Examination of Witnesses(Questions 81-99)|
THURSDAY 27 JUNE 2002
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
(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
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
(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 throughwe
do not know yetbut 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.
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
(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.
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
Chairman: We will look at the sovereign
debt restructuring mechanism and the Krueger versus Taylor views
on the bankruptcy court versus the debt contracts.
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
(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 problemand
JP Morgan claim they have onelet 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
(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.
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 Argentinayou 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
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.