TUESDAY 5 NOVEMBER 2002
Tony Baldry, in the Chair
Memorandum submitted by DFID
Examination of Witnesses
RT HON CLARE SHORT, a Member of the House, Secretary of State for International Development, MR TONY FAINT CBE, Director, International, and MS PENNY McMILLAN, Policy Analyst, International Financial Institutions Department, Department for International Development, examined.
(Clare Short) Can I just say a word on that?
(Clare Short) We are living in a time when it is sort of fashionable to knock public officials and say how difficult it is to reform the public services, but I think the country should be very proud of the officials who work for the Department for International Development. Across the world we are seen as leaders and yet they have also led a lot of change and reform and improved effectiveness, so I just think the country is entitled to be proud of them and the UK is the leading-edge player in this area and we have some very good, high-quality people.
(Clare Short) I think with the G8 at Kananaskis there was agreement that an extra one billion was needed. At the annual meeting in Washington, I convened a preliminary meeting, because there is always this tension between the G8 and the non-G8, to try and get the non-G8 to commit to do their part if the G8 kept its word so that everyone is on best behaviour to put in the sort of proportions we had last time to get the extra one billion. At the meeting in Washington Germany committed, we committed and Sweden committed. The US made a commitment to the same proportion that our Chancellor was working very hard on, or Paul O'Neill did, of $30 million informally and then there was the further meeting in October which did you go to, Tony?
(Mr Faint) I did not, but I have had a look at the report of it.
(Clare Short) I think the US are talking of a lower figure now, so the October meeting, that was then and we were trying to move things forward and start some pledging so that others would be put under pressure. Germany made this very important commitment and we made our commitment. The other big thing was the EU which, as you all know, has uncommitted funds and getting them committed in this way is a good way of spending resources which are due to go through the Commission. There was resistance at first, as there was last time round, for the EU to make a commitment, but they have now done so. What happened beyond that at the October meeting, Tony? It is always like this with these committees because you are trying to mobilise some momentum and then people come in behind it.
(Mr Faint) The October meeting definitely did benefit from the campaign we ran beforehand and the Germans estimated that some of the roughly $850 million had been pledged against the up to $1 billion that the G8 had reckoned was the financing gap. There is a little bit of controversy about the financing gap, and that is the other point you were coming to, because there is not yet consensus as to whether the extra bilateral efforts that those countries have made should be additional or should be included in the calculation on Completion Point release, so some people say that the gap is about 800, some people say it is one billion and some people and the Americans even say that it is only 650 million. That is why they have pledged 150, but we do hope that the Americans will increase their pledge over the next few months.
(Clare Short) And there is on top of that some of the HIPC countries that are currently considered likely, but might come forward, like Sudan, which would be wonderful if we can get the peace process in Sudan again and get the debt relief, but that is not allowed for and we would need to come back again. Of course there is Burma sitting out there and Somalia and so on, but there are some other countries who, if they started to move forward, and maybe Sudan would be the most hopeful and obviously Congo which is a bit further forward - are Congo allowed for in these figures or not?
(Mr Faint) I believe not, no.
(Clare Short) Again that is a very large, highly indebted, poor country with a peace process going on which, if it can be captured, then debt relief can come in afterwards, so it is only full financing this time round for the tranche of countries that are moving forward. In an optimistic scenario we need to come back again for more.
(Mr Faint) Yes, they did.
(Clare Short) Japan has always found debt relief difficult. It really does because it is troubled by the moral hazard argument, but never wants to stand out alone. Did they commit in October?
(Ms McMillan) They did, 56 million.
(Clare Short) Yes, $56 million.
(Clare Short) They are still in the recipients ----
(Clare Short) Well, not of debt relief, but in the categorisation of countries. Some extraordinary countries are still seen as developing countries.
(Mr Faint) Saudi Arabia is neither a donor, but I do not think that Saudi Arabia has made any contributions to the HIPC Trust Fund.
(Clare Short) I have got a list here of the countries which did pledge. Do you want me quickly to read it? Germany, 100 million, including any EU share; Denmark, 20 million; Iceland, 0.75 million - these are all dollars - Finland, 6 million euro, plus whatever the EU share is; the UK, 95 million, which is plus our EU share; France, up to 70 million. Is that in addition to the EU share?
(Mr Faint) No, I think it includes the EU.
(Clare Short) Okay. Netherlands, 68 million; Canada, the same share as last time; the US is now 150 million; Norway, 26 million; Switzerland, 33 million - these are all dollars - Italy, 60 million; Belgium, 17.7 million; Sweden, 32 million, so Sweden has put itself up; Spain says it will maintain the share; and Japan, 56 million.
(Clare Short) Yes.
(Clare Short) This is the wider issue of the categorisation of countries and getting countries that become wealthier to come into the international development banks and the international system of donors. Singapore has just done that and I think that is the way to approach it, so that of course Saudi Arabia and the Arab countries have special loan systems.
(Mr Faint) The Arab funds. There are various Arab funds.
(Clare Short) I think the way to look at this systemically is when countries get to the point that they should move across and become a donor. Of course the countries about to join the EU are just moving across that line and that needs to be organised in a sensible way, but Singapore has moved.
(Clare Short) Well, I think there has been a wonderful, heart-warming public campaign across the world and very strongly in the UK on debt relief, but some of the detailed arguments have been economically muddled. There were even people saying that unconditional debt relief, for example, which as I keep saying in the case of Sudan probably would have prolonged the war, that has moved off, or sometimes people were saying debt relief, not aid, which is a muddle. You have got to see debt relief as one part of moving a country and the world forward on the Millennium Development Goals for our very, very highly indebted, very poor countries which have such an overhang of debt from the past, often by corruption, but they are in a position where the best possible development policies and economic policies can never get them out of it, so it needs to be written down so that they can adopt good policy and then grow their economy. Of course with this debt we are talking about foreign det and that is highly linked to trade clearing of the debt or bringing it down to a sustainable level that the country can afford, getting back a reputation for proper management of its debt and, therefore, being able to take responsible borrowing in order to grow its economy. That is a crucial part of some of the poorest, tiny, indebted countries being able to clear a backlog and being given a chance to move forward, but the countries which are being stars on qualifying for HIPC, the Ugandas, which was the first, the Mozambiques, the Rwandas indeed, they still need aid, considerable aid. These are very poor countries and still need support with institution-building and they still need better trade access.
(Clare Short) Yes, we had this argument at the Development Committee annual meeting. The UK moved first and then I think all the other G7 moved to say, "We go to 100 per cent debt relief". Actually the Paris Club wrote us all in at 90 odd and in one sense it sounded better than it was in terms of the amount, but it was very important symbolically. There is now an absolutely disgraceful fiddle going on in that when the World Bank makes the calculations of whether countries are sustainable, they take into account the extra committed as to whether a country can go to 100 per cent, so this is an additional, voluntary bit more generosity and the countries who are not doing it are being subsidised. It is absolutely wrong that the calculation should be made in this way and we made a fuss about it and a number of other countries feel very strongly similarly, so yes, that is going on, it is outrageous and we made a fuss at the meeting and thereafter. The US does not agree with us.
(Mr Faint) No, and one or two other countries.
(Clare Short) Who else - Japan?
(Ms McMillan) Japan, yes.
(Clare Short) Well, I think you cannot look at funding a country to get to the Millennium Development Goals only through the prism of debt relief. You have to look at debt relief that is sustainable enough that the country can then trade and grow and is not constrained, but then it will need aid and other reform. You can look at how much debt relief is necessary to release a country that if it adopts the other policies and gets enough aid, then it can really drive forward in achieving the Millennium Development Goals, so clearing debt is a component, but alone cannot deliver a country to achieving the Millennium Development Goals. It needs other reform and it will need aid.
(Clare Short) Well, we are back to top-up and sustainability on debt relief and it was always a pretty mean formula. The Cologne Formula was more generous to what was on offer before the great G7 in Birmingham and all the wonderful turnout of campaigners and then they went on to Cologne. A more generous formula was agreed at Cologne, but it was still less generous than we were hoping for at that time, so this question of knowing whether it is generous enough at Completion Point we have been working on ever since then, but the extra thing that has kicked in is both oil prices and commodity prices with oil prices going up and commodity prices collapsing. Then the formula does not work because, like the Ugandas, their earnings in foreign countries have gone right down because coffee prices have fallen, so we need to give countries more to get back to the original formula and the original formula was pretty mean. So we need more on debt relief to release countries enough to do the other things they need to do to move themselves forward to the Millennium Development Goals, but you cannot do it on debt relief alone.
(Ms McMillan) We should not forget as well that there are other countries that are outside which are not heavily indebted, but which are poor and they also need help.
(Clare Short) Like Bangladesh.
(Clare Short) I think to argue that debt relief is the most effective is again the same old muddle. Debt relief is an overhang which stops countries moving forward. It needs to be cleared, but then they need other things and to pretend that it is either aid or debt relief is that muddle and it is to fail to remember that it is foreign currency debt, that it needs clearing, but that countries still need to have their own revenues and to spend their domestic revenues well. They need another package of reforms and to label too much on to what debt relief can do is unwise. Debt relief is absolutely needed to remove this overhang and I am proud that the UK helped to shape the poverty reduction strategy as a way of giving debt relief, so debt relief has leveraged important reform in the management of public finances and who public spending is on and that is important too. To say it is de facto budget support I think is a bit silly. It is debt relief and debt relief is very important in the way that I have outlined and that we understand. In your other question on budget support, the most effective use of aid is backing poor countries, and it is always effective backing poor countries even when there is not a reform effort, but it is at its most effective in generating economic and social development per dollar spend. Where you have got a reforming country, you can get it to budget and you can get into the systems of the country, then you can really drive rapid economic advance, more kids at school, better healthcare and those things which, in turn, generate a leap forward in development. We are a leading-edge player in moving towards budget support, but we do not go into rotten systems in a government. You say, "We are willing to move on budget support", but then we have to look at fiduciary risk, and of course what we are saying to countries is, "We'll help you with your financial management systems", and they have to be tight and good before we can contemplate budget support. Now, the beauty of that is that we used to protect our own money in projects where it was spent. If, in order to protect our money and our reputation to Parliament and our National Audit Office, we help countries tying up their own financial management systems, the prize is that the management of their own revenues is also improved, so where we can move there, we are leveraging more sustainability and more institutional reform, but we will not move there where there is fiduciary risk, though we will use our willingness to move there which means that a country's desire to be seen to deliver to their people as opposed to having donors delivering to their people and them delivering little to try and leverage the kind of reform in their central bank, in their finance ministry, in the management of their own money. So there is always a better way, but we will never go there where it is risky, but we will help countries tighten up their systems so that we can move there and I think that is the right place to be.
(Clare Short) This is very much a Treasury lead and a Gordon Brown lead, so I can report to you and answer the questions, but the reasons for that and the reason why DFID is not a leading co-player with the Treasury is that this is not so relevant to very poor countries. It is highly relevant to the East Asian economies and their kind of crisis, the Argentinian-type crisis where there is a lot of private sector investment, but if then a crisis starts flowing out of the country and you get a country into crisis, and then the IMF and the World Bank are having to come in to resolve the crisis and the private sector is getting off with a free meal and not having to play its part in some of the irresponsible investment it might have engaged in, so the idea for a bankruptcy procedure is to tie the private sector in to paying some of the price of some of the unwisdom of its investments which, in turn, led some of these countries into trouble. So it is a very important proposition, very complicated in the detail and so on and it really is much more relevant to moving towards middle-income countries with large amounts of or fickle private sector investment and then moving out at the time of crisis than it is to the HIPCs. In some of the campaign for debt relief there has been a call for a bankruptcy procedure as though it would be a free lunch, you could write off all the debt, it would liberate the countries and everything would be better, but that is not the proposition; it would not be a free lunch. What it is all designed for is to get the private sector to pay some of the costs and, therefore, learn to be less reckless. It is very important, but I think it is not as simple as it has been presented in some of the debt relief arguments as a kind of wonderful solution.
(Mr Faint) It is of limited relevance to poor countries because the private sector role in HIPC countries' debt is very, very small and almost non-existent, so it is really a middle-income country issue and I think we do favour the work that the IMF have been commissioned to do. I do not think that really, as the Secretary of State says, it is for DFID to lay down government policy on this, but you would need to discuss that. We could obtain a note for the Committee on the position, I guess.
(Clare Short) I have a note here, but it is pretty silly for me to read out something I am not leading on in policy terms, and I hope I have explained clearly why not, and if there is any more detail that you want, I would be more than happy to provide it to you, but you understand what I am saying about the argument on debt relief, this idea that you could have a bankruptcy procedure and countries would be clear. If countries have a reputation for being bankrupt, they might never get any investment again. I do not think any country would be queueing up to be declared bankrupt. The Argentinas of this world or what happened in the East Asian crisis, it is a mechanism to get better procedures for dealing with those crises than actually chasing the private sector for an irresponsible investment, but it would be an enormous reputational question for a country to go bankrupt. It is not a simple exit from any problem.
(Clare Short) I think they are wrong, as they are wrong on some other things.
(Clare Short) I do not think so. I am not going to ask for a paper from my Department in an expertise that we lack. We are an extremely high-quality department and our expertise is good, but I am not pretending that we have expertise where we do not have it. What is proposed in the IMF in reality, because it is really about tying in the private sector to more of a sense of responsibility and helping countries through crises, is very much a Treasury lead. Now, if there are specific proposals from Jubilee Research, who do make proposals which I think are ill-informed quite often, and I am an enormous admirer of the campaign, but it does not mean that all the arguments put by some of the campaigners are economically useful to developing countries, but if there are specifics where they think this would help poor countries, then we will answer that and if you give me their points, we will come back with an answer, but the real details of where we are in these very complex negotiations going on in the IMF to try and bring these procedures forward, I need to get from the Treasury for you because that is where the work is being done.
(Mr Faint) I believe that this proposal for SDRs is one that has been under discussion for a long time in the IMF and it actually involves some differential issue of SDR amongst the Members.
(Clare Short) It has been around in negotiations and they have to all be put through all the different countries. It does not bring any benefits to developing countries. Soros came up with the proposal for countries to donate the extra SDRs to developing countries, but it is all going nowhere and the US, amongst others, does not agree. That is my short memory of it.
(Mr Faint) The US Congress is blocking that, I believe, at the moment.
(Clare Short) No, it did not actually.
(Clare Short) We can certainly get you a note on special drawing rights. The Chancellor's proposal for the extra 50 billion rests on countries pre-committing growth in ODA resources and borrowing against those commitments and getting a triple 'A' rating and raising some money from the markets to bring forward through partnering with private sector funds what would come out of increasing ODA budgets through to 2015. That is the core of that proposal and it does not rest in its core on special drawing rights, but certainly where we are with special drawing rights, and I am pretty sure because I did follow that this Soros thing might go somewhere and then I found that I thought it was going nowhere on that, I must say, and I have not found out what happened since, but we can certainly get you a note on both.
(Clare Short) Probably, yes, because it was global.
(Clare Short) We have done that, but I am more than happy to try and update it and put it perhaps to you to see if you think there is any way of clarifying it. There are some countries and institutions that are not co-operating and we could do with a campaign on that, but getting this greater generosity at Completion Point is fantastically important and we could do with some more pressure on that. The other thing that the campaigning NGOs are moving on to, and it is the partner to debt relief, is trade access. Of course once you have got rid of your foreign currency debt, you want to be able to borrow responsibly and trade responsibly in order to grow your economy, so I think the thrust of the campaigning is moving there. I am more than happy to let you have a draft standard letter and briefing that we have because the problem is that people's sense of moral clarity is very simple and clear and we are into then some very technical and complex issues and there is a sort of clashing mood about the two.
(Clare Short) Let me let you have what we have got and see if you can help us make it better.
Chairman: Perhaps then one can also move campaign groups on to the campaigns that need people rather than the campaigns that do not.
(Clare Short) Let me say a word on the G7 because we had an argument about the last replenishment of IDA, the very concessional, long-term loans of the World Bank to the poorest countries, and there was a difference between the European perspective and the US perspective. I would just note the point that if Europe stands together, it is a majority, but it does not always do so because one of the problems is that the lead in the Bank in a lot of countries is in the finance ministry, not in the development ministry, unlike us, so you do not get the people who are as sympathetic to or as informed about development leading in the World Bank, so you get that division, which is kind of interesting and we could do more with the World Bank and moving forward reform faster, I think, if all countries had their development ministry leading. Some do and some do not. On the gender balance, at the first meeting of the Development Committee I went to, which I think was in 1997 in Hong Kong, I think I was the only woman and there were all these ministers either from finance ministries or indeed from central banks reading out sort of turgid macroeconomic advice. We then got a whole series of women ministers who started talking about poverty and I was thinking at the last meeting that you would not recognise the two meetings, that people now talk up rather than read, there are more women at the meetings, still not 50 per cent, but it has changed the atmosphere and the focus on poverty is a transformation. So change can happen in these institutions and it is worth trying. Strengthening the developing country voice is very, very important and it is one of the promises of Monterrey. Lots of countries are not keen on it. It is slightly complex in that obviously the commitment into the institution is according to the wealth of the country and the countries that put the money in want to have their say about how much money is put in, but the borrowing countries have a big interest in what the policy is. It seems to me that this is what we need to unpack. Of course if you said, "The borrowers can tell everyone that is putting money into the institution", you might get some pretty crazy decisions, but, on the other hand, the borrowers have a fantastic interest in how the institution is used and what the policy lead is and, therefore, it is much too weak there. There is room for looking at which decisions, who has consulted about what and how much say everyone has. Then the other thing is the offices in Washington, how many executive directors there are, Africa has two, so you have two people, one Francophone, one Anglophone, paid to represent every country in Africa. Weak communications, enormous complexity. Just being resourced to do that, they are not adequately resourced. There is a thing about voice and influence on policy, I think, but also there is how well serviced the people are who are doing this heroic job of trying to represent very frail countries with a weak capacity to brief their people in Washington about what their interest is. We have got some proposals, we have been working to try and strengthen the African EDs and there is more that can be done there. We did press at the annual meeting which has just gone for a report on improving the developing country voice to be brought to the spring meeting. A lot of people do not like it but because it was promised at Monterrey they have got to do it. It is well worth watching. It is very important to change the atmosphere in the institution. There has been a massive improvement in the relationship between the UN institutions and the Bank which used to fight and really be hostile, it is more collaborative now. I think getting a stronger developing country voice would balance it again and everyone would start seeing them as institutions which can help everybody, we are not there yet.
(Clare Short) As you know, this is an old carve up since the Bretton Woods meeting. Funnily enough the US gets the World Bank and Europe gets the IMF and it cannot go on, surely. What about the rest of the world? This is disgraceful. The World Bank's first remit was thinking about restoring Europe and you can see how that was the mindset then but now it is the important institution for developing countries and they are carved up by that deal of everyone contemplating taking up the leadership. It is intolerable. The geographical carve up is intolerable and then the system for selecting is a kind of political fix system, lots of UN appointments are too, let me say. We need to have a much more open process saying what are the skills which are required. I think when you are looking for these international jobs you need international head hunting because just to have an application system when you are looking at fix or six continents is not right. I have been having this discussion with Kofi Annan too. Of course he has got to balance African/Asian men, women, Europe but I think you could have a head hunt for people who are in the bracket of competence and then if you need to balance continents you can do it. Then the final selection is a bit like political selections, as long as the short list is competent in the end it does not matter who wins. It is an outrage the present system and it needs continuing pressure to make it transparent, to go for competent and to have a political fix. It extends to UN appointments too.
(Clare Short) Jim Wolfensohn keeps saying he has got anther two and a bit years.
(Mr Faint) It is just over two years, yes.
(Clare Short) I must say we are not winning this. We are arguing it. Tony, do you want to say something?
(Mr Faint) I was going to say, I think that we have made some progress internationally. Some jobs, for example the head of UNESCO appointed a year or two ago was done by a very open and competitive process. The process for the head of the WHO looks like it will be quite open, although ---
(Clare Short) I think that is a bit romantic.
(Mr Faint) --- it will be structured in a certain way, nominations by high governments. On the IFIs, well, you have very powerful large shareholders who still feel comfortable with the current system which the Secretary of State says is contrary to the principles of multinationalism and we have to go on pressing to try and change it.
(Clare Short) Of course the Scandinavians and so on, the smaller ones, would always support. Is there anyone else? G7?
(Mr Faint) I think a decision in G7 is what this would take.
(Clare Short) Yes, but there is no-one else?
(Ms McMillan) No.
(Clare Short) I think the truth is without more energy behind this the prospect of a change by the appointment in the next President of the World Bank is less than 50:50.
(Mr Faint) Even if we can have a competitive open process limited by nationality that would be a big step forward from the current one name nomination.
(Clare Short) Yes. I think some of these campaigners are opposed to the interests of people in developing countries and tend to oppose any dam, any development, any pipeline, any energy project. If you take, for example, the Chad-Cameroon pipeline, these are desperately poor countries which have got oil. They must be allowed to exploit it surely for the benefit of their development which means a pipeline and surely it is better to have the World Bank engaged. The campaigners come in to get the World Bank out, if you get the World Bank out it will just be done commercially. You are right, they mount enormous campaigns, it tends to be environmental groups with little knowledge of development and therefore ending up often unsympathetic to development. We had a similar campaign about a project in the west of China amongst some desperately poor people and in the end China just said "Get the World Bank out we will do it on our own". There have been a number of these campaigns where we stand very strongly against that kind of cheap headline grabbing campaigning but we insist as a Government with our influence that all the proper environmental checks are done and such investments, which are often in frail and environmentally precious environments, are done responsibly. Yes, personally I and the Department have stood against some of these campaigns because they are often anti-development campaigns and they are people living in rich countries who have access to energy and clean water and sanitation who mean well but are against any development in poor countries. We think the World Bank should have the highest standards but it is better to have the Bank in than out on a lot of these projects. The effect of some of those campaigns is to get the Bank out and just leave it to pure commercial exploitation which will have lower environmental standards then.
(Clare Short) Of course, but you asked specifically about Chad-Cameroon and I think the campaign was run on that and I think it was right to go ahead and keep the Bank engaged. I think the campaign against the Western China project --- can you remember what that was called?
(Ms McMillan) Western China Poverty Reduction.
(Clare Short) Western China Poverty Reduction Project, the net effect was to get the Bank out so the thing is going ahead without the Bank's environmental standards being engaged. China is moving on environmental standards. That was the whole point of, for example, the World Commission on Dams. There were big infrastructure projects when that was the fashion of the time with exaggerated notions of what the irrigation effect or the power effect would be, displacing people, disrespecting people, not looking at all the human consequences. I think it swung then to no infrastructure development, no dams, no power, which you cannot go to. We need to go much more to the sort of wisdom that was in the World Commission on Dams, responsible projects, properly managed, properly considering all the interests of all the people involved. Of course there have been propositions which have been disgracefully not considerate of poor people and indeed of the environment. That does not mean every single project should be opposed. Some groups have got to that point and that is where the argument is with my Department.
(Clare Short) Absolutely or require a further screening of the potential environmental effects and an adjustment. In the Western China project I know we asked for another stage of consulting local people and so on. We intervene often to try and make sure the projects are more responsible but we always look at what is the interest of poor people in the country, can it help reduce poverty and be responsible environmentally and in considering the interests of the poor. My own bias is to have the Bank in if you can rather than leave it to pure commercial development which will tend to be less considerate of people and the environment.
(Clare Short) There are a massive number of strategies being developed. I think the Poverty Reduction Strategy way of working has taken off in the international system. For example, Bangladesh is doing one that is not a HIPC because it does bring together macro-economic policy and social policy and revenues and how to deal with debt and how aid is dispersed together and more long term and then looking at what trade can contribute and get a more holistic approach and a more open approach. You can go too fast or at least a lot of the highly indebted poor countries, they had interim Poverty Reduction Strategies and because they needed their debt relief fast it was often only an outline. Then we needed to stick with it and deepen them and lengthen them and widen them; that process has been going on. My sense is - but Penny might want to comment on this - some of the other countries represented on the board of the Bank have started piling on the conditionality and slowing things down a bit but some countries are less committed to reform than others. A lot of development talk is as though all leaders of all developing countries care about the poor and as you know that is not the case.
(Clare Short) Sometimes the strategy is not good enough. Do you want to comment? It has gone slower than we hoped.
(Ms McMillan) Certainly it has gone slower than we hoped. I think in the very broadest terms with a lot of the countries which have been slow preparing the PRSPs before reaching a decision point on HIPC it has been due to conflict and especially in sub-Saharan Africa. There has been a certain slowness between decision point and completion point which has sometimes been related to poor policy and environmentally slower implementation of reforms than perhaps we would have expected. I am not sure about the conditionality point that you raise, Secretary of State. I think that as the process has gone on from its very early days we have realised just what is involved and what potential it has to draw in absolutely everything. This is a very large process so we have to make sure that we get it right. As we go on and have got more experience with it we have realised just how much can be built into this to make it a real Poverty Reduction Strategy.
(Clare Short) On the first point, in my view the Poverty Reduction Strategy process borne out of debt relief but now going much more widely, and the transformed way of the Bank and the IMF working in developing countries, is a revolutionary shift from reform agendas written in Washington, imposed on countries, often in collusion with some of their governments, because reform is difficult, and if you can say the IMF made us do it, it is sometimes easier. There was some of that collusion going on. If you talk to the HIPC finance ministers they say it is politically more difficult but they prefer it. It means they take the flack at home, they cannot just say "It is all the IMF's fault". You can get this shift from Washington so we can do what we like, it is not that. It has to be the genuine partnership aimed at meeting the Millennium Development Goals, the beauty of them being that we have all agreed to them. You have got corrupt governments who do not really care and who want their debt relief but do not want to spend it on people. You have got very powerful elites in developing countries and they want the health and education budget spent on hospitals and university places for the capital and the elite. Those tensions are very strongly still in government so you do need this kind of partnership conditionality, it is about delivering to the poor, it is about working together to meet the Millennium Development Goals but it needs to be driven by the country and open in the country, that has been a condition of the PRSPs. I think everywhere it has opened governments to criticism by civil society that they were not used to when it came to reform, they were agreeing with the Washington institution. Those reforms used to be agreed behind the back of people, limited at first often because a lot of people in very poor countries are not used to being consulted, they do not have the means or the knowledge to know what all these phrases mean. We have been trying to work with church groups in particular which tend to penetrate right down to the grass roots so if they are more informed about the processes really they can bring the people in. That is ongoing work and we are very committed to it. I think in the early stage we missed parliaments because we said it must be open with the people, we were all concentrating on civil society. Parliaments were hardly in the process in many countries. I think that has been corrected and in countries where we have been engaging with the kind of reform in finance ministries on budgets and so on, like Tanzania, then it has to go into the parliament because they have now got procedures which mean financial commitments have to go into the parliament. I think not just us but the whole inspiration of the PRSP, this country lead and openness is very much a part of it but there was a tension in the early days, the interim PRSP was to trigger the debt relief so countries wanted to do it fast. Of course then they want to put down what the Bank and the Fund will approve so I think in the early days sometimes it was not as locally owned a process. There is a tension between speed and local ownership. I think local ownership is deepening. We are very committed to this and I think it is deepening across the world in a very important way. How can you make sure that the debate is about real choices? This is enormously important. The Poverty --- what do you call them.
(Mr Faint) The Poverty and Social Impact Analysis Group.
(Clare Short) --- which we are very, very keen on. You know the arguments about good water being run by a private sector provider or should there be any charges or the whole misleading campaign against the Ghana water reorganisation. The view of my Department is we should not take an ideological position on these questions if it is the water sector or something else. How is the country doing? What are the interests of the poor? How can you get a better service and keep the prices and so on? If you then say "Should we build this dam or not?" or "Should we reorganise the way we do our water supplies? Should we bring in a private sector partner or not?" then countries get choices if they have a procedure that can check what are the benefits. There are always thousands of different ways of doing things. I think we are moving there. We are very keen on this Poverty and Social Impact Analysis. We are doing some work to experiment with rolling them forward and giving them an example. Funnily enough, up to now the IMF has been keener than the Bank. I have been pressing the Bank too. We have been pressing at all levels. I took it up with Jim Wolfensohn. Do you want to add something? This is really important to all. Within the strategy the PRSP would enable countries to look at different options and where the interests of the poor lay. That gives the choice and sense of control you are looking for.
(Mr Faint) I think conceptually we have won the argument. It is accepted that you need to have a good analytical base for the key choices facing countries in designing Poverty Reduction Strategies. The way to go is through a disciplined assessment process. The IMF is a consumer for this. The IMF needs the analysis in order to design its programmes better and have its dialogue with the Government. The World Bank with the donors has helped to deliver this product. I think we have an analytical tool which will do this job but there is a lot of work to be done. We have done some pilot exercises. We have had discussions with the Bank and the Fund on the underlying concepts and what is needed now is to roll this out, and it is quite a large task, to identify key issues within Poverty Reduction Strategies that require this kind of analysis and then programme it. It is going to take a period to do this job. Conceptually I think we are there but there is quite a lot of implementation still to be done.
(Clare Short) We are doing these studies to try and drive it forward which I think we should share with you. I think this is very important. There are five - Mozambique, Uganda, Rwanda, Armenia and Honduras - which are complete and there are others coming, Indonesia and Pakistan. I know we are going to do a dissemination with NGOs. I think we should keep the Select Committee informed. It is a thing which will need driving. It is a tool of more local ownership and choice again that civil society needs to understand so they can face up to what the real choices are in a country.
(Clare Short) I agree with this. Let me say there is another thing, the cost of getting elected. We pushed multi-party democracy on to countries without thinking through who pays for politics. It is estimated it costs £20,000 to be elected in Uganda, as much as £750,000 in India. I have been trying to get Transparency International to be interested in an index of how much it costs to be elected because if people are paying that kind of money then for sure they are going to try to get it back from somewhere, so that is another part of the battle. I agree within goodwill - and there is always some of that - you never get total corruption, there are always some people who care. Giving them the tools of holding their government to account we do try to work it into the improved financial accountability but more could be done. I agree it is a really important aspiration and we ought to think it through more. The Commonwealth Parliamentary Association does enormously important work but maybe we could add to it and sharpen it and this sharing of skills could be a very important effort. The World Bank has set up a parliamentary tier which I am sure some of you have been involved in.
(Clare Short) I will have to look into that. That is the first time that point has ever been put to me. Let me say, the old style of everyone turning up mob handed to the meetings of all these multilateral organisations, and NGOs spending a fortune of the money they collect charitably to go there, is a crazy system. Getting back to the proper systems of accountability - which are to parliament and to civil society at home which we have been trying to work on through these notes and indeed this kind of scrutiny - is the right way.
(Clare Short) Then having some representation of parliament and maybe NGOs in government delegations, as you know, I think is a good thing. I think the idea that everyone has to travel to know what is going on at the meeting is madness because it gives people a sense that everything is out of control and there is no way of holding their government to account. I will look into it.
(Clare Short) I know you do like attending these meetings.
(Clare Short) We cannot have all 650.
(Clare Short) This is a wider point about how to get development in the poorest, most misgoverned countries. We have made a lot of progress in the last five years in improving the way we back reformers and back countries which are willing to go for reform. That has tended to lead to them turning away from the countries with terrible corruption and bad government. Lots of the very poorest people and most depressed people in the world live in those countries. There has been work going on in the Bank, they call it LICUS - Low Income Countries Under Stress, terrible set of initials - and there is work going on in the development committee of the OECD. I think this is the next theme we have to pay attention to, how to drive forward progress in countries where that energy is not coming from the government, and it is very difficult to work in the country when you have got corruption and oppression and so on. I have been thinking things like maybe in a country where you just cannot get a commitment from the government to primary education, say, for the poor, maybe the donor should fund it to get one generation of children through because we know that brings about deep change. You can do things on social marketing, things like condoms, bed nets and so on. Improving our capacity to intervene in countries where you cannot get a commitment to reform out of the government we are working on and I think we need to do more on. I think it is very important to get pressure on it but it is very difficult in the nature of the task. If you take Nigeria, it has come to democracy, enormously important, it is more than one in five of sub-Saharan Africans, very little reform has happened since the last elections. It is an oil rich country with 70 per cent of the people being a dollar a day poor. It is a very difficult country to reform: the separation of powers between the federal and the state and so on, if the Archangel Gabriel became the President it would be very difficult. No, we need to be serious, how can we help Nigeria reform itself? This is the biggest, hardest question in international development that you ask. We are working on it.
(Clare Short) Yes. First of all, the World Bank did not launch the initiative on Education For All by 2015 and gender equality, that was one of the international development targets, now the Millennium Development Goal. It did not come out of the Bank, it came out of the UN system backed by the development committee of the OECD and then reaffirmed most powerfully in the Millennium Development Goals. It was already there as an agreed international objective and lots of work had gone on. Then the World Bank launched its fast track initiative under a lot of pressure from NGO campaigning but tended to frame the question of what we needed to do to get faster progress on primary education in terms of extra donor resources. The first announcement of the fast track initiative was like a cosmetic presentation and a false analysis. It listed the countries where we have made some of the best progress and departments like mine and others have worked very hard: the Ugandas, the Mozambiques, the Rwandas and so on, and then said "We are going to have a World Bank fast track initiative". It was like they were going to have a trust fund, ask for some extra money, sprinkle it into the reformers and then claim that they had driven forward progress on primary education. That was the initial fast track initiative. We engaged very strongly. Then on a number of these countries like Uganda and Rwanda, where we are very involved, we are having arguments with the IMF that they are over-aided, so they are making progress on education and there are limits on the international system, so they cannot have more aid. We argued for the extension to countries with very large numbers of children out of school which are not leading the reform effort and are not moving forward. You have got then the so-called analytical fast track which is conceptual and complex and you look at the Nigerias, the Ethiopias, the Indias where there is some effort to make progress but there are still so many children not in school and so on and then the question becomes how can you energise the international system to put supportive pressure on a country to be willing to go for the kind of reform behind which extra resources can drive forward progress on getting more children into school. We are working very hard to try and reshape the fast track initiative in that way. I happened to go to Tanzania and be talking to ministers from Uganda and so on after the fast track initiative had been launched, it was being announced in Washington and NGOs were proclaiming it but people who lived in the country who were reforming education did not know anything about it. So there was a lot of that going on which really is no good. Also we need to get this thing under control because then it was suggested we will have a fast track health initiative and a fast track water initiative and then these are going to be cosmetic Washington, bits of funds, not delivering on the ground, not part of Poverty Reduction Strategies, not sustainable, not reaching scale. So in terms of the UK's commitment to finance, in the early stages they were talking about a World Bank Trust Fund, and it was part of this conception dole out a bit of extra money and you crack the problem. We are not proposing to put any money in a trust fund. We believe absolutely in working bottom up, backing Poverty Reduction Strategies, as we have been saying earlier this morning, putting money through budgets where you can because you are getting sustainable long term reform and reform in the use of the country's own revenues. You will know these figures. Since 1997 we have committed £700 million to driving forward the commitment to universal primary education. We have just done an exercise in the Department and projected spend - which is not the same as committed but these are plans in the Department if governments will commit to move - over the next five years is £1.3 billion. We believe passionately in driving forward primary education. As you know the evidence is that it is the most powerful intervention you can make in a country which brings about development. We are trying to reshape the fast track initiative to make it something useful and add energy to progress rather than a falsely based cosmetic initiative.
(Clare Short) It is not impossible. The problems you outline are there but the reality on the ground in many countries is that we have learned how to make progress. We have seen - and this is one of the most moving things I have seen - very poor families who, yes, rely on the work of their children. Either you have got fees or often in countries it is not fees but you have to buy the books, you have to have special clothes, there are all sorts of barriers which stop poor children getting to school. In the case of Uganda or indeed Malawi, which is a desperately poor country, when absolutely free education was announced millions of extra children came out of their desperately poor families with this fantastic hunger for education. That is the experience across the world. Then there are other things like girls will not stay at school, especially as they get a bit older, if there are not toilets there and simple things which you do not think about which are very important for dignity and security. Across the world there is work going on in the poorest countries. The reason we have a long summer holiday in this country is because our children used to help with the harvest. In many countries when children are from poor rural communities and they are needed for the harvest there should be a break from school. In many, many poor countries this is driving forward. In Andhra Pradesh in India massive progress is being made. I do not know if I have said this to you before. I have been to a village in Andhra Pradesh where there was not a single literate woman. It is a tribal village. Every single girl, including the special needs girls, is in school. It is not easy but it is doable with all this absolute drive and commitment but it must be free and it must not have hidden costs like books and uniform and all that sort of thing. We can make very considerable progress. The places where we have got problems are places like the Nigerias where reform is not driving or the conflict countries of course, the Myanmar, Burma, the Congo and so on, Sudan, you have to end the conflict before you can begin to try and get all children into school but we can make progress and that is the commitment. We are determined to drive it in any way we can. In Africa we have become more and more interested in resolving conflict partly because you cannot get the Millennium Development Goals in those countries until you have ended the conflict. Then if you concentrate on the Sudan there is a prospect of it coming to peace. If we all would focus on the Congo we can help that country to peace and then it will get its debt relief. There are something like 60 million people in the Congo so it is enormously difficult but enormous progress is possible. I have just come back from Afghanistan, schools are opening there and children are queuing up to go to school. Please do not be so pessimistic.
(Clare Short) I do not agree at all that is what the World Bank's Private Sector Development Strategy says. There are some NGOs who are devoted to campaigning against engagement of the private sector in the provision of utilities which are misinformed, I think, and stand against the interests of developing countries. There has been less investment in modern telecommunications in Africa than any other region in the world. It is the place with less connections to the internet than anywhere else in the world and where being connected to the internet - just to take one example - is more expensive than anywhere else in the world. It is the technology that is driving transformation and change. No country can get the kind of investment in modern telecommunications which are needed without getting some private sector investment. We have got to bring responsible private investment into the poorest countries if they are to get the investments in transport systems, telecommunications, water, sanitation and so on that they need to get the infrastructure for their economies to move forward. There are some campaigning NGOs who want to say the private sector should never engage, even though in our own country it is different. I do ask them always "Look at what is happening in our own country and what we are achieving by regulation. Do not project one set of values on to developing countries that you would not advocate at home" and many of them do. I do not agree that the World Bank Strategy is all about privatising the utilities, that is just a complete distortion. The view of my Department, and I think the Bank agrees, is there should be this assessment of where the interests of the investment in the economy of a poor country lies and it should be looked at in all the different ways. You need to go towards the private sector learning the lessons of good regulation. Some countries have made terrible errors, like Russia moving very fast without good regulation, regulation is very important. It was only a couple of years back when there was a big row in the World Bank with most of our campaigning NGOs joining in about whether you should be in favour of redistribution or economic growth. What a piece of absolute nonsense. We cannot reduce poverty without economic growth. You can have responsible economic growth just as you can have responsible private sector investment. You know the figures for Africa: 40 per cent of its domestic savings leave the continent, is it that way round, because the banks are weak and they all come out into our kind of banks. Getting the kind of improvements in savings, banking that keep domestic savings at home, that get them reinvested in a country, growing the local private sector and creating the conditions where responsible foreign direct investment comes in is absolutely key to development and the improvements in infrastructure which are needed. Sorry about this little rant but I mean it.
(Clare Short) Which I have never heard of, may I say, which is making false claims, whoever they are.
(Clare Short) I do not know who this organisation is, I had not heard of them before I read the briefing this morning for this meeting, but what they are claiming about the World Bank is false. The position of DFID and the position we advocate with the Bank, which is agreed --- because of course the Bank used to be under the pressure of different governments with different values and it is a public sector institution and when parties take control across the world with different values, the Bank will be influenced by that. We are in a consolidating period now and where we stand and where I personally stand very firmly is to be pragmatic about this and to look at where the best interests of good investment for poor people are. If you look at electricity in India; it is massively subsidised, grossly inefficient, there are constant power cuts so every business has to have its own generator, and there is virtually free electricity for rich farmers for irrigation, and all the public sector money that should be going into health and education for poor people is sucked into inefficient electricity generation. So in India we are working with others to try and help responsible privatisation of electricity so that some of those funds can go into health and education for poor people and, indeed, there can be more responsible distribution of the costs of electricity and so on. As I said earlier, we believe that case-by-case you should look at the interests of the poor and the best way forward for a country and use the tools, and that is the position of the Bank too, and that is the right position.
(Clare Short) No, I am sorry.
Mr Colman: --- There do need to be choices.
(Clare Short) The organisation is making absolutely false and untrue claims about Bank policy. I do not respect false claims. There is a lot of campaigning that goes on in development that seeks headlines by making false claims. I profoundly disrespect that so when that is happening I will say it is a false claim. On choice, it is our view that there should be choice. We do not prefer a private model; we prefer a model that will serve the poor and get better services. I have made that clear. Sorry, Chairman.
Chairman: I think we are all clear where everyone stands on that issue. Let's move on to trade. Bob?
(Clare Short) The Bank was really slow to take up the trade question and the Integrated Framework - which is the six big international organisations building up capacity in countries to negotiate their trade interests in Geneva and to take up trade rights that they have (because this is a fantastically complex area of policy) - was slow to get going but is now moving. We were pushing the Bank for a long time to take the WTO round more seriously and some of the studies they have done on the potential impact of widening trade access for developing countries were belated, but are good and are very important. I have not seen that quote that you have just read out. It is not our policy and it is not the policy of many developing countries, or any that I can think of, to just open unilaterally. In fact, since Seattle and up to Doha the move of developing countries to stand together - and South Africa played a very constructive role in helping create an alliance of developing countries and demand gains for developing countries out of the next trade round - is an unprecedented sense of clarity about what they want for developing countries and their capacity if they stand together to make gains. It does flow from the formation of the World Trade Organisation being a membership-based rules-based organisation. So I think most developing countries are very focused on making gains out of the next WTO round and would rarely be tempted to open their markets unilaterally. Our own view is that if you look at the evidence, countries that are opened do better than countries that are closed - and you have only got to look at North Korea - but you can open too fast. You need to phase it and organise it and create capacity in the country to take up the opportunities or to adjust sectors that are flourishing behind protection that are often very inefficient. I do not think there is any pressure on the Bank in this day and age for countries to unilaterally open. Do you, Tony?
(Mr Faint) I do not think so. On the contrary, the Bank has probably been rather slow, as you say, to get on to the trade agenda in the framework of the poverty reduction strategies. It is a fact that in poor countries trade tariff barriers and other barriers to trade do tend to be rather high and much higher on average than in developed countries. So there is an agenda for trade liberalisation in developing countries but much more important is the international liberalisation agenda and opening the markets of developed countries.
(Clare Short) Developing countries have high tariff barriers between each other. Because of colonial patterns, countries regionally often do not trade in their own region in ways that would be beneficial, so there is an agenda to open up regional trade and then you have got technology and cheaper transport costs and so on. I do not think World Bank is advocating that. No doubt it is a brief from another helpful campaigning organisation!
(Clare Short) There will be a ministerial meeting in Cancun in Mexico of the WTO in September of next year. That is going to be an absolutely crucial meeting as to whether the world is keeping to the development agenda that was agreed at Doha. I think if it goes sour and if we fail to deliver, there will be a bitterness in the international system and this whole momentum of the Millennium Development Goals, Monterrey, Doha and so on will shatter and we will be in a lot of difficulty and a lot of gains we have made will collapse. That is fantastically important. I agree with you that that is of enormous significance. What happened of course at the European Summit is that Germany - who is a net contributor and having some difficulties in its own economy and yet Germany wants the new countries to join because they are in their backyard in Central and Eastern Europe - did not want ever-growing costs of CAP, so, as I understand it, has made an agreement with the French that there should be no growth in spending. Now there is the mid-term review and the proposals from the Commission are to de-link subsidy from production, which must be the way forward for Europe and then you are not dumping food on world markets and we can keep to our commitments that were made at Doha. The French have difficulties with that because, of course, their farmers are very big beneficiaries from the Common Agricultural Policy. I understand part of the argument was about adhering to the Doha promises and that that was reaffirmed in the course of that spat which we heard about, although no one here was present at the meeting. I agree with you that this is a key issue for development. It is no good just improving aid if we cannot improve trade access. If we do not deliver on Doha the world will go backwards. Europe is key and Europe has to be willing to reform the Common Agricultural Policy in order for Europe to adhere to its Doha commitments. The American Farm Bill, which moved in the opposite direction, caused a lot of bitterness at the Bali meeting preparing for Johannesburg but since then they have made proposals towards the Doha round that are quite helpful. There is all to play for here. It is enormously important politically. The United Kingdom has got to use its influence in any way it can. France finds it particularly difficult. At Kananaskis, again at Johannesburg and again, as I understand it, at the European Summit a reaffirmation of the commitment to Doha was made. We have got to deliver that - and it will not be easy - otherwise Europe will be the barrier to Doha and that will be so shameful.
(Clare Short) My own view is that we need effective trade-capacity building, not necessarily "Uncle Tom Cobbley and all" doing it. We have worked very hard on the Integrated Framework, and it took ages to get it going, and we think it is going much better now and we have got the UNDP as the co-ordinating UN development agency, the World Bank, the International Trade Centre in Geneva, UNCTAD and so on. Certainly in the work we do and fund we use expertise and academics and so on but I do not think we need to spend all our time getting everybody in to offer training to developing countries. We have to make sure that we integrate those offers and help them take forward their capacity building. We have been working hard on that and we think progress is being made. As I say, it is a fantastically complex area of policy. It is both the capacity to negotiate and look at PRSP and think where is the possible growth in trade that would help us grow our economy. Then it is businesses in developing countries having enough knowledge to take up trading rights that might be out there but are difficult to take up. There is a real danger in the international trading system, especially in Europe where higher and higher (supposedly) food health or sanitary standards keep escalating and changing, which makes it very difficult for countries to export. So it is building all that sort of capacity. I am not drawn by your suggestion that every agency that feels it wants to get on the band wagon should be drawn in. I think we should take people as they add to effectiveness and for no other reason.
(Clare Short) I think my understanding is that France and United Kingdom are very similar and the United Kingdom has just gone ahead of France on GDP.
(Clare Short) France has got very serious problems because of the nature of its agriculture. We must not allow the French problem to blow Doha away but we must not all gang up on France. We must help to find a way through to seek something sensible and realistic for France. They have got a different scale of farming. It would be easy for everyone to get together and have a go at France and we might get ourselves nowhere. I did not realise that you did not know that the Council of Development Ministers has been abolished, so we have got not very effective EC development effort. Whatever it is now ---
(Mr Faint) --- It is the General Affairs and External Relations Council.
(Clare Short) --- which might occasionally deal with development, which is not good news for strengthening the development agenda in the EC. Even more shocking is the fact that every cow in Europe gets more than two dollars a day subsidy and 2.4 billion people in the world are surviving on less than we subsidise the cows. That brings the whole thing down to its shocking reality. The Commission's proposal for a mid-term review de-links subsidy from production which would enable French farmers to continue to be helped but not encourage surplus production, and then the agreement between France and Germany means the budget cannot grow with the accession countries coming in. If the EU will stick with the Commission's proposals on the mid-term review the EU can adhere to the Doha commitments. That is where the argument lies. My Department has been doing work on this since 1997 when senior officials in the DTI got apoplexy at the idea of anyone in my department doing work on trade. We now have a very strong joint working relationship and a very strong commitment amongst United Kingdom trade experts to the development agenda. There really has been a big shift which is very important. They are leading players now in the international associations, of course, forwarding the UK's interest but looking at all our interests in more than just the international system. The Bank has moved from not talking much about trade to, with some prodding by us amongst others, putting forward the trade argument very strongly and then the Bank has to judge in what detail it gets involved in arguments with the Commission. I agree with the points that both of you are making. This is a crunch issue for the world and for justice for the developing world. We have got until Cancun in September and if the EU is not willing to change the Common Agricultural Policy the EU would throw away Doha and that would be a terrible responsibility. So there will be lots more politics and lots more tension about this and we must focus on it. The United Kingdom Government - from the Prime Minister, the Chancellor, my Department and the DTI - is very dedicated and has the same view as this Committee, that it is in the United Kingdom's interest and developing countries' interest - and there is no clash of interest here - that we must reform the Common Agricultural Policy in order to fulfil the Doha commitments.
Chairman: Thank you very much for answering our questions. On this last exchange, we are going to be undertaking an inquiry into trade policy in the New Year. I suspect it will take quite a lot of next year. I hope that we will be able to hear as many voices from developing countries as part of that inquiry as possible via the Internet or via whatever other means because I think these are crucial issues. It would be a tragedy if all the work that had been done this year on Doha and Monterrey gets thrown away. We look forward to seeing you on 10 December when you are very kindly going to come and answer questions on Afghanistan as part of our current Afghanistan inquiry. We are staying here because we have to agree our report on DFID's Annual Report 2002 and do a few bits that we have to do to keep the Liaison Committee happy and the world happy. Thank you very much.