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Financial Institutions

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 macro-economic balances. The IMF had the wrong macro-economic 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 macro-economic 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 macro-economic 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’ 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.