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Financial Institutions

Volume 704: debated on Thursday 30 October 2008

asked Her Majesty’s Government what is their assessment of the effectiveness of international financial institutions such as the International Monetary Fund and the World Bank.

The noble Lord said: At the conclusion of the Bretton Woods conference in 1944, to universal applause, John Maynard Keynes paid tribute to his colleagues, who he said had performed a task appropriate,

“to the prophet and the soothsayer”.

I often speak of the wealth of talent and experience that exists in your Lordships’ House; however, I do not think that any of us today, in the limited time offered to us, will be claiming the title of “prophet” or “soothsayer”. What we can do, however, is look at the financial crisis that is upon us and ask what has happened, why it has happened and what must be done so that it does not happen again.

As many of your Lordships know, I have had this debate in the ballot for a number of months. Not only am I delighted that it is taking place at such an important and appropriate time, but I am grateful to those Peers speaking in the debate today, many of whom are recognised as world experts in this field. I welcome the Minister to this House. I congratulate him on his appointment, and we look forward to his response at the end of the debate.

If recent events have taught us anything, it is that the global institutions set up after the Second World War, such as the UN, the IMF and the World Bank, so appropriately created for that time, are now so out of step with our time. As reported in the Times, there are three kinds of organisations: those that make things happen, those that watch things happen and those that wonder what happened.

Take the IMF, an organisation of over 2,700 employees, with access to resources in excess of $363 billion. With all those resources, where was the IMF last year when this crisis started to unfold? Where were the IMF’s warnings as the world sleepwalked into financial meltdown? And today, when we are in the grip of the crisis, where are the IMF’s proposals on how to end it? The question we have to ask ourselves is: if the IMF is not mandated to fulfil that important function, why not? To its credit, the IMF’s 2007 Global Financial Stability Report in fact recognised that the US housing market was slowing down. However, it said that,

“this weakness has been contained to certain portions of the subprime market ... and is not likely to pose a serious systemic threat”.

Ironically, the stress tests that formed the IMF's evidence base for this report were produced by none other than Lehman Brothers.

A core function of the IMF is to act as the lender of last resort, but even there we have seen that it is not the lender of first choice. Take the Asian crisis of 1997, when South Korea ignored the advice of the IMF and came out the better for it. Today Iceland and Pakistan, for example, have both turned elsewhere first before approaching the IMF.

I want to make it clear that this is not a blame game. It is about finding a new mechanism that will enable the global community to work together. I heard President Clinton say that, whereas countries have historically always been interdependent on one another, today countries are integrated with one another. We have all heard the saying that when America sneezes, the world catches a cold; we can now see that we all catch that cold the very same day. Today we see the Indian stock market anticipating the actions of the US Secretary of the Treasury before they have been announced. Today we see India, a country still without a fully convertible currency, having to react swiftly to the challenges and opportunities presented by our integrated global economy.

The balance of economic power in the world is changing dramatically. The US, the European Union and Japan together contribute approximately 60 per cent of global GDP, and yet emerging countries with large surpluses are today investing huge sums of money in developed countries. These rising stars of the world economy need to be better integrated and represented in our global financial institutions. In short, the world’s top table needs to change—it needs more seats.

The world is returning to where it was some three centuries ago, with India and China once again set to emerge as the two dominant economic superpowers. Yet neither country has a place in the G7 or the G8, and India remains excluded to this day as a permanent member of the UN Security Council. The chairmanship of the World Bank remains the gift of the President of the United States. For what reason? That America was once the bank’s biggest funder by far. Today, however, it is just one of many. If the World Bank is to be for the world, surely its governance should reflect today’s economic reality, not yesterday’s. Similarly, does the managing director of the IMF need always to be European? Why not an American? Why not an Indian? Why not the best candidate for the job?

There is no question but that America is by far the most powerful country in the world today, but, looking ahead just 20 years from now, when China and India are economic superpowers alongside the EU and America, will it, for example, seem appropriate for the headquarters of the IMF, the World Bank and the UN to all be located in one country?

Contrary to recent events, we should be proactive, not reactive, and look at what is right for the world as it is today and as it will be tomorrow, whether that be a reformed World Bank—by the world, of the world, for the world—or a reformed IMF that would be genuinely global in its funding and in its scope, acting as an economic firefighter but, more importantly, as the steward and guardian of the global financial system. We need a mechanism for global financial institutions that can promote free trade without hampering free trade. We need regulation that is neither light-touch nor heavy-handed but balanced to protect consumers globally; to promote transparency; to prevent; to predict; to lead by example; and to argue forcefully that trade is not a zero-sum game.

The Brookings Institution said earlier this month:

“Public institutions need to be the vehicles by which leaders take public responsibility for the public interest … The International Monetary Fund is in the doldrums, waiting for a new global mandate in the midst of a serious global financial crisis. Member governments have failed to act to give the IMF a role in co-ordinating national responses and institutional innovations to help remedy this financial crisis or prevent the next one”.

Today it is Britain that has shown leadership in the international community through the announcement of its £500 billion rescue package for its financial sector, a sum that dwarfs America’s $700 billion package even at today’s exchange rates, and America’s economy is more than six times larger than Britain’s. In advance of the meeting of world leaders on 15 November, I urge the British Government to follow in the tradition of Keynes at Bretton Woods and to lead the way with boldness, confidence and authority in reforming our global financial institutions. Over 60 years ago those institutions were born out of the Second World War. Now they need to be reborn out of the global financial crisis as institutions that are fit for purpose for today and for tomorrow.

We are all grateful to the noble Lord, Lord Bilimoria, for initiating the debate. He has said much with which I agree entirely, so I shall confine myself to what I can add to the debate. First, when President Nixon announced on 15 August 1971 that America would shrug off its role as a key currency in selling gold at $35 an ounce, the IMF died. It should have been given a decent burial immediately because it had no function to perform once the particular combination of a world of capital controls and fixed exchange rates was gone. It had been a vision created by John Maynard Keynes in Bretton Woods. It served its purpose extremely well between 1945 and 1971, but in subsequent meetings that had to decide on a regime of flexibility in rates, noble Lords will recall that it was individual countries themselves that took the initiative to fix, in a series of meetings, what the system of flexibility in rates would be, while Europe took a lead and set up the European Monetary System, and so on.

The IMF completely missed the petrodollar crisis, let the third world get into unsustainable debt, and in 1981 started bullying everyone about their macroeconomic balances. The IMF had the wrong macroeconomic model for developing countries and ruined many of them. Indeed, it performed a signally negative role throughout the 1980s and 1990s. Today the IMF is a moderately good macroeconomic forecasting body, somewhat like the National Institute of Economic and Social Research, although it is not quite as good. I suggest that we should abolish the IMF at the first opportunity and merge its macroeconomic forecasting unit with either the World Bank or the Bank for International Settlements, which is a glorious institution when compared with any of the others. One can be absolutely bloody-minded about the IMF, and I agree strongly with the noble Lord, Lord Bilimoria, that it did not do anything in either the current or any previous crises. Indeed, last March I was taking part in a BBC programme while the IMF was holding its spring meeting. I then managed to roundly abuse the institution and say that it should be abolished, so I am not saying anything on the spur of the moment.

Institutions that have outlived the function for which they were set up should be abolished forthwith, not reformed. There may be a need for an institution at the international level, but the first question to ask is this: what is the gap in the market that the institution is supposed to fill? If we have complete flexibility in rates and if, despite the financial crisis, we have good capital flows, what is the market failure that an institution designed like the IMF is supposed to correct? Indeed, would it not be better for countries in balance of payments difficulties to go to a consortium of private banks that would be less bullying and authoritarian than the IMF? The IMF sets conditions which a country receiving its help has to accept. What is most absurd is that the IMF makes countries request that it imposes conditions on them so it looks like it is not the IMF but the country itself that is asking to be whipped, put in chains and messed about.

I also concur with the noble Lord, Lord Bilimoria, about the governance of the IMF and the World Bank, and I do not want to add anything to what he said. Even the permanent secretaryship of the UN should be advertised and the best person elected, rather than let it be a case of Buggins’s turn, which is what we have. That sort of business almost always leads to a second-rate person being appointed.

I want to make one more point about the World Bank. Over the years it has improved a great deal, and to the extent that the IMF has performed functions related to aiding the third world, those activities should go to the World Bank. We also need to think more broadly about the functions performed by the World Bank. While there is need for such aid flows, we must ensure that they are given to where they are most needed and are not wasted on a number of rather peculiar experiments, especially, say, the dams experiment in which the World Bank got involved.

It is always a challenge to follow the noble Lord, Lord Desai, but when he came to abolishing institutions, it seemed to me that the house is on fire and that we should not pour petrol on the flames.

The philosopher Nietzsche wrote that there are no such things as truths, only interpretations. Nietzsche was quite a problem to himself, but he has left us with this valuable insight.

Interpretations vary from yet another valuable insight to frankly partisan spin. How do we tease out the Government’s interpretation of their assessment of the IMF? I shall refer to two short sentences in the Prime Minister’s Statement on the European Council meetings. On the rebuilding of confidence, given the Prime Minister’s view that as the crisis started in America, America is responsible, any interpretation of Northern Rock is left high and dry. The first sentence refers to,

“a new international architecture for the global financial sector”.

The second sentence refers to,

“reform of the International Monetary Fund and Financial Stability Forum, including the creation of an early warning system for the global economy”.—[Official Report, Commons, 20/10/08; col. 22.]

How does the noble Lord interpret “a new international architecture”? Is the whole of Bretton Woods to be felled? As we follow once again in the revolutionary footsteps of Tom Paine, what will be built and when? We have no time for this fantasy when what we need, and encouragingly are seeing, is daily IMF action—for example, Iceland, Hungary, Ukraine and Pakistan. Where next? This architecture sentence is firmly in the category of “spin”. What is the Government’s interpretation?

The second sentence is more interesting. Three points need consideration. First, we need to consider reform of the IMF, which is 64 years old with 185 members, 10 of whom have 55 per cent of the votes. With 11 years’ experience, the Prime Minister will be sitting on many a memorandum entitled something like “Proposals for the reform of the IMF”. Have any been published? I could not find one on the Treasury website.

Now I part company with the noble Lord, Lord Bilimoria, to whom we are all grateful this afternoon. The IMF has understandably long found it risky to give hard advice to the 10—55 per cent—members. Indeed, everyone finds it risky to give the Prime Minister hard advice. The fund has frequently been reminded that many identify the onset of irrelevance. When and if it has run scared, that has not been surprising. That is not so now when such critics are repenting or at least spinning their willingness to claim that they have always been determined supporters given unspecified reforms. However, the most recent IMF financial stability assessment of the UK was in 2003 and the United States will not have one.

The reform of the Financial Stability Forum is an entirely different matter, although it appears in the same sentence. The FSF is nine years old. It is housed in the Bank for International Settlements with a seconded secretariat of seven. There is no structure, no professional staff or any legal status. As no threat to G7 leaders, or to their bureaucracies, it is a comfortable partner. How is it to be reformed? It is not an international institution as it is.

Finally, the early warning system is already the delegated responsibility of the IMF, but who paid due attention to the April 2007 global financial stability report—perhaps punches were pulled, as the noble Lord, Lord Bilimoria, suggested, but they were running scared of the bullies—or to the April 2008 report, which was closer to the mark than any rich-country Government? How do the Government assess the IMF—as an interesting institution but not much use until reformed, or as an important and professional contributor to the solution of today’s crisis? What is the answer?

I, too, am grateful to the noble Lord, Lord Bilimoria, for initiating this debate on international financial institutions in the middle of the biggest financial meltdown since the war.

I shall concentrate my brief remarks on the IMF. Unlike the noble Lord, Lord Desai, with whom I rarely disagree, I do not want to abolish the IMF—his suggestion that distressed borrowers come to private banks for loans is a remarkable expression of confidence in the private banking system at this moment of its performance—I want to reform it.

My reform would be based on reminding us of what it stood for: to promote a stable system of exchange rates by preventing countries from manipulating their currencies to get unfair trade advantages. Various things went with that: the commission to devalue in exceptional circumstances, short-term loans, temporary balance-of-payments difficulties, and allowing countries to prohibit imports of goods through something which the noble Lord will know about but I do not know how many others do—the never used scarce-currency clause. All this was designed to prevent the development of global imbalances of the kind that we have seen recently. It did not work out that way, however, because creditor countries such as Germany and France in the first phase of the Bretton Woods system found it more convenient to increase their dollar reserves than to revalue their currencies, and the United States could run increasing balance-of-trade deficits by printing Treasury bills.

The whole system fell down in 1971, and the main purpose of the IMF’s requirement to preserve stable currencies was abolished in 1978. As we have just been told, we were on a non-system of flexible exchange rates, but this did not solve the problem of global imbalances, as it was supposed to. Since the 1980s, the problem has re-emerged in spades. China and the Far East now hold US Treasury bills in large quantities, which the United States pays out to finance its huge current account deficits of $500 billion a year, on average, for the past four or five years. This is called the savings glut in Asia, the counterpart of which is the consumption glut in the United States.

Exchange undervaluation by Asian countries has been a deliberate policy to carry out both the accumulation of reserves and their export drives. This is where we come to the connection between this world situation and our current financial crisis, because these excess Asian savings have been shovelled into the housing bubbles of both America and Britain: not directly, of course, but by enabling our Governments to pursue expansionary, monetary and fiscal policies that fuelled an unsustainable credit and housing boom. That has contributed directly to the current financial collapse.

For the past 10 years, America has in effect had no budget constraint. What is true of a country was true of lots of individuals, who piled up personal debt on the back of constantly inflating house and asset prices. The IMF, as the noble Lord, Lord Bilimoria, rightly said and as the noble Lord, Lord Desai, reiterated, has been completely marginalised in this process, because it has lost its central purpose: to prevent these huge imbalances from occurring in the first place. Any reform of the IMF must therefore start with seeing how we might reform the international payments system in order to promote a balance-of-payments adjustment. It seems obvious to me.

The clear first step is to attack the Asian fetish of building up huge reserves for crisis insurance. The best way to do that is to activate the IMF's power to create international fiat money by means of special drawing rights. The quantity of extra reserves would have to be very high, but we have been used to talking of hundreds of billions of dollars, and a few hundred billion more will not alarm us that much.

Secondly, we must find some method to prevent the pile-up of large creditor balances and their counterpart of persisting debtor balances. In other words, we need to revisit the whole question of exchange rate adjustment. A well known suggestion by the economist John Williamson is that the major countries should agree periodically on reference exchange rates which they intervene to push market exchange rates towards. That is a complicated suggestion, but it begins to address the problem of how we can keep our exchange rates more stable and prevent global imbalances building up. That would be a desirable new project for a Bretton Woods conference. We will come to that in the end. When we do, we should hold it at the Mount Washington Hotel in Bretton Woods, New Hampshire, where Keynes and Harry Dextor White hammered out the original Bretton Woods system that served the world so well for 30 years.

I, too, begin by thanking the noble Lord, Lord Bilimoria, for securing this debate and for introducing it with the insight and eloquence that we have come to expect from him.

We all agree that there is a need for a genuine and radical reform in the world's financial architecture. There is no shortage of suggestions. The question that we should ask is: what are the principles that should guide how a new financial architecture should be set? Those principles, in turn, will be determined by the goal and objective that we want the institutions to realise. Is the reform intended to stabilise capitalism? Is it intended to save capitalism from the folly and mischief of capitalists? Is it intended to perpetuate existing global inequalities? What is our goal?

There should be widespread consensus that our goal should be to create a just world in which globalisation works to the advantage of all. If that is our goal, certain principles follow from it. We should evaluate in the light of those principles whatever suggestions are offered. First, the institutions should increase our capacity to control the impersonal forces of the market and allow us to shape our economic destiny, rather than be governed by it. Secondly, the institutions should promote global well-being, as articulated, for example, in the millennium development goals, such as reduction in poverty, disease, hunger, and economic underdevelopment in general. Thirdly, the institutions should ensure democratic participation, so that all voices are heard and all legitimate interests are taken into account. The fourth and equally important principle that should guide our decision is that the institutions to be set up should be transparent and accountable.

If we judge by those four criteria, which are crucial, the existing institutions turn out to be extremely disappointing. For example, in the IMF, developed countries have 72 per cent of the votes, whereas Africa has only 5.6 per cent, Asia 10.4 per cent and Latin America 7.7 per cent. As the noble Lord, Lord Bilimoria, pointed out, the managing director of the IMF is by convention European and the president of the World Bank is American. Those posts are not advertised; they do not even necessarily go to the best people; they are political gifts. The mischief that that can cause we have seen over the years.

Those institutions have served the interests of developed societies rather than the rest of the world. The noble Lord, Lord Desai, rightly talked about the mischief that the IMF pursuing Washington consensus caused under Paul Wolfowitz. The IMF posed a neo-conservative agenda and gave money to those regimes of which it approved. In the 1990s, the IMF unleashed klepto-capitalism in the Soviet Union and its associates.

The question is that if all these institutions are inadequate, what should we be doing? I want to end with four or five suggestions that I think are quite important. First, the posts of managing director of the IMF and president of the World Bank should be widely advertised and open to all, as is that of the secretary-general of the United Nations. I am even tempted to suggest, given that the World Bank is intended to help poor countries, that the president must always come from one of the low-income or developing nations.

Secondly, the composition of the IMF and the World Bank should be adequately representative of all parts of the world. All kinds of criteria have been advocated and I shall not go into them for lack of time, but population, deposits, need and volatility of an economy are all criteria that can be taken into account. Thirdly, the policies followed by the IMF and the World Bank should be publicly debated and endorsed, and therefore both could do with a globally representative advisory committee. There should be a way to provide for regular consultation with those countries which have to turn to these institutions for help and consultation on their management.

Fourthly, an imaginative way must be found to increase the funds that are available to the IMF and the World Bank. It is extraordinary that the IMF is going to have to depend on China for funds when that country has no effective say in the running of the fund. Imaginative ways of raising funds might be by raising taxes on global commons or a version of the Tobin tax. Finally, we must think in terms of regulated mechanisms to monitor cross-border capital flows, to keep an eye on the lending practices of the big banks and in general to ensure the confidence of the international financial institutions.

If we think along these lines, perhaps a new version of the IMF rather than the institution as it is currently structured could take on these functions.

I congratulate my noble friend on raising the issue of IFIs, which have had too little attention in Parliament. I have tried to understand the present crisis through the prism of the needs of developing countries which inevitably are going to be the worst casualties. In Beijing the UN Secretary-General warned that the crisis could be the last straw for the world’s poorest:

“It threatens to undermine all our achievements and all our progress”.

The president of the African Development Bank, Dr Donald Kaberuka, recently expressed similar concerns and said last week that on present trends, Africa can no longer reach the millennium development goals. Some 17 million people face starvation in the Horn of Africa alone, only partly because of conflict. The situation is being aggravated by the wider economic climate. The IMF itself has warned that rising prices and inflation are already undermining the improvements made in economic and social stability in the third world over the past two decades. Inflation in sub-Saharan Africa is expected to reach 12 per cent by next year. The president of the World Bank has made food prices a particular concern, and our Government have responded positively.

I will not repeat the stories of poverty and hunger that have been reported in the press over the past few weeks, but leaders of developing countries are naturally pessimistic not just about the state of the world economy, but the ability of the Bretton Woods institutions to cope with it any longer. There is a vigorous network of NGOs with a good deal of expertise nowadays in the workings of the IFIs, and they are arguing for a stronger voice for these countries at World Bank and IMF meetings. Even the Group of 20 meeting in Washington next month will have only South Africa to represent the entire continent of Africa. That is why 556 NGOs, 60 of them in Africa, have called for a Bretton Woods II, a global summit genuinely representing all UN members. Decisions will still have to come from the G8 plus two or three, and parity between borrowers and non-borrowers would be difficult to achieve, but in today’s crisis with more developing countries becoming lenders, surely more account should be taken of them. Does the Minister agree that Africa should have a third seat at the World Bank, and will the UK support the case for wider third world representation?

More of the countries invited to Beijing should be included in IMF meetings. Incidentally, it was another Beijing summit two years ago which brought an African forum together and created a new momentum of Chinese aid and investment in Africa, which has caused considerable confusion in the western aid world. It becomes even more significant at a time when China has been asked to become one of the world’s bankers.

In contrast to its image, Africa has enjoyed spectacular economic growth of about 7 per cent over the past decade, and progress has been made in health and education, but that has occurred in spite of the restraints imposed by the IFIs, as outlined by the noble Lord, Lord Desai. No one should be in doubt about the low reputation of the IMF and the World Bank in Africa. That was dramatically portrayed in Abderrahmane Sissako’s 2006 film “Bamako”, when leaders of the two institutions were literally standing trial while Africans suffered from globalisation and harsh conditionality. What right, for example, did the IMF have to interfere in the details of wages of teachers in Malawi and Mozambique? The consequence, as recent research by ActionAid shows, is that untrained teachers are now being employed, lowering the quality of education. The IMF has not understood the principle of the poverty reduction strategy.

I know that my noble friend will join me in arguing that the IFIs should be much more accountable, and perhaps the Minister agrees with that. Can he forecast our position at the forthcoming finance meeting in Doha? That may be the first international meeting that represents the needs of the poorer world effectively. The Doha round must also be revived at all costs to rebalance world trade and recognise the legitimate demands of the LDCs. We have to look at the long term. The world must find a solution in which, as many economists since Keynes have argued and even more do today, fairer trade and steady social improvements in the poorest countries will in the end create a climate of economic stability for all of us.

Like other noble Lords, I congratulate the noble Lord, Lord Bilimoria, on securing this debate. I have contended for a long time that one of the reasons why the world global institutions perform so badly is that they are accountable to no one. National parliaments take very little interest in them on a sustained basis, and I hope that the trend that the noble Lord has started today will continue.

I shall concentrate on the IMF. In good economic times the IMF plays a relatively quiescent role. It has an ongoing surveillance function, of dubious success. One of the things I hope to pursue with the Minister on another occasion is the extent to which the IMF was looking at what was happening in Iceland earlier this year and the extent to which it was talking to its major member states about the inherent risks in that country. Surveillance is a job that someone needs to do; the IMF does it, but might do so a bit more robustly.

In times of currency crisis, however, the role of the IMF is much greater in helping stabilise increasingly unstable situations. In recent days we have seen countries from across the globe, from Pakistan to Iceland, lining up for IMF support. In some cases, at least, they are getting it. The criteria of the noble Lord, Lord Parekh, for the purpose of the IMF were noble, but a simplistic answer to the question, “Why do you need the IMF?” is, “Frankly, if we didn’t have one, at times like this we would have to invent it”.

It is clear that there are major challenges to the IMF if it is going to fulfil successfully the role that so many countries look to it to provide. Central to those is that the IMF and the World Bank have been seen, and have acted, as advocates for a particular economic doctrine, and have been seen to be very much under the sway of the US and, to a lesser extent, of the EU. Over the years they have been pushing concepts like privatisation and liberalisation that in theory might work but, in practice, do not work everywhere all the time.

In the excellent biography of Keynes by the noble Lord, Lord Skidelsky, he describes Bretton Woods in tremendous detail and explains that the Chinese delegation, which I believe was quite small, suffered the disadvantage of not speaking a word of English, and because the whole thing had been done at short notice there were no translators. At the time, no one seemed to mind very much; the role of China was relative small and it did not really matter. It jolly well matters now. The current economic crisis clearly marks a sea change in economic power, which is moving from the US and Europe to China and India, the resource-rich countries of the Gulf and elsewhere.

The IMF completely fails to reflect that. Voting strengths are: China, 3.66; the US, 16.77 and the UK, 4.86. Although that changed earlier in the year, it needs to change more. The weakness of the IMF in terms of perceptions can be seen if you look at the way that Pakistan looked to get its support. It described getting support from the IMF as plan C. It tried China first and the Gulf second. The IMF was plan C. It should be looking to the IMF as plan A, because the IMF should be a trusted institution. There should be changes in the way that people are appointed and changes as regards transparency. It does not publish its minutes for 20 years after the executive committee meets, which is a joke. All these things need to happen if it is to be treated seriously by those countries which traditionally have played a small part.

Secondly, the IMF needs to have a lot more resources. People have bandied about the fact that it might need $2 trillion instead of $200 million, and the Prime Minister has talked about a bail-out fund. In the past week, every day there has been a major new development involving the IMF. Yesterday, it was looking at new rules to enable it to make grants to countries more quickly. Literally earlier today, China announced its willingness in principle to contribute to an enhanced international bail-out fund; the implication being that it would be administered by the IMF. So far from being a dead institution, it clearly is seen as an institution with a major role to play. I fear, however, that the meeting planned for 15 December will not lead to its reform. What we need is a long-term, thought-through series of meetings to get the real reform which will enable the IMF and the other international financial institutions to fulfil the purposes, if not quite those envisaged at Bretton Woods, which the world now sees they need to fulfil.

I, too, congratulate the noble Lord, Lord Bilimoria, on securing this short debate, and, indeed, on securing a star-studded list of speakers to contribute to it.

I am sure that the IMF and the World Bank did a fine job in helping the world economies to be rebuilt after the Second World War. Like the noble Lord, Lord Newby, I shall concentrate my remarks on the IMF, which has continued to support economies which have run into trouble, including, of course, our own during a period of Labour Government mismanagement of the economy in the 1970s, and we should not forget that. But, of course, a valuable history does not guarantee the IMF a place in the future. After the Asian financial crisis in the late 1990s, the IMF admitted that it had “a lot to learn” about preventing financial crises. As other noble Lords have said, it is fairly clear that it played no positive role in the current global financial crisis as it evolved. Therefore, we have to ask whether the IMF really has a role beyond that of clearing up after the event on an ex post basis.

The IMF spends a lot of time analysing countries and issues a lot of reports, but it seems to have no real influence unless it has a rescue package to which it can attach some levers. I give an example. In the 2006 Article IV consultation on the UK’s economy, the IMF warned about the UK’s high household debt, its overpriced housing market and the high leveraging of our mortgage lenders. It concluded that the UK was particularly vulnerable to shocks in international markets. All of this has proved very accurate. We challenged the Government about it at the time, but it was all too easy for them to ignore the analysis.

There also have to be questions about the quality of the IMF’s analysis. In 2003, the IMF completed a financial sector assessment of the UK, which described our financial stability policy framework in glowing terms. But that is the framework that included the FSA, which regulated Northern Rock appallingly badly, and the tripartite arrangements, which were a shambles when put to the test. What value does the IMF add, with reports that can be ignored or which, with the benefit of hindsight, flattered to deceive? Is the IMF simply too polite about countries such as the UK, whose support is important to its continuation?

As has been mentioned, there have been calls from the Prime Minister, certainly since 1998, for changes to the international financial architecture, and no one has been really sure what that has meant in practical terms. Indeed, there has been no tangible action in that period, though of course there are thousands of worthy words written on the subject by bodies such as the Financial Stability Forum. Yesterday, we heard from the Chancellor that there will be 30 colleges of regulators, but apart from that, we are still only promised more meetings on the subject. Is there any substance to the latest round of rhetoric? I hope that the Minister will be able to enlighten us.

Apart from grand plans to reform the international financial architecture, there are some short-term issues about funding which some noble Lords have already mentioned, given the queue of countries now waiting for some help. In 2006, the IMF sold off some of its gold to fund its operations and thereby ran down the resources that it had available. As the noble Lord, Lord Newby, pointed out, the Prime Minister called for hundreds of billions of extra dollars in a bail-out fund. The noble Lord, Lord Newby, is ahead of me in hearing that China has signed up. When I was researching this yesterday, there was deafening silence on whether anyone was going to put their hand up or indeed put their hand in their pocket. Maybe we will get some extra money into the IMF, and I am sure that will be helpful.

This week, we have seen that there are separate and partly competing EU, US, IMF and World Bank funding initiatives. Does the Minister think that this patchwork of different initiatives to support countries is the most efficient way of delivering support? Do the Government think that the IMF and the World Bank should be at the heart of those efforts, or are we witnessing a nail in the coffin of the positions of those bodies in the global economy?

I should also like to express my appreciation to the noble Lord, Lord Bilimoria, for securing this debate. This is my first contribution to a debate since my maiden speech earlier this week. I have handed in my registration of interests, but it has not yet been processed. I assure the Committee that I have nothing relevant to declare, save that which we all have that is relevant to declare: a real interest in the truly extraordinary issues facing the world at the moment in terms of financial instability, the performance of the global economy and the needs and interests of those in the developing world.

Institutions such as the IMF and the World Bank have a key role in assisting countries hit by negative shocks, but recent events in financial markets have confirmed that the world economy has changed irrevocably. The noble Lord, Lord Bilimoria, started with a quotation from Keynes. Having also recently read the book by the noble Lord, Lord Skidelsky, I shall take a quotation from Keynes:

“The difficulty lies not so much in developing new ideas as in escaping from old ones”.

One of the challenges for us in our role in supporting the IMF, the World Bank and other institutions is recognising that in a changed environment they themselves must have changed roles, changed processes and changed cultures.

The noble Lord, Lord Bilimoria, reminded us of the critical interdependency between economies. These are not times when single national initiatives alone will suffice, although the initiatives taken by this country and others to support confidence in their own banking and financial institutions have clearly played a very valuable part. Contagion is a word that we now come to associate with global economics and global finance. The Government support the strengthening of the robustness of international controls. In particular, my right honourable friend the Prime Minister has emphasised the important role that he sees for the Financial Stability Forum, which will certainly need more resource than it currently has, and to which the noble Viscount, Lord Eccles, alerted us. We see a more assertive role for the Financial Stability Forum in accounting, rating agencies, and the regulation and transparency of the derivative markets—in short, a role that meets the call of the noble Viscount for it to be proactive rather than reactive.

We support the expansion of the top table at the World Bank and the IMF through the extension of its membership, which the noble Lord, Lord Bilimoria, talked about. We have also publicly spoken about the unacceptability of the gentleman’s agreement under which the leadership of the World Bank and the IMF is determined, and we have argued forcefully for an open and transparent process of appointment that leads to the best equipped people being appointed to those important roles.

In response to the observations of the noble Lords, Lord Bilimoria and Lord Parekh, about supporting the institutions and making them become more legitimate, I should say that we have agreed that the IMF quota reform in April 2008 was an important further step towards making the organisations stronger and more accountable. As I said, we support making them much more open and transparent about the performance of their duties. The UK has also been vocal in support of the IMFC chair coming from an emerging market economy.

My noble friend Lord Desai argued the case for abolishing the IMF. I am not persuaded at this point that substituting IMF support for support from a consortium of private banks is entirely the best approach. Indeed, some of the difficulties with which the IMF is now coping are a direct consequence of the need to substitute private bank-provided finance which has been used to support long-term capital investment and budget deficits in a number of countries. He made a more powerful point about the need to change the way in which the IMF works if it is to perform an effective function in the future.

The noble Viscount, Lord Eccles, invited us to speculate that reference to architecture is spin rather than substance. I assure him that it is not. We are talking about putting our shoulder to the wheel to ensure that fundamental changes are made in the IMF and the World Bank to improve their efficiency and make them relevant to the needs of today. The noble Viscount also asked whether the reports from the IMF received as much attention as they should have done. That is an endemic problem. My former colleagues at the Bank of England would point to the fact that they alerted us to difficulties in the banking sector to which the sector itself seemed oblivious. I can think of ways in which the IMF and the World Bank could communicate their views more forcefully. Indeed, a report on the actions taken subsequent to their analysis and the publication of their views would be an important step forward. My right honourable friend the Prime Minister has already argued in support of this.

I am indebted to the noble Lord, Lord Skidelsky, for his economic analysis and his focus on the absence of constraint and the persistence of imbalances, which are the fundamental source of the instability with which we are now coping. His remarks were trenchant, powerful and highly relevant.

The IMF and the World Bank are responding to the challenges. The IMF has made up to $250 billion available to support nations affected by the global financial turmoil, and the fund is already in discussions with several countries to provide advice and, where necessary, to bolster countries’ reserves. I am delighted to see that the call made by my right honourable friend the Prime Minister to supplement the resources available to the IMF through the concept of a trust fund in which those countries that are in substantial balance were able to provide funds which would be invested alongside the IMF, has led to such a positive response from China, as the noble Lord, Lord Newby, told us today. We hope that the Prime Minister’s visit this weekend to the Middle East will be a further step in advocating the case for putting more resources behind the IMF in the future. It is clear that demands on the IMF for resources are going to be considerable.

The noble Lord, Lord Newby, made the case for stronger and more effective surveillance and asked questions in that respect about Iceland, a country about which I have become increasingly knowledgeable in recent days. I share his interest in what we will learn from that. He made the important point that the IMF needs to improve and to become a trusted, accountable and effective institution. He said that if it did not exist, we would probably have to invent it. Rather than invent something, why should we not do what the Government are encouraging: promote an improvement in the culture and processes of the IMF and the World Bank?

The current economic conditions may be such that significant additional resources are required, and we are taking steps along with other Governments to ensure that that is achieved. The World Bank has made contributions through its rapid finance facility which was established earlier this year to support countries affected by the food and fuel crisis. The noble Earl, Lord Sandwich, reminded us of that there are great difficulties and poverty in many parts of the world which we must not overlook. Strengthening our economy and banking system is an important step to facilitating our ability to do that. We support a louder voice for countries from developing nations in the IMF and the World Bank, including countries in sub-Saharan Africa. The Prime Minister has been clear in his recommendations on that point.

The Government have an important role in mobilising the resources of the IMF, the World Bank, the G7, the G20 and ECOFIN. The noble Baroness, Lady Noakes, questioned whether competition is the right approach here. I would normally expect to hear support for competition from her Benches. There is a case for plurality and for mobilising as many institutions as possible, with the Government acting as a linking mechanism.

I thank the noble Lord, Lord Bilimoria, for arranging this debate. I have personally found it extraordinarily helpful, and I am encouraged by the contributions from all sides of the Committee.

[The Sitting was suspended from 4.59 to 5 pm.]