Select Committee on International Development Minutes of Evidence

Examination of Witnesses(Questions 1-19)



  1. Secretary of State, welcome. This is the first time that we have met since the Summer Recess and I think it is fair to say that during the Summer members of the Committee in different permutations and combinations have been to different places, including Afghanistan, Ethiopia, Malawi and Zambia, looking at a whole number of different issues. I think it would be fair to say and to put on the record, and we said it to officials last week, that almost without exception wherever we went those we met, whether it be Prime Ministers or Presidents of the countries concerned and others, all were voluble in their praise for the DFID officials and what DFID was doing, and, as we said to the officials last week, though I am not sure they believed us, they were not on the rack, but I think it was very notable and I think that is worth putting on the record.

  (Clare Short) Can I just say a word on that?

  2. Yes, of course you can.
  (Clare Short) We are living in a time when it is sort of fashionable to knock public officials and say how difficult it is to reform the public services, but I think the country should be very proud of the officials who work for the Department for International Development. Across the world we are seen as leaders and yet they have also led a lot of change and reform and improved effectiveness, so I just think the country is entitled to be proud of them and the UK is the leading-edge player in this area and we have some very good, high-quality people.

  3. And I think that comes through. Now, today's session, Secretary of State, really is looking at the outcomes of the Autumn meetings of the IMF and the World Bank which were held in Washington towards the end of September and you were there with the Chancellor of the Exchequer, with you of course as the UK Governor of the World Bank. I think the first thing we would like to ask you about is debt. DFID gave us a memo and on page 5 of that memo[1], I would just like quickly to put these questions into context, where DFID says, "We will continue to emphasise the need for full financing of the Enhanced HIPC Initiative to provide genuine debt sustainability for all eligible countries. We will press for concrete pledges from donors to fill the c. $1bn financing gap in the HIPC Trust Fund from the G7 and non-Paris Club creditors. We remain convinced that the rules on topping up HIPC debt relief at Completion Point need revision. We will also press the Bank and the Fund for more advice for HIPC countries on more realistic debt sustainability analysis to ensure that countries exit the Initiative with a sustainable debt level." So it is a pretty substantial agenda there and I was just wondering, and John Battle also has some questions on this, firstly, when do you anticipate that there will be a general recognition of the need for full financing of the Enhanced HIPC Initiative and when do you anticipate that the shortfall in the HIPC Trust Fund is going to be made up?

  (Clare Short) I think with the G8 at Kananaskis there was agreement that an extra one billion was needed. At the annual meeting in Washington, I convened a preliminary meeting, because there is always this tension between the G8 and the non-G8, to try and get the non-G8 to commit to do their part if the G8 kept its word so that everyone is on best behaviour to put in the sort of proportions we had last time to get the extra one billion. At the meeting in Washington Germany committed, we committed and Sweden committed. The US made a commitment to the same proportion that our Chancellor was working very hard on, or Paul O'Neill did, of $230 million informally and then there was the further meeting in October which did you go to, Tony?

  (Mr Faint) I did not, but I have had a look at the report of it.
  (Clare Short) I think the US are talking of a lower figure now, so the October meeting, that was then and we were trying to move things forward and start some pledging so that others would be put under pressure. Germany made this very important commitment and we made our commitment. The other big thing was the EU which, as you all know, has uncommitted funds and getting them committed in this way is a good way of spending resources which are due to go through the Commission. There was resistance at first, as there was last time round, for the EU to make a commitment, but they have now done so. What happened beyond that at the October meeting, Tony? It is always like this with these committees because you are trying to mobilise some momentum and then people come in behind it.
  (Mr Faint) The October meeting definitely did benefit from the campaign we ran beforehand and the Chairman estimated that a sum of roughly $850 million had been pledged against the up to $1 billion that the G8 had reckoned was the financing gap. There is a little bit of controversy about the financing gap, and that is the other point you were coming to, because there is not yet consensus as to whether the extra bilateral efforts that those countries have made should be additional or should be included in the calculation on Completion Point debt relief, so some people say that the gap is about $800m, some people say it is one billion and some people—the Americans even say that it is only $650 million. That is why they have pledged $150m, but we do hope that the Americans will increase their pledge over the next few months.
  (Clare Short) And there is on top of that some of the HIPC countries that are currently considered likely, but might come forward, like Sudan, which would be wonderful if we can get the peace process in Sudan again and get the debt relief, but that is not allowed for and we would need to come back again. Of course there is Burma sitting out there and Somalia and so on, but there are some other countries who, if they started to move forward, and maybe Sudan would be the most hopeful and obviously Congo which is a bit further forward—are Congo allowed for in these figures or not?
  (Mr Faint) Yes it is.
  (Clare Short) Again that is a very large, highly indebted, poor country with a peace process going on which, if it can be captured, then debt relief can come in afterwards, so it is only full financing this time round for the tranche of countries that are moving forward. In an optimistic scenario we need to come back again for more.

  4. The countries you mentioned are the US, Member States of the EU and then the EU and I presume Japan contributed to this?
  (Mr Faint) Yes, they did.
  (Clare Short) Japan has always found debt relief difficult. It really does because it is troubled by the moral hazard argument, but never wants to stand out alone. Did they commit in October?
  (Ms McMillin) They did, 56 million.
  (Clare Short) Yes, $56 million.

  5. Before I hand over to John, there are other kind of wealthy countries in the world that never seem to get on to the list, or at least if they do, I do not notice. How about countries like Saudi Arabia and other wealthy Middle Eastern countries, do they contribute to the UN family in this way or not?
  (Clare Short) They are still in the recipients—

  6. Not Saudi Arabia.
  (Clare Short) Well, not of debt relief, but in the categorisation of countries. Some extraordinary countries are still seen as developing countries.
  (Mr Faint) Saudi Arabia is an IDA, a donor, but I do not think that Saudi Arabia has made any contributions to the HIPC Trust Fund.

  7. Really this is just a question in parenthesis, which is that it seems to me that it is always the same countries who are giving and I just wonder whether there are countries out there that should be giving that are not giving and which we should collectively bring more pressure on. Their contribution to the international community and in part to the international community is assisting in ways of this kind.
  (Clare Short) I have got a list here of the countries which did pledge. Do you want me quickly to read it? Germany, 100 million, including any EU share; Denmark, 20 million; Iceland, 0.75 million—these are all dollars—Finland, 6 million euro, plus whatever the EU share is; the UK, 95 million, which is plus our EU share; France, up to 70 million. Is that in addition to the EU share?
  (Mr Faint) No, I think it includes the EU.
  (Clare Short) Okay. Netherlands, 68 million; Canada, the same share as last time; the US is now 150 million; Norway, 26 million; Switzerland, 33 million—these are all dollars—Italy, 60 million; Belgium, 17.7 million; Sweden, 32 million, so Sweden has put itself up; Spain says it will maintain the share; and Japan, 56 million.

  8. So it is all European countries plus Canada, the US and Japan.
  (Clare Short) Yes.

  9. I cannot believe that there are not any other sufficiently wealthy countries in the world who cannot put their—
  (Clare Short) This is the wider issue of the categorisation of countries and getting countries that become wealthier to come into the international development banks and the international system of donors. Singapore has just done that and I think that is the way to approach it, so that of course Saudi Arabia and the Arab countries have special loan systems.
  (Mr Faint) The Arab funds. There are various Arab funds.
  (Clare Short) I think the way to look at this systemically is when countries get to the point that they should move across and become a donor. Of course the countries about to join the EU are just moving across that line and that needs to be organised in a sensible way, but Singapore has moved.

Mr Battle

  10. We have spoken about the Trust Fund, but perhaps I could broaden the question a little bit because I think in some ways there is a sense in which there is a feeling publicly perhaps that we have had a go at debt and it is time to move on to fair trade. I think we ought to say that with the debt story really, yourself and the Chancellor have done a tremendous job to get the issue championed on the international agenda, leading that agenda and building up momentum and with a record, as you put it, for moving things forward and making real commitments. I think that is a very complimentary story and chimed in well with those who are asking the Government to do things and it got a very positive response, but could I focus on the connection between debt relief and the Millennium Development Goals. In other words, is it a means of transforming the whole? One of the phrases the Chairman read out from the memo was about realistic debt sustainability analysis and I just wondered, if we want to make the assessments more realistic, how do we make those links with what is actually going on in the country relating to the Goals and the process of debt relief? What would you see as the way for perhaps changing or improving or revising the analysis?
  (Clare Short) Well, I think there has been a wonderful, heart-warming public campaign across the world and very strongly in the UK on debt relief, but some of the detailed arguments have been economically muddled. There were even people saying that unconditional debt relief, for example, which as I keep saying in the case of Sudan probably would have prolonged the war, that has moved off, or sometimes people were saying debt relief, not aid, which is a muddle. You have got to see debt relief as one part of moving a country and the world forward on the Millennium Development Goals for our very, very highly indebted, very poor countries which have such an overhang of debt from the past, often by corruption, but they are in a position where the best possible development policies and economic policies can never get them out of it, so it needs to be written down so that they can adopt good policy and then grow their economy. Of course with this debt we are talking about foreign debt and that is highly linked to trade, clearing of the debt or bringing it down to a sustainable level that the country can afford, getting back a reputation for proper management of its debt and, therefore, being able to take responsible borrowing in order to grow its economy. That is a crucial part of some of the poorest, tiny, indebted countries being able to clear a backlog and being given a chance to move forward, but the countries which are being stars on qualifying for HIPC, the Ugandas, which was the first, the Mozambiques, the Rwandas indeed, they still need aid, considerable aid. These are very poor countries and still need support with institution-building and they still need better trade access.

  11. And they sometimes get it and they sometimes get additional relief, but sometimes that additional relief is not counted as additional and it is not included in the Completion Point in the debt sustainability analysis. I wondered if we were doing anything in terms of that analysis perhaps to ensure that additional relief is actually counted as additional so that you do not get in a country the argument, "Well, they are short-changing us and we are not getting what we think we should be getting".
  (Clare Short) Yes, we had this argument at the Development Committee annual meeting. The UK moved first and then I think all the other G7 moved to say, "We go to 100 per cent debt relief". Actually the Paris Club wrote us all in at 90 odd and in one sense it sounded better than it was in terms of the amount, but it was very important symbolically. There is now an absolutely disgraceful fiddle going on in that when the World Bank makes the calculations of whether countries are sustainable, they take into account the extra committed as to whether a country can go to 100 per cent, so this is an additional, voluntary bit more generosity and the countries who are not doing it are being subsidised. It is absolutely wrong that the calculation should be made in this way and we made a fuss about it and a number of other countries feel very strongly similarly, so yes, that is going on, it is outrageous and we made a fuss at the meeting and thereafter. The US does not agree with us.
  (Mr Faint) No, and one or two other countries.
  (Clare Short) Who else—Japan?
  (Ms McMillin) Japan, yes.

  12. The IMF and the World Bank, in their review of HIPC, said, "There are no reliable estimates of the costs of scaling up debt relief to achieve the Millennium Development Goals". I wonder, do you think that debt relief should be explicitly linked to countries' Millennium Development Goals financing needs? I think there is a proposal from the HIPC Finance Ministers at the Autumn meetings, which made sense, for, "The Bretton Woods institutions to present MDG financing needs in all HIPC and PRSP-related Board papers". Would you support that in your approach?
  (Clare Short) Well, I think you cannot look at funding a country to get to the Millennium Development Goals only through the prism of debt relief. You have to look at debt relief that is sustainable enough that the country can then trade and grow and is not constrained, but then it will need aid and other reform. You can look at how much debt relief is necessary to release a country that if it adopts the other policies and gets enough aid, then it can really drive forward in achieving the Millennium Development Goals, so clearing debt is a component, but alone cannot deliver a country to achieving the Millennium Development Goals. It needs other reform and it will need aid.

  13. I agree, but are the systems subtle enough to measure that at the IMF/World Bank end?
  (Clare Short) Well, we are back to top-up and sustainability on debt relief and it was always a pretty mean formula. The Cologne Formula was more generous to what was on offer before the great G7 in Birmingham and all the wonderful turnout of campaigners and then they went on to Cologne. A more generous formula was agreed at Cologne, but it was still less generous than we were hoping for at that time, so this question of knowing whether it is generous enough at Completion Point we have been working on ever since then, but the extra thing that has kicked in is both oil prices and commodity prices with oil prices going up and commodity prices collapsing. Then the formula does not work because, like the Ugandas, their earnings in foreign countries have gone right down because coffee prices have fallen, so we need to give countries more to get back to the original formula and the original formula was pretty mean. So we need more on debt relief to release countries enough to do the other things they need to do to move themselves forward to the Millennium Development Goals, but you cannot do it on debt relief alone.
  (Ms McMillin) We should not forget as well that there are other countries that are outside HIPC which are not heavily indebted, but which are poor and they also need help.
  (Clare Short) Like Bangladesh.

Hugh Bayley

  14. In the evidence they gave to us, the aid agencies who submitted a joint paper[2], the main UK development agencies argue that debt relief is the most efficient and effective form of resource transfer for a number of reasons. They say it is good economically in terms of being anti-inflationary and spurring growth, but they also make the point that it is good because it is de facto budget support. Where a country has reasonable standards of governance, budget support, I am sure, is the right way to go, but not all highly indebted, poor countries have standards of governance which give me confidence that if you put money into general budget support, it will be a more effective use of aid and a more effective means of developing development capacity than putting it into particular ear-marked schemes. To what extent does the Government believe that debt relief is the most efficient way of transferring resource from the rich world to the poor world?

  (Clare Short) I think to argue that debt relief is the most effective is again the same old muddle. Debt relief is an overhang which stops countries moving forward. It needs to be cleared, but then they need other things and to pretend that it is either aid or debt relief is that muddle and it is to fail to remember that it is foreign currency debt, that it needs clearing, but that countries still need to have their own revenues and to spend their domestic revenues well. They need another package of reforms and to label too much on to what debt relief can do is unwise. Debt relief is absolutely needed to remove this overhang and I am proud that the UK helped to shape the poverty reduction strategy as a way of giving debt relief, so debt relief has leveraged important reform in the management of public finances and who public spending is on and that is important too. To say it is de facto budget support I think is a bit silly. It is debt relief and debt relief is very important in the way that I have outlined and that we understand. In your other question on budget support, the most effective use of aid is backing poor countries, and it is always effective backing poor countries even when there is not a reform effort, but it is at its most effective in generating economic and social development per dollar spend where you have got a reforming country, you can get it into budget support and you can get into the systems of the country, then you can really drive rapid economic advance, more kids at school, better healthcare and those things which, in turn, generate a leap forward in development. We are a leading-edge player in moving towards budget support, but we do not go into rotten systems in a government. You say, "We are willing to move on budget support", but then we have to look at fiduciary risk, and of course what we are saying to countries is, "We'll help you with your financial management systems", and they have to be tight and good before we can contemplate budget support. Now, the beauty of that is that we used to protect our own money in projects where it was spent. If, in order to protect our money and our reputation to Parliament and our National Audit Office, we help countries tying up their own financial management systems, the prize is that the management of their own revenues is also improved, so where we can move there, we are leveraging more sustainability and more institutional reform, but we will not move there where there is fiduciary risk, though we will use our willingness to move there which means that a country's desire to be seen to deliver to their people as opposed to having donors delivering to their people and them delivering little, to try and leverage the kind of reform in their central bank, in their finance ministry, in the management of their own money. So there is always a better way, but we will never go there where it is risky, but we will help countries tighten up their systems so that we can move there and I think that is the right place to be.

Mr Colman

  15. One area of debt relief is of course the HIPC Initiative and the other area is the movements on sovereign bankruptcy and the Communique of the International Monetary and Financial Committee of the IMF on September 28 called on the Fund to develop for consideration at its next meeting, "a concrete proposal for a statutory sovereign debt restructuring mechanism to be considered by the membership". Could you outline what you would like to see in that concrete proposal and do you favour a market-oriented approach or an institutional or arbitration approach and who do you think should be the arbitrator? This would clearly be not just for HIPC countries, but what impact do you think this would have on HIPC countries?
  (Clare Short) This is very much a Treasury lead and a Gordon Brown lead, so I can report to you and answer the questions, but the reasons for that and the reason why DFID is not a leading co-player with the Treasury is that this is not so relevant to very poor countries. It is highly relevant to the East Asian economies and their kind of crisis, the Argentinian-type crisis where there is a lot of private sector investment, but if then a crisis starts flowing out of the country and you get a country into crisis, and then the IMF and the World Bank are having to come in to resolve the crisis and the private sector is getting off with a free meal and not having to play its part in some of the irresponsible investment it might have engaged in, so the idea for a bankruptcy procedure is to tie the private sector in to paying some of the price of some of the unwisdom of its investments which, in turn, led some of these countries into trouble. So it is a very important proposition, very complicated in the detail and so on and it really is much more relevant to moving towards middle-income countries with large amounts of or fickle private sector investment and then moving out at the time of crisis than it is to the HIPCs. In some of the campaign for debt relief there has been a call for a bankruptcy procedure as though it would be a free lunch, you could write off all the debt, it would liberate the countries and everything would be better, but that is not the proposition; it would not be a free lunch. What it is all designed for is to get the private sector to pay some of the costs and, therefore, learn to be less reckless. It is very important, but I think it is not as simple as it has been presented in some of the debt relief arguments as a kind of wonderful solution.
  (Mr Faint) It is of limited relevance to poor countries because the private sector role in HIPC countries' debt is very, very small and almost non-existent, so it is really a middle-income country issue and I think we do favour the work that the IMF have been commissioned to do. I do not think that really, as the Secretary of State says, it is for DFID to lay down government policy on this, but you would need to discuss that with the Treasury. We could obtain a note for the Committee on the position, I guess.[3]

  (Clare Short) I have a note here, but it is pretty silly for me to read out something I am not leading on in policy terms, and I hope I have explained clearly why not, and if there is any more detail that you want, I would be more than happy to provide it to you, but you understand what I am saying about the argument on debt relief, this idea that you could have a bankruptcy procedure and countries would be clear. If countries have a reputation for being bankrupt, they might never get any investment again. I do not think any country would be queueing up to be declared bankrupt. The Argentinas of this world or what happened in the East Asian crisis, it is a mechanism to get better procedures for dealing with those crises than actually chasing the private sector for an irresponsible investment, but it would be an enormous reputational question for a country to go bankrupt. It is not a simple exit from any problem.

  16. Secretary of State, I am sure that we would welcome perhaps a joint paper from DFID and the Treasury to explain what you would like to see in these concrete proposals. Jubilee Research of the New Economics Foundation, the successor body to Jubilee 2000, have been campaigning very strongly on this as being the second part, if you like, of the campaign.
  (Clare Short) I think they are wrong, as they are wrong on some other things.

  17. I hear what you say, Secretary of State, but clearly it is important for us, as the International Development Select Committee, to be able to take up the concerns that Jubilee Research are raising with us in terms of seeing this as a way of dealing with developing countries which are on the cusp of the HIPC Initiative, the Nigerias, the Bangladeshes, and whether they could actually benefit from this and, if in fact this is a proposal not yet laid out in concrete, whether there are ways of developing this proposal which is not only for East Asian countries, but also for those countries which have not come under the wire of HIPC, as it were, but are just outside. Is there not a way to mould this proposal to ensure that they also can see some debt relief?
  (Clare Short) I do not think so. I am not going to ask for a paper from my Department in an expertise that we lack. We are an extremely high-quality department and our expertise is good, but I am not pretending that we have expertise where we do not have it. What is proposed in the IMF in reality, because it is really about tying in the private sector to more of a sense of responsibility and helping countries through crises, is very much a Treasury lead. Now, if there are specific proposals from Jubilee Research, who do make proposals which I think are ill-informed quite often, and I am an enormous admirer of the campaign, but it does not mean that all the arguments put by some of the campaigners are economically useful to developing countries, but if there are specifics where they think this would help poor countries, then we will answer that and if you give me their points, we will come back with an answer, but the real details of where we are in these very complex negotiations going on in the IMF to try and bring these procedures forward, I need to get from the Treasury for you because that is where the work is being done.

  18. Can I quickly bolt this on to a further area which you also may well say is Treasury-led, which is the decision on special drawing rights where I understand that every country within the IMF was actually supporting the issue of these special drawing rights at the February meeting of the Bank, except the United States. What was the position at the Autumn meeting and how do you see the situation going forward on this which clearly again would not be an advantage, I understand, for HIPC countries, but would actually add to liquidity in many of the developing countries and many of the accession countries in Eastern Europe?
  (Mr Faint) I believe that this proposal for SDRs is one that has been under discussion for a long time in the IMF and it actually involves some differential issue of SDR amongst the Members.
  (Clare Short) It has been around in negotiations and they have to all be put through all the different countries. It does not bring any benefits to developing countries. Soros came up with the proposal for countries to donate the extra SDRs to developing countries, but it is all going nowhere and the US, amongst others, does not agree. That is my short memory of it.
  (Mr Faint) The US Congress is blocking that, I believe, at the moment.

  19. If I can press you a little further on this, the Chancellor of the Exchequer in his Marshall plan that he issued in February prior to the Spring meetings of the Bank clearly stated that SDRs was a way forward, not for the least developed countries, but for in fact providing aid to those countries outside the HIPC Initiative and in Eastern Europe particularly.
  (Clare Short) No, it did not actually.

1   Ev Back

2   A Joint Submission to the World Bank and IMF Review of HIPC and Debt Sustainability, August 2002 (www. Back

3   Ev Back

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