Select Committee on Treasury Minutes of Evidence

Examination of Witness(Questions 160-179)



  160. I understand that the IMF has admitted now that the recommendation to Malawi was based upon the wrong information. Do you think that was the case?
  (Mr Ko­hler) I do not think that I can tell you, "The IMF said this," and "The IMF said this." I want to underline: this is an issue in the responsibility of the World Bank and the EU Commission. The IMF was part of this process of giving advice to the Malawi government and the IMF may also have not been attentive enough, but I just tell you that I am not accepting that the IMF is made the culprit for this case, and I really also will go public if it continues, this kind of accusation. I have sent the President of Malawi a letter in which I made clear that he was involved with the World Bank and the EU Commission in this project; that the IMF was part of, say, the kind of international advice and the IMF may, again, not have been attentive enough how they exercised how to run this maize stock, but it was not the responsibility of the Fund to implement the advice.

  161. If I may ask the last question, because we have to move on. There may have been responsibility between the different international organisations in relation to this. My primary concern is about the issue not the individual allocation of responsibility. Do you acknowledge that a mistake was made here in the advice? Do you think there is something that we could learn in the future—the IMF, the World Bank and so forth—about giving this advice and about the kind of impact assessments that we might make before giving such advice again in the future?
  (Mr Ko­hler) Clearly there have been mistakes. I think it is right that the government of Malawi has now started an audit in this, so that, after this audit, hopefully, we are in a situation to have better information of what went wrong and who was involved in what went wrong, so that we have a clearer defined responsibility and, on this basis also, accountability. It is clearly an issue to think how we can avoid that this kind of mistake will happen again.

  Mr Laws: Will you do an impact assessment—

  Chairman: I am sorry, but we have to move on. Jim Cousins on macroeconomic stability.

Mr Cousins

  162. Do you think, Mr Ko­hler, after the experience of the last few months in our own markets, that we can be completely confident in rolling out our own institutions as they happen to be and our own practices as they happen to be on the rest of the world, or that perhaps we should put our own house in order first?
  (Mr Ko­hler) I think what happens in the advanced countries demonstrates that there are in all places of the world, all countries, mistakes, political failures, and that means also, again, there is a need for reviewing things, lessons learned, to define a better policy. I have definitely the opinion that it would be a big mistake if we would always concentrate—IMF/World Bank, but particularly, in this case, IMF—on problems in poor countries or emerging market countries. I agree that Enron/WorldCom demonstrates that there are risks and vulnerabilities here in the advanced countries, in the UK, in US, in Germany, in Europe, and we need to tackle these issues.

  163. You have made a very strong point this morning, and I do understand that, about the need for what you have called self-responsibility and political cohesion as a pre-condition for economic prosperity. What do you think are the sources of a lack of political cohesion and bad governance in some of the poorest countries of the world? Do we not have a responsibility in actually producing that lack of political cohesion?
  (Mr Ko­hler) This is a question which has a variety of elements. I think the history, the culture, politics, wars, even the geographical location of countries often define this particular situation. But we have no choice but to try, because in a globalized world everything is interconnected, to work based on dialogue, inclusion, and also on what I call an encouragement for national systems to be aware of the need to have respect for the social dimension or social cohesion in a country. Because social peace is a productive factor, so that we work for a better world, but, if we would give up self-responsibility for the countries, I think we would take over or would try to take over responsibility which no-one could implement. I mean, there is no world government. I think even if there were one I have a doubt that the world government could fix it all because, say, the dimension of the problem boils down to this, that you need to have awareness for the local situation, for the local politics, and encourage communities, local processes, to deal with the situation. So I have no quick-fix, Mr Cousins, for a better world but to say that there is a local level, there is a regional level, there are national levels, there is a global level, and try to define institutions, try to define dialogues, try to define, as I call it, a kind of global ethics in order to promote a better world. Global ethics is, for instance, something which, I think, here in the UK but also in Germany, people now care for more and more. There is, for instance, a foundation in Germany called World Ethics where they try to promote, to facilitate, a dialogue between religions and they try to find out that there is some common ground between all major religions—so Judaism, Christianity, Islam. For instance, in all the big religions you have a rule—a kind of golden rule, as they call it—that: What you do not want to happen to tou, this you should not do to anyone else. If we would, through dialogue, facilitate and promote the acceptance of this golden rule, then I think it would help to create a better world.

  164. If I can follow that point directly, is it not a common principle of the ethics of all those religions—and one which certainly I would regard as being part of my own upbringing—that the poor come to the table first to be fed before they get the lecture on free markets.
  (Mr Ko­hler) I think that is not, as I see it, the issue, because I have said already that the social dimension, solidarity, should be part of every human community, human body, institutions. But, if you would create an environment where people have the feeling they just can go to somewhere where they are fed or get answers for everything they are asking for, I think this institution is not available. The strengthening of self-responsibility, plus an environment of solidarity and dialogue, I think is the right approach.

  165. I understand that, and you are very clearly putting what you call self-responsibility first—that is the first of your two pillars—but do not the poor of the world look at you and say, "Well, here are these guys lecturing us about free markets and telling us of the value of free trade, but what can they do to prevent the United States raising trade barriers against the rest of the world and pouring untold sums of money into food subsidies, price subsidies, for American farmers?"
  (Mr Ko­hler) Mr Cousins, first, the IMF, at least since my time, is not lecturing about free markets. I must make this clear. Secondly, look to this very important kind of historical initiative in Africa called NEPAD, a new partnership for the development of Africa, where the African leaders themselves have said, "It is our obligation, our responsibility to provide good governance, to fight corruption, to fight against armed conflict. It is our obligation." So it is not that kind of lecturing, they themselves are saying, "It is our obligation" and I think they are right, because of one point: I would guess that the national pride or the pride of a people, even a tribe, in Africa is an important element for development, more peace, more freedom, more democracy. The pride of a nation depends also on the fact that they are aware: "We did it. We made it. We are not just depending on aid and all of this"—a very strong point which I feel should always be taken into account. But your second point is right: there is too much of hypocrisy, double standards, in the international community. I am, indeed, advocating more trade integration. Then, I think, it is only clear that I also have to speak up against subsidies, trade distorting subsidies in Europe, in the US, in other advanced countries, and I am doing that. But you should also be aware that there are trade barriers amongst the poor countries themselves—and this is, again, going back to self-responsibility—and it is also not credible for the poor countries in Africa to ask for more market access to Europe when, on the other hand, they are not yet exploiting fully the possibility for more trade (and that means more income and job regeneration) between themselves.

  166. With the structure of world trade as it is now, against the background of the Zedillo Report which examined the benefits of trade liberalisation that went to the rich countries and not the poor countries—and all over the world it is easiest for a man with a gun to grab the latest lorry load of cheap American maize, and President Bush is pouring another £190 billion into subsidising its production—do you think they will ever achieve self-responsibility?
  (Mr Ko­hler) Yes. I am encouraged through NEPAD, the Africans themselves. I do think that there are countries like Mexico, like South Korea, like, if you want, China and others—south Asian countries—which demonstrate that there is a chance, through trade, to come out of poverty and a critical situation. But there is really the need now to change the overall trade policy, not least, in the advanced countries, and this kind of dialogue here in this parliament, with the NGOs, will help to create the public awareness that the advanced countries have to change and have to change more rapidly.

Mr Plaskitt

  167. You are indeed speaking out about these things, because you gave a speech to the US conference of Catholic bishops in January and you used some pretty tough language on this point. You said, "It is unconscionable"—that is the word you used—"for the United States, Japan and the European Union to spend hundreds of billions of dollars on agricultural subsidies to maintain marginal activities for the benefit of a small segment of their population, while undermining agricultural sectors that are central to peace and development in poor countries." I think most of us would say, "Amen" to that, but the question is: Where is your leverage as an organisation? Because that comment is addressed to the funders basically of the IMF—and you have spoken in questions earlier about respecting their capital, when we were discussing the organisation of the IMF. Can you at the same time give due weight to the capital they put in and do anything more than simple exhortation about what they are doing with agricultural subsidies?
  (Mr Ko­hler) I mean, certainly a difficult task, and I should not be in the temptation to put too much of a load or ambition on my shoulders. But—and I think you are more aware than I am because you are a politician—politics in the 21st century more than ever goes by a public debate communication. I think—and I do not hide it—that I feel myself committed to participate in a public debate and, on this basis, create public awareness about the problems. I have some trust in the reason of the people, the ordinary voter, that he is able to draw conclusions. I trust, indeed, that the ordinary man or woman here in the UK, in Germany or in France, will understand that the existing pattern of trade policy needs a change because more and more the ordinary people understand that this poverty issue is a major threat even for themselves. So I am part of this public debate. I know that I am taking risks because the big powers do not like it—and it is in a way backfiring—but I think I should take this risk, first. Secondly, and more concrete, we are in a process of discussion with the WTO how we organise our work also in the institutions and with the orderly mechanisms. This means that, in particular, the WTO has to take up this discussion and make the Doha Round really a development round. Thirdly—and this is what I am going to discuss with my shareholders, the UK ED and the other EDs—we have already discussed in the board that within our Article IV process of surveillance and dialogue we should also have a window about market access and trade distorting subsidies. I am going to pursue this further and I hope that we will come to a conclusion which enables us, on the basis of a more systematic approach, to discuss in a transparent way market access and trade distorting subsidies for all our membership.

  168. Do you have in your mind a timetable for the unwinding of these agricultural subsidies?
  (Mr Ko­hler) Well, I mean, you are European—the UK is part of the European Union—you know how difficult, in particular, the Common Agricultural Policy is, so I should be cautious about myself setting a timetable. But my advice is to you and to all your colleagues in the parliaments of the world: be ambitious. Set an ambitious timetable because time is running. Because you, the politicians, the parliaments, need to change it.

Mr Ruffley

  169. Oxfam has said—and I quote—"Trade liberalisation measures should be removed from World Bank and IMF loan conditions. Instead such discussions should be carried out under the auspices of the World Trade Organisation which is formally charged with negotiating reciprocal trade liberalisation measures. Trade reform via the World Bank and IMF is not reciprocal". Could I ask you therefore, Mr Ko­hler, why the IMF is involved in trade liberalisation issues, when this is more properly, in Oxfam's view, the responsibility of the WTO?
  (Mr Ko­hler) Since I am at the IMF trade liberalisation is not an element of conditionality, so I want to make it clear about that. I do not want to comment on what was in the past, but I do not make it a kind of, say, major conditionality point for our policy point of view. I would also say that we have empirical evidence that those countries which had been more forthcoming with integrating international trade gained also the advantages of that. I have mentioned already countries like Mexico, like South Korea, like Malaysia, like Singapore. I mentioned already what I have in mind about trade and the IMF, and that is, talk about it, have a dialogue, an Article IV attention to this, but indeed I would trust that it is the WTO who should sort out the right political approach about further trade integration involving both, equal and even-handed, the advanced countries and the poor countries.

Kali Mountford

  170. But it is not the case that you are disinterested in trade issues. We have heard a theology from you today which I translate into a sort of water babies theology of "Do unto others as you would have done unto you". This is a "Do as you would be done by" philosophy. Given that, you said that you are ambitious in getting rid of barriers to trade between developing nations themselves. Is it reasonable to ask them to look at the problem in their own eye, when they are faced with bigger barriers outside? In other words, we have America saying, "I'll do unto others as I'll do to myself, I'll put up big trade barriers, but you mustn't, you must remove your trade barriers, before I shall." Is that reasonable?
  (Mr Ko­hler) Yes, I think it is reasonable. If, for instance, between Kenya, Tanzania, Mozambique, South Africa there would not be a kind of trade integration, then it is pure economics. For example, the cost of transportation is lower in this regional area than the cost of transportation to the far remote countries. I think it makes sense. I think it makes even more sense in the direction that we have evidence also—and I think the European Union is the proof of that—that to cope with international competition it is easier if you have the kind of strong home market and an extended home market; based on that you are stronger also to compete with remote areas. A third element, and what I think went wrong in Africa, for instance, is that we need to strengthen local business activities. The Africans should be able to produce food also for themselves, and they should be able to trade with food or products to the next country. So I think that it is not a contradiction if we would say strengthen capacity to produce food and to develop a kind of division of labour in the region, and based on that be prepared to integrate in the bigger environment.

  171. You touched on NEPAD a few times today, so I am assuming from your answers that they hold an element of support from you, but we also heard, I think particularly from Professor Vines, Bretton Woods and Oxfam that there is a lack of technical knowledge within some of the African nations and that they need support. I also notice that you are supporting five new regional centres for technical assistance. How do you see those developing? Do you think they will be adequate to provide the skills gap so that that internal trade and growth can grow in the way that you imagine it can?
  (Mr Ko­hler) I believe that it is often not a lack of political will but a lack of capacity, administrative operational capacity, to do a better job. Therefore, indeed we decided to set up five regional technical assistance centres, but we want to concentrate our assistance on our major focus, and that is macroeconomics—that is, not least public expenditure management and the statistics for that and financial sectors for that—so that is what we are concentrating on. Our initiative is well discussed and co-ordinated with the World Bank, and the Work Bank is co-ordinating with the WTO and their trade assistance to poor countries. So I think you are right, there is a need for technical assistance, and the WTO and the World Bank should care about what they can do to provide support for the poor countries. We are concentrating on our four areas.

  172. Could you tell me a little bit more about how you envisage this operating? It is not really clear to me where this new expertise would be drawn from, how you would make sure that there would be some home-grown new technical knowledge. Who would be co-ordinating it? Who is taking precedence, and will that mean that the priorities that you want to see set would actually develop out of these?
  (Mr Ko­hler) We have discussed it with the Africans themselves. They appreciate very much our concept, and they encouraged us to concentrate on what I call our priorities—that is, public expenditure management. For this we have two kind of major vehicles. First, training. We train Africans so that they are able to handle the budget, how to collect data, how to put it in a framework, how to assess statistics. We are going to train them. We are also going to hire Africans as much as possible as permanent staff in this technical assistance, because we want again to demonstrate that we are not coming from Washington or the UK, white people, lecturing them; we want to demonstrate "We want to support your philosophy, your approach, your culture." I also want to say that there is an issue where again I give it back to you as parliamentarians. Official development aid is still too heavily bound to so-called domestic interests—that is, tied aid—and I sometimes get really impatient when I recognise that there are big rhetorics about official development aid, but in substance it is a kind of accommodation of domestic interest, giving orders to domestic construction firms and so on. There is a political interest, clearly, but if it is not going to change that official development aid is really given with the clear idea to help the Africans or poor countries, and not to help the next company around the corner here in Germany or in the UK, I think then it will not substantially improve.

Dr Palmer

  173. On that, we understand that in Britain aid is now substantially untied, but we welcome your comments. To clarify one difference in evidence, we have had a written submission which says that in 2000 the IMF advised the Government of Malawi to reduce the strategic grain reserve from 165,000 tonnes to between 30,000 and 60,000 tonnes. In your reply to Mr Laws you said that that statement was actually false, and it was not the IMF, it was the World Bank and the European Union, is that correct?
  (Mr Ko­hler) I concentrated on the Malawi case. You may have an advantage to me. I offered to you a kind of paper where we outlined in the IMF how we see this development.


  174. Mr Ko­hler, could we have that paper from you on Malawi, and then we could go on to another question? That would be very handy.
  (Mr Ko­hler) Yes.

Dr Palmer

  175. That would be fine. How do you react to the criticism that the poverty reduction strategy papers have not really been integrated in the basic thrust of the IMF's thinking, that it is almost like lip-service or lip indicator, that the focus of the IMF is still on macroeconomic stability and not poverty reduction?
  (Mr Ko­hler) First, I think macroeconomic stability is good for poverty reduction, because poverty reduction will only be achieved in a medium and long-term approach, and without macroeconomic stability you cannot sustain this effort. Secondly, I think Mr Fallon had a different angle of asking me on this. He said I am over-ambitious and take everything on my shoulders. Indeed, I travelled three times to Africa. On my last visit when I travelled to Africa I particularly concentrated on a dialogue with officials, with civil society, with business people, churches and so on, asking does this process work, is it accepted? The outcome of this dialogue was that it seems that it is promising, the African people themselves accept this concept, and therefore there is no problem within the IMF. But I admit to you that I feel the major guardian for the PRSP should be the World Bank, because we should have this concentration on macroeconomics, financial sectors, good monetary policy and exchange rate regimes, but the overall concept and its implementation in the medium and long term should be the prerogative of the World Bank.

  176. I see. I was struck by the fact that when you were asked about the poverty and social impact assessments you were not sure which countries were involved. Obviously this is not a quiz programme, but that did suggest to me that it was not getting a tremendous amount of management attention. Would you agree that actually these are a bit peripheral for you?
  (Mr Ko­hler) No, they are not peripheral, but indeed we are at the beginning of this process. As I said before, the social impact and poverty analysis is an idea since round about a year now. I am asking staff, "What about it?", and the answer to this is that the concept is in a process of implementation and learning by doing. This involves the World Bank, us, it involves also particularly the countries themselves. It is not the concept which you sort out here at the green table and then overnight it is implemented. We need to have the countries themselves backing it and working with that. Here there are, I would guess, as much difficulties as possibly lack of attention at the managing director's office.

  177. Finally from me, the IMF has its own poverty reduction and growth facility approach. It has been suggested to us in evidence that this has superseded and overridden the policy-making process of the PRSP in certain cases, notably Senegal. Basically the argument is that the country itself is leading the PRSP, they make a certain amount of progress, and then the IMF comes along and says, "This is our concept of the PRGF" and that really overrides it, because they need your money.
  (Mr Ko­hler) That is not our philosophy. What I understand from the review process of the PRSP and the PRGF is that there was a kind of very well harmonised attitude to implement both, and that the PRGF should fit in the PRSP, and the PRSP is the bigger contest and the bigger concept. So if there is a complaint, we have to look at it, but I feel the PRGF is not the dominating vehicle or instrument for the PRSP.


  178. Mr Ko­hler, we have had the issue of the sovereign debt restructuring, and your deputy Anne Krueger's proposals for a domestic bankruptcy court which she said would be an international, worked-out mediation service. They have been contrasted with John Taylor the US Treasury Secretary's aspect of debt contracts. They seem to be quite far apart. Are they as far apart as that, and is there a possibility of us resolving this issue so that we have such a mechanism to resolve the unsustainable debt problems of countries, which would benefit debtors, creditors and, more importantly, the international community?
  (Mr Ko­hler) These two tracks are, for management of the IMF, two complimentary tracks. That means we are very much engaged in discussing and working to make the collection action clauses in sovereign bonds operational. There are a lot of difficulties, but we are working on that and, as you know, also the G10 are working on that. We are also saying—and I personally have the opinion—that at the end the collective action clauses will not do the job, we need also the sovereign debt restructuring mechanism. I then depend on shareholders. We have made a kind of step forward that the G7 major shareholders have agreed that this is a double track, a complimentary approach, but it is up to the shareholders and their input whether we will succeed in this process. There is an argument that the United States Congress will never accept a change of articles, because the sovereign debt restructuring mechanism needs to be accommodated through a change in articles. I would not advise us to stop our activities because of this argument, but there is a major question. I think the two positions are in substance not apart, they should be part of a wider concept, but at the end the politics is decisive here, and I encourage you, your Parliament, Gordon Brown, the Government, to be a strong advocate, outspoken, ambitious, to work for the sovereign debt restructuring mechanism.

  179. Back to us, then. On the issue of Brazil, economic analysis has suggested that the growth prospects there are dimming with the financial turmoil. If Brazil defaults on its £171 billion in foreign debt, then the shockwaves will be felt everywhere. One of our expert witnesses last week said to us that "To have the Fund walk away from Brazil is exactly the wrong solution to problems of this kind. That is where the Fund needs to be, not helping just in fundamental solvency crises, but in liquidity panics of this kind". They said, as others have said, "Brazil has done everything the IMF wants, yet we still find ourselves in this position". What can the Fund do to reassure Brazil and the international community?
  (Mr Ko­hler) We have demonstrated that we are supportive and at the side of Brazil, not least that I think two weeks ago we, in a very flexible way, accelerated our programme and our policy dialogue with Brazil, enabling them flexibly to use IMF money for their situation. We are also in a close dialogue with them to follow what happens and be prepared. I think that clearly the situation in Brazil is manageable, and we will do everything to make it manageable, but you should also be aware, Mr Chairman, that the difficulties come not because of the IMF, or the stupid IMF, but because of some discussions about politics and the question "Will more left from the centre coming in be prepared to service the Brazilian debt, or will they pursue the policy which was in principle very reasonable from President Cardosa?" There is an element the IMF has not under its control. I make you aware, the IMF again cannot be the saviour for everything, but regarding Brazil I can assure you, it is our interest, we have a good dialogue, a good co-operation with the Brazilian Government, so that we should not exaggerate that.

  Chairman: Thank you. My colleague Andrew Tyrie wants to come in on the back of that.

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