Examination of witnesses (Questions 320 - 329)
7 APRIL 1998
RT HON
GORDON BROWN,
MP, RT
HON CLARE
SHORT, MP,
MR RICHARD
MANNING and MR
GUS O'DONNELL
Chairman
320. Is it not true that the establishment of the IDA
trust funds against which we write off debt represents a reduction
in the amount of money that the World Bank IDA has to spend on
other perhaps very urgent economic developments? It is misleading
to suggest, as I fear Jubilee 2000 does, that in fact this is
a cost-free exercise?
(Mr Brown) There are discussions and I have met
the President, Mr Wolfensohn, to talk about these things to talk
about this net income which you have described and the World Bank's
financing needs for the future and these are part of the continuing
discussions.
(Clare Short) You are right that it is not costless
because which pocket it comes from and the question of the balance
in the Bank is linked to very poor countries and at what cost
to middle income countries and at what cost is very important
to the distribution of the resources. You are right that no debt
cancellation is cost-free. The funding is coming from somewhere
and not going somewhere else.
321. And must draw it away from other countries who desperately
need help but perhaps run their economies in such a way that they
do not actually need debt forgiveness?
(Clare Short) There is a point there for equally
poor countries that have not got debt they might complain if concessional
lending to them was reduced because other countries that accumulated
debt were getting preferential treatment and we do have to keep
an eye on that.
322. Otherwise, for whatever reason, you are rewarding
those who may be wasting money or using it incorrectly or those
who have got themselves in debt for whatever reason, and taking
it away from those that have not.
(Clare Short) That is a danger and that is why
in my view the net income discussion we are going to have in the
next meeting Gordon and I are determined it is so important if
we can get an adjustment there will be more concessional funding
available to poorer countries. We must make progress on that.
323. Also is it not true that it is in fact really objectionable
in principle that we should be using our bilateral aid budget
to repay debts to the World Bank, to the IDA and also to the regional
development banks? This is money which should otherwise have been
used for schools, hospitals, roads and effective economic development.
It is in principle wrong, is it not?
(Clare Short) As I said in my introductory remarks,
the money, my budget, our budget is for poverty eradication and
to improve investing conditions that will allow the poorest people
of the world to climb out of their poverty. That is what it is
for. It should only be used for debt relief if it is levering
in other resources to release more resources to the poor. When
it does that, as in the case of the catalyst of Mozambique or
in the case of Uganda enabling the whole of Ugandan relief to
come on, which is worth $30 to $40 million a year to the Ugandan
government, then I think it is proper use of the money. That is
the test all the time: does spending it bring greater relief to
poor people who are meant to be the beneficiaries of that budget?
(Mr Brown) I think that is absolutely right. The
debate about the overall level of the international development
budget is one that will continue obviously and it is part of the
comprehensive spending review. Clare is absolutely right, if by
the $10 million expenditure from the international development
budget we can help unlock the situation in Mozambique—the
£116 million that was then provided by the international
community, some by the World Bank, some by the IMF and some by
individual countries—
then that is money well spent. If the money is going to the African
Development Bank to unlock the situation in Uganda to allow the
African Development Bank to make what it had to make which was
its proportional contribution otherwise the process in Uganda
could not be completed, again it is money well spent. So it is
not a question of whether that money is well spent, it is whether
it is well spent in these circumstances, and I think your question
is more generally about the overall level of the budget.
324. The IMF could well afford to actually provide money
for these purposes from its own resources and if the development
banks are run properly so should they.
(Mr Brown) Yes, but there are agreements about
bi-lateral and multi-lateral financing. It is true in the case
of Mozambique when the figures come out they will show both the
World Bank and the IMF did play their part in making up the difference.
(Clare Short) I think, chair, your question is
right. If we can leverage more assistance to poorer people by
investing some of our budget that is a sensible use of money.
325. I think the Committee would get extremely concerned
if the amount of money we have for this debt level approaches
too high a level. I think your answers demonstrate to the Committee
they are very well justified in these cases that should debt relief
become a major item of expenditure on the aid budget I would have
thought that was objectionable.
(Clare Short) I think, personally, it depends
on the outcome of debt relief. For example, in the case of Mozambique
we have got a desperately poor country coming out of an enormously
difficult history and a very well- intentioned government doing
all it can to get debt relief. In the meantime it has got to pay
debt and we are helping the government of Mozambique to pay that
debt so it can direct its own spending into education and health
and getting into a sustainable position of running services for
its people. In each case we must judge carefully but I think that
is good expenditure.
326. I am sure that the Committee will agree with you
on that. It is just that it is worrying if it climbs too high.
I think there is another very important issue which I hope you
will agree with and that is that we have really got to look not
just at internationally owed debt but also at domestic debt in
some of these countries. We went to Kenya and we found that although
their international debts to the multi-lateral institutions are
manageable, nonetheless they have got huge debts within their
own domestic economy and such is their borrowing requirement that
interest rates within Kenya are at 26 per cent. With a fluctuating
and downward exchange rate in Kenya plus their payments to international
institutions and a 26 per cent interest rate level those are conditions
which make economic investment and development impossible.
(Clare Short) These are very difficult questions
because of course the consequences of a government that is borrowing
massively domestically might be very high interest rates, which
might for example mean that rural farmers who borrow because of
the effects of El Nino will be paying very high prices for seed
which might be anti-developmental. One cannot assume that the
right thing to do is to write off that debt. It might be the consequence
of poor economic management that is not beneficial to the poor
people. Malawi is another country that has got very high levels
of domestic debt and has come out of a very difficult political
situation with a much better government than it had before, very
well-intentioned but with desperately high levels of poverty.
We do need to look at countries like Malawi. I think in the case
of Malawi, debt is due to come down considerably in a few years.
I think we looked at that when I was there. That cannot be under
HIPC, we do have to look separately. This cannot be erased by
HIPC. We have to take it case by case and look at the causes.
I think the difference between Malawi and Kenya, for example,
is quite significant.
327. What we really want to do is to talk about the total
debt of the country and then through the mechanism we have been
discussing this morning reduce it to a level at which they can
pay off debt and start and re-start their economic development
for a long period, sustainable for a long period. Is that not
what we want to achieve?
(Clare Short) Absolutely. But the causes of domestic
debt and international debt can be very different.
328. Yes. We need to look at the whole picture, not just
part of it.
(Mr Brown) I agree with you. As Clare says, we
do need to look at the whole picture. I think in a global economy
the position has changed for all countries now. Thirty years ago
it was possible for a national economy, whether it was in Africa
or anywhere else, to be completely separate from the rest of the
world, to make all the mistakes it wanted to make and to be able
to hide these mistakes from the rest of the world community, to
borrow money and to get on with it. It is not possible for any
country in the world now in a global economy to escape a penalty
when it is in a position where it has either got unsustainable
debts or alternatively it is running the wrong macro-economic
policies. It is a lesson that every country, developed, developing
and under-developed, is recognising. That is why in my view one
of the best long term solutions to this is far greater openness
so that people know exactly what is happening, it will be found
out anyway. But openness at the right time so that we are in a
position to look at the position, the international community
can see more clearly what the position is and therefore people
will see what the rewards for taking the best macro-economic decisions
are. I think we have got to recognise that for every country in
the world it has changed from what the position was 30 or 40 years
ago, even ten or 20 years ago.
329. Yes indeed. I want to congratulate both my Committee
and you for finishing our questions before one o'clock and to
thank both of you, all of you, very much indeed for coming to
the Committee this morning and discussing this vitally important
issue.
(Mr Brown) Can I say we will provide the information
that we said we would during these discussions. I think it is
absolutely right and good that you have taken such a big interest
in this process of debt reduction and we will be very happy to
report back to you in future months about the progress or otherwise
as we continue to press these issues in the international community.
The work of this Committee is in my view very important to what
is happening in this process and I hope it will continue.
Chairman: Thank you very much.
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