Examination of Witnesses(Questions 100-119)|
THURSDAY 27 JUNE 2002
100. Most corporations find some ways of negotiating
special deals which enable them to withdraw a proportion of their
capital over a given period in countries which have strong outflow
(Professor Miller) I take the point that having a
reputation of hammering investors in your country is not the best
way to attract money. Money is going back into Malaysia, but I
guess this also raises the question of what kind of money you
want. If one wants FDI, which is what a lot of people think is
the most productive form, we are not really talking about FDI
because that does not get pulled out in a crisis. We are talking
more about short term Funding, which is likely to be pulled out.
101. In a crisis, people get what they can.
That is the definition of a crisis, or at least one of the features
of a crisis. To get FDI, if you want anything at all, do you not
want inflow controls so that before it arrives you have some idea
what its purpose is?
(Professor Miller) It is widely agreed that inflow
controls seem to be a good idea for giving people incentive to
put money in, long term. On the outflow side, many times it is
the creditors themselves that want the control. They are worried
that some members among the group could pull the money out and
they want to stay in. I do not think creditors automatically criticise
outflow controls. They will often criticise those of their members
who are trying to pull out. In the case of a bank, for example,
very often you are very happy not to have the bank collapse. One
can see the control as a way of solving, at least in a crisis,
the problem of creditor coordination.
102. May I ask about Russia? Does anybody here
think that the IMF handled the Russian crisis well and, if not,
what are the lessons. Was it right for the IMF to lend money in
the way they did and respond in the way they did when the crisis
(Professor Miller) It was known as the moral hazard
play. Essentially, it was seen as going to fail and people said
that the only reason for lending was based on the IMF being wrong,
so you could say that the IMF was wrong in encouraging that. On
the other hand, the IMF finally pulled the plug so you could say
the IMF did the right thing. Maybe you should not have gone through
those two sequences of encouraging moral hazard playing and then
pulling the plug. Why not make it more obvious all along that
you are not going to pay the money? This comes back to what we
are discussing: what are the alternatives to giving money? If
there is not a proper bankruptcy procedure or decent contracts,
the IMF may get forced into putting in bail out money. I think
the IMF is looking for another alternative so that it does not
get gamed into these moral hazard plays.
(Professor Vines) No one wants to become a country
that is known to have an enthusiasm for capital controls. The
problem of living in a world with a very high degree of capital
mobility is that, without that possibility, you face the problem
of unmanageable crisis. What we are describing is a world in which
countries need to have the possibility in extremis of going
in this direction of capital outflow controls. It needs to be
combined with an IMF which is known not to be in the business
of lending potentially unlimited sums of money, which was the
nature of the Russian and the Argentinian problem. The UK Bank
of England and others have been pressing for it to be clearer
on what the limits of the Fund lending would be, for reasons which
everyone would support.
103. Theoretically they are in the IMF statutes.
It is a function of the quota.
(Professor Vines) Those have been effectively overridden
in the last ten years.
104. That is what was done over Russia, which
is why I asked the question.
(Professor Vines) That is what was done earlier over
Mexico and in a sustained way in Asia. We need to go back to a
world in which there is a clear understanding of what could be
expected to be lent. Pari passu with this, when you have
got into a crisis with very large outflow of money and you have
got to the Fund limit, we cannot envisage a world in which international
institutions just walk away and say, "That's it." We
need some regime of capital controls and crisis management, both.
Unpleasant though originally bankruptcy would have seemed to those
facing its introduction, that is essentially what we are describing
here: orderly management of those very unpleasant, disorderly
circumstances which can arise.
Chairman: On that issue of chapter 11
and the analogy with what happened in the US, we will come back
to that because it is a very interesting area. You mentioned Mr
Soros and his comments. He had the opportunity of an informal
discussion with us yesterday which we found very helpful and he
brought up the issue of emerging market liquidity. Brazil, for
example, which has conformed with everything that has been asked
and yet is in real crisis.
105. I want to look at a domestic aspect of
all of this and that is the UK's provision and contributions to
the IMF. The Treasury officials in evidence to us have been crowing
a bit about the UK's influence. They have been claiming some credit
for the poverty reduction and growth facility, the HIPC initiative,
greater transparency, crisis resolution, contingent credit lien
and the creation of the Independent Evaluation Office. Do you
think this is overblowing the UK's influence or should we be quite
pleased with what the UK is up to within the IMF?
(Mr Wilks) It is quite hard to see what the UK is
doing on a week by week basis in Washington. It is not clear for
us in London, in a non-government organisation, even though we
do have a number of discussions with Treasury officials in London
and Washington, which side of the lines our government has come
down on all the time. On the other hand, most of those issues
that you raise, the UK has been one of the more energetic board
members pushing for them. Some have not worked out as well as
we might have hoped and we are going to come to some discussion
of HIPC and the PRGF. I think you mentioned the contingent credit
line and that has not been a wild success. We need to look into
what has been done but the UK has been more energetic than some
(Professor Miller) Gordon Brown is the chairman of
the IMF committee which has been set up to look at these strategic
issues so this gives the UK, in some sense, the responsibility
of the chair. This must explain why it has been involved in the
major developments. The other thing is the timing. These crises
have hit the world when Gordon Brown has been in the chair and
the IMF has had to react. Imagine if they had done nothing over
Argentina. People would have blamed the IMF and said, "Look
at East Asia. Now we have all of Latin America", so I think
the IMF was under tremendous pressure to respond and it has done
(Mr Wallis) I would support what Alex says about the
possible UK government stand. We are concerned though, despite
some of the Chancellor's recent statements about not pushing countries
to liberalise too fast which we welcome, that the UK government
has not done nearly enough to grasp this issue of opening up developing
country markets too far. That is not happening. The words are
starting to come out but there has not been strong pressure and
the Treasury report still talks about economic liberalisation
being in the best interests of poverty reduction. We do not agree
with that. We think there is a real case to be argued there. That
would be our major point of concern. Despite some better cautionary
remarks from the Chancellor recently, the UK government's position
on trade liberalisation for developing countries in the current
situation is not in the right place yet.
106. You mentioned the annual report. This presumably
is something you welcome but how much real, hard information does
it give? Does it enable us to reach an objective view as to what
the UK government is doing inside the IMF? Does it need to be
(Professor Vines) I am not sure that it does.
107. You do not think it is transparent enough?
(Professor Vines) I do not think so. It might well
require a large amount of resources to write something which was
a more detailed account of what was being done. But the statement
that it is not completely transparent is correct.
108. What specifically needs to be improved
(Mr Wilks) In our memorandum, we made a number of
specific proposals. In terms of what it does, it has elements
of an IMF annual report, reporting in general on what the IMF
has done. I feel that that can be gained from the IMF's own report.
It is not so clearly focused on the UK's role. Whilst it now does
add in an annex a general idea of how the UK approaches certain
decisions, it does not say for country X we went this way; for
country Y we went this way. It also does not give a flavour of
the discussions. For example, how much the UK is facing down the
US or other key shareholders where we have significant differences
of opinion. It does not give a view of what academic or civil
society commentary is taken seriously by the UK Treasury officials
in dealing with the Fund. It does not give a forward looking sense
of what is coming up in the next six months, at the spring meeting
and the annual meetings which relevant stakeholders may want to
take up with people in the Treasury or Gordon Brown, as appropriate.
So: more forward looking; more of a sense of the debates with
other key players in Washington and in countries and on the ground;
a differentiation of this from the IMF's own annual report. Those
are some specific, quite practical proposals that we have in our
(Professor Miller) I welcome the existence of such
documents. The increasing transparency over the last few years
in the IMF itself and in countries relating to the IMF has been
dramatic. But one of the features of the way it does business
is not to have votes. The voting record discussed at the end is
more or less irrelevant. The decisions are made by consensus.
I am not sure that pressing too far on some of the details that
were earlier suggested would be very helpful. If you are having
a round table discussion on issues, why do you want to see what
the UK's position is? It almost encourages the UK to act only
for itself, rather than in the interests of global governance.
There are no votes so there is no voting record to look at. I
am not sure quite how one would get the information that was suggested
just now. If so, would it be very useful? What exactly are we
supposed to find out about Treasury representatives? Do they talk
to some US representative in a corridor before a meeting and so
on? My feeling is that the structure does not offer the kind of
data that would fulfil what the previous speaker suggested.
109. What about Mr Wilks's basic point that
at least you can open up the debates that are taking place and
therefore encourage some external input into them?
(Professor Miller) There is a report of the debates,
of the meetings.
110. What about looking forwards, saying what
is coming up in the future, being more open?
(Professor Miller) I think there has been a big increase
in transparency. The problem often before was that governments
were not transparent. The IMF started publishing stuff that governments
often do not publish. The UK is setting a fine example in publishing
what it is doing.
111. Is there any other government producing
annual reports? To some extent, this is a new venture for the
government of this country and we are inventing the wheel with
it. Do the Americans publish an annual report? Are there other
reports that we could be looking at?
(Mr Wilks) I have not looked into it recently but
about two years ago we wrote some evidence in to your predecessor
Committee and at that time the Swiss, the Australians, the Americans
and a number of others
112. Are you familiar with all these reports?
Does your organisation get them?
(Mr Wilks) We certainly get some of them but more
often we are in touch with our colleagues in other countries,
in Paris, for example, who give us a sense of the findings of
their report. There is a lot more that parliamentarians could
do to work together to get at what is tabled in other parliaments,
whether it is annual reports or legislation. Working together
can be effective. They are very complex issues. Two months ago,
there was a meeting in Mombasa, Kenya. I met a Kenyan parliamentarian
at the World Bank parliamentarians' network last month at a meeting
and she said it was fascinating. They had a meeting with IMF officials,
finance ministry officials and many parliamentarians from Kenya
and they felt that they were being played off by both sides. The
finance ministry was saying there were all these problems with
the IMF. The IMF was saying to the parliamentarians that all the
problems were with the finance ministry. It was a very difficult
situation for parliamentarians to scrutinise what was going on.
For example, the IMF in one of its conditions says that you have
to put through the parliament such and such legislation on tax.
This legislation gets tabled in a parliament and then gets rejected
by the parliament or heavily amended and then the country is off
track on its IMF programme. It would be much better if the parliamentarians
were brought in earlier in the deliberations where the conditions
were set, rather than having to deal with the situation at the
last minute. There are similar examples in Bolivia, where the
parliament have thrown out a planned tax reform that had been
agreed with the IMF. It meant that the whole country went off
track. It would be better for developing country parliamentarians
to be much more involved structurally at the beginning of designing
programmes and I think it would be possible for you to get communications
from developing country parliaments and support them politically,
where you felt that was appropriate. This World Bank parliamentarians'
network may extend to dealing with the IMF next year and that
may be one way in which these information exchanges and information
flows can improve.
113. I was sympathetic when I read your paper
in terms of the ten suggestions you make, but you do undermine
your position by being unfair in terms of this annual report.
Our previous Committee asked for certain things which have been
delivered. They put how they voted when they voted. Look at page
71. They go further and put their position on other decisions
where they did not get to the vote, so I am very critical of other
departments' annual reports, but this seems to be a nice balance.
Of course it can be improved, but they have gone beyond what we
(Mr Wilks) We do welcome the report in principle and
we welcome other steps such as the statements from the Chancellor
and the Secretary of State for International Development before
each spring and annual meeting. There is definite progress. We
feel though there is this issue that has been raised. If there
is not a formal vote taken, does it mean that the UK does not
have a position? How is the position defined and therefore how
can accountability be generated on these positions which do not
go to a vote? Our feeling was that you get a general sense of
the UK's approach to issues but you do not necessarily get a detailed
read on exactly where they came down on specific country cases
114. Can we look specifically at representation
and perhaps address this question to Professor Vines? The executive
directors are a curious bunch. Some of them are national; some
of them represent a region or group constituency. Is this sensible?
(Professor Vines) It is historical. It is the institution
that we have. I think there is a lot to be said for longer term
structural change in the governance of the institution in bringing
in the kind of outsiders, a very different sort of institution
from our Monetary Policy Committee, who are appointed by the body
above that directs the fund, the Committee of Central Bankers
and Finance Ministers, appointing people to the Fund on the executive
board who are not the delegates of countries. The fund, at the
minute, is under the supervision of the ministers for finance
but beneath that there is an Executive director and the Executive
Directors from the separate countries. To have a governance structure
that was not composed entirely of EDs representing separate countries
and their interests would make it possible to develop something
stronger, a core responsibility for the institution, rather than
the EDs, representing the interests of the countries that have
put them there.
115. I understand that but is the MPC parallel
a good one? The external members there are appointed by the Chancellor
in whose interest monetary policy is being conducted. Who would
appoint your externals to the IMF board?
(Professor Vines) They would have to be appointed
by the overriding committee of central bank governance and finance
ministers, the deputies to whom the Fund reports.
116. Would that really improve decision making?
(Professor Vines) I think it possible that it would
in the sense that those appointed would not be there as representatives
of their countries but managing and developing an international
institution. We ask for reports about votes more clearly but in
circumstances where there is a conflict of interest between lending
and borrowing countries the question of how the overriding board
of Executive Directors deals with things is not as easy to imagine
as recording a vote on in something like the Monetary Policy Committee.
117. Once you move away from the present structure
of non-executives or externals, whatever you want to call them,
you move away from the contributory principle of representation
on the board. Are you doing that because you think that the contributory
principle itself is wrong and representation on the board should
in essence be based on how much a country contributes?
(Professor Vines) It could well make a difference
to the governance of the institution because the governance is
about the management of international financial stability rather
than the representation of national interests in the pursuit of
that. I think there are occasions on which these are separate.
118. How likely is it that the board is going
to agree to changes like this, given that it has always been based
on their economic and financial weight?
(Mr Wallis) We do see a fundamental problem in the
way that the board is structured. We do not necessarily have in
our competence what should be the ideal solutions but having a
situation where the US has formal voting powerit does not
exercise it usually, but it does reflect its weight in decision
makingand has more votes than the whole of sub-Saharan
Africa, south Asia and Latin America combined, this is a totally
unacceptable situation for a global institution in the 21st century.
Similarly, as the Treasury report picks up, having two representatives
of 44 sub-Saharan African countries. We welcome the sense in the
Treasury report of giving them more technical assistance and support,
but that is missing the key point. Is that a wise way to run a
global institution? We would say not. I would not like to pronounce
about how we get from A to B. Of course, there are all the politics
and other things involved, but I would submit that that is not
an acceptable way to manage something that is trying to look at
the global problem.
(Mr Wilks) The G77 has given further mileage to an
old slogan in relation to the IMF surveillance of these new codes
and standards on a whole range of areas, and they said they want
"no harmonisation without representation". In other
words, the are not prepared to adopt and follow and be monitored
on the application of all these codes and standards if they have
not been involved properly in defining the codes and standards.
This representation issue does come up again and again, and the
G77 and the G24 and other groupings have made it. We in the Bretton
Woods Project published a paper last year called "Structural
Adjustment for the IMFOptions for Reforming the IMF's Governance
Structure", which has a whole range of longer and shorter
term actions. On the longer term side, we argue for increasing
the number of constituencies and executive directors and allocating
the extra ones in favour of developing countries. As we mentioned
in our opening statement, if the Europeans are going to coordinate
more on their interventions in the IMF, which is a logical extension
of some of the closer monetary coordination, are the Europeans
prepared to forego one or more of the permanent seats? There are
a number of issues which we have raised in those previous papers,
and I think other multilateral organisations, particularly some
of the regional development banks, have experimented successfully
with changing the mix of contributions and other ways to decide
formal voting share. There is an excellent paper I would recommend
to the Committee by Professor Stephany Griffiths-Jones of the
Institute of Development Studies, a very recent paper on governance
of the World Bank, which reviews the different ways in which different
institutions cope with this dilemma.
119. There was one other issue I wanted to pursue.
I would welcome your views on the Independent Evaluation Office.
This has taken an awful long time to evolve. It seems to have
been talked about for seven or eight years now. It has finally
come into existence but is it a bit of window dressing or can
it do something really important in terms of offering independent
evaluation of the work of the IMF?
(Mr Wilks) We very much welcome it. The Bretton Woods
Project has been pushing since 1997-98 for such an office to be
put into operation and also looking into the detail of exactly
how independent it will be. It is a lot more independent than
we feared it might be at some stages. It seems to have somebody
selected from outside the IMF, someone insulated from the IMF's
politics. They have been taking very sensible steps to encourage
other people to contribute to the programme design and the scope
of their investigations. They will be at a meeting next week in
Berlin, inviting a number of outsiders to contribute to their
discussions on prolonged use of IMF resources at the moment. So
there are some good signals, but we have to see how strong and
independent their first report is and also how seriously the IMF
takes it. Of course, it does not have teeth to make the IMF do
anything about what it finds, so it could produce dusty reports
which sit on shelves. But I think now that there is a flurry of
interest from parliamentarians and outsiders as well as people
on the Board as to what the IMF is up to, it will give further
ammunition for people to scrutinise the Fund and push it in better