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IMF boss blames World Bank and EU for Malawi blunder
4th July 2002
At a hearing in the British Parliament today, IMF Managing Director, Horst Koehler, blamed the World Bank and the EU for pressing heavily indebted Malawi into selling 28,000 tons of maize to repay debts, just before a harvest failure and the onset of famine. (See Jubilee Research editorial on the Debt Channel at One World). In reply to a question from MP David Laws as to why the IMF had pressured Malawi into reducing grain reserves Koehler said: "The IMF is not the scapegoat for everything. The advice (to sell the maize) was given by the World Bank and the European Union - its plain wrong to blame the IMF. Ask the World Bank and the EU what they did. The IMF was part of this process, the IMF may not have been attentive enough; but the decision was with the World Bank and EU". Mr. Koehler went on to admit that "there have been mistakes made" in Malawi, and reported that the Malawian government had started an "audit" to identify who was involved in the decision and what went wrong.
The historic hearing before the Treasury Select Committee is the first time an IMF MD has reported to a British Parliamentary body.
Mr. Koehler commented on a range of issues in his opening remarks, including the weakness of provincial government in Argentina, the need for greater trade liberalisation in South Africa; the need to strengthen frameworks for financial institutions in developing countries, and the need for social safety nets and poverty reduction. This prompted MP Michael Fallon to ask whether the IMF had not exceeded its remit, and by covering regional government, financial institutions, trade and poverty issues, was attempting to act as a world government? Mr. Koehler replied that "globalisation is interconnected…I am not the master of all" he said, "but am sure I should have an overview of the interconnectedness".
One MP, Mr. George Mudie accused the IMF of being a "rich man's club" where voting power was dependent on financial wealth. Mr. Mudie noted that in Britain a system of voting based on wealth had been abolished in 1832 , and asked why such democratic processes were not considered relevant for the IMF? Mr. Koehler replied saying that the IMF "is a financial institution, which means you have to have someone who provides capital - and voting based on capital provision is good for efficiency and delivery".
Mr. Koehler admitted to MPs that "in the past we (the IMF) have not given enough attention to poverty and social safety nets when proposing structural changes. But structural changes are always accompanied by dislocation . We must live with permanent change in order to achieve economic growth in developing countries".
When asked about the progress of PRSPs in debtor nations, Mr. Koehler could only recall two countries in which the PRSP process was taking place, Tanzania and Mozambique, for which MPs took him to task. One asked if this was not an indication that for the Fund the poverty reduction process was peripheral? Mr. Koehler replied that the PRSP process was led by the World Bank.
David Ruffley MP asked Mr. Koehler why the IMF was involved in trade liberalisation, when this was properly the role of the WTO? Mr. Koehler replied that since he "had been at the IMF, trade liberalisation was not a condition of IMF programmes". He went on to argue that developing countries "should be able to produce food for themselves - and we should help them strengthen capacity to produce food".
In a passionate intervention Mr. Koehler criticised western aid for its bias towards "domestic interests; that is, ODA really given with the clear idea of helping local companies, not to help Africans". He noted that it "would be a mistake if the IMF would focus only on problems in emerging markets: there are risks here too". In criticising US and European protectionism Mr. Koehler noted that a German think-tank "Global Ethics" was examining the common ground between all the major religions; noting that central to them all was the notion "do to others as you would have done to you" - a "golden rule", he said.
On the IMF's proposed bankruptcy mechanism for indebted nations, the Sovereign Debt Restructuring Mechanism, Mr Koehler replied to John McFall MP, that the two tracks being pursued by John Taylor, deputy US Treasury Secretary, and IMF deputy, Anne Kreuger "were complementary". On John Taylor's proposal to amend bond contracts, to include "collective action clauses (CACs)" (i.e. agreements whereby the majority of creditors can agree to debt cancellation on behalf of others) Mr. Koehler said the IMF was "working to make these operational". "However" he noted, "in the end, the collective action clauses will not do the job - we need a statutory framework - but getting such a framework is up to shareholders. It is widely accepted that the US Congress will not accept a change to the IMF's articles to ensure such a framework" - so this is a matter for British and American parliamentarians, as well as other shareholders.
Mr. Koehler was tackled by another Parliamentarian, Andrew Tyrie MP, on the question of the IMF's massive bail-outs of mainly US bankers and investors. Mr. Tyrie noted that the IMF's lending to Turkey was now 25 times the limit set by Turkey's quota of loans, making a nonsense of IMF limits. Mr.Koehler replied by asserting that bail-outs were not just a a result of US pressure, but of UK and G7 pressure as a whole. "On big bail-outs" said Mr. Koehler, " it is too early to say what we did in Russia, Mexico and South Korea was wrong - it made sense at the time. Nevertheless we need to have clear limits on bail-outs". When pressed on what these limits should be, Mr. Koehler noted that there was a debate on this being conducted by the Fund's Board; but his thinking was that "we should make clear that there are limits".
On Argentina: Mr. Koehler argued that there was institutional weakness in the country; and that while the market-based reforms of the early 90's had been "bold", these had not continued into the second half of the 90s. The privatisation programme had been put in place without a framework for ensuring free competition.
On South Africa: Mr. Koehler noted that "South Africa moved quickly to a kind of dollarised economy but a dollarised economy constrains room for manouvre. So there was a lag between opening up of the capital account and the opening up of the trading account. This imbalance is now a problem, because trade opening was too slow".
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