Examination of witnesses (Questions 40 - 59)
TUESDAY 17 FEBRUARY 1998
MR ROBIN
FELLGETT, MR
RICHARD MANNING,
MR ANDREW
STEELE, AND
MR NICK
WESTCOTT
Dr Tonge
40. I should like to put a question that I know all of
you have awaited. NGOs such as Jubilee 2000 argue that our Government
should set an example by wiping out debts. I was amazed to discover
that the total interest payments per annum amounted to US$60 million.
That is less than the average borough council spends in a year.
Why can we not just wipe it out—
or would it put you out of a job?
(Mr Fellgett) I am out of my job! Obviously, that
is US$60 million paid to the UK. For a poor country it adds up
across all its creditors. As to unilateral forgiveness, I should
like to make two points. I may be anticipating a later question
but it may be of assistance to deal with it now. If one looks
at the structure of debt relief under the so-called HIPC initiative,
the philosophy is that an assessment is made of what the country
can afford to pay, which may be a large or small proportion of
what it notionally owes. Debts are then written off down to that
level. If the UK unilaterally wrote off the debt and the international
community went through the same process the poor debtor country
would have its debts written down to exactly the same level, so
it would be no better off as a result of the UK's unilateral forgiveness.
But other creditors who had not made the same gesture would find
less of their debts written down.
41. I do not understand that.
(Mr Fellgett) Let me give a simple example. Take
creditors A and B and a country that can pay only one third of
its debts and its debts are owed equally to A and B. Therefore,
two-thirds of the original debt is written down to the assessed
level of sustainability of one third. If creditor A writes off
all its debt that leaves half the debt. Under the HIPC process
the debt is still written down to a third of its original level.
Now all of that is paid to the other creditor who has not written
off anything. Therefore, the debtor is no better off; it is in
exactly the same position. It pays just as much but now only to
the creditor that has not made a unilateral gesture.
42. But why does not HMG lead the way? I am assuming
that once HMG have said they will do it—
because it is a relatively small amount - other members of the
Paris Club will follow.
(Mr Fellgett) I regret that they do not always
follow.
43. I should like to move on the structural adjustment
facility programmes that the IMF imposes on countries. They do
not seem to me to achieve any reduction in poverty, which is ultimately
what we are talking about. Governments do not comply with them
and do not change their underlying policies. Those programmes
are inappropriate if one wants to lift a very poor country out
of poverty. The adjustment programmes appear to concentrate solely
on economic factors and sometimes lead to countries cutting down
on activities like education to meet the economic criteria. That
seems to be crazy.
(Mr Fellgett) The experience of economic growth
in Africa is appalling. Economies have gone down, not up. There
have been encouraging signs in recent years. In the past two years
for the first time for decades economic growth has exceeded the
growth in population. People on average have become better off.
That is perhaps the wrong expression when one considers how poor
they are to begin with. I do not seek to argue that the IMF prescription
of sound monetary and fiscal policies and open markets is any
guarantee of success.
44. If they had those they would not be HIPCs?
(Mr Fellgett) Experience is that it is the only
medicine that has demonstrated success as a result.
45. But the only medicine we knows that works is primary
education. If countries have to cut back on that to meet the economic
criteria in my experience it does a lot of damage.
(Mr Fellgett) I agree with that. The view of the
Government is that the priority that needs to be attached to education
in developing countries should be respected in IMF programmes.
46. But that is not so at the moment?
(Mr Fellgett) We are heading that way. The Government
do not believe that we have got there yet.
(Mr Manning) The concern that you have expressed
is widely shared in many quarters, certainly by my Secretary of
State. Over the years we have observed—we have pressed for
it—that the international financial institutions are being
more responsive to some of the concerns that have been mentioned.
Indeed, the managing director of the IMF is meeting my Secretary
of State later this week. They have already had useful discussions
on this kind of question. Clearly, every government has a budget.
When that budget is under severe pressure it is extremely hard
to ring fence any particular part of it. However, what we have
sought to do through such programmes as the Special Programme
for Africa led by the World Bank is to try to work with other
donors to support public expenditure programmes that meet the
kind of concerns that you have in mind but are set within an overall
sustainable framework.
47. But that is DfID money, not relief of debt. Our development
money is being used to sustain those programmes. I am talking
about using the money which they would otherwise have spent on
paying debt on education and health programmes. Why can we not
say to them, "You no longer have to pay the interest on these
debts provided you spend it on education and basic health care—and
we will ensure that you do"?
(Mr Fellgett) That is the practical effect. For
example, Uganda made it clear———
48. It has not had any debt relief yet?
(Mr Fellgett) It has some debt relief.
49. Economically, for some years they have been behaving
like very good boys and girls but they have not reaped the benefit
of that?
(Mr Fellgett) It is not that big in the case of
Uganda. The so-called write-down completion point is due in a
couple of months. The Ugandan Government was very clear that they
saw that clear linkage. I have discussed this with colleagues
in the Finance Ministry in Uganda who are responsible for the
budget. They see that the reduction in debt payments that they
must make is helping to finance their programme to develop primary
education in rural areas of Uganda. It was not something that
was imposed on them; it was something that they wanted to do.
I suggest that that is rather better.
Dr Tonge: I agree with you, but sometimes governments
may not do that; they may decide to spend it on arms.
Mr Robathan
50. It is obvious that both public and private institutions
got their fingers quite badly burned in lending to developing
countries in the recent past. If all debt is to be written off
is it considered that that is not in the long-term economic interests
of some of the countries, in that if countries are for ever regarded
as bad debtors they go on a credit unworthiness list? Therefore,
although we might in future provide such countries with grants
public and private institutions would be unwilling to lend to
those countries which they viewed as incapable of repaying their
debts. Is that part of the equation?
(Mr Fellgett) Yes, it is. Clearly, it varies from
country to country. Some countries will not be in a position to
borrow on international markets for some time to come, but even
those countries who demonstrate a willingness to service perhaps
only a small proportion of their debts look ahead to the day when
they can do so. At the other end of the scale, for example Kenya
sought a rescheduling of its debts from the Paris Club three or
four years ago. The Kenyan Government did not seek debt reduction
but simply more time to pay because it wanted to demonstrate that
it was standing on its own two feet, albeit it was a recipient
of aid somewhere else in the budget, for exactly that kind of
reason. It wanted to establish its creditworthiness.
(Mr Westcott) The objective in answer to both
questions is to achieve self-sustained growth that will enable
these countries to have sufficient resources to pay for health,
education and all the necessary services both to alleviate poverty
and achieve growth. Education may be a long-term investment but
it is nonetheless an investment and borrowing money on the international
market plays an integral part in it. If they were not able to
borrow it would have severe effects on those countries. They could
still receive a certain amount of aid in grant form, just as they
do now, but it would be significantly less than the potential
inflow of capital that they could obtain if they were allowed
to borrow. At the moment, the international institutions like
the IMF and World Bank are constrained to lend rather than give
because they must think of future generations and have some revolving
income. Because they are so constrained the money that they can
make available must be based on loans. It is crucial to ensure
that the money which is lent to the poorest countries is invested
productively so that it will generate growth. The big failure
in a lot of these countries is that they have received a huge
amount of money without it being turned into productive investment.
The question is: why do we not take that US$60 million and give
it to the health sector in those countries rather than keep it?
To maintain the integrity of the international financial system
and the principle of equity all donors should make a contribution.
To some extent the position is stronger if we maintain our position
that we will participate in multilateral negotiations to reduce
debt rather than do something unilaterally which will weaken our
leverage to persuade others.
Dr Tonge: I believe that the question of future borrowings
is another matter. One would hope that in future lenders would
be much more prudent and impose more sensible conditions before
making loans. What Jubilee 2000 is referring to is debt that is
escalating because of oil prices and various other factors, including
corrupt regimes, which no one can do anything about. It is all
in the past. I do not suggest that in future we should not continue
to make money available.
Mrs Kingham
51. I have great concerns about the idea that the structural
adjustment policies stimulate internal growth which helps to reduce
poverty or that particular countries can become self-sustaining.
I noted that in the report of the UNDP there was criticism of
the fact that some of the structural adjustment programmes looked
for contraction rather than growth; in other words, they stimulate
countries to contract rather than grow their economies. The classic
example is Mozambique. I visited Mozambique during the war. The
shops were completely empty and the country was devastated. Recently,
shop keepers wanted to open up their shops and get the local economic
going, but the structural adjustment programmes and some of the
caps that have been imposed have meant that such activity cannot
be stimulated. It seems that yet again it is top down economic
growth which trickles down and somehow benefits the rest of the
population. Do you have a comment to make on that?
(Mr Fellgett) I regret that I have not had the
privilege to visit Mozambique. I should like to do so.
52. It is a very nice place.
(Mr Fellgett) I find it difficult to provide specific
details of the IMF programme for Mozambique. If you want us to
respond in writing on that point it may be more helpful if we
do that.
53. I am sure that you have come across the same criticism
of the structural adjustment programmes. We have been told that
it has changed, but it has not changed on the ground.
(Mr Fellgett) If one looks at countries like Côte
d'Ivoire, Guyana, Ghana and even Mozambique, clearly the structural
adjustment process is not easy. It does not deliver immediate
benefits to all the population, but experience suggests that allied
with such matters as maintaining investment in education, health
and so on and what social safety nets (to use the jargon) can
be afforded, it offers the prospect of success.
54. You used the crucial phrase "can be afforded".
Unfortunately, often caps are put on and these countries cannot
afford to provide education. In Mozambique statutory primary education
has been postponed until 2010 purely because of that cap. It is
not all that different from local government. It is not considered
to be a sound investment. Surely, if one is to have the economic
growth required one must increase basic skills levels.
(Mr Fellgett) As Mr Manning has said, the Government
very much agree with the thrust of what you say. It is important
to preserve programmes like that. I used the word "afford"
because Mozambique is so poor that the education that that country
can afford clearly will be less than a country like this which
is in world terms so much richer. That is bound to have an impact
on the budget that can be afforded for education.
(Mr Westcott) Just next door to Mozambique is
Tanzania where I lived for three years, so I know a little bit
about that area. They declared universal primary education as
their top priority in about 1967. They got pretty close to it;
they achieved about 90 per cent in the mid-seventies. Unfortunately,
they cannot sustain it. It is now at a level of about 40 per cent.
They cannot sustain it because the government do not have the
resources to pay the teachers and buy blackboards, chalk, books
and so on. It was due in part to the fact they expanded the education
provision extremely rapidly and the quality was very poor and
in part to the fact that other resources that they received by
way of loan were not put into productive expenditure. It has not
created revenue for the government in order to sustain the education
programme. Therefore, it is perhaps more sensible for Mozambique
to build up its education slowly to a level where it will be able
to sustain it, albeit five or 10 years down the line, rather than
declare that it will do it now. It could in principle fund it
by printing money, in the same way that Mobuto paid his army,
but that leads to inflation and the economic system collapses.
The basis of structural adjustment is to try to lay a foundation
on which one can build economic development. That has a cost,
but we would argue that that cost is worthwhile. To some extent,
it is more costly now because it was not done 20 years ago. That
is unfortunate.
55. Clearly, there will be a disparity between education
in the UK and in Mozambique. I do not think that anyone working
in the development field at the moment suggests that, for instance,
Mozambique should have an instant universal primary education
system or university system, but a good number of the structural
adjustment programmes have stopped the process dead. Because of
the conditions that have been imposed those countries have had
to go back to a system where the people pay for their health care.
That means that health has a knock-on effect on productivity and
the skills base. The whole thing is intertwined, but surely any
structural adjustment programme that is designed to achieve long-term
sustainable growth for countries like Mozambique must be based
on the fact that people's basic needs are met and the skills base
is developed at the same time as top-down economic growth occurs.
That is all about stimulating SMEs and so on.
(Mr Manning) Our clear objective in all this is
to achieve self-sustaining growth in these countries, and that
requires a balance between getting the fiscal policy right and
the priorities within that policy right. You will be aware that
in many African countries and elsewhere there have been severe
problems in achieving the right choices between and within sectors.
It is these kinds of matters that one seeks to press forward in
the various fora where we and the aid-recipient countries meet
to try to reach a consensus on policies that are both sustainable
and deliver the kinds of benefits that they seek. We also seek
to bring donors together in a more co-ordinated way to support
good sector policies. Mozambique is a good example. It has developed
some quite good policies, and donors are beginning to co-ordinate
rather better in supporting them. Clearly, debt is an important
part of this where debt repayment is significant in relation to
budget. That is why it is particularly important that we try to
get Mozambique quickly on to the train that has been designed.
56. A good deal of NGOs and academics believe that this
is posing a major threat to the whole HIPC initiative and the
credibility of James Wolfensohn because he put so much effort
into trying to make these programmes work. It has been said that
an 80 per cent level of forgiveness will not be adequate for Mozambique,
but the Paris Club's creditors have agreed that forgiveness will
not be granted to Mozambique above that level. Do you think that
that is a serious threat to the future of the initiative?
(Mr Fellgett) Clearly, there is a conflict between
two ways of looking at debt relief. As I indicated earlier, the
philosophical approach of the HIPC initiative is to say that there
should be some assessment made of what is a sustainable debt level
and what a country can afford to pay. The debts are then written
down to that level. The other stuff that it cannot afford to repay
is written off. The Paris Club has traditionally operated a slightly
different system which has certain percentage write-offs for different
categories of countries. There is no reason why the two should
match. A 50, 65 or 80 per cent write-off—
whatever is the Paris Club category for the country concerned
- will not necessarily be sufficient, or perhaps too much, to
match what is required to write down a country's debts to the
agreed sustainable level.
57. Can that conflict of approach not be altered in negotiations
between the parties?
(Mr Fellgett) The Chancellor has made it very
clear that it should be, but we are one country among 20 in the
Paris Club. I said to my colleagues in the Paris Club, "Look,
we have now committed ourselves through our participation in the
decisions of the boards of the IMF and World Bank to the delivery
of a write-down of a certain size. It is now incumbent on us,
the representatives of the same governments, to do that in the
Paris Club." That seems to me to be pretty straightforward
logic. I regret that that logic has not been appreciated by all
members of the Paris Club. Sovereign governments decide what they
wish. We can seek only to persuade. A key difference between the
discussion in the boards in Washington of the IMF and the World
Bank and the discussion among the Paris Club creditors is that
the IMF and World Bank boards meet and discuss matters in private,
which is fair enough. But that discussion includes an executive
director representing the country concerned, in this case Mozambique.
When the creditor countries meet privately in Paris there is no
one representing Mozambique. I believe that that is an issue which
takes the discussion back to Gordon Brown's call for greater transparency
in the process.
Dr Tonge
58. You say that other sovereign governments in the Paris
Club do not agree with our position. I am particularly fascinated
by the attitude of Germany and Japan to the writing off of debt.
What is the particular problem in relation to those two countries?
(Mr Fellgett) It is very difficult to speak for
others. Ask them. They can give a better answer.
59. I have tried to ask Japanese bankers. They have said
that it is against the Japanese culture to write off debt. On
the other hand, they have just done it for the benefit of some
of their big industries which have got into trouble. The Japanese
Government have helped out. The writing off of debt cannot be
that ingrained in the Japanese culture. In Germany people are
concerned about gold reserves. Perhaps you would enlighten me
on that.
(Mr Fellgett) As to gold, the question is whether
it should be used to finance part of the IMF's contribution to
HIPC debt relief. One problem here is the accounting system. In
the United Kingdom, when ECGD recognise that it has bad debts
it allows for it. It makes appropriate provision for it, as would
a commercial company. That is not so for all other countries;
nor is it the case for the IMF and World Bank because their preferred
creditor status means that their accounts operate on the basis
that everything they have lent will be repaid, whether or not
that is realistic. The fact that the UK has an accounting system,
which is not particularly sophisticated or modern (if Mr Steele
will forgive me for saying so)—but one which recognises
that debts are in reality unpayable, as any bank must do - means
that at the point of debt forgiveness we are more or less implementing
what we already recognise as the need to write off. The figures
may not match up exactly. That is not so in the case of the World
Bank, IMF or other governments. At the point of the write-off
in some accounting systems it emerges immediately as a new cost.
That ought not to make a difference because it is just accounting,
not economics. That is also the case for rather better reasons
with the World Bank and IMF because they are the preferred creditors.
The accounting system is such that at the point the IMF implements
debt forgiveness in effect it must have some money to go in to
make the accounting system work. The proposal is that the IMF
should sell up to five million ounces of the gold that it is sitting
on—unfortunately, it is now worth rather less than it would
have been had that proposal been accepted earlier because the
gold price has fallen in the interim—invest the proceeds
and take the interest on that investment to finance part of its
part of HIPC debt relief. That has not been completely agreed.
The great majority of the IMF board believes that that is a sensible
idea, but under the constitution of the IMF an 85 per cent vote
in favour of the proposal is required. Some people feel that these
are the IMF's reserves and they ought not to be sold.
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