THURSDAY 4 JULY 2002
Mr John McFall (Chairman)
Memorandum submitted by UKIMF
Examination of Witness
MR HORST KÖHLER, Managing Director, International Monetary Fund, examined.
(Mr Köhler) Thank you, Chairman, ladies and gentlemen. Let me first say that it is a pleasure for me to be with you here today. We met in Washington - I recall a very nice luncheon and the interesting debate - and I felt it quite natural to continue this discussion. I am here also because the UK, as you certainly know, was the founding father of the Bretton Woods Institution, and that means also of the IMF, and I feel this is not only an obligation for me to be with you here and to discuss matters but it should also be of some pride to the UK that this institution is still there and tries to do a good job. I have prepared a statement, Chairman. I do not propose to read it, though I will give it to the records, but, if you do not mind, I will make some introductory remarks and then I am here to answer questions as well as I can. I think this meeting certainly takes place at a difficult time for the global economy. In the global economy, broadly, the recovery is on track but uncertainties and risks are still there. However, we should, on the other hand, not exaggerate and only talk about the uncertainties, the down-side risks, but also look to the better side. This better side is clearly that there is a recovery under way, not least in the United States but also in Asia, and I do think that, on the whole, also a recovery is on track in Europe. Uncertainties have risen in the last weeks, particularly, because of developments in advanced countries - not just emerging market countries or poor countries but advanced countries - the risk coming from the stock exchanges, equity prices, and of course the shaking of confidence through cases like Enron, WorldCom and so on. Chairman, as you may have seen from the reports coming from the institution, I do think that the IMF is in a process of change and reform. The major points of this process of change are the following: first, we are in a process of a kind of revolution, getting more transparency in the institution and into our member states. It has happened already, but it is a continuing process of a more transparent, and in this way also more accountable, IMF. Secondly, we are in the process of developing further our surveillance mandate as the major vehicle and instrument for crisis prevention - because crisis prevention is the lesson - to give it more attention after a lot of crises in the past. Thirdly, we are also reviewing our, what you could call, "concept of conditionality". As you know, we are also an institution which is prepared, committed to lend to our members. In this context I stick to the point that we need to have conditionality but our conditionality was overstretched in the past, particularly in the 1990s, and we have to streamline and focus this conditionality, mainly also in order to strengthen the ownership of reform processes in our member countries or programme countries. Fourthly, we are in a very ambitious but of course also time-consuming process to define and implement rules of the game for the global economy; that is, shortly said, standards and codes for good monetary, fiscal policy, and, regarding Enron and WorldCom events, also, of course, corporate governance. We are in the process of working on standards and codes as rules of the game for the global economy. Fifthly, we are actively and comprehensively working to review financial sectors in our member countries, because, as you know, for instance, the Asian crisis had one of its causes in the weaknesses of the financial sector, therefore we are, together with the World Bank, working on a comprehensive programme to examine the strengths and weaknesses of the financial sectors in our member countries. This includes also work with offshore financial centres and this includes work against money laundering and against financing of terrorism. Last, but not least, I personally do think that world poverty is a major challenge in this 21st century and, therefore, the IMF has to have a well targeted role - I underline, a well-targeted role, but it has to have a role - in the fight against poverty, and we are engaged in that. I think also I should tell you that it is my own philosophy, my approach to my own understanding of my job, that the Fund has proved that it is a valuable institution, that it has made a good difference, but it is not perfect. It made also mistakes in the past and we have to draw lessons out of these experiences. There are two lessons, at least in these introductory remarks, that I would underline. First, we need to draw firmer conclusions in our approach to our countries about the role of sound institutions. "Sound institutions" means a fiscal policy and a budgetary process which is accountable, transparent, reliable, or a judicial system, where people know that the task of a court is to speak for justice and not to be involved in corruption. The importance of the role of institutions I am also underlining because I am a strong believer that it is good to have markets, freedom, operating, but markets need also a framework of sound institutions. This is not least demonstrated through the developments in Latin America. South America in particular is in a difficult situation, not least Argentina. I think, if you look to Argentina and the difficulties in South America, it has a short-term problem but it has also some underlying problems. What are the most underlying problems? First, there is the weakness of the institutions. This is also a particular: in Argentina, a very bold approach, for instance, in the first half of the 1990s for market-based reforms was not continued in the second half of the 1990s, but also there was not a consistency in reforms. For instance, privatisation, if it is not embedded in a policy for competition or to safeguard competition, is not giving the full benefit to the people. Or, what is a co-problem in Argentina, the central government tried to define a reasonable fiscal policy but the provinces had not been involved in that and therefore we are now in this difficulty. Another problem in South America is that at least five/six countries moved through a deliberate decision or indirectly through the decisions of their people to a kind of dollarised economy, but a dollarised economy means that the political system constrains its room for manoeuvre in terms of crises or, say, developments in the economy. For instance, I had a talk with the president of a South American country, where he said, "We, two or three years ago, took a decision to dollarise." I said, "Mr President, that was your decision" - it was before my time. But then he said, "But now we need to raise wages for our people" - they wanted to raise it 30 to 40 per cent - and I had to tell him, "Mr President, that does not fit to a dollarised economy, because a dollarised economy means something for competitiveness regarding external markets." The response was, "That is an academic question." It is, indeed, no academic question; it is a question of good economics and it is also a question of how the IMF, the international community, is educating, is communicating its advice or how it is engaged in dialogue, where the people are not just lectured as to what is right but where there is also a debate about the options, the down-sides and the up-sides of certain options. Another problem in South America is that there is a lag between the opening of the capital account and the opening of the trade account. So they opened up their economy, their society, for inflows of capitals but the trade integration of these countries often lagged behind the integration in capital markets and this imbalance is now a problem because they cannot earn their revenues for to service that debt because trade opening was too slow. More on that last point in this regard: of course we have, all of us, the international community, underestimated the importance, particularly in South America, of social safety nets, because structural change mostly is also combined with some kind of dislocation of people, lay-offs of workers. This is the kind of price we have to pay in order to gain the advantages of structural change, but you should not do it without a kind of minimum social safety net. We had not been too clear with that and therefore we are behind the curve. And, not least, regarding Enron and WorldCom events, it makes clear that risks and vulnerabilities for the global economy are not only located in emerging market countries or in poor countries; they are as well located in the advanced countries. This is why we, for instance, decided to establish within the Fund an international capital markets department. We also, Chairman, are active to review our ability to manage crisis, and in this context, as you know, the IMF management has proposed a new mechanism for how to restructure unsustainable sovereign debt in case it is really unsustainable, and this is, not least, coming out of the experience within Argentina. My last remark relates to poverty: I have said already that I do think it is possibly the biggest challenge for the international community, how to deal with that and how to give the people in the poor countries hope, and a process for improvement. I do think that the conference Financing for Development in Monterrey, Mexico, made a huge step forward, to define, at least, a consensus on what is needed or what is the right approach or how to fight poverty. I call it a two-pillar approach. The first pillar is - and this is very important - that no-one could and should take over the responsibilities that the countries, the nations, the people have themselves. The primary responsibility to deal with a difficult situation lies with the countries themselves. I have a good feeling that this is understood. Based on that, the second pillar: rightly so, poor countries ask for faster, more comprehensive support from the international community, and this is what we are in the process of. My strongest point regarding more support, more honest support for poor countries, is that the advanced countries have to change their trade policy, they have to accept and have to recognise that there is a need for faster structural change within their own societies, because trade is not just an issue for, say, the trade policy, it is also an issue for trade unions, for the people, what they are going to buy, and I think, in particular, Europe is too slow with its opening up of markets and also that the subsidies for agricultural products in the advanced countries are too high. I have been three times since I joined the Fund in Africa - I was particularly in Burkina Faso and Mali - and then you know, have to know, have to learn how dependent they are there, for instance, on cotton or maize and such things and how the subsidies in the advanced countries make their lives so miserable, then I think you need to take a conclusion that it is really urgent that there is a change in the trade policy of the international community. Chairman, that is it. I hope I have not spoken for too long. I look forward to your questions.
(Mr Köhler) Certainly significant. First, Gordon Brown is Chairman of the IMFC, in a way he is my boss, so I have to be able to cooperate with him, and there is quite a good situation because, as I see it, my own thinking is not too far apart from Gordon Brown's thinking. This means, two-fold, that the IMF is an important institution or has to play an important role in what I call the obligation to make globalization work for all. I am saying this because I am a deep believer that the further integration of economies could create a kind of win-win situation for all of us, the advanced countries but also for the poor, and, therefore, they should be open to the critical debate about globalization. I myself am heavily engaged in this because I think we are in a kind of search process, a political search process, for the right concept how to work with globalization and how to make globalization work for the benefit of all, but we need to discuss it also with NGOs, with civil society. I am not saying that the answer, the solution, will come from civil society but we should listen carefully, we should talk to them and define what it is worth to pursue, and what is also needed is to tell them, "That is not right." Gordon Brown, the IMFC Chairman, I think is also on this kind of line. Secondly, he strongly supports our efforts for increasing the ability to prevent crisis. Thirdly, he is particularly ambitious to fight against poverty, and, in this sense, I do think that we try to do a good job.
Chairman: Thank you very much. We have quite a number of questions from our colleagues, ranging through the IMF as an institution, to governance, to poverty reduction, to sovereign debt, to the HIPC initiative, to crisis prevention and others. I will start off by asking my colleague, Michael Fallon to ask the first question.
(Mr Köhler) I would like to answer, Mr Fallon. First, we should not forget, Bretton Woods Institutions had been founded after a wave of nationalism, protectionism and world wars and this spirit I think we should never forget. Because there is now a kind of debate: "Is all this integration, all this international approach right? Should we not pull back? Everything should be national," and so on. I am a strong believer that globalization means you need to strengthen the local level of politics, of economics, and so on. You need to strengthen it, but you need also to recognise that there is a level of problems and a level for institutions to care about these problems which is global. The Breton Woods Institutions have been defined for this kind of level, and if we want really to gain the full benefits of further integration we need to work also at this global level. That is the first remark. The second remark: things are interlinked, interconnected. That is globalization. Therefore there is always a need to be aware of this interconnectiveness. For me, for instance, you cannot any more advocate further integration in the world economy without being aware that markets need to have a kind of framework for guidance, because corruption, bad governance, bad state governance, is an issue that growth is not strong and that poverty is high. Therefore, even if the Fund would concentrate what we do on macroeconomics, if we are not aware that you need to have a parliament, a judicial system which provides, for instance, predictability for investors, then it does not work. So then I come to our own role. I may be overambitious, Mr Fallon - and that is not because of personal ambition - but I think that it is rightly so to define objectives and not just let it go. The IMF should have its objectives. I think - and I may not have made it quite clear - there is a good division of labour between the IMF and the World Bank. I do think for instance, that trade issues should be mainly located in the WTO but there are possible interconnectiveness with us and, therefore, we are discussing with the WTO, with the World Bank, with the ILO, with the United Nation system how we can define a good division of labour where our approaches are complementary, not competitive - not that we are dominating but that we work together. That is our approach. If I would have been understood that I am over-ambitious, I am not the master for all but I think I should have an awareness of the interconnectiveness.
(Mr Köhler) I think we have not the ambition to be a world government. But you should also be aware that, if something goes wrong in the world, all of a sudden the IMF is the scapegoat for everything. So we seem to be the scapegoat for everything when it goes wrong but we should not be ambitious for, say, our own objectives. I myself started a process of refocusing the Fund and the refocus is indeed to concentrate on macroeconomics, on the financial sector, exchange rate policy - which is part, still, of the difficulties. Also, when I came in in May 2000, I had a kind of retreat with Jim Wolfensohn where we defined this well-targeted division of labour between the World Bank and us, and that is that the World Bank is concentrating on the direct, long-term approach to fight poverty and we are caring about the macroeconomics in poor countries. I do think this is the right approach. I do think this Poverty Reduction Strategy process, where we are concentrating on macroeconomics and the financial sector and the World Bank is concentrating on the big environment of education, health, institution building, is the right approach. So we are in the process of focused work. We are streamlining our conditionality, as you may have been informed, I said already that I stick to some focused priority-based conditionality, but we are not ambitious to have the full universe of structural reform policies in our agenda.
(Mr Köhler) Yes, and it is so. The IMF is more transparent and we encourage our members to be more transparent.
(Mr Köhler) I think transparency is very good to promote democracy.
(Mr Köhler) Of course, I have nothing against it. The IMF is no world government. We are hopefully supporting democracies. We have, as I said before, decided, since I am there to review our conditionality, that that means that we are not going there to lecture them, to dominate them.
(Mr Köhler) OK, then I missed the point.
(Mr Köhler) I think, Mr Mudie, first, we are not lecturing our members; we are in a dialogue. We are in a candid dialogue. We are trying to listen. I am meeting and I am encouraging our staff to meet with parliaments and so on. Regarding our own governance - that was your question - I think still it is a democratic system, because the executive director for the UK is appointed by a government which is, say, appointed by elections here in the UK. We need to have a kind of representation to work with global issues' operation and therefore we need to have a representational system. I do think that, despite some down-sides, this system worked up to now. It works, not least, because the culture in the IMF is a culture of consensus and not just of taking a decision by adding up the voting rights of the membership. So since several years and, not least, since I am there, I am promoting this cooperative nature of the institution. For instance, in 2000 we had a very critical debate on reviewing the facilities of the IMF, and there was a big debate between the G7, because the G7 had set up quite a detailed programme how to reshape the facilities, and the emerging markets' and the poor countries' representatives did not like it. It was a lengthy debate, but at the end we came to a conclusion on a consensus, so that the poor countries, these two African chairs, fully joined the consensus. So there is a spirit of cooperation, of consensus-building which I feel is good. Secondly, I would also like to underline that still we are a financial institution, and a financial institution means you need also to have someone who provides capital, and I think there is a healthy element in the fact that the provision of capital and voting rights is, in a way, combined, because this is also an element of efficiency, of accountability. We are discussing for the moment a review of, say, representation. There are various suggestions: reviewing the quotas - that means, the voting shares; reviewing the, say, ability or equipment of chairs to do their job - for instance, it is a tough job for an African executive director to represent 20 or 21 countries in comparison with the UK chair/executive director, who has just to represent one country. Here there is improvement possible and I hope that we come to a conclusion. If you would ask me, Mr Mudie, "One country, one vote?" I would not advise, at least for the foreseeable future, to go to this kind of scheme - because, again, capital is needed and someone must be prepared to provide this capital. Until we have a world government - and I am not advising to rush to a world government and I am not sure we are well advised to try to achieve a world government - we need to work on the basis of representation and, on the whole, I think, the existing representation in the IMF did work but it can be improved.
(Mr Köhler) I think we have a system of representation which is based on democracies. You may differ, Mr Mudie, in, say, appreciating this kind of system and there should be a discussion how to change it, how to improve it, but I want to be clear that I feel it works. It can be improved, but it works. Because we have no global democracy in the sense that there is a global parliament, unless we have not decided on that in the world, I think we should work with the existing and working representation.
Chairman: On policy assessment and conditionality, David Laws.
(Mr Köhler) Yes. We did not give enough attention to the social dimension of structural change and often dislocations in the case of reform policies. But I also would like to underline that structural change is always accompanied by some kind of dislocation, change of attitudes. You need to move from one place to another and, therefore, we need to develop a kind of approach where we live with a kind of permanent change in order to reap the possibilities for better growth, job creation, not least in the poor countries. But this poverty and social impact analysis I think should be now a permanent feature in our programmes.
(Mr Köhler) That is mainly a task to be organised conceptually and being in charge by the World Bank, because that is what Mr Fallon said, really rightly so, the main -----
(Mr Köhler) I think there are. We have the PRSP process and the poverty reduction and growth process. Within these processes there is more and more the involvement of social impact analysis. I think we have started with 6/8 of these.
(Mr Köhler) Not fully because it is a process of learning by doing.
(Mr Köhler) We are doing it in Tanzania. We are doing it, I think, in Mozambique. But I am not in detail now informed about the countries.
(Mr Köhler) I think this has to be a question mainly to the World Bank about speed and content, but you should not forget that the PRSP process is still in place since three years, even less than three years, and we had a global outreach (meaning we had conferences everywhere, including our full membership) about what is the advantage, what are the strengths, of the PRSP process, including the social impact and poverty analysis. The outcome of this big review was, first, that it is a promising approach, the PRSP process; that the social impact and poverty analysis should be an integral part of this; and, you can be assured - at least what I know from Jim Wilkinson and so on - he and the World Bank is ambitious to bring it through, but these people also need to cope with the realities of their constraints/resources. It is also a matter of the countries being prepared. You need statistics for social impact analysis. It cannot be done overnight. I have an experience of working in governments and private sector of some decades, and I must say I am admiring the ambition, say the tough work, of the World Bank people and the IMF staff people to bring this forward.
(Mr Köhler) Mr Laws, the IMF is not the scapegoat for everything. In this context I must tell you that the advice or the concept for this maize stock was given and is given by the World Bank and the European Union Commission, so it is just plain wrong to accuse the Fund that it advised and made even a conditionality out of this. I am able, I would appreciate if you would accept, to give you better in depth information about this in a note.
(Mr Köhler) The kind of advice was given by the World Bank and the EU and I would argue that you should ask the World Bank and the EU what they did.
(Mr Köhler) 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.
(Mr Köhler) 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 Köhler) 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.
(Mr Köhler) 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 part of a kind of productive factory, 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 and no-one could implement. I mean, there is no world government. I think even 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.
(Mr Köhler) 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.
(Mr Köhler) 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 even 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.
(Mr Köhler) 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 Köhler) 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 ordinary 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.
(Mr Köhler) 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 Köhler) 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.
(Mr Köhler) 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.
(Mr Köhler) 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 we will discuss and co-ordinate it 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.
(Mr Köhler) 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.
(Mr Köhler) 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.
(Mr Köhler) Yes.
(Mr Köhler) 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.
(Mr Köhler) 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.
(Mr Köhler) 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.
(Mr Köhler) 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 collection 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.
(Mr Köhler) 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 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.
(Mr Köhler) I should not interpret that in this way. We are prepared clearly to do what we can do to keep the situation in Brazil manageable.
(Mr Köhler) I do not seek for the moment to define a bail-out package, because we need to decide when we come in, and we need also to be able to distinguish between that situation pressure from the private sector. They want us to step in very early to bail them out, but that is not our intention. Our intention is to support Brazil and to keep the achievements they have been able to promote alive and keep them on the track of a good development.
(Mr Köhler) I was what we call the State Secretary in Germany in the early 1990s, and that means Russia. I would guess that Germany was as interested, if you take the US, as the US to do something for Russia. It was not just the US, it was the G7, and the UK was part of the G7. So I would guess all of these members of the G7 had been involved in the Russia policy. My conclusion out of this is certainly that it should be the IMF's direction and commitment to work even-handedly to all its members; the big members should have a voice, but also the small and poor members should have a voice. It would be really a big development in the wrong direction if we would not be able to demonstrate that the IMF is not just there to accommodate what the big powers want them to do, and that is my commitment, not least because of my own experience. Regarding the big bail-outs, with hindsight, I must say, in terms of history, it is too early even to say that what the IMF did with Russia was wrong. It is ten years after the breakdown of the Berlin Wall. That is not such a long time. Regarding what could have been worse, I think it is not so bad. Go to South Korea. Go to the packages with Mexico. It was not totally wrong, it made sense. That is not, say, a plea that we should repeat these kinds of exercises, but of course we should learn from these exercises. One of the lessons learned for me is try to make clear and make the IMF managing director, if you want it so, personally accountable so that he listens as much to the emerging market countries, the poor countries, as he listens to the G1, the G7 or the G-something.
(Mr Köhler) There is a debate. We are making a debate in the board about limits to IMF lending, and I should not pre-empt this kind of discussion, but I will give you a clear indication about my own thinking. First, we need to make clear that there are limits to lending of the IMF. This is mainly also to strengthen self-responsibility of our members. This is also because the IMF is no lender of last resort in the sense that the IMF can print its own money and has therefore unlimited access to resources and liquidity. It would be wrong to give the impression that the Fund would have unlimited access to liquidity, because this would really then promote more assets in all of this, but we need also to be able to judge case by case. In the case of Turkey and Pakistan, it was before the war in Afghanistan and before September 11, that the IMF worked with Pakistan on a staff-monitored programme, and then we had already before September 11 the idea to extend this co-operation to a three-year programme. That means that they really work with us and they work and deliver. The same with Turkey. Turkey embarked in a comprehensive, bold reform process, and they deliver. That means if we have a sound judgement that there is really delivery and not just talk from our members, then we should also be forthcoming, because our obligation is to support our countries and not to tell them, "That's it." So on the one hand we have limitations, and I stick to saying that it is important now to clarify even more these limitations. On the other hand the philosophy should be that a member should rely that if he is in a kind of emergency, he can go and should go to the IMF and talk on how we can deal with this.
Chairman: I am conscious of the time, Mr Köhler. Andrew, a very brief question, then I will end with a question, but I am conscious of the time.
(Mr Köhler) I think there are demonstrations because these people and a lot of people feel there is something wrong, and I think they should speak up. The demonstrations, in my view, can and should help for you, for all parliaments, because that is, in my view, the place to decide on the right policy. But we should listen to them and try to sort out what is good, what we need to change, but also where do we need to be firm, telling them "That's not right." I also want to say that I see, I beg your pardon, the main demonstration should not, and does not, go to the IMF, because in my dialogue I challenge also the demonstrators. The main challenge goes to you, to the parliaments: official development aid, trade policy, that is an issue for you, and I am reiterating that in parliaments there is a discussion about globalisation. We should listen, we should be available, we should change as much as we can, but there is no way, as I feel it, to make the IMF the scapegoat or to say for all bad things, "That's the IMF. We parliaments have hearings like that, but at the end we have no impact on trade policy, on official development aid." So I am challenging you. You are requested to change and to define a better policy.
(Mr Köhler) I think this is an issue , and we are prepared to look at this issue. If there is an argument, we will be prepared to suggest to our board topping up of debt relief on a case by case basis.
(Mr Köhler) I very much hope so, because the G7 often have ideas at the expense of others. So in case they make suggestions, they should also deliver the beef - that means the money - for it.
(Mr Köhler) Thank you, Mr Chairman. On Malawi, I will give you a paper so that we have a fair chance to sort it out.
Chairman: Thank you.