quite right.

  92. I hoped you might have a suggestion as to how we might go about it.
  (Professor Miller) I understand the World Bank is in the business of institution-building and they do see the competence of the countries as crucial and evolution of that being very important. There are steps to do that in a long run run. That has been one of the big changes in the way people have looked at poverty and coming out of poverty. We have seen how important is the ability of a country itself to take control of its own fate and the World Bank is making efforts in that direction.
  (Professor Vines) This is a suggestion that the Fund is something equivalent in macroeconomic policy and financial policy for institution building countries as the central responsibility of the Fund itself.
  (Mr Wilks) The IMF in the last couple of months has announced two technical assistance centres in Africa. I do not know exactly how well resourced or how well focused they are but this is partly an answer to the question that has been put to us. Some of us have doubts about whether the IMF and the bank are the best people to do training. They are not necessarily that good at listening or facilitating those kinds of roles and there other agencies out there, including Oxford and Warwick Universities and elsewhere, which perhaps are better suited to training and those roles.

  Chairman: We will look at the sovereign debt restructuring mechanism and the Krueger versus Taylor views on the bankruptcy court versus the debt contracts.

Mr Fallon

  93. Professor Miller, how far apart are the Taylor and Krueger proposals? Had either of them been in existence for the Argentinian problem, which would have better addressed it?
  (Professor Miller) The Taylor case relies on private contracts to solve the problem of debt restructuring; whereas the other essentially assumes that contracts are not going to work and has some kind of court procedure. In one sense, that is quite different, although the objective is the same. The IMF's view is that the contracts are just not going to work and they give two reasons. One is that existing contracts mainly do not have the relevant clauses in them: they call this the Transition problem: how do we get the clauses in. If you solve that problem, i.e., rewriting two-thirds of sovereign debt, what about the fact that in any one case like Argentina there were over 80 different contracts around and each of these clauses only operates within one form of debt. The IMF view this as an insuperable problem. One question might be: can we put it to the test? Argentina is in trouble. If there is a magic bullet to solve the problem—and JP Morgan claim they have one—let us see it work. My own feeling is that we have an incredibly important test to see whether the contract solution can be applied. In Wall Street, they have these various ideas of doing bond swaps, where you change the nature of the contract to make it more applicable to the situation. Let us see it. If it does not work, we are going to have to believe what the IMF is saying and go for a more court-ordered process.

  94. You are implying in your own paper that one should try strengthening the particular contracts. In the knowledge that that does not work, the second solution stands behind it?
  (Professor Miller) Yes; but I think it is tremendously important not to shoot down Anne Krueger's proposal in the meantime because if it goes away we will all go back to 1995, when the Rey Report recommended collective action clauses and nothing happened. The presence of Anne Krueger's proposal on the table is really important as an incentive and its effects are quite dramatic. The Institute of International Finance, which was against collective action clauses certainly since 1995, if not before, has come round. So have many of the others. I think they play a part together and technically speaking I guess it makes sense to go with the contract solution first and give it a try.

  95. Is it practical to address this as a test case to Argentina now when so much capital has flowed to Argentina?
  (Professor Miller) That is a really critical point and I think it is a blind spot for the IMF. Why did not someone tell Argentina that it was losing money like a man haemorrhaging from a major artery? The estimates I saw at Easter were that the privately held assets overseas were about $150 billion, which is the amount of debt they are worried about. I think there is an important problem about the way the whole system is managed. One should think of capital controls as part of the whole process of handling a crisis. I agree with you. I would not want to start from here, but that is where we have to start from.

  96. Neither proposal properly addresses the issue of capital controls, does it?
  (Professor Miller) Not really. They are an additional, important element where there has been a huge change in IMF thinking. As you know, at the time of the East Asian crisis, there was a move afoot to change the articles in the IMF in order to mandate the abolition of any capital controls. The IMF has turned pretty much 180 degrees from that. They are now saying that certain forms, the Chilean style inflow controls, are acceptable. I think Anne Krueger has gone even further. She has said that outflow controls could also be acceptable. I think this may be an example where the IMF at any time is like the cavalry. It has an objective. It does not listen to anyone; it just charges. For a while, the charge was towards capital account liberalisation. Now they have realised they have to be more moderate. To give them credit, they have learned and they should be more open about the fact that they have in this case changed their minds and maybe they should go slightly further.

  97. If the Taylor proposal was pursued in isolation, it would not address the issue of capital controls, would it?
  (Professor Miller) Not as I see it. The words capital controls never crossed his lips.
  (Professor Vines) I was just going to take up your last question. It is not the right conclusion that the Taylor proposal of itself would be somehow enough. There is some need for working, in parallel, on the Fund proposal even if, in the end, we are not clear how the institutions to administer it would work. Working on it is essential for the reason that standstills and the Fund lending into arrears in time of crisis are going to have to be on the table and one of the critical developments. That is not central to the Taylor proposal at all. It is not in the Taylor proposal. Once that is accepted, there is going to have to be some forum in which the legitimacy of the decision of standstills is decided and the question of whether the Fund can decide or a country can announce to the fund, "I am now in a position of not honouring my contracts and will stand still on them", is a core question whether the crisis is in the end a solvency one or simply a liquidity crisis. Thinking through how to manage the private debt and the time of standstills, how far you would throw the net, whether firms that were not in trouble could be entangled in the standstills, whether you would give protection to firms that were in trouble, are all questions which are central to the full works of Anne Krueger's proposal, even without it going to its full extreme. It is going to have to be considered as well as the Taylor one. I agree with what Marcus Miller has said, they are in parallel.

Mr Tyrie

  98. Inflow controls create a honey pot that people want to get into. Outflow controls create a threat which people want to avoid, which is getting into an investment which they cannot get their return from. Are there takers now for outflow controls on a sustained basis?
  (Professor Miller) The case for them being used in cases like Argentina—you used the word "sustained"—Argentina was over-valued and wanted to defend its parity. I think it should have been told to impose outflow controls then or devalue. In general I would say it is at a time of crisis that one wants the control.

  99. Would you invest in a country which, every time it had a crisis, might slap on a control which prevents you getting your money out?
  (Professor Miller) Corporations do that. You cannot pull money out of a corporation: under chapter 11.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 12 December 2002