TUESDAY 14 MAY 2002

__________

Members present:

Tony Baldry, in the Chair
John Barrett
Mr John Battle
Mr Piara S. Khabra
Chris McCafferty
Mr Andrew Robathan
Mr Robert Walter
Tony Worthington

__________

Memorandum submitted by DFID/HM Treasury

Examination of Witnesses

RT HON GORDON BROWN, a Member of the House, Chancellor of the Exchequer, RT HON Clare Short, a Member of the House, Secretary of State for International Development, MR GUS O'DONNELL, Managing Director, Macro-Economic Policy and International Finance, HM Treasury, and MR BARRIE IRETON, Director General (Programmes), Department for International Development, examined.

Chairman

  1. Chancellor, Secretary of State, welcome. Subject to anything you would like to say, I thought, how we would play it, Chancellor, is, if you and then the Secretary of State might like to make an opening statement, then we will have some questions which we will put to you, and, I think, between you, decide how you would like to answer them, and indeed whether Gus or Barrie want to answer them. And then, subject again to anything you want to say, we thought we would try to take this reasonably briskly, to finish by about 5 o'clock, if that is convenient to you, so it gives us about an hour and a half maximum; is that okay?
  2. (Mr Brown) That is okay; thank you.

  3. So, Chancellor, do you want to start off?
  4. (Mr Brown) Yes, thank you very much, Chairman. It is a pleasure to return with Clare Short to this meeting of the International Development Committee, to thank you for the work that you do and have done, and to record that in the last five years I believe that your support has been vital in ensuring a restructuring of debt, which has enabled 26 countries now to obtain substantial debt relief, agreement around achieving the Millennium Development Goals, that by 2015 we must halve the proportion of people in poverty, cut child mortality by two-thirds and ensure every child has basic education. And, of course, the Monterrey Consensus, which you are discussing today, that development aid be seen not as charity but as investment in building capacity for growth; and what I believe is the makings of a new deal for the global economy, that, in return for developing countries pursuing corruption-free, pro-stability, pro-investment and pro-trade policies, developed countries should substantially increase the development aid they are prepared to offer in the run-up to 2015. Clare Short will be able to talk about all areas of international development, of course, but I want to say something specifically about debt relief and finance for development, so that we build a virtuous circle of debt relief, poverty reduction and sustainable development, in order that no country genuinely committed to good governance, economic development and poverty reduction, and to the opening up of trade and investment, is denied the chance to achieve the 2015 goals through lack of resources. Twenty-six countries are now receiving debt relief, but because of difficulties, as a result of low commodity prices and economic decline, and because some of the earlier forecasts made by the international institutions for growth were overoptimistic, we estimate that we will need a further $1 billion from richer countries to drive forward the implementation of HIPC and ensure its full financing. And, starting from the Halifax G7 Finance Ministers meeting, we will be asking the international community to come up with a plan that would mean ensuring the full financing of the HIPC initiative, and the systematic topping-up at completion point to ensure that no country exits the HIPC process with an unsustainable debt burden. The Zedillo report estimates, if we are to succeed in achieving the Millennium Development Goals, an extra $50 billion will be required each year until 2015; to raise investment by $50 billion would require unprecedented action, but I believe it is not beyond us. Together, pledges from the European Union and the United States, made at the Monterrey Conference, would raise $12 billion a year more for education, health and anti-poverty programmes from 2006, which means there is a reversal in a 20-year decline in aid levels. And I propose we ask Europe, America and other countries to maximise the benefits from the development aid spending by examining, as a matter of urgency, the means by which this $12 billion a year boost can be made to go much further, and its benefits maximised, by dissociating aid from the award of contracts, to maximise the impact on poverty, against, anti-poverty programmes could be as high as 20 per cent. More effective use of aid could produce extra resources; a greater focus on the poorest countries and better collaboration amongst donors, including the pooling of budgets, could also maximise the efficiency of aid in diminishing poverty. Overall better allocation, co-ordination and untying, by bilateral donors and by international institutions, could make aid 50 per cent more effective. Developing countries must, of course, show that the funds they have received are properly and effectively used, ending corruption, meeting their obligations to pursue stability and creating the conditions for new investment, so that we can ensure the resources go to fighting poverty. This is a new deal, where, in return for developing countries pursuing these policies, developed countries would put more money to increase vitally-needed funds to achieve the Millennium Development Goals. Now, in recent months, many proposals have been made for new and innovative ways to meet the funding gap, the Tobin tax, arms tax, Special Drawing Rights, and it is right that we examine the practicalities of these proposals. One possibility is to leverage up the new resources promise by Europe and the US through an international financing facility, or Development Trust Fund; if national governments offered a guarantee, either through callable reserves or appropriate collateral security, then additional aid contributions could be levered up in the years to 2015 to meet the $50 billion target, so ensuring that the $12 billion already committed to additional aid goes further and its benefits are maximised to the advantage of all. We will advance only if we advance together, and that means that each country must play their part, accept their responsibilities and go further than they have been prepared to go in the past.

    (Ms Short) I would like just to say a couple of words about where Monterrey fits into the action we have been trying to take to get more coherence and more united effort into the international system. Because, as you know, international development is littered with conferences, that make grand declarations that are never implemented, littered with initiatives and announcements, made by important people when they go to these conferences, that simply recycle the existing money around the fashion of the moment. We have been working since 1997 to get better global governance, really, and, as you know, the UN conferences in the nineties came up with a series of targets, the OECD adopted them in the DAC, the International Development Targets, we then took them back to the UN, and they started saying, "Don't impose these OECD targets on us." But we worked on, and the Millennium Assembly of the UN, reaffirming the targets, now named the Millennium Development Goals, at a meeting of the UN attended by more heads of state and prime ministers than have ever previously attended, was step one. Step two, Doha, Trade and the Development Agenda, and that was a shift in the international mind set, we have got to deliver on it, but to get the world agreeing there will be a trade round that will focus on delivering advances to developing countries. Then Monterrey, Financing for Development, where is the money coming from, and not just where is more aid coming from, that is an issue and I am sure you will come back to it, but how do we maximise the flows from trade, from how developing economies run themselves, to grow their economy, to have better revenues, to get rid of debt overhangs, so that they can use their revenues better. And the final bit in the jigsaw is Johannesburg, WSSD, can we get the environmental lobby to join up with the development lobby to be working for a sustainable planet; rather than a north of the world that is almost anti-development and not looking for sustainable development, we are looking for conservation. So I think we are making great advances in getting coherence into this international picture and into all countries agreeing. And Monterrey was very important, in that the developing world and the OECD countries agreed on what the reform agenda is to deliver to the poor of the world; that is unprecedented in human history, and very post cold war. That, now, what reforms are necessary to get the best balance between what the state does, what the market can do, internationally and nationally, was an enormous gain, and most of that was done before the meeting in Monterrey, the preparatory process was very good and went well. But I think it would have gone sour without the commitment to more aid, and the commitment from Europe, which is yet to be delivered, but helped to leverage the US feeling then that they had to commit. And I think, now, we have got to get WSSD right and then drive the world into implementation and stop having so many conferences, and, if we have conferences, let us just check on delivery, rather than have any more grand declarations.

  5. I think that all sounds very good sense. Can I just ask some questions about the International Development Trust Fund; now I am really just trying to understand how it works. In the Red Book, it very fairly comments on the significant increases in Official Development Assistance, goes on to acknowledge that there will be a need for an extra $40-$60 billion a year, and then speaks of the Chancellor's proposals for the International Development Trust Fund, to pool contributions and to leverage private sector finance. I then go to the 'Responding to the Challenges of Globalisation', the joint paper between the Treasury and the Department, and it talks about the International Development Trust Fund - sorry?
  6. (Ms Short) It is just the Treasury.

  7. Just the Treasury, this one, yes; there was another one between the Treasury and DFID. It talks about the International Development Trust Fund, and I am not quite clear how the private sector gets involved and where the leverage comes in?
  8. (Mr Brown) I think this starts from the Zedillo report, which I think you all are aware of, and I have been talking about in recent weeks, and there are certainly some submissions to your Committee that mention it in detail. What Zedillo was saying is that if we are to meet the International Development Goals by 2015 then we will need an extra $50 billion a year, I think $10 billion for education, $12 billion for health, $20 billion for the anti-poverty programme; so there is no doubt about the scale of the additional cost that would have to be met, if we were to meet these Millennium Development Goals. And I think it is quite interesting that the World Bank has got similar figures, and also I think Kofi Annan, of the United Nations, who obviously was involved very closely with Zedillo, talks about this figure of $50 billion. Now the question then is, how do we raise that $50 billion, if that is the sum of money that is necessary; and a great deal, indeed, as I said in my opening remarks, could be achieved by the better use of existing funds. And we believe, as Clare says, that, in maximising the effectiveness of delivery, particularly redirecting some of the resources, for example, the EU budget to the poorer countries, we could make a difference; but there will still be a gap. What happened at Monterrey was really two things, as far as finance. First of all, the European Union made this collective commitment that no country would be less than 0.33 per cent by 2006, and that, collectively, the European Union's total would be 0.39, and that would be, essentially, moving from 0.33 to 0.39 in the space of the next three or four years. That would involve an extra $7 billion a year by 2006, according to our estimates; then the Americans made this additional commitment that they would run up to 2006 by increasing the amount of aid each year, that by 2006 they would be spending an extra $5 billion. So we have $12 billion extra that is to be made available. If all these commitments are honoured, and that requires a great deal of discussion, we might talk about this within the European Union, about how each makes their contribution to the whole, because, as you know, some countries are at 0.7, some are beyond that, some, like us, are below the 0.39, and others are very substantially below 0.39. Now the question then is, is it possible for there to be a financing facility, not too dissimilar from what had to happen when the international institutions were created after 1945, that, by putting this additional money to maximum effectiveness, by drawing in potentially private funds, could we actually raise the $50 billion that was necessary, from now, or from 2006 to 2015, on the understanding that, if we were to achieve that by 2015, in other words reduce poverty substantially, it may require us not to do as much after 2015, but that is open to question as well. And then the question is, could countries guarantee, over a period of, let us say, 30 years, that they would provide X amount of money, on the basis of that private funds lever up the $12 billion to a greater sum of money in the immediate years to 2015, on the understanding that there is a guarantee provided not by the indebted countries but a guarantee provided by the richest countries. And that is really what the proposal is about, it is not a fund in the normal sense of the word, it is a facility, and it is not intended to overrule the existing flows that are being guaranteed by individual governments, or by international institutions, but it is an attempt to maximise the use of a large sum of additional money that is being committed by Europe and America, and potentially also, I would hope, by Japan reverting to being a country that is increasing its aid, rather than cutting it. And this is where the debate with Finance Minister colleagues and with some of the international institutions, as well as private financiers, will have to take place, over the next few months. Now, as you know, there have been other proposals, like Special Drawing Rights and Tobin tax, and everything else, but each proposal comes back to this essential question, are the individual countries who are the donors prepared to do more, because it requires political will, whichever solution you come to, whether it is a Tobin tax, or whether it is Special Drawing Rights, or some of the other proposals, and this is one proposal that we believe deserves some consideration. But I think there is an assumption that somehow it is a fund in the normal sense of the word; it is not. There is an assumption that it would override the existing mechanisms, like the Poverty Reduction Strategy facility; it would not. It is essentially a financing facility that we think should be looked at amongst the other proposals.

  9. I think we all endorse the Secretary of State's view, that we should try to limit the number of initiatives that we are taking, and try to ensure, so far as is possible, we are all singing from the same hymn sheet; and I do not know about other colleagues, but I am not sure that I would pass the examination question on the International Development Trust Fund, as yet. And I was just wondering if you could let us have a briefing note, that we could then all feel confident that when we are in, say, the United States, or meeting colleagues in Europe, or elsewhere, we actually feel confident we know, that, for example, that is the first time, I think, it has been explained, it was a facility and not an actual fund, and so on. I think that would be very helpful, Chancellor?
  10. (Ms Short) Can I just say one thing. I am sure Gordon will provide that, and there is one thing I would say that might help. The World Bank has a Triple A rating borrowing capacity, because governments are committed to cover it, and therefore borrows very cheaply and lends to middle-income countries the IBRD part of it, and part of the net return on that subsidises IDA for the poor countries. So, just as a help to explain some of the types of thinking, I think it helps clarify the idea. But the other thing I would like to say is this. Of the $51 billion we have got in the international development system, in ODA, it has just gone down because of exchange rates, and so on, if it was all untied and if it was all distributed as well as IDA is, the concessional arm of the World Bank, in terms of backing reformers where the poor are, effectiveness in reducing aid, we could make the existing $51 billion be 50 per cent more valuable; and then, of course, we have got the extra 12 promised, and then we are getting near the $100 billion. So we must drive on both. And I think we increase our public's confidence in aid when we show we are using it well and it is really getting children into school, lifting people up. So when you are going to America, and all that, if you could also get people to disburse what we have got already more effectively, we can bring very quick improvements, and then, of course, the EC money; if we could direct that properly we could enormously improve development effectiveness.

    (Mr Brown) I would certainly be very happy to give a paper showing the framework of the proposal; but it is one of many, obviously, that are on the table. And, while I do accept what you say, that if there is a surfeit of proposals then it becomes very difficult to know what is the best way forward, the problem is that each of the other proposals, like the Tobin tax, the Special Drawing Rights, and you may want to come on to this during our discussion, has very substantial drawbacks and they have failed to command the international support that is necessary for us to raise the level of finance over a short period of time so that we can achieve the Millennium Development Goals.

  11. I am sure we will go on to Tobin tax and Special Drawing Rights, but the International Development Trust Fund is HMG's proposal, that is what you are taking forward.
  12. (Mr Brown) We have always said it is one option, and we have put it on the table as something that should be discussed amongst Finance Ministers and amongst the international institutions and the private sector. And we have said all along that we are ready to examine all practical proposals, we invite other people to put forward proposals, if they have them, but this is one thing that ought also to be examined, as part of an attempt at resolving this issue of raising the finance necessary, in a relatively short period of time.

    Chairman: I think all of us on the Select Committee would want to feel able that we could respond constructively and in an informed way, if we are asked about it.

    Mr Battle

  13. Could I go back to general principles. I think, Chancellor, you said in your opening remarks, aid is not charity but investment, and just to invite you to say a few more comments about that, of why does Official Development Assistance actually matter? There has been an argument that it is trade and investment we should concentrate on and forget aid, and some even argue that aid undermines the ability of developing countries to actually develop their own financial incentives, not a view I share; but what would you say to that, and why would you say that Official Development Assistance actually matters and is important?
  14. (Mr Brown) I think, in a sense, this is a question that is best answered by Clare, because she is actually providing the investment aid through her budget. But if I just say, by way of introduction, that what we envisage is, what we call, a new deal, that, in return for developing countries being prepared to pursue corruption-free and pro-stability policies that will add to trade and investment as a result of the pursuit of these policies, we too have an obligation to help these countries increase their capacity for development. And when we say we are not talking about charity, what we means is, the end must be to increase the capacity of the poorest countries to develop, so that not only are they free from poverty but they actually have policies that can give them sustainable economic development in the longer term. And, therefore, I do not regard this as pursuing trade and investment or giving people aid, it is necessary to encourage policies that will give the chance of economic development. But there is absolutely no doubt that, when we are talking about health and education and anti-poverty programmes, these cannot be done properly without the richest countries being prepared to devote a higher share of income to the poorest countries. And when you look back on the 1940s and the Marshall Plan, which was conceived by America to help the restructuring of Europe, at that time it was 1 per cent of American national income that was transferred for a period of time into Europe, the benefits to America being in increased trade as well as the reconstruction of Europe as a social issue. What we are talking about with the $50 billion is not 1 per cent, it is just 0.1 per cent, and it ought to be possible, with the political will available in the richest countries, for that to be done.

    (Ms Short) If I could add. I sometimes say, we have got to get international development out of the charity box into the investment and economic box, and it is not that there is anything wrong with charity, but, if we have got rules of trade and other ways we run the international economy and we cannot resolve conflicts and we are just giving out dollops of money to very poor people who are absolutely dependent, this is not development, it is charitable relief for people who are in desperate straits. So the conceptual move, to say, create the capacity of a state to run its economy well, therefore that its economy will grow, its banking system is competent, its management of its own revenue systems are competent, that is one reason you need to deploy aid; there are lots of failed and weak states around the world which just need strengthening to have the competence of a modern, effective state. The other thing is, there are so many economies, least-developed countries, with $200 a head GDP, even if they run themselves as competently as it is possible to run them, it will take hundreds of years before they can afford to have healthcare for all their people, or all their children in school. So then some resource transfer behind the reformers can speed up how rapidly a country can move to universal primary education, for example, and we know that that, in turn, speeds up the development of a country. So then you are deploying the money in a way that has got a strategy behind it, that will bring sustainable change, that will help a country to lift itself up and lift its people up and be able to go on, rather than giving handouts to desperate people who just have no chance of improving the prospects of their lives.

  15. In the joint DFID/Treasury memo., paragraph 12, there is the statement: "The UK is determined to be at the forefront in the fight against global poverty. We are committed to the target of raising ODA to 0.7% of national income." If I remember rightly, in 1979 it was round about 0.4 per cent, just slightly above 0.39, in 1997 it was 0.26, it is increasing now, it is currently, I think, 0.32. Could I ask you, when will the UK Government commit itself to a timetable for actually reaching that 0.7 per cent?
  16. (Mr Brown) We are committed to 0.7 per cent. I think what we will announce, in the coming Spending Review, is where we can reach by 2006, because that is where the Public Expenditure Review figures would lead us to, and I hope that people will not be disappointed by the agreements that are reached as we go to 2006.

    (Ms Short) So do I.

    (Mr Brown) And Clare is particularly hopeful that she will not be disappointed by what is agreed. And we have already said that there will be a substantial increase in aid.

  17. I know I cannot expect you to give us the particular number now, but if I just - - -
  18. (Mr Brown) Tempting as it is, to this Select Committee.

  19. Tempting though it is; we might be disappointed if it was only 0.39 and, the average of everyone else, we will perhaps see that as a marker to move beyond that, if that were possible?
  20. (Mr Brown) I think you will have to wait, but I think you know that we have made a commitment to substantially increase our aid; but that is a matter of discussion, depending on what resources are available in the Public Spending Review. I think the interesting thing about what has happened over the last few weeks, and that is why I think this is a very important opportunity for us to discuss this at the Committee, is that, for 20 years, aid has been going down, indeed, the figures published today are not themselves encouraging about what happened in the previous years; but these two commitments made by Europe and America are a reversal of the trend. I hope that Japan and other countries will be in a position to do likewise soon as well. And we have got to make a reality of these changes, and we want to play a part in working with other countries as they raise the levels of aid as well.

    Mr Battle: That is encouraging.

    John Barrett

  21. Coming on to the 0.7 per cent target, and debt relief and aid both work towards that target, would there be any advantage in separating debt relief and aid, because the general perception is that aid is increasing, but if debt relief is increasing faster it could, in fact, reduce on the way to that 0.7 per cent target?
  22. (Mr Brown) To a large extent, we have already made our commitments on debt, the 100 per cent debt relief, and the extent to which we are committed by the actual expenditure, or the wiping out of liabilities, is now on whether countries can actually come forward; and the biggest barrier at the moment is conflict countries, as Clare would testify, because she has been very much involved in trying to help these countries. There is a special facility set aside to help, Post Conflict Assistance, but of the 26 countries which have gone through, I think, $62 billions of debt relief have been given. I think, in our case, we have done quite a lot so far, and what is preventing us doing more, although we have budgeted for much of that, is the countries that are currently in conflict. But I do not see the relief of countries from the debts of the past and the granting of overseas aid as any way in conflict; obviously, you would want the maximum amount of resources to be made available to enable us to do both.

    (Ms Short) But if I could add, you are on to something here, in that, obviously, the debt that, well, of the $100 billion for debt of the HIPC countries, I think, crudely, it breaks down to about 50 per cent of it is to Export Credit agencies, and about 50 per cent to the international financial institutions, the IMF, the World Bank, and so on. And the Export Credit debt, which for these countries is never going to be paid, as everybody knows, but is being used to leverage much better policy, that really is bringing benefits to the poor; once it is written off it counts to ODA/GNP, for all countries. So you have got new money spend and you have got, when the debt relief is completed, it goes into the ODA/GNP figure; and that needs watching, I agree with you.

    (Mr Brown) And it is true, I think, 65 per cent of the money that has come from debt relief is going to education and health, so it is encouraging.

    Tony Worthington

  23. If I can just follow that through. I think, to the person in the street, it would seem rather odd that debt relief money should be added to ODA, there just does not seem to be a logic to it, does there?
  24. (Ms Short) Barrie, would you like to comment? Because, as you all know, the DAC, it is in the Development Committee part of the OECD where the figures on what counts as ODA are worked out, and obviously you have got to hold it in common across the world, and you have enormously convoluted discussions there, about what is included and what is not. Do you know the origin of this, Barrie?

    (Mr Ireton) Yes, Secretary of State. When debt relief started, in the form of the Export Credit relief, under Trinidad terms, back in the mid/late eighties, it did not count as ODA; the DAC then took a decision, in about 1992, I think it was, that it should count as ODA, and it has been counted ever since, provided it is debt relief that is given for the purpose of assisting a framework of economic reform and poverty reduction. That is the origin of it.

  25. I may be completely misunderstanding, but it sounds as if the Chancellor allocates so much money in the UK for ODA, and other Chancellors do, and then, if more countries go forward for HIPC and are successful in HIPC, they would get fewer projects, or less aid, for new things; that is not how it is?
  26. (Ms Short) No. When we have completed our Comprehensive Spending Review, the Chancellor will make decisions about the budget of DFID; that budget, in cash money, we will deploy for developing countries, and that is cash money, and it gives Britain an ODA/GNI, as it now is, ratio. But, on top of that, as and when countries qualify for their debt relief, money that is written off as debt would be added to the ODA/GNP ratio; so nothing comes out of the budget, apart from what we put in the HIPC Trust Fund in the World Bank, but the ODA/GNP ratio might go up or down, depending on the debt relief that comes in that year. It is just to be clear. Do you want to add to that?

    (Mr Brown) Yes; and, remember, we have got different estimates for how much we may have to cover for debt relief, depending on how many countries can come through the process, and some quite big countries have not come through the process, and, therefore, if they were to do so, and we would want that to happen, we are committed to the 100 per cent that we announced some time ago. But I think it would be a mistake to say that you should take no account of the amount of resources countries are prepared to put up through debt relief, in looking at what the contribution is to overseas development. What you may want to say is that debt relief is an important part of that, but equally we should not neglect any other area as a result of our commitment to debt relief. But, I think, if other countries, for example, were to be told that debt relief had no bearing on what was published for Overseas Development Aid as a percentage of GNP, they might not be as keen to enter into the process. I think you should take that into account, rather than say that there is a contradiction here, you should just take it into account.

  27. But it is a question we are asked, and I think it would be one of those situations where another note would help, of what you have just said here, because it is a complicated situation?
  28. (Mr Brown) Yes. Can I say that what I did say in my introductory remarks, and, again, you may wish to come back to this, is that we have identified certain problems, as we move from decision point to completion point, partly because of commodity prices, and so on, and we know that a greater international effort will have to be made in that direction as well. But, again, I think it would be unfortunate if you recommended that the amount of money put up in debt relief should not be taken into account in ODA, because it might discourage some from being committed to it. But, I think, as you rightly say, it should be taken into account when you look at how well people are doing.

    (Ms Short) But there are two categories, and we will put this in the note, and it is good to clarify. I think there is a lot of muddle in the public debate, because, of course, because of commodity prices, we are going to need another billion dollars for the HIPC countries to reach sustainability, as proposed in the original HIPC scheme, and we will have to find cash money for that, either in the Trust Fund of the World Bank and IMF, which would come out of cash ODA, or, if we can, some of the grants that are proposed in IDA. So that will not be notional money, that will be real cash money. That is the problem, is it not, it is the notional versus the cash that causes confusion in the debate; but we can clarify this in the note.

  29. Can I move to the business of the effectiveness of aid, which DFID has been majoring on, really; if we could make the money work better, that would be, in a sense, a cash injection into the economies of these countries. Would you go through what are the major areas where the effectiveness of aid has to be improved; obviously, something like untied aid would be one area, but could you take us through the targets that DFID are setting, in order to measure whether aid is becoming more effective?
  30. (Ms Short) Yes. First, untying; we have completely untied all UK aid. It sounds (techy ?), but did you visit the wire factory in Ghana?

  31. Yes.
  32. (Ms Short) Some of you did; well then here is a man who sets up a business in Ghana, a poor country that needs to grow its economy, because he knows they are going to electrify. He buys the equipment to make wire, then he finds that most of the electrification is being funded by aid, which means the wire is all being purchased back into European and North American countries. That is just an example of how untying fails to get that Keynesian multiplier effect that you normally get; it has worse effects than that, because, of course, if you have got a fleet of vehicles because you are doing your health service, to a German, to a French, Korea, British, duh, duh, duh, then all the spares and all the maintenance, it is gross inefficiency on top of that lack of a Keynesian multiplier. And, do not forget, most of the aid in the world is still tied; and so not only is it a sort of disgrace, because it is bundled with ulterior motives, it is making that aid less effective and its knock-on economic growth that will benefit that economy and help it to improve itself. And there are varying estimates of the value of untying. There was a World Bank study that gave a 20-odd per cent figure, I think that has been reassessed recently, to, say, maybe 12 per cent. But we have got $51 billion this year, 12 per cent of that is a lot of money for a lot of poor people around the world, a lot of kids who could go to school, a lot of people who could get healthcare, or whatever. And then, similarly, where the aid is deployed, you know about how ineffectively EC aid is deployed; very big resource transfers to middle-income countries have very, very limited effectiveness in reducing poverty. In fact, what they often do is prop up the failure to engage in social reform. If you take Brazil, or the Latin American countries, the most unequal countries in the world, if, because they have got lots of poor people, you give them money that they give out to those poor people, they do not have the pressures in their political system to get all those children into school, or to include the excluded in a way that will benefit their economy, as well as get more social justice. So lots of aid, EC being one of the major bad players, but there are many others in the world, is deployed for political reasons on projects that do not reach the poor, that do not create sustainable reform, across the international system. And the Collier dollar work, which I presume the Committee has looked at, has looked at where, when you deploy aid, is its maximum poverty-reducing effectiveness, dollar for dollar, and it is where there are large numbers of people and where there are reformers; and, by the way, it is both. Even where there is a lack of reform but where there are large numbers of poor people, if you can get it in effectively, it still has high effectiveness in poverty reduction. So it is deploying it where the poor are and taking account of where reformers are. And then the third sort of tranche of things that need to be done is deploying it in a way that does not have a massive, costly, bureaucratic tail. You know, the famous Tanzanian case, highly aided, 30 major donors, 1,000 major projects, 2,500, or something approaching that, aid missions a year, each with their own evaluation system, accounting system, bank account in the central bank, using up all the resources of the Finance Ministry in accounting to the donors, and thus eroding the capacity of the state, instead of strengthening it. So this harmonisation, getting behind the budget, not having separate projects and plans for everything but strengthening the capacity of the country to run its own systems, makes it less administratively burdensome and more effective in building up the capacity of a state to run its economy better and provide better services for its people. And it is these three kind of bundles of reform.

  33. The extra $5 billion that is coming from the United States is, of course, tremendously welcome, but I have got an awful fear it is going to be bad aid, in the sense it will be tied aid, it will be highly conditional aid, it will not go in a co-ordinated way, it will be political aid, and so on. Can you reassure me that I am wrong on that?
  34. (Ms Short) It is true that the US has been very critical of budgetary aid, which we think, in the end, is the most effective, you cannot give it unless the country will tighten up its procurement systems, its public expenditure systems, and the prize is, in order to account to our own Parliament for the good use of money, you have helped a country tighten up its own systems and get rid of the great bureaucratic burden. The US has never been attracted to that, resisted that in the Board of the World Bank, and so on, under the previous administration, not just this. But having amounts of this extra money, and, by the way, I think it is $10 billion up to 2006 and then $5 billion a year thereafter, it doubles, the original President Bush announcement was $5 billion, and then, maybe, I do not know, because the mood was good at Monterrey, it increased, so we had a second and more generous announcement. And the US is now consulting with all its partners in the international system about how to deploy this aid. It has said it will not deploy it through US Aid, in the way that it normally does. And our Permanent Secretary has had discussions with them, and the invincible logic that the test of economic reform is systematic poverty reduction is becoming a significant part of the discussion. So we are not there yet, but the discussion is going reasonably well, and they are doing kind of open-minded consultation with other players in the world. And I think some of them are coming here, and there is some suggestion we are meeting with the all-party group, or something, as part of the consultation about how to use that resource. So that is well worth working on.

    Mr Robathan

  35. Secretary of State, if I can take you back to untying of aid, for which you made an extremely good case, the question I would like to ask you is, has our good example, originally taken, I think, in 1997, for major projects, has it been followed by others, and, in particular, how many of our European partners have now untied all their aid?
  36. (Ms Short) In 1997, we got rid of mixed credits, which is using the aid budget to subsidise contracts from the private sector into developing countries; and then it was the second White Paper when we got rid of any tying of any of our aid. We have also been working very hard, in the Development Committee of the OECD, to get other countries to untie it, with enormous difficulty; and we got agreement, not that long ago, that all would untie, project aid only, or something, to the least-developed countries, and we had sweated blood for that, all the members of the DAC. There is another issue alive, which is whether the EU countries will untie to each other; we think they are in breach of the Competition Directive on that, and Action Aid made some proposals, and I think The Netherlands Government is taking that forward. And then, in Monterrey, the document commits to movement on untying. But when you see how difficult it is to get progress in this, you see some of the vested interests, that are not about development, that we have got in the international development system. So we are creeping forward, but it is enormously difficult; but we are dedicated to making progress.

    Chris McCafferty

  37. Secretary of State, I was reminded, when you were talking about the difficulties of separating trade from aid, of when the Committee visited Pakistan, in November, and we saw a classic example of UK money being spent locally, on the border of Afghanistan, around Pakistan, buying grain locally and it being delivered much more cheaply and faster than the UK aid was being shipped in from the mid-west state, probably at considerably more expense and taking a lot longer to get there, but obviously it was helping the mid-west farmers. So I think there is an issue there of how you persuade a big country, like the US, to look outside of itself. On the point of how best to engage the US in development issues, I have just come back from the UN Summit on Children, and I have to say that I was in total despair about the attitude of the current administration to children's rights. I understand that Somalia has now said it will sign the Convention on the Rights of the Child, then, if that is the case, it will leave the US as the only country that has not signed it. In particular, I am sure you are aware, they forced the removal of the word 'services' from the paragraph on reproductive health, they wanted the definition of 'families' narrow, and they refused to have the paragraph on the abolition of the death penalty for under-18s included in the statement. Now, to me, all these things are very pertinent and important, and I just would like your comments on how are we to engage the US in development issues, when they clearly have a very different approach to issues of sustainability, and certainly access to reproductive health, I think, and education of girl-child; and access to services for young women and children, education for children, is very, very important?
  38. (Ms Short) Yes. On your first point, and Gordon might want to come in on the Children's Summit, because he has been there, was it last week, or the weekend, whenever it was. On food aid, your first point is about food aid, and there is a Food Aid Convention, it might be a thing that the Committee wants to look at, at some point. A lot of it was driven by OECD countries getting rid of food surpluses, and that often leads to very bad food aid, because, of course, in absolute emergencies you have to give people food, but if you carry on for too long you undermine the local economy, you undermine local agriculture. Now handouts of food can be very destructive for an economy, and that has happened to part of Ethiopia, it was so food-needy, but now it has constant food aid, even when it has a good year agriculturally, which Ethiopia is looking at. The UK, all our resources for food aid are given in cash, so that the food can be sourced as locally or regionally as possible, so that both you do not have all the costs of all the shipping and the multiplier effect on the economy. We have got the FAO, International Hunger, whatever it is called, a Hunger Summit, five years on, coming up soon, and you might want to keep an eye on this; this is an area, again, where we need to have reform, and you are right on the point, and we need to push the international system forward. I am aware of the US position at the Children's Summit. It is amazing that the US and Somalia are the only two countries in the world that have not signed the Convention on the Rights of the Child, and I did not know that Somalia was going to sign, but well done Somalia. And I am aware of the position they took on reproductive health services, and the abolition of the death penalty, and lots of our hard-working officials in the UK delegation in New York stay up all night negotiating these texts, so as not to give in on the point. We did get a reference on the death penalty, the undesirability of the people under 18; and the whole thing on reproductive health services is that they do not want there to be any abortion services to be available anywhere in the international system. So end games are played over languages, you know. But we think, after an enormous struggle, we have protected the principles that had been agreed at Cairo. But, I have to say, this is a big question; is there any point in having these plus-five conferences, where you make no advance and you have an enormous fight to defend what was achieved in an international consensus. Because Cairo was "Let's do reproductive healthcare by choice and respect people's choices, and have no forced population control but give people the right," and we did not need to re-examine that; but if you have the plus-fives, you spend a lot of energy just defending gains that were made before. It is difficult. The US, probably because it is such a big country, it does live in a different discussion than a lot of the rest of the world, on development issues, but it is worth engaging; one, you cannot not engage with the world's biggest economy and the world's only great power. But, on the way to Monterrey, the US delegation said, "Don't need any aid, we're against aid, capitalism's the answer," and a few other things, and were not very helpful; and we ended up with the Monterrey Consensus, which is a breakthrough in the agreement of the world. So we struggle on. And the US often does change its position, and does take very confrontational negotiation tactics, which probably Gus can testify to. Do you want to say anything about the Children's Summit?

    (Mr Brown) I was not involved in the discussions on the communiqué, on which Hilary Benn and John Denham were doing very well for the United Kingdom. But I would just reiterate this point that Clare made. Nobody expected Monterrey, which is what we are really discussing today, to produce additional resources in the way that it did. The European agreement came quite late on; the American agreement was perhaps even more surprising, given what had been said previously. And, as Clare has said, the figures have been raised substantially since the original announcement was made by President Bush. We move on to the G8 meeting in Canada, where there is to be discussion on the African Partnership for Development proposals, and, again, I think the US, like other countries, are engaged in looking at what more can be done in relation to African development, and again it is a deal in return for certain things changing, more money is available for education and for health. Paul O'Neill, the American Treasury Secretary, is about to leave for Africa, to visit many African countries, with Bono, and over the next few days I think you will be hearing the American administration saying some quite positive things about education, about health, about water, about some of the development projects that are worth investing in.

    John Barrett

  39. The increase in US contribution will be $5 billion in some years, $10 billion in other years, is not being channelled through the World Bank, it is going through Millennium Challenge Accounts. Will this affect donor co-ordination, and what is also the thinking behind this change?
  40. (Ms Short) This is the consultation they are engaging in. They have said they will have this Millennium fund, they are not putting it through their usual mechanisms, which is US Aid, you know, they have a devolved agency that spends the other money that they have; and whether they agree to deploy it according to what we see as the best principles of harmonising, so not having the great bureaucratic burden, making it untied, building up the capacity, that is under discussion. They have said there will be a separate fund in the State Departments; the rest is all up, I think, to win, in discussion and consultation.

    (Mr Brown) I think it is fair to say that the Americans have opened that discussion, and the UK has already been involved in the original part of this discussion, and it will continue, and it is a discussion about how they can make most effective use of the resources; and I think that is actually a positive thing, that there is this dialogue with a number of donors about what might be done. It is true that they had said that they would not put the money through the World Bank, in the way that you might want them to, but, equally, one of the reasons why I think it is worth investigating an international financing facility is that large amounts of additional money are going from both Europe and America, and it may be that we could reach some sort of agreement about the way forward.

    (Ms Short) Could I, for your information, give you those ballpark figures. Of the UK 3.6 billion budget in my Department, our contribution into the World Bank is 178 million a year; just so you get an impression, because people think of the World Bank as sort of predominant and having all the money. That is just for your information.

    Mr Khabra

  41. First of all, I would like to congratulate both of you on being at the forefront of fighting against world poverty, and it is well-known to the international community. The UN Summit, Financing for Development, discussed the issue of world poverty; it also focused its attention on issues of aid, effectiveness, conditionality and the nature of development partnership. My question is, on the question of the issue of conditionality, what efforts are being made to ensure that low-income countries, particularly countries under stress due to conflict or other shocks, are included in the international development effort and are not marginalised as a result of strict conditionalities and the targeting of aid?
  42. (Ms Short) First, on conditionality, we have been trying to use the Millennium Development Goals to slim down the conditionalities. Instead of hundreds of different requirements from each donor, from the IMF and the Bank, saying, countries, "The requirement is that you are committed, as rapidly as possible, to grow your economy and improve your public services, so you meet the goals for yourself," so it is not an imposed conditionality, it is "Let's mean what you've already voted for." And that is the whole point of the Poverty Reduction Strategies, that, instead of the reform agenda being written in Washington and the Bank and the Fund, the country puts together how it is going to run its economy, raise its revenues, use its aid, use its debt relief, in order to take itself forward. So we are trying to slim down conditionality and make them be behind, the Government leading, in open consultation with its people, how it meets the International Development Goals. Theory is a bit ahead of practice, but that is where the system is going. But you are absolutely right, and that is a much better way of working, both democratically and in terms of effectiveness. As we stress, and we do, that putting resources where there are poor people and where the reformers are, we have to say what happens to the poorest, most oppressed people in the world, the people living in poor, very badly governed countries, what happens to them; we are clearer and clearer about how to use resources effectively where there are reformers in place, and there is work going on in the World Bank on this issue and in the DAC, the OECD Development Committee. Obviously, we already provide humanitarian aid whenever it is needed, you know, if people are hungry they have got to be fed, and sort of basic assistance like that, but the task is, how, beyond that, can we help to drive advance in countries that are very badly governed, which is a very hard question, it is the toughest question in international development. I will not elaborate in detail now; we are doing work in the Department too, and there is some work we do across the world, because, actually, if you have it in your mind there are reformers and then badly governed countries, it is not like that, there are lots of gradations in-between, different kinds of interventions can help. And, often, even within a Government, there might be a couple of reformers, so the Ministry of Health might be a reformer, where you can get in and get some health reform, and you might not get anywhere with the Ministry of Education, or whatever. So, on your second point, we are doing a lot of work, and I would like to keep the Committee informed; it is a very important question, I do agree with you.

    Mr Robathan

  43. If I were to stick with the question of conditionalities and partnerships for development, particularly the responsibilities, which you have alluded to, of the recipient governments, I think we would agree that local ownership, or national ownership, is an important feature of effective development plans. But the question I have is, how does the Government ensure that these conditionalities are made compatible with national ownership and an aid programme, because there are these very different standards, and you have alluded to reformers and bad governments and the spectrum between them; so how do we make these conditionalities apply?
  44. (Ms Short) There is a constant dialogue. For example, the countries that are in receipt of debt relief, or have programmes with the IMF and the World Bank, which they want both for the money and for the reform, and for the reputation as a reformer, because that is part of their reputation and their likelihood of attracting inward investment from the private sector too; there is a constant dialogue on what the reform agenda is. So you get, say, a Poverty Reduction Strategy, or an agreement with Bank and Fund for a programme, and then there will be missions to see if the thing is on track. And we are working more and more to get those conditionalities to be reasonable, to be in tune with the Poverty Reduction Strategies, and then the UK's aid to be in tune with that, so there is not an endless series of hurdles that countries have to, you know, first they satisfy the Bank, then the IMF, then Britain, then France, then Germany, and there is still so much of that. But there is a constant dialogue, and we are trying to move it from "We're the donors, we'll tell you what to do; jump over all these hurdles or you can't get your money," to "This is a partnership, we have agreed on this Poverty Reduction Strategy together; let's check that it's on track." And, often, with goodwill, countries go off the track a bit, they might have a drought, commodity prices might fall, and then it is a question of helping them to get it right, not always just saying "You're off track, we'll cut off the money." So we are trying to change the culture of how we interpret those conditionalities, and that work is going on and is a constant endeavour.

    (Mr Brown) I think we have moved quite a long way from the days of the structural adjustment programmes, and the sense in which the IMF, for example, was posed as the IMF versus a country. And I think the key is how successful the Poverty Reduction Strategies are going to be in the future, because, in theory, these are country-owned, indeed, they are not just country-owned but they are civil society and community-owned, and obviously they have not been going for a great deal of time, but we believe that that is the key to future success. And I think there is some evidence that they give that sense of ownership, and there is some evidence also that they are working.

  45. I do not gainsay that, at all, indeed, I applaud it, but, on the ground, we see perhaps less evidence of that. And, as you know, we were recently in Nigeria, which, as the Secretary of State knows, I have particularly fixed views about, where we are increasing our aid programme, we have identified reformers, in about four states, but I have to say that what we saw was deeply depressing. And, to go back to the public confidence in aid, of which the Secretary of State was speaking earlier, it gave me no confidence at all that any aid would be well spent; and I just wonder how one addresses these issues in a concrete and tangible manner?
  46. (Ms Short) There is no doubt, we have discussed Nigeria before, Nigeria's return to democracy is fantastically important. This is a very important country, one in five of all Africans cannot move forward, just in terms of the population of the continent, unless Nigeria moves forward, and the reform effort since the democratic elections has been extremely disappointing. So we have got a country that is naturally wealthy, with enormous oil wealth, but 70 per cent of its people are dollar-a-day poor, and lots and lots of children are not in school, and people are not having any kind of basic healthcare systems or access to clean water, and not much progress in the last few years; so you have got a low-income country under stress. Now it has gone off track, with attempts to have programmes with the Bank and the Fund, because it did not keep to the agreement in the way that I have just been trying to describe, but we, the UK, have tried to engage both with pushing the reform effort with the federal government, with limited success; but we have got to hang on in there and keep saying what would reform be, not disburse money but staying aid. And then it is quite a decentralised federal system, as you know, so we are also in at the state level, trying to find states where there is a reforming effort and trying to push forward that effort. So I agree with you that you must not transfer resources to countries that are not trying, but you must not turn your back on the poor of the world because they are badly governed, and it is that dilemma; but never using funds to prop up a non-reformer, making it easy for them not to reform, never, but not abandoning the poorest of the earth, finding the spaces where you can push a bit of reform effort, that is what we are trying to do in Nigeria. It is difficult, but I am sure it is the right thing to try to do.

  47. I do not disagree with you, I think it is a really huge problem. Can I ask you what mechanisms you use to spot a reformer, and how successful do you think you have been?
  48. (Ms Short) Barrie? He has been at it all his life.

    (Mr Ireton) The reform has to be judged by actions, as it were, rather than just rhetoric, and so what we are looking for is building up confidence between the international community and a particular government and civil society about the way it is going to move forward. I was just thinking, this morning, Secretary of State, you saw President Jagdeo of Guyana; he said, he was discussing something, IMF and World Bank programmes.

    (Ms Short) It is a HIPC country.

    (Mr Ireton) It is a HIPC country; and there was quite a detailed set of programmes. Now his response was "I don't mind all these so-called conditions, I am a reformer and I want to make progress in Guyana." I think that is a good example of somebody who is trying and who is clearly a reformer. As the Secretary of State said, we often find, because no government is monolithic, that in different parts of government we can make faster progress, whether it is in education, or agriculture, or health, and we will back that process, even though we may not be able to make, say, broader progress with the government over, say, basic growth issues.

    (Ms Short) Let me take another example, Zambia, which has been a development failure historically, was a rich country at the time of independence because of copper, though, of course, copper prices have gone down and down and down and not made it easy for it, had a history of poor governance. I should say, we try to stay on the foot of looking for the opportunity to move forward countries that are very poor, so we are not saying "Well, we're taking our bat home and we're abandoning you," because there are so many people in need in those countries; and in Zambia, after a change of government from the President Kaunda years, then the President Chilube era was disappointing. We all made a great big effort, we got a commitment to reform, Zambia qualified for HIPC, and that needed extra arrangements, because they had a big tail of debt that was going to kick in again, and then, towards the end of his period, President Chilube moved away from reform, if I could put it sort of generously, and we had some problematic elections. But there are all sorts of signs, I saw the President today, President Mwanawasa, that he is trying very hard. And when you inherit a system where all the systems are corrupt, that is part of the problem of President Obasanjo of Nigeria, it is very difficult to be a good leader, you know, you are in a poor country, you have got rotten systems and you have got corrupt politicians all around you. So then we are looking for the entry point and trying to help those people. And, we have just said, with Zambia, he wants to tighten up procurement systems and public financial management systems, dead right; and the new Finance Minister did a very good job in cleaning up their revenue authority, and he said "I've now cleaned up how the money is collected, I am going to clean up how it is spent." So that is how it goes. It is hard, and you have got to find people and you have got to be looking for them and give them a chance. And then, often, the reform agenda will move forward and then it will slip, there are other reasons at work, political reasons, or whatever, and then you have to be stern but friendly and try to push it back on track, and then that becomes very political and it depends a bit on personal relationships; and that is how it goes.

  49. You also talk a lot about partnerships with developing countries, and this is very much part of what we have been talking about, of course. Could you explain rather more what exactly partnerships mean in the relationships with other stakeholders in development? I think we have got it, to a large extent, but...
  50. (Ms Short) The ideal, Rwanda was a test case; after the genocide, everyone would do humanitarian aid, no-one would help Rwanda, because the Government had been decimated and everyone could make allegations about everyone. So the UK moved forward, because we did not have any history in the country, we were one country that they felt that they could trust, to try to just reconstitute the state; and then we found, it is so poor and so decimated, with a high population, on limited land, and problems of being under attack from outside, therefore defence spending, every problem in the world Rwanda certainly has. But when we looked to the IMF and the World Bank for a programme for Rwanda, they could not project any economic growth, so it was like saying, "The country is desperately poor, the population is going to replace itself and grow, and we cannot responsibly lend it any money." So we got involved, trying to get others in, who would not go to Rwanda, because it was difficult politically, to commit aid resources over time, to get the Bank and the Fund to have a slightly more ambitious programme for the country. And this route led us to a memorandum of understanding, the UK with Rwanda, committing long term our resources, behind a reform agenda, in a high risk environment, and Rwanda tends to be very scarred by its history and not trust anyone very much; so we agreed that the Rwandan Government would commit to reforms, we would commit to deliver, and there would be an independent monitoring of how we both kept to our commitments. And that has been seen as a model, in some parts of the world, it really has helped move Rwanda forward. And I am planning to do that in Sierra Leone, about corruption, you know the elections are today, and that country needs to be reconstituted, but it has got desperate corruption problems, and it was corruption that led it into all the trouble it has been in. So that is on the edge of how partnerships go; if both sides commit and then an objective monitoring of whether they kept their word then you have got a more equal partnership. Coming back from that, it is the PRSPs and the putting the country in charge, and being more transparent about what the conditionality is and that it arises from the Millennium Development Goals. I think Gordon wanted to come in.

    (Mr Brown) If I may just add one thing, not about individual countries, because Clare is the expert in dealing with them, as her Department does, but about how the international environment has changed, which I think is one answer to your question. A few years ago, the idea of transparency in monetary and fiscal policy, the idea of pushing forward with countries reaching agreements about how they would be far more open about the way they reported the public finances, and everything, was not the emphasis of the international community; it was either the IMF moving in at a crisis, or, alternatively, even developed countries, like ourselves, not being transparent in the way that we operated some of our financial and monetary policies. And I think the whole international atmosphere has changed on that, and I think even countries that are resistant to the idea of transparency, as they were a few years ago, thinking it is some sort of almost neo-imperialism, that we want to impose conditions upon them, that they must open their books, and everything else, I think that atmosphere has changed as well. And, I think, if you look at what has been happening, particularly in the IMF, but the IMF and the World Bank, over recent years, there is a general move towards codes and standards, these being generally applicable, codes and standards having to be operated by the richest countries as well as the poorest countries. And then a move towards far more effective surveillance, and I think the IMF is attempting to be a far more effective and objective independent organisation in the way it operates surveillance, far more publication of reports that are done, instead of the old secretive nature in which these reports were done privately and never appeared, and, equally, evaluation of the IMF surveillance. So you move from a sort of behind closed doors situation, where there was little emphasis on the transparency that is necessary to avoid or expose corruption, to openness in monetary and fiscal reporting, surveillance being a very important arm, indeed, perhaps the most important way international institutions operate in these areas, reporting by publication of reports on countries, which are becoming far more common, and the IMF itself being subject to surveillance for what it does. And I think this will be the trend over future years. And if you look at the new partnership for Africa, and what is being discussed, it is, in a sense, this deal, that, in return for greater transparency, openness, a deliberate set of policies to avoid corruption, to open the accounts in a way that people can see publicly what is happening to the finances, independent operation of monetary policy, and so on, more money will be provided. And I think there is less resistance to that sort of conditionality, because it is seen to be the norm, not just for developing countries but actually the only way that stability can be achieved in developed countries as well. So I would just emphasis the change in international atmosphere. We have got the Commonwealth Finance Ministers meeting in Britain this year, and I think that will be very much part of our discussion, about what advances have been made in transparency, what more can be done, and I think, in future years, you will be thinking of the IMF far more as an organisation conducting surveillance on behalf of the world community, and, in a sense, allowing the exposure of problems before they arrive, so that it is a crisis prevention institution, rather than simply brought in whenever the crisis hits people.

    Chairman: That is very helpful. Let us move on to currency transaction taxes and Tobin tax, which we will all become experts on.

    Mr Walter

  51. The Committee took evidence, a couple of weeks ago, from Professor Spahn, of Frankfurt University, who has given evidence to the German Government in some detail on this. I wonder if I could ask you, first of all, some questions about practicality. The proponents of this tax see it as a means of creating stability in foreign exchange markets, which would, in turn, be good for developing countries and their economies, and so on. I suspect it would be good for developed countries and their economies as well, and the Chancellor's predecessors, over many years, have wrestled with that problem in the past, and also as an international hypothecated tax that would be used to fund development. Professor Spahn advances an idea of something like a one basis point tax. I wonder if, first of all, you could suggest whether or not you think that this sort of currency transactions tax could be made to work?
  52. (Mr Brown) When Professor Tobin proposed this sort of currency tax, and Professor Spahn has moved the issue on with his two-tier tax, and everything else, when he initially proposed it, it was in a world of very restricted movement, very sheltered economies, not a great deal of liberalisation of the capital market. And I think the real problem that you face, in operating a Tobin-style tax, in practice, and this is what you are asking about, is that it would have to be effective to be applied right across the board, internationally, that you no longer have the barriers that existed in the 1970s and 1980s to the flow of capital, you have got a free flow of capital at the moment, and for it to be operated in every regime you would have to have the international political will to do so. And that is the great drawback. And Professor Tobin, of course, died, sadly, this year, but I think by the time he had looked at this again, in a world of liberalised capital markets, Professor Tobin himself - - -

    (Ms Short) Did not support the Tobin tax.

    (Mr Brown) ...thought that it was going to be very difficult. It is very difficult to advocate a tax that has been, in a sense, rejected by the person who put the proposal forward. Professor Spahn's proposal, which is this two-tier, lower rate of tax on standard transactions and a higher rate applied during periods of speculative attack, it has got the same problem, that you would have to get agreement right across the financial markets, right across the countries operating markets, you would require, therefore, political will on the part of all countries to do it, and there is no sign that that political will exists. And, again, it just seems to me that this issue of how much money, apart from whether it is a solution to the problems of speculation, but how much money countries are going to be able to make available, at the end of the day, it comes back to the political will of individual countries; and, whether it is a Tobin tax, or an arms tax, or anything else, each individual country would have to make a decision to go ahead with this.

    (Ms Short) I would like to add to that. Because I think the right position on the Tobin tax is, "It is interesting, let's look at it, but don't hold your breath;" is everyone in the world going to agree, because it could not take place before that. But the bad side of this is people pretending that you have got to find new forms of tax to fund development; whereas, in fact, the money we are spending on development, compared with the whole of British public expenditure, is a tiny amount of money. You do not have to invent a new tax to find the money, you have to decide whether you should find the money, and then, if new taxes are good for the international system, let us have them. But I think it is slightly dangerous to the development argument if you get boxed into thinking you can only get more money for development if you can find a new tax.

    (Mr Brown) And, of course, there is a paradox about it, if it is successful, that we raise very little money.

    Mr Robathan: And you do not like taxes to do that.

    Mr Walter

  53. I think the Chancellor's objection is one that I raised with Professor Spahn, who seemed to think that it could be imposed unilaterally by EU Member States, but I think his understanding of the way financial markets operate is something that I am not convinced about.
  54. (Mr Brown) We are one of the few countries that actually has a tax on transactions, and that is Stamp Duty on shares, and we are under repeated pressure from the City to get rid of it, and there is not much evidence that other countries are wanting to follow it; so there is a difficulty. I still think, myself, that these issues should remain open for debate, because there may come a point at which people are prepared to agree collective action, and it may be in relation to a Tobin tax, it may be in relation to Special Drawing Rights, I do not think we should close our mind to all these things. But, as I keep saying, it does come back to whether individual countries are prepared to say that they themselves are prepared to spend more, one way or another; because, if you are to raise money, you have got to get the consent of your own domestic legislature, whatever country you are, to do so.

  55. Can I just pick up the Secretary of State's point, which I think you alluded to as well, Chancellor, by saying that it would not actually raise very much money, as to whether or not this sort of tax initiative is desirable, should we not be concentrating on the real gain, which is countries actually raising their own budgets for this, rather than trying to find some incredibly sophisticated wheeze, in order to get a little bit of extra money?
  56. (Mr Brown) I myself think that, whatever we expect and hope that the developing countries are prepared to do to change the way they use money, it is going to be essential, in the next period of time, that we provide more development aid. So I do not think we can rely totally on the individual countries themselves, over the next few years, to be able to solve, by their own budgetary decisions, their health and education challenges. And I think we have a duty, we have a moral duty, but I think it is in our interests economically for the long run as well, and we are talking about global public goods, in a sense, here, as well, that it is in our interests to support this. So we will need more, additional development money, there is no doubt about that, in my view; we should see it not as charity but as investment in the capacity of these countries being built for the future. And the question is, where will we find the political will in developed countries so that these decisions about additional development aid can be made. And I hope that, by individual countries working together, we can push the process forward, so that if we do something more we can have an effect on other countries as well; and, equally, I still think it is worth looking, as I said at the beginning, at whether an international financing facility can be developed. Because it was not beyond the imagination of people after 1945, when faced with perhaps greater problems, in restructuring the whole of the world economy, to create new international institutions that were capable of doing that job. I am merely talking about a financing facility that would be of use over the next ten to 15 years.

    Tony Worthington

  57. Can I go to debt relief and Monterrey and what progress you made in assessing what was happening with regard to sustainable debt relief at Monterrey, and we have had the HIPC process for a number of years now; is there any thinking about how it might be changed, or developed, or improved?
  58. (Ms Short) No. In the run-up to Monterrey, there were some countries calling for more debt relief for more countries. I think the campaign for debt relief moved the world beautifully, and it is probably the first global civil society movement the world has even seen; but some of the arguments that come on the tail of it, some of it is economically illiterate, and you get people saying, "Yes, middle-income countries should get debt relief, and unconditional debt relief," which is nonsense. The whole point of HIPC, and that, is, countries that are so poor and so burdened by mistakes of the past, often by previous corrupt governments in their own countries, plus other bad lending, and so on, that they will never, ever escape, and never be able to go forward, so you have a process to write that off, that leverages better economic management and better concern for the poor of their country, and it is meant to relieve these countries and put them on to a better forward path. So, in the end, we worked hard to fight off unrealistic demands for debt relief, that then the world would not have agreed on, and then we would not have had agreement at Monterrey. And so I think it says some general words about deeper debt relief, and because of the problem that Gordon alluded to, which is very serious, that, since enhanced HIPC started, commodity prices have fallen very seriously and oil prices have risen, so countries that have completed the process, like Uganda, because of the fall in coffee prices, are no longer sustainable under the formula and they have exited. And the World Bank did a study recently showing that ten countries, I think it is, will not be sustainable under the formula because of the change in commodity prices, and, as Gordon said, some of the assumptions made in the original calculations by the international financial institutions were a bit optimistic; so the great challenge now is to get the extra billion to deliver what we have promised to the HIPCs, and then to bring the HIPCs that have not qualified, Burma (Myanmar), Sudan, the Democratic Republic of Congo, Somalia is also one, to get them to the condition where they can qualify for their debt relief. So that is the real issue on debt; and some of the talk about more debt relief for more middle-income countries is never going to happen, nor should it happen.

    (Mr Brown) The success in getting 26 countries started through the process is, I think, something that we should congratulate all those people who campaigned for this over many years for achieving; and I think when this started people did not expect us to be able to get that number of countries through, and I think it is to the credit of IMF and the World Bank that their process moved far faster than it had in previous years. Of the remaining countries that are talked of as potential recipients of debt relief, we usually think of it in terms of 16, although the list could keep changing. Five have, for one reason or another, opted out of HIPC, or do not need HIPC, of that 16; of the remaining 11, as Clare says, most of them are conflict countries, where there are particular problems that make it not valuable to the countries, in the end, to achieve the debt relief until they have changed the system of government, or have ended civil wars, or have ended conflict. I think Côte d'Ivoire is the 27th that is expected to reach decision point by September. So there are a number of countries in conflict which we would expect, if they came out of conflict, to benefit from the conflict assistance facility that Clare has been contributing to. On the problems that have arisen in operating the HIPC system, obviously, if you were starting right from the beginning again, you might have had a different form of facility, but to build the international consensus around this facility and to get many countries to go to 100 per cent has been an achievement. Clare is right, there were probably too optimistic scenarios painted about the economic growth and the exports that some countries were likely to achieve. There has been this big shock to commodity prices, and there has generally been a downturn in the world last year; for that and for other reasons, so that we can ensure that countries would have a sustainable exit from debt at completion point, there will be more money needed, and I think it is as well to alert the international community to the fact that, by one means or another, we will have to do more. The World Bank Trust Fund was $2.7 billion, I think, in the end, in dollars, and every country that was serious about development did make a contribution to it, and this is the sort of thing that is going to be discussed; but, as Clare says, there may be a number of ways that we could look at about how that $1 billion was provided. But the $1 billion does not mean that the HIPC process has been a failure, it has been a success, in getting countries out of it, but, as Clare always reminded people during this process, debt relief was only the beginning for some countries, and it is sustainable development that we are interested in. And, for some countries, it is allowing them to be in a position to borrow, so that they can actually have economic development in future, and it is putting it in its proper perspective, as both a campaign which was successful but also the start of a process for large numbers of countries about getting sustainable development.

    (Ms Short) Can I just make a quick point, because people sometimes talk about debt relief instead of aid. Uganda, that is the star, and that qualified first, 50 per cent of its public expenditure is aid, Mozambique, it is more than 50 per cent. It is not true that a country that has come through debt relief does not need continuing assistance, because these are very poor; but the other really good thing about the countries in conflict is that the possibility of qualifying for HIPC is becoming an incentive to get to peace. And in Sudan I had meetings with the Finance Minister, and they would so like to engage with the IFI and get debt relief, there is a growing interest in moving peace forward, for other reasons as well; and the same in the Democratic Republic of Congo. So it is going to take time, but the HIPC's existence is increasing the will to find peace.

  59. I agree with everything you have both said, but we started with saying there were 41 countries. We all received lobbying about debt relief, right, and we started with the situation of saying there are 41 countries that are appropriate for debt relief; is that 41 now finished?
  60. (Mr Brown) It was 42, at one point.

  61. Is that 41 now finished; are we saying, as well, that the 26 are as far as they are going, in terms of debt relief? I understand about the cases that are conflict zones, and so on and so forth, and the non-consenting countries. But, in response to what people out there seem to want, in terms of debt relief, what does one say, that the system has now delivered, that is basically what I am taking out of this, and that we now move on to much more important things, like trade and aid and development generally?
  62. (Ms Short) Can I say, what we have to do with the development lobby, which has a big heart and sometimes nonsense economics, is love its heart and grow up its economics. Most of the development NGOs in Britain were against a trade round, at the time of Seattle; they have now all come round. Some of the calls on debt relief were nonsense, unconditional debt relief, which would have allowed countries in conflict to buy more arms. Now it was all well meant, and what we needed to do was take the sense that was in that separately from some of the nonsense in the specifics and take the world forward. So we had 42 countries that were so highly indebted that they could never pay and never escape, and we had a formula; now the list is not closed, there could be some countries that slip down and become even poorer. And if you look at the Central Asian republics, we have been looking at those, some of those are as poor as HIPCs, and will only be called HIPCs or need equivalent treatment if we can move them forward on their, some of them have got terrible governance and terrible corruption problems. But, similarly, of the 42, there are four or five, Vietnam, Angola, Kenya and Yemen, that do not qualify on the formula, they are not quite that poor, and Laos, as you say, I did not go for it; so it is not a closed list. But it is a reality that it would be good for the debt lobby to just take more seriously some of the detail, because they often talk about debt relief means you do not need aid, as though Mozambique does not. Mozambique will need aid, it is growing at 10 per cent a year, it is a star reformer; it is a desperately poor country, it has qualified for debt relief, it is investing its aid well, but we are going to have to stick with Mozambique for ten, 15, 20 years.

  63. Could I just take it a bit further. This "certainly qualify for sustainable debt relief," that is the phrase; is that phrase being looked at again? What does 'sustainable debt relief' mean; is that going to be redefined? You will know, because we have discussed it before.
  64. (Ms Short) There is a formula, that has got two parts; but it is your foreign currency earnings, because this is foreign currency debt, and there is something on tax revenues, is there not, in there too. And we did argue, at the enhanced HIPC, that particularly the tax revenue element should be deepened, and did not win, in the international system; as Gordon says, you have got to move everyone forward together. So there is room always for technical arguments, and around this changing commodity prices and what is sustainability we can revisit, but it is into detail; but, of course, finding another billion is not nothing, but where they have a tranche of country some people talk... I went to a meeting in Addis Ababa of all the African Finance Ministers, and the middle-income African countries were saying, "We'd like to have our debt relief; we'd like to have all our debt written off." We cannot encourage that thinking, because it is just not realistic, and not even sensible.

    (Mr Brown) I think, an additional answer to the point that you are making, and I do understand that you have these letters and submissions from different organisations, is, first of all, there is no complacency on our part about both what has been achieved and what has yet still to be done. When the G7 met, and indeed the IMFC committee met a few weeks ago, in the communiqués was this commitment to flexibility; in other words, we understand that there may be problems that some countries face in achieving what you rightly say is sustainable exit from the burden of unpayable debt, and therefore we have to continue to look at this. And where flexibility is needed, either because there are external shocks, or because there is a period of economic decline, or because something else happens in the international community, or to that individual country, if there is something we can do something about, in the way we look at debt, I think we should be prepared to do it. So, rather than say the whole system has gone wrong somehow, I do not believe that is true, you may not have started from where we started, but that is where we did start from, what I think we have got to do is to say that, where we identify problems, either for post conflict countries or for individual countries because of what is happening to their economies, there should be sufficient flexibility in the process so that we can deal with that problem when it arises. And I think it is right for us to say now that we have spotted some problems, that that should not tarnish the whole effort to get debt relief, but we should be prepared to look, as an international community, at putting up more money. So I think it is flexibility that is needed in the way forward, but remembering also that our focus is not simply on debt relief but it is on the Millennium Development Targets and it is on sustainable development.

    (Mr O'Donnell) Can I just add to that. The technical problem was, in the Boards of the Fund and the Bank, when we were discussing this, we were defining sustainability as a debt/export ratio. The question was, you were doing that at decision point, but they get a debt relief at completion point, so how could you tell what exports would be, three years forward; we had no reliable forecasting method, so we used back data. As it turned out, what happened was, we went through a period of a world slow-down, commodity prices fell, export prices fell, so the debt/export ratio that was built in was not the right one. What we are trying to do now, to put that right, is to recalculate that export ratio, so at current commodity prices, and the like, and that is what will lead to the billion extra funding that we need. But it was a technical problem, of trying to work out what a sustainability number would be, some years in the future.

    (Ms Short) And there is another problem that people muddle, and that is domestic debt, and domestic debt can be a terrible squeeze on the growth of an economy. Kenya has got terrible domestic debt, therefore fantastically high interest rates, that absolutely squeezes the private sector, and that needs fixing in countries, like Ghana's (problems ?). But that is not a HIPC problem, that is an economic management problem; and when you are a reformer we can use aid to help with that problem. So sometimes they say, "Oh, I'm indebted," but it is domestic debt and it is a different problem.

    Tony Worthington: Well, I am indebted. Thank you very much.

    Chairman

  65. Before we close, just a couple of very quick, practical questions. Global new deal. Is the global new deal a phrase which encompasses the new International Development Trust Fund?
  66. (Mr Brown) When we talk about a new deal, what we are meaning is this relationship between developing and developed countries, that, in return for developing countries pursuing the sorts of policies that Clare was talking about, transparency, stability, corruption-free policies that encourage trade and investment, the dealers, that the developed countries should be prepared to do more; it would be a deal, irrespective of whether there was an International Trust Fund.

    (Ms Short) But can I add, that Monterrey was that, an agreement, an absolute consensus on what to do; but it includes Doha. And we have just seen legislation in the US increasing subsidies to agriculture, we have now got, what is it, $360 billion in the international system, in OECD countries, subsidising agriculture, tariffs against developing countries bringing in their products. Part of the deal is Doha, it is not just an aid deal; and if we do not give countries better trading opportunities they will not have the chance to grow their economy.

  67. Lastly, did you think that the Monterrey process gave sufficient voice to developing countries; were they sufficiently engaged in Monterrey?

(Ms Short) What we have, for all the UN Conferences, is this really quite painful, bureaucratic and long-winded preparatory process in the preparation of texts; but it is a UN process, and they have regional meetings, and all countries are involved. So, yes; you never get perfection in this life, but, the UN systems, they often have very bad products, because they are so bureaucratic, often, you cannot get any kind of strategy into it, you have just got lists of things that everyone piles into the documents, if you are not careful. And that is why Monterrey came well. And, I think, Kofi Annan appointing Zedillo, and some of those things that Gordon said, was part of it, and involving the World Bank and the IMF, and that was unusual for the UN, in bringing them in and trying to hone the reform agenda. But I think they did, and they always are, in UN Conferences, but it does not always give us a good product. We are having trouble on the way to Johannesburg, but we have got to work harder.

(Mr Brown) Can I just add. One of the great things, and Clare mentioned this at the beginning, about the Millennium Development Goals, is that all the international organisations, uniquely, I think, since 1945, including the IMF and the World Bank, the United Nations, OECD, have signed up to the Millennium Development Goals, most countries have signed up to these Millennium Development Goals, and that, I think, is absolutely crucial to how we see the way forward. And the Monterrey Consensus was possible, I think, because these goals had already been subscribed to, and then a tremendous amount of work, as Clare said, in what sometimes looks like a bureaucratic process, but, with goodwill, was achieved at Monterrey. And I think we should congratulate Kofi Annan and the work that was done by the Zedillo group on this, including Michel Candessus and Trevor Manuel, who were Special Representatives, who were asked to be involved in this at the last minute. The way I see us moving forward is, there has got to be greater co-operation between these international institutions in future, the UN, IMF, World Bank and OECD, of course, the WTO. In the WTO, it is a 'one member, one vote' system; in the IMF, of course, and the World Bank, it is not exactly the same. And there will have to be better mechanisms in future for the voice of developing countries being heard, and there will have to be better co-operation between the international institutions, so that you do not have the blame game, where one set of institutions is blaming another. But the one thing I would say, in conclusion, because I am not invited before your Committee as much as Clare, is that the international reputation of Britain is largely due to the work that Clare Short herself has done, and I think the international reputation of Britain has been added to by the work of this Committee. And I do congratulate you on building a reputation for Britain round the world, as being, on an all-party basis, interested in these development issues and pushing the agenda forward, and I hope that your work will be able to continue that over the course of the year.

Chairman: Thank you for that, Chancellor. I think the issues are too important, so I think it is important we approach them on a, you know... And thank you, both you and the Secretary of State, for coming and explaining to us today sometimes some quite technical things, which you are involved in, the Department is involved in, on a day-to-day basis, which helps us be better informed and we can then help better inform the other groups outside the House, so we can actually engage in a sensible discussion on these things. But, Chancellor, you can rest assured that we are always happy to see you, and I am not sure whether it would be a reward or a threat to say, depending on how much you give the Secretary of State in the Comprehensive Spending Review, we will be either very pleased to see you, to congratulate you and thank you, or to give you a hard time. But we are sure that your appearance here today is evidence that it is a Department you are concerned about, and we look forward to seeing how this all moves forward. Thank you very much for coming.