Select Committee on Treasury Minutes of Evidence


Examination of Witnesses(Questions 100-119)

PROFESSOR MARCUS MILLER, PROFESSOR DAVID VINES, MR STEWART WALLIS AND MR ALEX WILKS

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 controls.
  (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 came?
  (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.

Mr Plaskitt

  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 members.
  (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 so.
  (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 improved?
  (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 in it?
  (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 memorandum.
  (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.

Mr Mudie

  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 asked for.
  (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 and decisions.

Mr Fallon

  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 power—it does not exercise it usually, but it does reflect its weight in decision making—and 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 IMF—Options 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.

Mr Plaskitt

  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 directions.


 
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