Examination of witnesses (Questions 252 - 259)
7 APRIL 1998
RT HON
GORDON BROWN,
MP, RT
HON CLARE
SHORT, MP,
MR RICHARD
MANNING and MR
GUS O'DONNELL
Chairman
252. May I welcome you most warmly on behalf of the Committee,
Chancellor of the Exchequer and Secretary of State. Thank you
both and your assistants, Mr Gus O'Donnell—you have recently
returned from Washington, have you not, as the IMF Deputy or Alternate
Director?
(Mr O'Donnell) I am halfway back. I am still doing
those jobs.
253. You are mid-Atlantic, are you?
(Mr O'Donnell) That is right.
254. And indeed Richard Manning, who is well known to
us from the Department for International Development. You are
very welcome. We are hoping to produce our report in May just
in front of the G8 meeting in Birmingham. That is why we are rather
hurrying this. We were looking at our draft heads of report this
morning before you came in. We have not quite got through it and
of course we want to include the evidence that you are going to
give us this morning. We do think this is a very important discussion
we are going to have this morning. Do you wish to make initial
statements to us?
(Mr Brown) Could I and Clare say something very
briefly to you about the progress that I think the Committee will
be interested in hearing news about. May I first of all thank
the Committee for inviting Clare and me to give evidence on this
very important issue on the concerns that we all have about debt
reduction and debt relief, concerns that are borne out of the
unsustainable levels of debt that cripple some of our poorest
countries, concerns that I believe are growing amongst the churches
and voluntary organisations as well as this Government as we approach
the millennium, and concerns that in my view we can answer with
better solutions than we have had in the past. Debt relief is
a moral issue because millions of people in the world's poorest
countries are suffering because money that could be spent on health
and education and on ensuring economic self-sufficiency is currently
going to repay debt. We have in my view a duty to act but it is
also an economic issue. We cannot build economies and societies
that thrive in a new century on a mountain of unsustainable debt.
It is because the debt burdens from the past which poorest countries
endure today hinder their economic development for the future
that I believe we must act decisively to reduce debt and help
set countries on a course for sustainable development. The importance
of the issue means that any solution to the problems of debt must
be both sustainable and permanent. I cannot over-emphasise how
much the implementation of the HIPC initiative is a practical
issue that will be achieved only by realistic solutions and the
ability to carry the rest of the creditor community. I believe
the great advantage of the Highly Indebted Poor Countries Initiative
is that it involves acceptance of multilateral responsibility,
a comprehensive framework for action, it emphasises the importance
of sustainability, it offers an exit strategy for the poorest
countries, it takes into account the vulnerability of the economies
and the essential importance of poverty relief and education.
I believe the Mauritius Mandate, for which we are seeking support
and which builds upon the HIPC process, does so with a new time
horizon. It is more comprehensive because it can include post
cut-off date debt. It is more forward looking because it keeps
the issue of IMF gold on the agenda for the future. It emphasises
economic reform as essential for sustainable development and supports
a distinction between productive and unproductive expenditures
in the poorest countries where export credits are on offer, and
it also offers a new voice for those in debt. Most of all the
Mauritius Mandate offers a new urgency that all countries can
be in the process by 2000, that three-quarters of the countries
that need additional HIPC relief will have reached a decision
point, that some of those will have their cases completed and
that billions of debt can be reduced or be on the point of being
reduced with a sustainable exit for the countries concerned. Like
you, I met President Museveni of Uganda yesterday, and there has
now been formal agreement by the IMF and the World Bank for $40
million a year in total debt relief and a total redemption of
$347 million of unpayable debt. With greater flexibility than
some have imagined in the HIPC initiative Uganda has completed
the process 18 months after its launch. There have been problems
however which highlight the need for further reforms, as the Committee
knows. Mozambique is the most immediate specific problem. In February
Clare Short and I decided that it was necessary for Britain to
take the lead with a $10 million pledge that we would make along
with other contributors. With contributions that have now come
from the Bank and from the IMF I can report to the Committee today
that this donation has proved to be a catalyst for other bilateral
contributions and I believe that the financing problem is now
resolved. Indeed, I can tell the Committee that we expect a positive
decision on Mozambique's decision point in the International Monetary
Fund and World Bank boards later today and I will send the Committee
full details in a few days' time[30].
It is upon the Mauritius Mandate and the initiatives that I have
talked about that Clare Short and I now want to build. I will
be pressing my colleagues in G7 and in the IMF and World Bank
meetings to join us in further moving forward these reforms. I
am convinced that sustainable development—promoting growth,
jobs and poverty reduction from a platform of economic stability—is
the issue so conditionality ensures that the preconditions for
achieving sustainable growth are in place and I am convinced that
the reforms we seek must include both the use of resources for
productive expenditure like education and not arms and a degree
of openness which is necessary to avoid corruption. I think we
should now consider three things: first of all greater involvement
by debtor countries, and our offer is to provide to them both
the technical assistance they seek and the means by which they
can come together to consider how they approach the debt process.
Secondly, there should be a new attention to social issues, what
is being done about poverty reduction and education, and the World
Bank should now be more fully consulted in the IMF reports, and
thirdly, we should move forward more decisively to debt reduction
agreements on a case by case approach that recognises the circumstances
for each country, as has been shown in Guyana, the Ivory Coast
and Uganda amongst other cases where that approach has been taken.
Where there is scope for progress I believe progress can now be
made and, working together, the international community as a whole,
I believe that we can help set the developing countries on a path
of sustainable growth. This will be our agenda over the next year.
255. That is a very positive and very welcome statement.
Did you want to add anything, Secretary of State?
(Clare Short) Very briefly if I may, first to
say that the Treasury and my Department have worked very closely
and very well together on this and that Gordon and I have been
very close and that is how it needs to be because both Departments
have a role in it. Our arrangements are very satisfactory. The
second point I want to stress is that it is important to remove
unsustainable debt in order to help developing countries meet
the international development targets for poverty eradication.
Sometimes people talk as though debt relief is a good thing in
itself. It is not. It is a means to an end. It is a means to countries
being able to do better in reducing poverty. We must never forget
that connection. Britain has been writing-off aid debt since the
days of the last Labour Government. We started on aid debt in
1978 and about £1.2 billion has been cancelled. We recently
extended that, as you will recall, to other Commonwealth countries
and I am pleased today to be able to announce that in the case
of Jamaica we have agreed with the Government of Jamaica a writing-off
of this year's debt of £7 million in order to help Jamaica
to strengthen its anti-poverty programmes. Our aim is improved
services for the poorest, especially basic health and primary
education. They are at the heart of the fight against poverty,
as the Committee knows. We must ensure that spending in these
areas is protected and debt relief is for that purpose. I am very
glad to say that we have been able to contribute to speeding up
the work of the HIPC initiative through the aid programme the
$10.5 million that we provided to cover the African Development
Bank's contribution to Uganda and, now we have got this very successful
outcome for Uganda, the $10 million pledge for Mozambique that
has had the catalytic effect that Gordon has just talked about.
We are likely to provide more of that kind of small amount to
help keep the process moving. I want to stress that the great
bulk of the funding is coming from creditors themselves, from
the World Bank, the IMF, the Paris Club, and relief under HIPC
is therefore truly additional to the countries concerned and is
not merely a reallocation of existing aid funds. There is some
of that but that is not the whole of it and that clearly is also
very important. We also need to remember that debt relief alone
is not enough to eradicate poverty. We need continuing resource
flows from donors like the UK and increasingly the private sector;
we need to do better at that. It is crucial that debt relief is
linked to policies which will encourage this and will benefit
the poor. We must always keep that connection in mind. Finally
I would like to say that I have enormous respect for the campaign
that the churches and the NGOs have mobilised throughout this
country; they really have reached all corners of the country.
It is extremely impressive and we need more of that worldwide
to make sure that we implement HIPC more flexibly and more speedily
in the way that Gordon has outlined.
256. Thank you very much indeed for that very positive
statement. In relation to Mozambique, which was going to be on
our question list but you have answered the question before we
have asked it, there is one issue that I would be grateful if
you would clarify. It is the Committee's understanding that Mozambique
did not qualify for the Paris Club because in fact its debt relief
was 90 per cent and the Paris Club would only agree to 80 per
cent reduction. Could you explain that to the Committee, how you
got round that problem?
(Mr Brown) What happened was that after the normal
procedures of the Paris Club had been gone through there was a
$100 million spending gap. It actually became a $116 million spending
gap after a number of other things had to be taken into consideration
and one fact that always has to be borne in mind here is that
Russia is now part of this process and there have been debts that
have not been properly calculated up to then. There was a gap
of $116 million. As Clare has said, from her budget a few months
ago she offered $10 million as the first instalment of what we
hoped would be bilateral contributions made by other countries.
In addition the IMF and the World Bank have looked at this matter,
and on the basis first of all of a change that the Paris Club
made which pushed it up to 85 per cent, then other changes that
have been made through individual countries and the IMF and World
Bank coming in (and I am grateful for the response in perhaps
surprising quarters from countries who have now come in to make
their contributions), this decision that I believe will be confirmed
today can be made by the IMF and the World Bank. When we came
into power, despite what I would like to say was very good work
that had been done by my predecessor in helping with the HIPC
initiative and being very much part of it, there was a lull in
the process and we believed that if you like something had to
be done to push things along. Therefore the Mauritius Mandate
was part of that but also pushing the question of Mozambique became
very much part also of ensuring both the credibility of the HIPC
process and making sure the timetable could be achieved. It is
because Clare was prepared to make that contribution initially
that we have speeded up the process and now, as I say, a larger
number of countries have come in as well as the World Bank and
the IMF, so I think the figure now goes up to 88 to 90 per cent
and that is the answer to the problems that we have had.
257. So the new Paris Club rule therefore will be that
they will give up to 90 per cent of debt?
(Mr Brown) No, I do not think there is a new rule.
We are dealing with exceptional circumstances here, that it actually
went up not to 90 per cent but to 85 per cent and then there were
these contributions that will be recorded later. I cannot give
you all the details of them obviously until other countries make
their positions known, but it is clear that a large number of
countries have been prepared to come in where they have not been
prepared to do so in the past and I am grateful for that, but
I think it started off with Clare's initiative with the $10 million.
(Clare Short) As you know, the Paris Club in the
past would go up to 80 per cent. Mozambique needed more and we,
Britain, were willing to go all the way to get Mozambique cleared
at the Paris Club but other countries were not. The Paris Club
went to 85 per cent. The gap was $116 million and it has been
made up through this pledging process.
258. Thank you very much indeed for that clarification.
What are the respective roles of the Department of International
Development and the Treasury in formulating and implementing debt
relief policy? You have actually given a very good demonstration
of it this morning, but for the record I would be grateful if
you could describe it to us.
(Mr Brown) We have made a change with the creation
of the new Department, which I think has been a very significant
innovation in itself, already proving to work. Clare became the
Governor of the World Bank and I became the Alternate. I remain
Governor of the International Monetary Fund, and of course Mr
O'Donnell here is the Joint Executive Director, an Executive Director
appointed in consultation with the Department of International
Development. We rearranged the responsibilities in that way to
show the importance we attach to the international development
issues. As far as debt relief directly is concerned of course
that is a Treasury responsibility, including our responsibilities
in relation to the Export Credit Guarantee Department, but we
work very closely together and of course, as we have seen, because
of the respective budgetary responsibilities of individual Departments
the help that has been given to make possible the debt relief
process work in relation to Mozambique, and indeed in relation
to Uganda where a grant was made to the African Development Bank,
has come from the Department of International Development, so
while we are responsible in the Treasury for the issues of debt
relief and international economic development, the close partnership
between DfID and the Treasury is absolutely crucial to securing
progress in these issues. I would say the big innovation was that
Clare is the Governor of the World Bank.
(Clare Short) If I may just add, we have an arrangement
in Washington which I think other countries would envy. Gus O'Donnell
is the Executive Director, there is an official from my Department
who is his Deputy, and our capacity to work together is much stronger
than in the case of other countries and it is the view of many
people that one of the lessons of the Asian crisis for example
is that the Bank and the Fund need to work much more collaboratively,
the Bank looking at development interests and the Fund at macro-economic
adjustments, and I think our arrangements as a country are a model
of how to bring the two together beneficially.
259. Are you, Secretary of State, Deputy or Director
of the Monetary Fund?
(Clare Short) No.
(Mr Brown) This works through the Governor of
the Bank of England being the Alternate.
30 See Evidence, p. 90. Back
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