Proceedings of the Standing Senate Committee on
Foreign Affairs
Issue 17 - Evidence - Meeting of June 7, 2005
OTTAWA, Tuesday, June 7, 2005
The Standing Senate Committee on Foreign Affairs met this day at 5:02 p.m. to examine the development and security challenges facing Africa; the response of the international community to enhance that continent's development and political stability; and Canadian foreign policy as it relates to Africa.
Senator Peter A. Stollery (Chairman) in the chair.
[English]
The Chairman: Honourable senators, welcome to this meeting of the Standing Senate Committee on Foreign Affairs, a meeting held in the context of our special study on Africa.
[Translation]
Today's meeting is the second in which we will hear from a Canadian representative to the international financial institutions. On May 11, we had the pleasure of welcoming Mr. Marcel Massé of the World Bank.
[English]
Today we have the pleasure of welcoming Mr. Kevin Lynch, Canadian Executive Director at the International Monetary Fund.
Mr. Lynch began his career at the Bank of Canada. Since1976, he has held a number of senior positions including the post of Deputy Minister of Industry. Mr. Lynch was Deputy Minister of Finance from 2000 to 2004.
Welcome to the Senate of Canada, Mr. Lynch, you now have the floor.
Mr. Kevin Lynch, Executive Director, International Monetary Fund: Thank you, Mr. Chairman. It is a pleasure to have the chance to be here today. I have submitted a statement dealing with two issues that I understand you wish to discuss.
The first is the review of the strategic direction of the International Monetary Fund, which is underway. The statement sets out a number of issues that are front and centre in that regard, and were part of your discussions with Minister Goodale when he appeared in early April.
The second part deals with the role of the International Monetary Fund in low income countries, particularly Africa. The managing director of the International Monetary Fund recently gave a speech in Africa at the annual meeting of the African Development Bank. I can perhaps say a few words about his message. I will not go through it entirely, but I will highlight a few points.
This is the sixtieth anniversary of the International Monetary Fund and the World Bank; both began in 1944 but came into effect in 1945. The distinction and separate roles of the World Bank and the International Monetary Fund are often misunderstood.
In its articles of establishment, the IMF has a very singular mission, which is to promote a stable international financial system, to prevent financial crises, if possible, and, if not to remediate them as quickly as possible. That is the overall mission of the fund set out in 1944 and 1945, and it is still relevant today
What has changed over the last 60 years is the environment within which the IMF operates. To flag a few points for you, the first is the massive increase in the private capital market. Back in 1945, the International Monetary Fund had a large size relative to its size today. The key providers of capital are the private markets, not the IMF. One of our challenges today is how to act to leverage and influence that, given our relative size.
The second point is that from 1945 through to themid-1970s, the world's currency, except for the Canadian dollar, was one of fixed exchange rates and a gold standard. It is a different world today, where the majority of currencies are flexible. The liberalization of capital accounts around the world have posed great opportunities and, from time to time, posed risk.
The last point is the huge growth in the capital economy, particularly foreign direct investment and trade and technology linkages. It is a more interconnected, fast moving and networked world than it was 60 years ago. One of our questions is how to fulfill our mission in that world.
It is useful to think about the IMF toolkit, which has four core components: surveillance, lending, capacity building and poverty reduction. The IMF has 184 members and there is an annual review of each member country. The review is an overview of what is happening in terms of overall macro policies and economic growth. It is unique around the world, provides the IMF with a chance to learn about them, and provides policy advice. The surveillance function is a key and core activity of the IMF.
The second component of the toolkit is lending in the event of a balance of payments crisis. Again, 60 years back, typically the crises would arise from current account difficulties, whereas today they arise more often from capital account difficulties. That lending function, the ability to step in and prevent a systemic rippling out, is a key function of the IMF, because the 1930s saw that rippling out and it caused problems.
The other two components are interesting and somewhat newer. The first is technical assistance or capacity building. If you are going to give policy advice, there has to be the ability in the countries to implement and sustain it. The more complex the world gets the more important it is, but also the more difficult it can be for a number of countries around the world. An increasing focus of the IMF is not just to give advice on what to do on macro policy but to work with the countries to see that they have the capacity to put the policies into effect, because that is where you get your traction.
The last component is poverty reduction activities that include working with the World Bank, the multilateral development banks and the donor community. The focus of the IMF in this regard has been on lending in support of macro policy adjustment.
The strategic direction of the IMF review determines what extent of the refurbishment, given the changed circumstances over the last period of time that I went through.
The surveillance activities of the IMF have been largely concentrated on bilateral surveillance. For example, the IMF does an annual survey of Uganda, and sends a mission there, which spends a couple of weeks and then writes up a report and brings it back to the board. There would be policy advice and that would be discussed with the authorities and published as part of the transparency. That is the traditional type of surveillance.
Increasingly, there is a sense that the IMF has to do not just that, but move more to regional and multilateral surveillance. You see some of the regional surveillance in Africa, for example. There are only three monetary unions in the world: one in the Caribbean, one in central Africa and, obviously, in Europe. If you have regional integration to a certain extent, should you be looking more at regional surveillance and, lastly, multilateral surveillance? If you have balance of payment fiscal difficulties, how does something in Europe interconnect with North America and Asia? We live in a complex world and the sense is we have to look at integration more closely.
A number of African countries that do not want to borrow from the IMF have requested that we play a signalling role in their affairs. Let me give you a specific example. Nigeria, which has graduated from lending programs, would like to maintain a relationship with the IMF because they view it as a useful signal to the international donor community and to capital markets that the policies they are following, which are their own, are being rigorously undertaken and there is a third-party analysis. It is interesting that a number of countries who are graduating through their balance of payments difficulties want to have an ongoing surveillance relationship. That is the first side of surveillance.
Everyone involved is trying to do more on the capacity-building side. Many countries have good people in place and it is part of our job to number of countries and you have some very good people but help train people to do that and work with them in the implementation. That is quite a challenge in a number of parts of the world. We at the IMF are especially concerned with the area of regulation, macro policy and monetary issues, all of which include complex policies. We focus on those issues and the donor community has to focus with us.
I will talk about that in the context of Africa. About50 per cent of all IMF technical assistance and capacity- building focuses on Africa and that will probably increase over the next while.
On the lending role of the IMF, there are a couple of changes. One is debt restructuring, and certainly, Canada is one of the countries that pushed collective action clauses. In fact, there is a way to do debt restructuring where there is equal treatment and involvement for everyone.
We strive to provide clarity in terms of the rules of the game so that they know when the IMF is there and under what conditions.
In terms of the lending — and this issue I assume will come up in the questions — is what sort of conditions are put on the lending?
Starting in 2002, the IMF tried to do two things on its conditionality. One is to focus on criticality. A list of100 conditions is difficult to maintain so we focus on the top three or four and determine whether the country and the international donor community buy in as well. There is more of a focus on the conditions as to what is critical, why is it critical, and to be able to explain and debate the reasons.
On the role in low-income countries, the primary focus of the IMF is on the advice on the macro policies that are necessary to sustaining growth. If you look through the experience inmiddle- and low-income countries and high- income countries, no one has been able to sustain growth if they have bad macroeconomic conditions. If you do not have sustained fiscal positions and stable inflation, you are not going to sustain growth over a long period of time. The main role of the IMF is to provide advice to a variety of countries in terms of what is necessary for macro stability.
In the context of low-income countries, we have announced a couple of initiatives in the last year or two that might interest the committee. We have introduced a new fund for assistance in terms of post-conflict and natural disasters. We found that you have to have a capacity at highly conceptual rates to go in; and, again, our focus is on helping to rebuild the macro managerial capacity and balance of payments, and to deal with that on a quick basis. Grenada is an example of one of a number of countries in the Canadian constituency which has taken that up.
The poverty reduction and growth fund is a key area of fund activity. It is about $6 billion SDRs, or $10 billion Canadian, that the 71 low-income countries of both the IMF and the bank are eligible for, and I am more than happy to take you through that activity.
Lastly, a new program in terms of trade integration is a concessional lending facility to help countries with the sometimes balance of payments challenges that grow up as they are adjusting to trade agreements, whether multilateral or regional.
Those, Mr. Chairman, are the four main components and the changes that we face. They are similar for the focus in Africa. I will table this with the committee, if you are interested;Mr. de Rato, who is the managing director of the IMF, spoke at the annual meeting of the African Development Bank on May 17 this year. He set out the three areas where the IMF can play a role. They are the ones that I mentioned to you — providing the macro policy advice for a stable macro fiscal situation capacity and the poverty reduction program, lending in that regard.
He noted that last year Africa had the highest growth rate in a decade and the lowest inflation in one-quarter of a century. A number of the best performers over the last decade — Tanzania, Mozambique and a few others — are countries that have held to rigorous macroeconomic policy. We are starting to see some kind of payoff for holding to rigorous programs over a sustained period.
The managing director of the IMF set out the focus of the IMF on expanding its capacity-building in Africa. You may know that the IMF, in agreement with African heads of state in 2002, has set up two technical assistance centres in Africa, with IMF staff and others to provide on-the-ground assistance. They are in Mali and in Tanzania. We are in the process of making our evaluation of those countries, but the initial feedback has been positive. We have global experts on the ground nearby who can work on an ongoing basis rather than periodically with those countries.
The IMF has also set up an African Economic Research Consortium where we bring in African researchers to spend time at the IMF. Over 100 people have spent a number of months at the IMF. That has helped us to understand policy issues they are dealing with and, hopefully, helped them as well in terms of building networks. There has been a fair bit of traditional capacity-building focused on that area.
The last is the trade integration lending and that is totally focused on the challenges in Africa.
Mr. Chairman, I will stop there. You have the statement and I will leave with the clerk the recent speech by the managing director of the IMF.
The Chairman: Thank you very much.
I want to ask you a question of my own. I have two points. The first point is on the question of growth. We have had several witnesses explain to us that the growth in sub-Saharan Africa is about 5 per cent overall, about equal to the population growth. Therefore, the ability to increase the standard of living is negligible because it cannot happen if the growth rate is the same as the increase in the population.
Second, there is a currency union in Africa that is basically the old French colonial CFA. In my day, there was one CFA franc for two metropolitan francs. They have since taken a couple of zeros off the metropolitan franc and they have done many other things. Therefore, there is a currency union.
How many are there in the union?
Mr. Lynch: There are six countries in the union.
The Chairman: We are also aware that the International Monetary Fund is not the World Bank and trade, obviously, is the WTO and the Doha round trade negotiations. If there is a trade arrangement, you can facilitate it but not initiate it. Is that correct?
Mr. Lynch: Yes, that is a correct statement. The leader in trade is the WTO. The April meetings of the International Monetary Fund ministers certainly called on the WTO and ministers involved to move ahead quickly because success and early success in the trade round can be very helpful to a large number of low-income countries with the appropriate adjustment mechanisms.
That called for it, but it is in the hands of the WTO and the negotiators.
The Chairman: Maybe I am wrong, but you do not hear about the IMF that much in terms of Africa. When you hear about the IMF, it is in regards to the Asian crash and the Argentine financial disaster and things of that nature.
Are you less involved in Africa for perfectly good reasons than in other parts of the world? Am I completely wrong?
Is it because there has been no great financial collapse, or maybe there has been and we have not heard about you?
Mr. Lynch: It is viewed as a market success if you do not hear about us because it means there has not been a balance of payment crisis.
If you go through the four components that I mentioned; surveillance, capacity building, lending and the poverty reduction and growth initiatives, about 50 per cent of our capacity activities, which account for 30 per cent of our annual budget, are in Africa. Our capacity activities include trying to build the capacity to establish and regulate a financial system, establish a budget, regulate a budget, and to audit. All of those trappings of governance and transparency are crucial to run a solid macro policy that will give the private sector confidence to invest, whether it is in the domestic, private or foreign sector. Much of that work is in Africa, and it is not headline activity. It takes a long time to bear fruit and there are other challenges because sometimes a number of the folks that you may train may immigrate. It is an on going challenge.
On the surveillance, we have an article IV on each of the 184 members. All the member countries in Africa, which is the vast majority, have that mission each year. They tend to extend missions in Africa, partly because there are limited statistics in many of these countries. The IMF team works with the authorities to establish the base statistics so that we can give advice on them and in turn, they can make plans from them. It is extremely difficult to look at policy and program improvement if you do not have statistics.
Concerning poverty reduction and the lending, more thanone-half is in Africa. It is structural lending for low- income countries that meet criteria at highly concessional rates related to adjustment problems and focusing on the macro side.
The last area is the standard balance of payments problems. There is some of that in Africa but that is dominated by the large countries. Right now, it is Argentina, Turkey and a few others. That is the vast majority of the number sides on the lending. However, if you want to know how many countries, you would see many smaller amounts in Africa.
Senator Downe: We have heard criticism from Africans who have appeared before this committee about the World Bank and the IMF.
Should there be an independent body to review the IMF and the World Bank?
Mr. Lynch: I am not sure what the independent body would do.
Senator Downe: Maybe you can explain the reporting. I understand you would report to the Canadian government because you are the Canadian representative and everyone else would report to their government but there is no overall supervision.
Mr. Lynch: Let me take you through the governance structure.
The World Bank is similar but not the same exactly. This applies mainly to the IMF, which has an executive board that represents all the members. Twenty-four executive directors vote for the entire quota of the membership of the institution. The managing director who heads the institution is also the chair of the board. The staff and management of the institution are represented in the person of the managing director.
The board is the policy-making and administrative board for the institution. In 2001-02, we established an independent evaluation office as well, consistent with changes in corporate governance. It is completely independent of both the board and the management and chooses a number of topics that it reviews on an annual basis. The reviews are sent to the board and published at the same time.
We have a board process with various committees to check what the management is doing, external auditors on the financial side and the independent evaluation office on the policy side looking through what we are doing, providing third party advice and actually publishing those reviews as well.
Senator Downe: As the Canadian representative on the IMF, are you satisfied with those measures? Do you think there is need for an additional requirement?
Mr. Lynch: Corporate governance is changing. Any board should continually ask itself whether it is engaged in best practices for today.
We have been talking about the need to have greater focus on risk management. It is not just auditing that is in the past but looking ahead and asking where the risk might come from, on the financial side or on the policy side and institutionalizing that in a committee of the board. It is similar to the things that you see in the corporate governance side in the private sector. Do we have state-of-the-art human resource management? How do we encourage further growth of the independent evaluation office?
I think the structure is not bad. You continually grow within the structure in line with best practice in terms of corporate governance.
The Chairman: It says here that you are an executive director. What does that mean? Is it a director or more than a director?
Mr. Lynch: The 24 members of the executive board are called executive directors. I am one of the 24 members. Unlike a number of institutions, if the board is unable to resolve an issue by consensus, at the end of the day, the board can vote. The vote is on the basis of your quota. In the end, the chair that we represent, which is not just Canada but also a number of other countries, would vote the quota share of our constituency.
The Chairman: What is that quota share?
Mr. Lynch: We are 3.75 per cent of the overall quotaof the International Money Fund. Canada is 3 per cent of the 3.75 per cent. The other countries in it are Ireland, which accounts for about one-half of the 0.75; and there are a number of Caribbean countries in our constituency as well.
The Chairman: What is the U.S. quota?
Mr. Lynch: The U.S. quota is 17 per cent.
The Chairman: Has it come down relative to others?
Mr. Lynch: It has a little bit. As you have increased quota given to certain parts of the world in recent years, the U.S. has allowed it to stay constant.
Senator Downe: I have a supplementary. Is the position you hold a permanent position, or is it rotated?
Mr. Lynch: It is an elected position. The constituency votes on it every two years. Canada holds the majority but not all of the votes in the constituency.
Senator Andreychuk: I want to talk about a more practical approach to IMF.
You talk about surveillance, technical assistance, monitoring, et cetera. From my experience working in some African countries, the IMF team would arrive with all the experts, and the government would hurriedly put together whatever responses or positions it wanted to make.
That team would work with the government for a short period of time, and a plan would be put out for that country, upon which the IMF and the government would agree.
The problem from looking at it on the ground was that it was highly paternalistic in the negative sense of the word. The government seemed to know what the IMF wanted, not what they believed they could deliver. They would then go about the business of attempting to deliver what they could.
Within the practical governance realities of some countries and the political realities of some countries, they would blame the IMF or the World Bank because they could not deliver what the people on the ground wanted. We have talked about those failings.
What are you doing differently in your governance structures with those countries to make an appreciable change that is a partnership as opposed to a laid-on program?
Mr. Lynch: You are absolutely right. Looking back, the criticism is quite valid. Some progress has been made, but I think probably a lot more cannot be made.
One of the criticisms has been a one-size-fits-all attitude. There is a much greater effort being made by the board and by the institution itself to try and tailor the advice. You see much more analysis on what the critical factors are for low- income countries versus middle-income and emerging market countries versus others. They are not completely separate, but they are not exactly the same, either.
How do you start to tailor that more? A lot of the research and policy is trying to understand the nuances and the differences.
In respect of the poverty reduction growth fund, for example, the activities that go on under that are not just done in cooperation with the government, but the IMF and the bank insist on a public process where they engage NGOs and others to the extent that there is a third party dialogue to go around us. They are often looking at more broadly based indicators like health and education and inherent governance issues.
With efforts in that regard, can one go further? I think unambiguously they can. Part of the challenge is that if you want to have sustained policy change in today's world, you cannot just do it in the institution of government. There must be a sustained public dialogue with facts and debate on the table. All of us in the international institutional community must move more into that area. Governments must do that as well.
Governments often like to keep this as a bilateral debate, as much as institutions do. All of us have to broaden that discussion within countries. You will only get sustained public buy-in when you have sustained policies.
Senator Andreychuk: One of the other recent criticisms is that when this criticism started the IMF and the World Bank reached out to civil society, but not so much to Parliaments.
The view of many countries is that until we get accountability from Parliament requesting the accountability of the executive, not much will happen.
I was pleased to participate with an IMF seminar that brought into Tanzania the finance committee for the first time before the IMF agreement was completed. Parliamentarians were saying, ``What do they know about the deal?'' They found the agreement in their cubbyholes, and they were asked to vote on it that afternoon with not much analysis or involvement.
This was the first time, certainly in eastern Africa that the IMF had reached out to Parliament. What amazed me was how little work there has been done to strengthen the Parliament's role in this whole area. Was that an experiment, or will the IMF follow this direction in future?
Mr. Lynch: I do not know the specifics. I hope it was not an experiment because, as you can tell from my remarks, I think governance is crucial to success. To have better governance, you must have broad-based participation.
I will give you an example for one of the countries in our constituency in the Caribbean. There was a change of government recently, and the IMF team participated in a televised public press conference debate that included the Minister of Finance, opposition critics, and the press.
That was a very different way for us to do it. It took buy-in from everybody, but was an interesting experiment that went even further than the one you mentioned. Those sorts of experiments are the right way to go, and they will not all work. The more you can get a sense of the facts and the challenges and the opportunities for people to understand and debate is great, but it is hard to get people to buy into change.
Senator Andreychuk: Some of the criticism I have heard is that the IMF is a very male-dominated area, as finance often is. There has not been an attempt to reach out to third world countries and to work with women, both within IMF structures and with women in the field. As we know, poverty hits women more than men in these countries. Is there any move for more of a gender balance within IMF and its structures?
Mr. Lynch: There certainly is a strong push from countries for greater diversity in the staff of the International Monetary Fund. More generally, to be an international institution, you not only give advice to the world, but you represent the world. That requires an understanding of different cultures and different perspectives.
There is greater pressure on the institution and a greater willingness from the institution to reach out in its recruitment policies. That takes both a big change and a sustained effort over a period of time. Certainly it is one that we think is important to move ahead on.
Senator Mahovlich: I hear some very good reports from Argentina. Has the IMF studied and looked at their system? Could their policy work in Africa?
Mr. Lynch: Argentina has gone through a difficult period in the last while. It still has many challenges to face. It has just gone through a debt-restructuring program as part of its austerity program. Growth is picking up again in Argentina, but there are inflation challenges, and current account problems.
A major outstanding issue is that about 34 per cent of the holders of the restructured debt have not agreed to the restructuring proposal. There are still a number of challenges vis-à-vis the policy program and movement in Argentina. The IMF spends a lot of time on Argentina.
Senator Mahovlich: You have been around since 1944, but we still hear many negative things in Africa and that part of the world.
The Chairman: To be fair, Senator Mahovlich, just to add to your question, it is more about the World Bank than the IMF, but certainly the two, just to clear that up.
Senator Mahovlich: Is it your policy or do you blame the Africans and their governance?
Mr. Lynch: That is a profoundly important question. Why have growth and living standards been so substandard in Africa for the last 30-odd years? In many countries, as Mr. Massé pointed out, the standard of living was higher in the 1960s than it is today. That is true across a number of regions and a number of experiences. Why is that? I do not think anybody knows the answer as well as he or she should. People can give you lists of aspects of it: There have been periods of very bad macro policies, huge inflations, troubling fiscal policies and tough governance, but you have also had huge challenges in secular decline in natural resources prices, and natural resources were the fundamental basis of a number of those countries. A number of the countries have run into agricultural subsidy problems.
The value of what the committee is doing and the focus on the committee from Africa is saying that this is so profound and so complex a problem that we cannot go at it in piecemeal ways. We need to have a comprehensive, sustained way of doing it and a good understanding of the problem. It takes a recognition that you will not find a uniform answer to the question you pose, but we have to move ahead on the best policy we can on a sustained basis working with the population.
We find best practices and really build on them. There are some good examples coming to the fore, and there is much to learn from their successes.
The Chairman: I forget the sequence of the four components and therefore I cannot remember to which I want to refer when I ask if have any connection with NEPAD, in other words, the system of peer review.
Does the peer review system that we hear about in the NEPAD procedure involve the IMF?
Clearly, peer review must involve the financial sector that the country is operating at its basis level. There is a certain amount of tax revenue coming in and government expenditures and so on. Is the IMF involved in the NEPAD peer review system?
Mr. Lynch: The IMF is there to supply and support it. Because it is peer review, it is actually driven and managed by the countries involved. The key is that the colleague countries look at each other and come up with a view. To the extent that they need support, the article IV analysis that we do of each of the countries is available to them.
You are right that a key part of article IV, our country surveys, is increasingly on the financial sector, because many of our analyses point out that if you are not healthy and sustained, you will not have the domestic growth and smaller business.
The answer is yes, but it is at the request of the NEPAD authorities, because those authorities fundamentally drive it.
The Chairman: We have heard about NEPAD and I understand the article IV element. Presumably, if there were any substance to the NEPAD review system, you would have already had calls from them. I have not figured out in my mind just how this works. If four countries are reviewing country X, presumably the peer review involves their neighbours or somebody reviewing their system of government. Has the IMF been called on to assist in reviewing the financial sector?
Mr. Lynch: I do not know. I would be more than happy to find out and get back to you. The material is available to them. To what extent they draw on it, I do not know.
The Chairman: I am sure it is available, but the issue is whether they have made any use of it.
[Translation]
Senator Robichaud: In the 184 reports on the consultations, what are the considerations with respect to article IV? It is taken into consideration that, in some countries, people are less able to feed themselves than they used to? Is that factor considered in the talk about reducing poverty? We are told that, in the push to have these countries move toward international trade, some of them have lost the capacity to feed themselves. Is that factor taken into consideration when we talk about section 4?
Mr. Lynch: You raise an interesting point about capacity. When we conduct each country's annual evaluation, we ask the government whether it has the capacity, within the public service, for example, to adjust to foreign trade, to regulate the financial system or to join a central bank. It's very easy to say we agree with the idea of having a stable inflation rate. However, if the capacity is not there, if there's no central bank with officials who have experience in the field, it is very hard to achieve objectives.
Part of our annual follow-up consists in attempting to establish a picture of capacities and to have a discussion with the government in order to examine ways of increasing capacity and setting priorities. This takes a lot of time.
As I said earlier, in foreign trade, it is not enough just to sign an international agreement; adjustments have to be made. That is one of the reasons why we raise the importance of this factor. Capacity is one of the factors we will have to consider in future.
Senator Robichaud: I do not know whether I understand. You are talking about the capacity to feed oneself?
Mr. Lynch: There are a number of capacity factors in a country. Our work is done in macroeconomic policy, foreign trade policy and financial industry policy. The question of capacity requires that we clearly understand where the weaknesses and potential are. Then we can focus on that aspect.
Senator Robichaud: So your reports do not focus on the fact that people have lost the capacity to feed themselves or to carry on traditional agriculture, which is not at the same level as that found in developed countries. You do not take that aspect into account?
Mr. Lynch: It is a somewhat as though there were a division of tasks between what the IMF and the World Bank and the regional banks do. When we do a revision for a country review, we are more interested in monetary and financial policy aspects. We do not assess the situation on a sector-by-sector basis. That is more the responsibility of the World Bank.
Senator Corbin: I am finding it hard to take in everything you have said this afternoon. I am not an economist, and I do not know much about finance, but, while listening to you and my colleagues, I quickly tried to read the brief you submitted to us. Based on certain conclusions that you make in the brief, I get the impression that there is an implicit admission that your policies are far from achieving the goals set. For example, you yourself say that your analytical capacity leaves something to be desired.
In a recent report, the Independent Evaluation Office concludes that the IMF must better target its methods for providing its assistance and focus more on priority areas. I see on page 4 that, in the context of these studies, the IMF should seek to better understand the causes and dynamic of capital account crises and how affected countries can gain access to the international capital market.
I could continue along those lines. I get the impression that, although it is an institution that has been in existence for more than 60 years, it's far from having the power to analyze crises, and, in these post-crises, you come up with new ways of doing things. I thought an institution as prestigious as yours would be able to grasp the cause of problems immediately and act spontaneously in solving them. If I rely on what you say in the brief, I sometimes get the impression you are like academics who conduct case analyses rather than solve problems.
Your statement leaves me confused. I would like to know how much time you spend conducting situational analyses compared to targeted actions in the field to resolve crises, governance situations and so on. You must have an impressive staff of analysts. I would appreciate you're being open and frank in your answer. There's nothing wrong in recognizing that you're not in full possession of the facts.
Mr. Lynch: If you think that there is an element of analysis underlying our work, you are right; that's precisely the case. We have 184 members. If there is a crisis in a given country, we have to understand the reasons for it. Is it for the same reasons as last time? Is this a current account or a capital account crisis? Is this something that happens often because of the situation in that country, or is this crisis a reaction to circumstances in other countries in the region? This is much clearer after the facts than at the time of the events.
A country typically requests our advice. If it were possible to achieve perfect understanding, that would be good, but that is not the way the world is. You have to have very good knowledge of the possibilities. It is a bit like a patient who goes to the hospital. The diagnosis of the disease is not always clear. You have to take the time to understand its causes. When there is a balance of payments crisis, you have to conduct an analysis to gain a clear understanding of the reasons that led to the situation in order to establish the appropriate action plan that should remedy the situation. Can the IMF try to understand the situation? Of course, and we put a great deal of energy into getting a clear understanding of the reasons why there is a problem.
[English]
Senator Corbin: I have a supplementary.
Mr. Lynch: There is a standard criticism of the IMF that if you are in a balance of payments problem, the IMF prescribes fiscal adjustment medicine that is difficult to take. There is shorter-term pain, and there is always a promise of a gain in the future, but the future is always quite a ways away. I am sure you have heard it around the committee and you certainly hear it as a new member of the IMF.
Very much in the spirit of your question, the board has asked the IMF to look through 260 examples of large fiscal adjustment. In these unsustainable situations, the international community advised that large adjustments were in order. It looked at adjustments in very poor, middle income, and emerging industrial countries. The IMF looked at Canada because of our large fiscal adjustment in the mid-1990s.
The surprising result is that in the majority of the cases, the degree of negative economic impact in the short term was dramatically less than anyone projected at the time and the degree of gain was both larger than expected and it happened earlier. In other words, what we typically forget is that if you are in very difficult fiscal or monetary straits, you are already hurting your economy. Taking that fiscal or monetary problem away, really gives you quite a positive response. It is quite interesting that the well-designed, quickly implemented, clearly communicated macro adjustment programs have shown across a broad range of experience to be much more positive for the countries than ones that are either slow to take effect, poorly designed, or if you just let the situation move ahead on its own.
Senator Corbin: Are you prepared to admit failings?
Mr. Lynch: Personally? Certainly.
Senator Corbin: There have been failings in your policies. Some things have not worked well in certain countries. Are you prepared to admit that is the case and could you give us examples?
Mr. Lynch: As I said to you earlier, it is a learning experience. In answer to Senator Downe's question, the independent evaluation office has been going through the various funds. It has done an excellent report on the experience with Argentina. There are a number of criticisms in how the IMF and various parties handled it and suggestions for the future and how to avoid that problem in the future.
You have to build that analysis evaluation to learn from it in the future. Can we do policy conditionality better than we did in the past? Can we work with not only the government but also the party? Unambiguously, yes. We have made progress and there is more we can make. I agree with your premise; it must be a learning organization based on a lot of analytic work.
Senator Corbin: What has been your experience with the IMF?
Mr. Lynch: It is in the process of doing a benchmarking. It forecasts the entire global economy. A major international forecaster of that sort will get a good baseline economy but it is difficult for forecasts that have to deal with all countries to catch major turning points. By definition, they will catch trends and imbalances, but not shocks. The firefighting role is dealing with the shocks and we must be prepared to deal with them. Everyone will be different by definition.
Senator Corbin: I see that you also represent Antigua, Barbados, the Bahamas, Belize, Canada, Dominica, Grenada, Ireland, Jamaica, St. Kitts, St. Lucia, and St. Vincent and the Grenadines. Why are they bunched with Canada?
Mr. Lynch: I am not totally sure, to be honest. We have 184 members in the IMF and 24 members of the executive board. Most countries have a constituency. There are only five or six countries that represent one entity.
Senator Corbin: What are those countries?
Mr. Lynch: They are the United States, Germany, Japan, France, the U.K. and Saudi Arabia.
Senator Corbin: That is strange.
Mr. Lynch: Everyone else has a constituency. Typically, there would be a dominant member of the constituency in terms of quota share but there would be others. Frankly, it is a useful thing, because it gives you a breadth of experience. Dealing with the Caribbean members is very different from either Irish or Canadian issues and it builds into the constituency a bit of an understanding of the challenges across countries.
Senator Corbin: Why do you not take an African country or two under your wing?
Mr. Lynch: I am not sure of the allocation of countries. There are a number of African chairs on the board and there is a grouping of countries around them. Typically, there is a fair bit of geographic proximity, although Ireland is further away than some. I do not know the answer to that question.
The Chairman: The former French African colonies, for example, are now independent countries. They are not represented by France on the board. Who represents them?
Mr. Lynch: There are two Africa chair constituencies around the executive board and they represent the vast majority of the sub-Saharan countries of Africa.
The Chairman: This is out of the 24 executive board members?
Mr. Lynch: Yes. One of the expansions over the last decade involved increasing the African representation on the board.
The Chairman: Do you have meetings of every one of the184 members? That sounds unmanageable.
Mr. Lynch: Most of the 184 will have an article IV that comes before the board.
The Chairman: They do not come directly but through the24 executive board members, is that correct?
Mr. Lynch: That is correct. The article IV report on their country comes from the board. The board discusses every single article IV for every single country each year.
Senator Downe: I have a supplementary. Of the 24 executive board members, how many are from Africa?
Mr. Lynch: There are two full African constituencies and then some of the northern African states are in other constituencies. There are two chairs in sub-Saharan, and north of the Sahara there are other chairs, but in broader constituencies.
Senator Downe: That was two out of 24 and you said it was increased so it was one out of 24 before.
Mr. Lynch: It would be a mixed chair and it has become100 per cent.
The Chairman: Before I call on Senator Mahovlich and Senator Robichaud, I think that Senator Corbin raises a good question.
We are studying Africa, not the world and the IMF is a world organization. When asked, does the organization learn from its experience, one cannot help but draw the conclusion that no, the IMF has not learned very much.
I am thinking back to Argentina and the collapse in that country. I cannot remember the last collapse. I also recall the previous Mexican collapse.
I was as an analyst with the Carter foundation in Mexico, about 1991. I remember saying that a collapse was imminent. The IMF did not say there would be a collapse but if you looked around and talked to people and knew something about the traditions of the country, you knew that it was unsustainable. This comes from experience. You have been doing this for many years and you get the picture.
I think the IMF is important. I do not mean to use this as an occasion to bash the IMF. However, we had the Far East collapse. I remember when the World Bank — and that is not the IMF — had to withdraw its own report and predictions. I am sure you recall that situation.
It seems that this is a system of being around and saying that this will not work is something that the IMF does not seem to have done very well.
Mr. Lynch: Every time you have a balance of payment crisis, it is one crisis too many. I agree with you on that point.
Our goal is to try to pinpoint problems before they happen and try to convince the authorities that it is better to take early action than let the crisis happen and deal with it. Sometimes the IMF may give that advice but the countries may not want to follow it. We can only give the advice but not force them to act on it.
Mr. Chairman, you raised the topic of Argentina, and there is no doubt that we missed many of the danger signals. Sometimes everyone misses them. Sometimes the advice is there but it is not taken. Other times it works well; the advice is given, it is accepted, and we avoid problems.
The Chairman: The wishful thinking that an Argentine peso was worth a U.S. dollar was not lost on any of the people that I talked to that this was unsustainable and would inevitably collapse, but the international financial community seemed to like it so much that they waited for the collapse.
Senator Mahovlich: I have one more question about Argentina. I get a feeling that it is a grass roots deal in Argentina now instead of from the top down.
Do you have confidence that the system will work in Argentina and they will be able to turn things around?
Mr. Lynch: That is a very good question. Article IV will be coming to the IMF in the next couple of months, and the board is looking at whether the policies are in place that will give the country a chance to sustain growth.
There is a high debt-to-GDP ratio, a large current account deficit, challenges in terms of the fiscal transfer system, and there is the unresolved issue of the creditors who were not part of the restructuring. There are significant outstanding challenges that both the Argentinian government and the international community have to deal with. They are certainly all on the table and being debated.
Senator Mahovlich: Do have more debt than they can handle?
Mr. Lynch: There was a large haircut on the debt. About66 per cent of the creditors participated in the restructuring and 34 per cent have not. The IMF has said that in order to normalize relationships, you must have a reasonable bringing on board of the remaining creditors, which is a challenge in any international debt restructuring initiative. That is an important and critical issue.
Senator Mahovlich: What is reasonable?
Mr. Lynch: That is always an issue in restructuring.
The Chairman: Basically, they borrowed money and they cannot pay it back, so they will not pay it back.
[Translation]
Senator Robichaud: When it was recommended that the African countries eliminate agricultural subsidies — that was a considerable expense for each of those regimes since they had eliminated certain types of action that gave producers a market for their products — was the International Monetary Fund involved in recommending that those countries completely abandon subsidies so that they could adjust their capacity to administer their needs in and outside the country?
Mr. Lynch: I am not exactly sure about the IMF's recommendations. As regards the fiscal approach, the IMF tries to reduce subsidies, where they distort the economy. As for the Marketing Office, I believe a number of countries have had problems with it because of its inefficiency.
I do not think there was any advice about anything very specific. That's why you have to have a more open-market- based system to reduce subsidies and to have a reasonable adjustment process.
It is up to us to make very specific recommendations for a specific sector. Reducing subsidies and trying to introduce a system more sensitive to market signals is much more general.
Senator Robichaud : Do you realize that those countries absolutely have to receive assistance so that they can feed themselves because they are no longer profucing?
[English]
Mr. Lynch: Maybe I can answer from a couple of perspectives.
There are two sorts of subsidies: consumer subsidies and producer subsidies. There are explicit producer subsidies from government transfers, and there are implicit subsidies through the marketing boards. Equally, there is a subsidy problem in the competitors. You have in certain sectors large subsidies outside of Africa which impact on relative prices. Each country employs a different method and there is not one general approach.
A country receives both specific as well as general advice. I think the IMF's advice more broadly is to move towards more liberalized trade, to reduce subsidies, which are distorting, particularly ones that influence the lowest income developing, and to ensure you have adjustment programs in place. The goal is to raise productivity in agriculture; it is not to have less agriculture but to have agriculture that is more productive in those countries and that takes investments in capital processes and methods.
It is an issue of what happens in the system outside of the country, not just about what happens in it. If you just unilaterally change something within a specific country without having the ability to change the overall context, you can come up with outcomes that are not necessarily what one would hope to have if you had a general consensus about the approach.
Senator Robichaud: That is what happened, is it not? Those countries reduced their subsidies to production. Other countries like Europe and even America continued their subsidies to production, which caused a situation whereby they could not compete with those subsidized products that came from those developed countries.
Mr. Lynch: I am not an agriculture expert.
Senator Robichaud: It is with regards to agriculture and anything else.
Mr. Lynch: The view of the IMF in general would be the fewer subsidies the better. One, poor countries cannot afford the subsidies and, secondly, rich countries should not have the subsidies. From both perspectives, the more you level the playing field and give the appropriate adjustment, you will have a better outcome.
At the same time, a challenge we see has been that the real price of natural resource agricultural commodities has been declining over the last 30 to 40 years. We see this in our Caribbean constituency where there is real pressure on some of the islands. Just the price of those commodities as a result of new sources of supply and new competitors has made what they have more difficult to maintain, even in Latin America and South America.
It is not just the subsidy, but you have generalized increased productivity in agriculture, and you have to reinvest in technology and processes. That is an investment challenge as well. You have to take out the distortions and move towards more high value-added agriculture, to the extent you can.
Senator Robichaud: You say that regarding the subsidies issue we should try to have a more level playing field. Do you feel that we have moved in that direction at all, considering the African countries?
Mr. Lynch: I certainly think the trade environment today is a lot better than it was 20 or 30 years ago. Is it as good as it can be? No, it is not as good as it can be. There is such a focus on agriculture for the Doha round because of the very issue to which you refer. Trade liberalization is good and it has been good for countries like ours, and it has been good broadly, but the agricultural sector has been one of the more difficult areas in which to make progress. There is such a focus on it in Doha because it will impact positively if we can make some progress on a number of African countries, as well as other countries around the world that are still heavily reliant on agriculture.
Senator Robichaud: Are we moving toward a more level playing field?
Mr. Lynch: It will depend on how the Doha round will come out. That is why it is so important that we have a positive resolution.
The Chairman: I think you made the point very well. It goes back to the issue that the committee has heard before: We are asking other countries to take measures we do not take ourselves.
Senator Corbin: My question will not be difficult. Mr. Lynch is quite a diplomat, I find. He does not name too many countries in his detailing of the IMF policies.
With respect to the bottom paragraph on page 2 of your text, I would like you to give me an example of a ``country- led, intensified surveillance mechanism'' that is subject to frequent monitoring by IMF staff.
Can you give me an example of a relative success story with what seems to be a new IMF approach?
Mr. Lynch: One success story is in our constituency. It is Jamaica. Jamaica has not had a borrowing program with the IMF for a considerable time. Jamaica wants to access international capital markets and want to have better interaction with the donor community.
They worked with Canada at the IMF to go to the institution and put forward four country-owned, explicit policy targets for the next couple of years. Jamaica asked the IMF to evaluate their targets and tell the world whether they meet them or not. Jamaica wants to know if it is over-achieving, under-achieving, and whether the IMF thinks it should go further. The IMF agreed to do that on a pilot basis.
Nigeria has also come to the IMF in exactly the same way. It is doing well with oil revenue, as you know, but it has gone through problems in the past with its oil revenues. Therefore, it set up a number of objectives for itself but wants that third party validation for its own citizens, for markets and donors that it is following its own programs. It is using this twice a year, not just once a year, which is the procedure of the IMF.
Senator Corbin: Do you have an example of where this mechanism has been able to identify major problems?
Mr. Lynch: This has only started in the last two years, and these are our two pilot cases. They are the only two that have actually asked. We are now looking at whether we can make it a regular program.
Mr. Goodale, in his comments here and in his statement to the spring meetings, called on the IMF to make this a permanent part of the toolkit, because it allows us to play a third party signalling role to donors and to markets. A small country that may have had some challenges in the past does not want to be carrying that history forever. It wants to be evaluated on what it is doing today and may do tomorrow, not on what might have happened in the past. This looks like a useful mechanism.
Senator Corbin: It also reassures the citizens of those countries that their policies are working.
Mr. Lynch: In fact, both those governments give it fairly wide distribution.
Senator Corbin: That is a political plus for the government of the day, in other words.
Mr. Lynch: Certainly, and it is also an incentive to meet the targets as well, which is not bad for everybody.
Senator Corbin: That is an excellent initiative.
The Chairman: With that, I will adjourn the meeting. We were delighted that you could come and talk to us. I knew a little bit about the IMF, but you have explained it, and it has been very useful for the committee.
In our previous chat just as you were coming in, I think you suggested we meet, if we can, with a representative of the African Development Bank, which I thought was a solid suggestion.
I remind senators that tomorrow we have our agricultural trade negotiator. Senator Robichaud, I hope we can get some information on the kinds of questions that you have been asking, although trade negotiators are notorious. They do not talk while they are involved in negotiations.
The committee adjourned.