Select Committee on International Development Minutes of Evidence


Examination of witnesses (Questions 300 - 319)

7 APRIL 1998

RT HON GORDON BROWN, MP, RT HON CLARE SHORT, MP, MR RICHARD MANNING and MR GUS O'DONNELL

  300.  They are instructed that they are not supposed to give evidence.
  (Clare Short)  You cannot oblige but I would be very surprised if they refused. I would have thought the Bank would be happy to.

  301.  Not on the record. We can have private meetings but not on the record where they are actually documented. I wonder if you are making any moves within our Government to try and make those international financial institutions more accountable so that for example select committees can see minutes of meetings. Transparency and accountability are the buzz words. What are we doing about it?
  (Mr Brown)  I am very keen that far more of what is done by the World Bank and the IMF is made public, that the reports on individual countries are not kept secret, they are made public, that there is a far more open process of decision making both in the World Bank and the IMF and in relation to how countries report what is happening to their economies. I think you will see the process of greater openness move forward. Gus, are you in a position to answer about the World Bank and IMF and their willingness to give representations?
  (Mr O'Donnell)  As part of the overall process of improving transparency we think is crucial to improving governance, but of the international financial institutions themselves we are pushing for both the Fund and the Bank to publish a lot more. You will have seen in the Asian case, for example, letters of intent, which were one of the most secret documents the IMF ever used, were published. The programmes have been published. We are pushing for all Article 4 reports where there is a press information notice, which basically says what the Fund thinks the country should do, for those to be published and it is up to the member government to agree to do that. The United Kingdom agrees to do that and we are pushing other countries to do that. The key document in the World Bank is really the country assistance strategies. We very much want the country assistance strategies to be published and we are pushing all the time and both the Chancellor and the Secretary of State will be discussing these issues at the Interim and Development Committees next week to try and get real progress on getting more of this information published earlier. If I can help in any way in getting more information from either institution I am very happy to do so.
  (Mr Brown)  We will publish the IMF's report on this country whether it is good or bad.

Chairman

  302.  I understand, Secretary of State, that you are going to publish your own Department's programmes?
  (Clare Short)  We are indeed. Let me stress it is part of being accountable to our own Parliament but I think it is very important to civil society in the countries themselves that the whole of society knows what the government's programme is and can help to keep the government on track because there are always pressures on any government to spend less on the poor and more on other groups. I think it is not just about our own accountability, as important as that is, it potentially improves the informed debate within the developing countries and the capacity of their civil society to hold their government to responsible development programmes.

Mr Rowe

  303.  You said at the very beginning, Chancellor, that you had been encouraged and impressed by the campaign of the churches and others. I did wonder whether, in fact, you had suggested to that campaign that they might actually consider extending their efforts to our partners in multi-lateral aid agencies because, in fact, if they bring pressure to bear in Germany and elsewhere that might be beneficial?
  (Mr Brown)  These are decisions that only these organisations can make themselves. There is talk of postcards that have been sent to other different parts of the world. There have certainly been many postcards and requests sent to the Treasury, including——
  (Clare Short)  —— And to my Department.
  (Mr Brown)  —— Including money to help pay off the debts of the individual countries.

Chairman

  304.  How much have you received, Chancellor?
  (Mr Brown)  I can give you the exact figures. We received 7,000 letters which include 1,600 post cards in response to the Christian Aid Campaign on third world debt. The total amount of money is over £6,300 which will be used to help pay off debts owed to the United Kingdom by Tanzania. We continue to receive letters every day. Can I say one thing about this: in the Budget we introduced a new gift aid for the millennium that would allow people to give to third world or developing country charities and organisations which are engaged in poverty reduction and education in particular, and the normal tax relief available for gifts above £250 is extended to gifts of £100 not over one year but over three years allowing large numbers of people who might have thought previously they could not give money to do so. I believe this is a important contribution which we can allow people to make in helping some of the organisations that are doing so much in some of the countries we have been talking about today. I hope we will be able to devise with them means by which this can be publicised so that large amounts of money with a considerable supplement given by the Treasury makes possible some of the projects that are so important to these countries.
  (Clare Short)  Did you hear him say he hoped the Treasury would pay a lot more!
  (Mr Brown)  It is not a hope; money has been set aside.

  305.  The money that people have contributed through Jubilee 2000 is actually going to pay off some of Tanzania's debts. Is that right?
  (Mr Brown)  That is right but the new millennium gift aid will mean that for every £100 people give, we would match it with £20, £23 or £40.

Mr Robathan

  306.  Since you brought the subject up, Chancellor, I have to say I am surprised how little I disagree with what you have been saying!
  (Mr Brown)  It is good to have a constructive discussion!

  307.  I agree but you have raised the question of money. In the past and in the distant past the Conservative Government, you will recall the last Government committed itself in the long term to giving .7 per cent of GDP to international development and aid. I know that that was in the manifesto of 1992 and not in the last one. Given that the financial position in this country is now quite good, would you be considering moving towards .7 per cent of GDP?
  (Mr Brown)  Yes, we are looking at that. Our public expenditure review is taking place at the moment and it would be premature for us to give a report of what is going to come out of that. I have to say on the last Government, just to give factual information on a non-contentious basis, that the proportion that was given fell from 0.52 to 0.27.

Ms King

  308.  We know the IMF provided information to the Paris Club about the necessary levels of debt rescheduling and debt cancellation. Evidence we have received advises that the IMF is not suited to making these long-term projections and it has been over-ambitious with predictions particularly in relation to growth rates and the actual ability of countries to repay the debts. In fact, the evidence we have received from NGOs and academics to this Committee has been unanimous in advocating a reduction in sustainability levels used in HIPC. Firstly, should the IMF be responsible for dictating sustainability ratios and, secondly, are you satisfied that the measures of debt sustainability used to determine debt relief under HIPC are realistic and actually lead to enough debt relief?
  (Mr Brown)  I think these are very important points and they have all got to be dealt with and answered and, where necessary, improvements have got to be made. The first thing is that the debt to sustainability ratios are ones that were decided after a great deal of examination of what had happened in the past and although they are not the same, as someone pointed out, that Germany benefited from in the early 1950s, they are based on a realistic assessment of both what can be done and what is necessary for the sustainability of the process over the longer term. I just point out that it is not the IMF alone, it is the IMF working with the World Bank that are drawing up these sections of advice. Of course one of the things, as Clare and I were talking about today, is the importance of including first of all an allowance for unexpected things that may happen, in other words a preparedness to look at some of these things where, for example, there is a big change in commodity prices or whatever but secondly taking into account social and educational factors. I did say at the beginning that if this was going to succeed, because the issue is long term sustainable development, then the conditionality, that is the making sure that the process is sustainable, is very important in the long run to its success. The idea that you can eliminate conditionality or not have any expert advice is in my view not acceptable but, of course, you have got to be prepared to look at these things over time and see how they are working.
  (Clare Short)  The answer here lies in getting better collaboration between the Bank and the Fund. The Fund's responsibility is macro-economic stability. The Bank's responsibility is the structural changes that are necessary to promote development. We could do better if the two organisations could work more together. That is where we need to press and make improvements and then we can get better judgments. The development perspective, that is not the Fund's job, will be taken into the equation. That is what we need to press for.

Chairman:   Can we plunge into conditionality now.

Dr Tonge

  309.  We are now coming on to my least favourite bit of development-speak which is Structural Adjustment Programme, which I always thought was something to do with civil engineering and I find that it is not. Some of the NGOs are there to alleviate poverty it is said in the broad sense but some of the NGOs, and indeed some of us, feel that they have actually stopped developing countries spending on education and health which are the things that will ultimately alleviate poverty. Is it your view then that Structural Adjustment Programmes will lead to poverty alleviation in the long run or is the reverse true?
  (Mr Brown)  I think there is a general recognition that in these programmes everything should be done that is possible to protect the most vulnerable sections of the community. What we are talking about is putting the countries into a process where they themselves can ensure sustainable development and, therefore, economic reform is going to be necessary. To leave things as they are is not going to be the correct way forward. To have a degree of openness that allows a public debate in these countries about the best way forward is important as well. There is a sense, I think, that is accepted by the IMF as well as the World Bank that of course the vulnerable sections of the population should be protected in these programmes. How far that is happening in individual cases is subject to review and, of course, we should be prepared to look at that.
  (Clare Short)  I think there is lots of room for criticism of past structural adjustments. This is a point I keep making about improving structural adjustments and bringing the Bank and the funding to a closer working relationship. You cannot abolish structural adjustments because countries go to the Fund when the economics of the country do not add up and they are in trouble, immediate trouble, and need some immediate assistance. We must ensure that any programme of adjustment has got a really serious developmental perspective and a really serious poverty eradication perspective. There has been some improvement, there is room for more improvement. As Gordon said in his opening remarks, we are very committed to strengthening that work and there is a strong commitment in the Bank and in the Fund, although there could be a bit more there, to make this improvement. That is really the way it has got to go.

  310.  Is this documented somewhere?
  (Mr Brown)  Maybe Gus will come in. I think the one thing you should know is that these programmes are now being assessed by independent advisors and perhaps some of the experts who are coming to your Committee may be part of that process over time. They are now being assessed by independent advisors for exactly the things that you are mentioning.
  (Clare Short)  I think the replenishment is due for ESAF funds fairly soon. I was thinking yesterday, Gus, I am sorry I have not discussed this with you, we could probably use that opportunity to press this case forward.

  311.  I think the difficulty is that we hear this phrase "structural adjustment", but we have not seen it written down, for instance: "This country was asked to do this, this and this".
  (Mr O'Donnell)  Like I say, part of this is getting the programmes the IMF puts forward public so you will know precisely what is involved in an ESAF programme. There has been an independent evaluation of the ESAF programmes by a group of academics. That report has been discussed in the IMF Board and it will be discussed further at the spring meetings next week. The idea is that the Fund is basically saying that ESAF programmes have not been perfect in the past, there are lots of things we can improve on and we are looking to see ways of improving the Fund's performance in these areas. The Secretary of State has spoken to Michel Camdessus about this and so has the Chancellor. The idea is that we will get some more staff within the Fund who will specialise in some of these areas. We have to maintain the distinction that this is not the Fund's comparative advantage. Certainly within the programme they can say "we need to be careful about how these impact on the poor" but it will be the Bank that implements the programmes that actually make that happen. We need the two institutions to work very carefully together which is why it helps that we are on both boards.
  (Clare Short)  If I could suggest, Chair, this is such an important issue that I hope the Committee will keep an eye on it. If we can make improvements on the way the two institutions work together it could make a lot of difference.

Mr Robathan

  312.  I have to say that I think the full and frank answers from both the Chancellor and the Secretary of State have covered many of the questions I want to ask about the funding. I wonder if you could explain to me the funding of the IMF and to a lesser extent the World Bank? I understand in the past there were conditions attached to the money that we gave the IMF. In particular in the Mauritius Mandate I understand the Chancellor pledged that future UK contributions to HIPC would be free of conditions. What were the conditions that you stood by? Why were they removed?
  (Clare Short)  The HIPC Trust Fund.
  (Mr O'Donnell)  If I can explain. The IMF's articles do not allow it to cancel debt relief, therefore there has to be a rather complicated process that we go through to provide the money. Basically what happens is we get agreement on debt relief from a country. We then set up a trust fund such that that is an escrow account, so to all intents and purposes it is the money provided to the country itself, and then when the debt interest would have become due the money is paid for out of that escrow account. It is as if the debt relief happened, it is just that because the articles do not allow us to write it all off in one go we pay the debt interest through time. The UK provides overall funding to the IMF through the quota that we provide, and indeed there is a quota increase that will be considered by Parliament coming up, but that is for the Fund's overall activities. It is lending throughout the world, not just to HIPC.

  313.  Is the money that we provide to the IMF from DfID funds or from the Treasury?
  (Mr O'Donnell)  The overall money for the IMF is a quota which is money which we move across from the UK into the IMF.

  314.  From the Treasury?
  (Mr O'Donnell)  It does not actually count as public expenditure. It is callable capital, not actual capital.
  (Clare Short)  If I am right, Gus, the funding for ESAF comes out of my budget and that is about to be reviewed.
  (Mr O'Donnell)  The money I am thinking of for the IMF is the big money that will be used, for example, in the Asian programme.
  (Clare Short)  That is a distinction between the Asian programme and the particular needs of Africa which as you know is coming out of two different funds.

Chairman

  315.  That is why there is such a great need for strong co-operation between yourself and the Chancellor, is there not, because ESAF is IMF and therefore his bailiwick?
  (Clare Short)  It is our money.

Mr Grant

  316.  The IMF was set up some time ago. You just said that the articles do not allow for debt relief. Why can you not change the articles?
  (Mr O'Donnell)  It is a long and complex process. Basically to change the articles of agreement you need an 85 per cent majority of the Board so that can be quite difficult to achieve. One or two countries together can block it.

  317.  In order to get round the lack of an article then you have to go all over the place in order to compensate for that. Would it not be easier to just change the articles and put some effort into getting the 85 per cent?
  (Mr Brown)  The problem over IMF gold is exactly the same as the problem that Mr O'Donnell is talking about over any big changes in the articles in securing an 85 per cent agreement. In the case of Mozambique it has been possible for the IMF and the World Bank to move when it became necessary to do so. I see other instances where that will happen.
  (Clare Short)  Even this Government would have trouble getting an 85 per cent majority!

Dr Tonge

  318.  Secretary of State, I think you have just said that the ESAF money, some of the debt relief money comes out of the aid budget.
  (Clare Short)  The ESAF money, this famous structural adjustments money comes out of my money and in relation to the Bank we replenish the Bank for IDA funds—that is concessional loans. The Bank can raise funds on the market for higher interest loans and indeed there is a need for a rebalancing of its endeavours so it can from middle income countries get more profits so that we can replenish IDA better.

  319.  We have got you both together and it is Easter at the weekend, so how about you, Chancellor, increasing the aid budget? I know you have done one or two little things but how about a direct increase in aid budget like you always said you were going to work towards?
  (Mr Brown)  We did say that was part of the public spending review. What Clare has achieved in the first year is to shift resources to those areas of greatest need and of course what we are looking at in the strategic spending review is the future spending requirements and our ability to meet them in the country and that is very much part of our us discussions. As far as IMF and the World Bank, our contributions are roughly about five per cent. As Clare said, the contributions to ESAF come through the international development budget, but all these things are being considered.


 
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