Examination of witnesses (Questions 120 - 139)
18 MARCH 1998
ANN PETTIFOR
and DAVID WOODWARD
Mr Canavan
120. The World Bank seems to put great emphasis on debt
as a proportion of exports, the debt exports ratio; do you think
that is a fair way of measuring indebtedness, compared with, for
example, debt per capita, or debt as a proportion of GNP,
or a combination of both?
(Mr Woodward) Yes. I think debt relative to exports
measures one aspect of the debt burden. Much of the problem arising
from debt is because it diverts resources from alternative uses.
Now that arises in terms of export revenue in the sense that the
debts have to be paid in foreign currency, and in order to earn
that foreign currency, unless you are going to borrow it, you
have to earn it through exports. So it measures the balance of
payments impact of the debt reasonably well. What it does not
do is measure the effect on the public finances, because the money
to buy that foreign exchange has to come from Government revenues;
so, to measure that, you need to look at the debt relative to
Government revenues. And this is one of the reasons for my concern
with the restrictions which are applied to the fiscal criterion
under the HIPC Initiative. I think there is some role already
for the debt to GNP ratio within the HIPC Initiative but it is
a very limited one: it is one of a number of vulnerability criteria,
so-called, which determine where within the 200 to 250 per cent
range the export threshold is set; but its effect within that
is quite limited. Personally, I think there would be a case for
including that more fully in the process, and I think there would
also be a case for looking at the debt relative to domestic savings
or to domestic investment, because it does also divert resources
away from those uses. So, in summary, yes, it is one aspect of
debt, but I think it has been over-emphasised and there are a
number of other aspects of debt which need to be incorporated
more fully into the analysis.
Dr Tonge: I just wanted to clarify another point. As
well as this confusion over how much debt actually is owed because
of the exchange rates and things, at what point in history, in
time, would you say debt should be paid before this time and not
after this time; do you see what I mean? HIPC countries are incurring
debt all the time, they are getting export credits on a continuing
basis, it is a continuing process, so, if you calculate it for
the end of last year, by now they will have incurred more debt.
What is the timescale in all this? It was triggered by a letter
I had in my post recently from a distant relative of mine, who
claims that his family, or our family, lent Richard II 200 shillings,
which had never been paid back, and would I please contact the
Treasury and find out when this money, plus interest, was going
to be paid back. I just say that to sort of lighten this rather
heavy morning.
Chairman: You remember how Richard II met his death.
Dr Tonge
121. Yes, I do; and that was in my response, actually,
that we could hardly expect it to pay up. But what is the timescale,
in all this, what do you see, are you going to call a year and
say debt before that year?
(Mr Woodward) Yes; well, you mean debts incurred
up to a certain point. No, I think what we are looking to—Ann
should speak for Jubilee 2000.
(Ms Pettifor) We recognise that you cannot take
into account loans given yesterday, in talking about writing off
debt, and that a period of time has to be set, and the date we
are looking at is between 1993 and 1995. I have to stress that
we are a movement of ordinary people calling for debt relief,
we are not the IMF, we are not a powerful institution, and we
do not want to act, if you like, as God in these proceedings.
And, above all, we think these are decisions that ought to be
made in the country with the debtor Government around the table.
But we recognise there has got to be a cut-off date, and that
it makes it very hard, as Mr Robathan said, to borrow if the loans
that you borrowed yesterday are being written off today, and,
clearly, that cut-off date therefore has to be a few years earlier
than the year 2000.
Chairman
122. Can you help the Committee with one of the other
pieces of econometric jargon that we are getting involved in,
which is your statement, you keep making reference, Mr Woodward,
in your evidence submitted to us, about the net present value
of public and publicly guaranteed debt. Now net present value
is a concept which I understand, and you then go on to criticise
it because you say that this is heavily dependent on discount
rates used; now clearly it is, that is what net present value
calculations involve. So what are you advocating, are you advocating
a figure for the discount to be used, or one simply fixed arbitrarily,
or how would you like to do it?
(Mr Woodward) I would like to see it done on the
basis of a long-term rate. At present, as I understand it, the
rates are based on the OECD guidelines for new export credits;
now those are relatively short-term and they are lending rates.
Given that we are trying to discount payments over a period of
something in the order of 50 years, if you are looking at a rate
which actually applies to the next five years, that is not necessarily
appropriate. You should be looking to a rate which extends over
the period which is being considered.
123. So let us say 50 years; what sort of rate would
you suggest and where would we get it from?
(Mr Woodward) Personally, I would be inclined
to use long-term government bond rates.
124. The Chancellor announced that those had fallen to
6 per cent yesterday, is that what you would use?
(Mr Woodward) That could well be.
125. And would you do it on an annual basis, so that
you really change the figures annually so we all get thoroughly
muddled?
(Mr Woodward) If one were to go ahead with debt
reduction at a point in time, say, in the year 2000, there would
then be a single interest rate for each currency at that point,
so that would actually take away some of the confusion. But the
other point is that long-term rates tend to fluctuate less than
short-term rates, because they are looking at long-term expectations
rather than short-term; so even if one were looking at a process
which was phased over a number of years there would be less dependence
on the point in time which was determined for debt reduction for
each country.
Ann Clwyd
126. Can you tell us a bit more about debt sustainability,
and particularly your argument that human development and fiscal
indicators should be used to define countries in need of debt
relief, and also tell us why you have defined further countries
who should be covered by the HIPC Initiative and are not covered
at the moment?
(Ms Pettifor) Human development is a factor in
HIPC, it is a factor taken into account, but, strangely enough,
it is taken into account in the middle of the process and at the
end of the process and not at the beginning of the process. And
so, when the World Bank looks at whether or not debt is sustainable
in, say, Rwanda or Mozambique, it does not, in setting the sustainability
level at the beginning of the process, look at human development
indicators in those countries; and so it sets this sustainability
level on financial criteria, if you like, which do not look at
the situation in the country, and we think that that is an unfair
bias. What happens subsequently is that human development becomes
a condition for getting debt relief, so these poor countries,
which are, under HIPC, enduring more rigorous economic conditionality
than they would do normally, and are expected to have quite a
long track record of implementing IMF economic reforms, then have
to also reduce poverty. So while you are, for example, in Mozambique,
making 5,000 workers in the cashew nut industry redundant, because
you have to remove subsidies under an IMF programme from that
industry, at the same time you have to do something about the
poverty of those unemployed people. And so you are implementing
a deflationary economic policy, on the one hand, and you are expected,
halfway through the process, to also do something about poverty.
And if you fail on the latter you are not eligible for further
debt relief. And so it seems to us to be a double-bind, an unfair
double-bind; we want human development taken into account right
at the beginning of the process. We think that the creditors have
selected a rather short list of countries, we think there are
far more countries in need of debt relief, and we think some of
those are middle-income countries. We know that, for example,
Malawi is a country that ought to get more debt relief, we know
that both Kenya and Ghana have not asked to be part of HIPC, but
the debt service payments going out from their countries is a
very heavy burden on their people. We think that countries like
Jamaica and the Philippines, defined by the World Bank as middle-income
countries, actually need help, because the burden of debt service
that their economies carry has caused really very serious damage
to those economies. And we have produced a set of criteria for
doing that, which is quite different from that defined by the
World Bank and the IMF. But I think these are things that all
ought to be discussed with the debtor countries themselves, and
with what they can possibly afford, and if we have a more fair
and independent process for determining that we will be able to
make a more sensible assessment on the ground of what that country
is capable of. At the moment, debt sustainability is determined
in an office in H Block, Washington, by some very, very clever
people, but they do it on a remote basis. The World Bank has far
more experience of conditions on the ground in these countries
than the IMF, simply because it has more people and more projects,
and therefore can be more realistic, but actually the determination
of that level of sustainability is, in effect, made by the IMF,
by the IMF Board, and we think that that is not sensible. I am
sorry, Ms Clwyd, have I answered both parts of your question?
127. Yes, certainly. Is there any sympathy for your point
of view?
(Ms Pettifor) As I say, at the very highest level
in the World Bank, the Chief Economist, Mr Stiglitz, has said,
and I would just like to take you through what he said, because
it is very important, and I think that if your Committee were
to play a role here it should be to call on the Treasury to review
the unconditional support we seem to give to IMF economic conditionality
in these countries. Mr Stiglitz has said, for example, and this
will be very shocking to those who support neo-liberal policies,
that moderation inflation is not harmful. He claims that below
40 per cent a year there is no evidence that inflation is costly,
and I am quoting him directly here, he says budget deficits can
be okay. Given, he says, the high returns to Government investment
in such crucial areas as primary education and physical infrastructure,
it may be a good thing for Governments to incur deficits. But,
for example, the IMF will refuse to permit Governments to balance
the budget by treating foreign aid, for example, as a legitimate
source of revenue. Mr Stiglitz recommends that countries should
be able to use foreign aid as a legitimate source of revenue in
balancing their budgets. He says that macro-economic stability
is the wrong target, he says some of the most destabilising things
the IMF can do is to massively contract employment and output
very suddenly. That is very destabilising to an economy. So laying
off 5,000 workers in Mozambique does not help macro-economic stability.
He says the benefits of privatisation have been overestimated;
he notes, for example, that China has not privatised her industries
and has had much higher growth rates than Russia, which has gone
for privatisation in a big way. He says that markets are not automatically
better, and that liberalisation has become an end in itself, a
dogma, and not a means to a better financial system. He particularly
points to IMF mistakes in Thailand, Indonesia and South Korea.
Now if the Chief Economist of the World Bank shares our view on
this approach to conditionality then I think the British Government
has to look very seriously at IMF conditionalities for HIPC, and
to the sort of unswerving support that we give. These conditionalities
are like a chain, and if we were to break the chain of OECD countries
supporting conditionality, IMF economic conditionality, we would
provide an awful lot of help for these poor countries.
128. You have answered this in part, but what is your
assessment of the negotiation process leading to debt relief and
the HIPC?
(Ms Pettifor) It is more open and it does take
more account of the debtor countries' point of view than previous
processes, but it is still pretty brutal. We know that, in the
case of Guyana, because we speak to Government officials and ministers
in these debtor countries about this, the IMF was setting Guyana's
debt sustainability level without reference to the Finance Ministry
in Guyana, and was saying to them that they would not get ESAF
loans unless they accepted the sustainability level at that point,
at that level. Fortunately, the Minister for Finance, Mr Jagdeo,
in Guyana, is a man of extraordinary ability and confidence, and
he refused to sign the ESAF loan agreement before the debt sustainability
level had been renegotiated. Now these sorts of facts are not
made public but we do hear about this going on behind the scenes
under HIPC, when HIPC began with good intentions to include debtor
countries in a more open and transparent way; that is not actually
happening on the ground.
Chairman
129. Can you answer Mrs Clwyd's question to you on which
countries, in addition to the 41 countries identified by HIPC,
should receive relief beyond Paris and Naples Terms?
(Ms Pettifor) I wonder, Mr Wells, if it would
be possible to post that to you, to send you a letter listing
our countries and listing our criteria. I cannot rattle those
off here.[26]
Chairman: Yes, we should be very grateful if you would.
Mrs Kingham
130. I am very interested in what you have said there
about conditionality. Do you believe there should be any conditionality
attached to debt relief, given your quite sort of damning statement
there about some of the Structural Adjustment programmes and some
of the conditionality for the loans?
(Ms Pettifor) Personally, I think there should
be, we think there should be, conditions attached; the problem
though is that if you are to write off debts it is then quite
hard to impose conditions. The whole point about keeping debts
on the books is that you can enforce conditions thereby, which
is why the IMF and the World Bank will never write off debts,
because they cannot impose conditions unless the debts are on
the books. So, while we are advocating the write-off of debts,
it is quite hard for us to see what lever we could use to impose
conditions. But there is a great deal of awareness in developing
countries of the benefits of debt relief, and Uganda, for example,
has publicised how it would use the relief, or the additional
resources it would get from debt relief. And I think one of the
very tough conditions we have to impose is transparency. I happen
to know that the World Bank is very keen on transparency. I am
convinced also that it is possible in these countries to publicise
the fact that the Government may be getting additional resources
and to ask that people participate in deciding how these resources
are spent. I think transparency is the key, because, in the end,
we are not going to be able to impose democracy or openness or
more accountability from here, we are going to need to empower
people locally to be able to demand accountability from their
Governments, and the best way to do that is being very open with
them, explaining that we are giving the Ghanaian Government a
loan to build a dam in this part of the country and do the people
know about this, or that we are giving the Ugandan Government
debt relief and do people know about this, and is this going to
be used properly? But the Ugandan example of committing the Government
in advance to using additional resources for primary school education,
I think, should be used to put pressure on other debtor countries
to divert additional resources into poverty reduction programmes.
131. So would you use that kind of conditionality, the
diversion of resources from Governments' priorities that they
may set up to date or been imposed upon them by the international
financial institutions into areas such as basic needs, things
like clean water provision, education, health care, is that the
kind of conditionality you would propose?
(Ms Pettifor) That is what we favour. We note,
for example, though, that in Mozambique the Mozambiquan Government
has said, "We'd love to build schools and hospitals in the
north of Mozambique where we need them; unfortunately, we don't
have any roads, and teachers and nurses wont go to those schools
and hospitals until we have a road." And so that is why I
think it is not possible, from the north, to impose those conditions
without an awareness of what is happening locally. But if we absolutely
insist on transparency, that the Government should make public,
in advance, how precisely it is going to divert these resources,
then I think we have some leverage over Governments, and that
is what we should use.
Chairman
132. Can I just ask you, are you asking the Governments,
the receiving Governments, to make these transparency statements,
or are you empowering an international body of some kind to ex
cathedra tell the people of Uganda what their negotiations
have been with their Government? Is it not the responsibility
of the Government of the country concerned to inform their people,
not some supranational body, or even Jubilee 2000, for example?
(Ms Pettifor) Absolutely. I think there ought
to be both. I would say that it is both possible for an institution
like the World Bank or UNESCO to inform the people but it can
do that through the Government as well as aside from the Government.
I think the World Bank has tremendous clout in these countries,
as we know, as you will have seen, and it will be possible for
them to insist, particularly if debt relief is being made available,
that greater transparency is in force.
Chairman: Well I hope you are able to get the UK Government
to be similarly transparent.
Mrs Kingham
133. I just wanted to ask again about Structural Adjustment
programmes, you have covered it quite substantially but is it
your view that they do lead to poverty alleviation? Obviously,
we have just been to Uganda and Rwanda and we have had meetings
with the IMF and the World Bank, and the impression that was coming
over to us, or the statements coming over to us from those institutions
are that they have recognised past mistakes and that they are
confident and encouraging Governments to spend more money on health
and education. And you have just explained what is happening in
Mozambique, in terms of delaying primary education, universal
primary education, because the Structural Adjustments programmes
have been imposed upon them. So, from the experience that you
are getting, from Jubilee 2000, do you see the evidence on the
ground that those Structural Adjustment programmes have changed
their bias towards sort of macro-economic and down to sort of
basic needs?
(Ms Pettifor) We certainly are getting evidence
that the IMF is putting more pressure on Governments to divert
resources; whether that is leading to poverty reduction we very
much question. We are very biased on this, I fear. We see no evidence
in Africa, for example, of IMF economic policies having led to
growth and development; the IMF reassures us in the opposite direction
all the time. We recognise that countries have to adjust, that
they do have to make macro-economic adjustments to their economy;
we just think that the IMF's recipes, menu of adjustments, if
you like, are very rigid, and often not appropriate to that country.
We are willing to accept that in some cases, like in, for example,
Chile, there is evidence that an IMF programme has helped, but
on the whole in Africa there is universal agreement, from (Geoffrey
Sachs ?), on the right, through to all the aid agencies here,
that IMF policies have not worked. I think David is better placed
to answer the question about poverty relief.
(Mr Woodward) There are two separate factors here.
I think what the IMF and the World Bank have become better at
over the last ten years or so is actually putting pressure on
Governments to maintain, at least, if not increase, spending on
health and education, rather than including it in a blanket programme
of expenditure reduction. I think there is still some room for
improvement in particular aspects of that. For example, in Mozambique,
there are severe constraints imposed by the IMF on the total public
sector salary bill, which keeps the salaries of teachers and health
workers, in particular, at extremely low levels, which is quite
a serious obstacle to any improvement in education. But, on the
whole, they have become better at moving the emphasis towards
health and education. They have also—or, at least, the World
Bank has—
increasingly focused on different kinds of compensatory programmes,
public works programmes, to create jobs, and so on. But they have
tended to focus very much on individual aspects of poverty and
social welfare individually, rather than actually to integrate
human development and poverty objectives within the overall policy
framework. So I think there is often a contradiction between the
overall thrust and the overall economic effects of an adjustment
programme and these sort of targeted interventions which take
place within that framework.
134. And this is the double-bind situation that you referred
to earlier, presumably?
(Mr Woodward) Yes. If you are then saying, well,
you have to meet these health targets and these education targets,
these poverty targets, before you get debt relief, but you also
have to meet all these economic targets and follow all these economic
policies, there is a real risk that there will be a contradiction
between them, and it may even be completely impossible to do both,
because the links between economic policy and health and education
outcomes are actually quite poorly understood.
135. My next question was about the actual HIPC framework
and its flexibility, or lack of it; you have touched on this,
too. Your memorandum, from Jubilee 2000, suggests that flexibility
within the framework has been limited, and that in the future
a flexible approach is unlikely. Oxfam also suggests something
very similar in their memorandum to us, that the flexibility within
the Initiative allows opponents of debt relief to obstruct implementation,
and several other of the memoranda that we have agree that there
has been a degree of political manipulation of the HIPC process.
This also arose, the question of flexibility or not, for HIPC,
in our discussions in Rwanda with the World Bank and the IMF,
and it seemed to us that there was a complete sort of rigidity,
or to some of us, certainly to myself, in the process, particularly
for post-conflict countries, or countries that have gone through
a devastating process such as the genocide in Rwanda, that the
development indicators are different because everything has been
knocked out of sync. So, an example, in Rwanda, they do not have,
60 per cent of their university staff and academic staff for training
and vocational progression have gone, they have lost them, so
that it is not necessarily just a situation of looking at primary,
basic-level education, there is also a need for the other end
to be focused on, and that the flexibility was not really there,
in my mind, from the World Bank. Can you elaborate on this, and
this is just a personal experience we have had recently?
(Ms Pettifor) If anything, we can just only agree
with you, really, that it is very rigid, that it does not take
into account broader issues. Increasingly, we are coming to the
view that the framework for HIPC is not a framework for returning
a country to a sustainable level of debt service and to economic
recovery, it is simply a framework, if you like, what David has
called, for accounting sustainability. Guyana was not paying debt
service before HIPC came along, she now pays her debts; the accountants
are pleased, there is a stream of income going out, servicing
the debts, and creditors feel better. What it has not done is
actually to alter, as you say, things on the ground within that
country very much, still a very high proportion of her budget
is being used, in the case of Guyana, a third, in servicing debts.
So we think it is rigid because precisely of what I said earlier,
which is that it is there to suit creditors, it is there to prevent
the build-up of arrears, which is one thing creditors do not like
is the build-up of arrears. It is not there to help economic recovery
and to restore sustainability. So Rwanda will not be helped by
the framework. And the problem with the drafters of the framework
is that they do not see themselves as doing that, and if you speak
to IMF and Bank officials they make it very clear, "We're
not here to save Rwanda, we're here to sort out the debts",
basically, is what they are arguing. And so I think we have invested
a great deal of hope in the HIPC Initiative, whereas the creditors
invest only the aspiration that their debts be serviced, not that
there should be economic recovery for Rwanda. That, I think, is
the divergence.
136. Can I just mention, the two examples you have used
so far have been Mozambique and Rwanda, which are both post-conflict
situations.
(Ms Pettifor) Absolutely, yes.
137. Would you, in Jubilee 2000, see there being a case
for creating a special framework, you have mentioned Marshall
Plan, which is a phrase that came up frequently in Rwanda during
our visit; would you see there being a special case for post-conflict
reconstruction situations for creating a new framework for HIPC
that would fit those countries?
(Ms Pettifor) Absolutely. I think we should do
for African countries what we did for Germany in 1953. Germany
had attacked Europe and her wars had resulted in millions of people
dying here, and yet we were extremely generous after the war—after
the second world war not after the first world war, we learned
from our mistakes after the first world war—
to Germany, and we ought to do the same for Africa, because much
of Africa's degradation is a result of the fact that we manipulated
and received much lower prices for the commodities that Africa
exported, and so we have been beneficiaries. The debt has, in
a sense, been paid already, through lower prices for coffee, copper,
sugar, and so on. So I think that it is essential that Africa,
that African countries—and the point is that much of this
conflict is a result of economic degradation, it is not simply
the result of Africans being different from Europeans and killing
each other, it is the result of often dramatic economic degradation;
in the case of Mozambique, a result of the Cold War and the apartheid
regime's destabilising tactics. We would like there to be different
categories of debts, in particular odious debts. South Africa,
which can well afford to service her debts, nevertheless has a
burden of odious debt to repay; i.e. debts incurred by the apartheid
regime to purchase weapons to repress black people with are now
being repaid by those same black people. In the case of the Philippines,
Marcos' debts are odious debts; why are the people of the Philippines
repaying them? Who were the beneficiaries of those loans? In the
case of ZaiÏre, those were odious debts; who were the beneficiaries,
they were the big construction companies that built the Inge Dam
in ZaiÏre, not the ordinary people. So we would want a category
of odious debts and we would want categories of post-conflict
countries that need special help, yes.
Chairman
138. The International Bank for Reconstruction and Development's
first task, on formation, was, in fact, the rebuilding of the
European economies, was it not, and that IBRD, of course, is the
World Bank? I wonder whether you would acknowledge that the HIPC
Initiative does do at least one thing, that it acknowledges for
the first time that self-generated funds within the IBRD are to
be used by setting up a trust fund, I understand, to, in fact,
write off debt against? When we all airily talk about writing
off debts, somebody has to pay, or, alternatively, the institution
itself has to contract. But this is for the first time, the HIPC
Initiative, it actually puts its own money into a trust fund to
write off debt; so would you not welcome that, at least, of the
HIPC Initiative, because you have damned it pretty badly already?
(Ms Pettifor) I have to say that we do welcome
what the World Bank has done and the fact that the World Bank
has put substantial sums into a trust fund. We note that she has
done a lot more than, say, the IMF. The IMF was able to find $57
billion for South Korea almost overnight, and I admit that that
was money found on the international capital markets and will
be repaid at market interest rates. But the IMF has taken nearly
two years to find $0.08 billion to put into its HIPC debt trust
fund. And so, compared to the IMF, the World Bank has played a
very, very good role. What we note is that, of course, these are
the profits made from lending to other developing countries, so,
in fact, the contribution is being made from returns coming back
from other, and probably more comfortably off, developing countries,
middle-income countries, but, nevertheless, they are returns on
that lending, which is then being diverted into the trust fund.
So we note that. We think that big OECD creditors might be able
to contribute more and that the burden of easing the debt should
not just rest with middle-income or developing countries. But
there is another point I would like to make, Mr Chairman, that
the IMF and the World Bank insist on not writing off debts but
repaying those debts, and so funds have to be raised to actually
service the debts, so the debt is not being serviced by the poor
country but by the Bank, and the fund has this rather peculiar
escrow account, a sort of arm's length account, whereby they put
money into an account to pay debt owed to themselves. It seems
to us, that is rather—I have never fully understood that,
quite frankly, and I do not see why the debts cannot just be written
off and that money be used more productively. We come back to
the IMF's arguments about, "If we did write them off this
would make the countries less creditworthy", and that is
why they insist on servicing the debts.
139. But, wait a minute, if you write off debt, you then
went on immediately to say that you are going to use the money
you have written off more productively; now that does not seem
to me to be a logical sequence. If you have written off the debt
you have not got that money, have you?
(Ms Pettifor) Sure. The trust funds for writing
off the debt are got from (a) returns on loans made to other developing
countries and coming back, the flow coming back from IBRD loans,
and also from bilateral grants which come from ODAs and DFID into
IDA and into the trust fund. We are saying that those monies should
not be used to service debts to major creditors; the debts should
be written off and those monies, if you like, should be ploughed
back into the IBRD or should be ploughed back into productive
investment in those countries. It is this notion that you cannot
write off debts and that you have to find the money to service
the debts before you can agree to reschedule them.
26 See Evidence p. 52. Back
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