Examination of Witnesses(Questions 100-119)
TUESDAY 17 DECEMBER 2002
RT HON
CLARE SHORT
MP, MR BARRIE
IRETON, CB AND
MR GARY
JENKINS
Chairman
100. Secretary of State, thank you very much
for your time and thank you for coming to see us twice in so many
weeks. If CDC had not existed when you became Secretary of State
and you had not inherited it amongst your portfolio of things,
do you think it would have needed to be invented? Have you found
a role for CDC because it was there or do you think CDC as an
institution is a valuable part of the instruments you have in
fighting poverty?
(Clare Short) I would not invent the
CDC which our government inherited. What we are trying to make
it into, I would invent and if it can be a success, it will be
an extremely significant development instrument leading to increased
and more speedy private sector investment into reforming poor
developing countries. If we can achieve that, it will be very
important. Prior to 1997, strangely really, my department did
very little work on private sector enabling environment. Yet to
get the kind of investments in infrastructure and the economic
growth which are needed to reduce poverty, the private sector
will be the engine of growth. The resources which are needed for
infrastructure cannot conceivably come out of the maximum possible
aid in the world system or the maximum possible public sector
investment which can come out of developing countries. Yet we
have our pension funds and our ageing population looking for investment
which will produce a really good rate of return to look after
our generation. If we can get the enabling environment right,
then you can get the investments these countries need, then you
get the 10% a year economic growth of the Mozambiques which would
be good for us as pensioners. There is a win-win there if only
we could put it together. It is why we put much more effort into
resolving conflict because that destroys private sector investment
and economic growth and regional integration, and we have put
much more effort into the enabling environment in terms of central
bank management of inflation levels and so on. The enabling environment
which allows very poor people to have little businesses or medium
level businesses in a developing country to grow and thrive is
the same enabling environment which attracts foreign direct investment.
There are not two conflicting reform agendas. In many countries
in the past banks were owned by the state, poor people could save
in them but never borrow and therefore they could not even get
the tractor or the little motorbike so they could take their goods
to market and you had to have licences for everything—everything—so
you could not get a business running. All of this matters enormously
in reducing poverty. In the past there has been too little attention
to the complimentarities and we have to change our mindset on
what aid is for, to see it neither as a handout to help the poor,
nor as fixing everything, but as an investment fund to create
the conditions where countries can fix themselves. The most important
thing in the long-term reduction in poverty is creating a climate
where the private sector can thrive. You know the figures for
Africa. Forty per cent of the savings of Africa leave the continent.
What should be the first call for any investment in any country
are the savings of its own people because the banking systems
are unreliable or political risk is too great. Getting all this
fixed is fantastically important. Highly subsidised or very low
rate of return investments from the old CDC are almost counter
productive because they are almost like saying the private sector
cannot invest at normal rates of return in these countries. You
need a public sector instrument to get any of this investment
flowing. Where you need to put money in, for example to rural
areas and agriculture, if it is grant to get land reforms sorted
out or credit to rural people or good technical advice as opposed
to all the money wasted on extension services which are often
very, very poor in developing countries, then it should come out
of grant and development funds and we should not muddle up what
is grant and what is an investment which is meant to be productive
which will help the economy grow and have a rate of return. We
could have, indeed I think the original announcement on the changes
to CDC implied it was a privatisation and it would have been possible
to say this is not really working, we will sell it off and have
the £1 billion or so into the development budget and we shall
use it as grant for development. We have had a growing budget
anyway, so although that was the original announcement, we would
just have got some money from somewhere else, so that would not
have been a very wise use of resources available to development.
We are trying to achieve something more complicated which we very,
very strongly believe in, which is to restructure it in a way,
use its expertise in developing countries and indeed its links
to our government and the expertise which is in my department,
not improperly but just the knowledge of countries and how they
are moving and how reforms which are improving the enabling environment
are moving forward, to encourage private sector funds to partner
the public sector funds, to increase the flow of investment to
developing countries with very low levels of investment and then
to be the first of private sector funds which will follow, because
you demonstrate they can have a return. That is what we are trying
to achieve and I really believe in it. The first model we had,
which we put before parliament and which was fully scrutinised
by your predecessor committee and the committee wholly supported
it, as did the previous Chairman of the Select Committee, was
the idea that once we entrenched the requirement to invest in
poor countries and the ethical code, then the private sector would
buy into CDC itself and we would get past the magic 50% and it
would flow. The market conditions meant that could not happen
and it would have been totally irresponsible to sell off because
the return would have been so low. I think that the way we have
refined the model to have more tightly focused funds is a better
model. We have had a lot of private sector advice, we had to refine
the model because market conditions meant the first proposal could
not flow at that time. I still feel optimistic and quite proud
of the fact that we are making this effort. A lot of other development
agencies across the world are watching us to see whether it works
and whether it brings in responsible private sector investment,
and then it would be a new tool in development and potentially
very, very beneficial to poor people.
101. In fairness, this is a dangerously consensual
committee and I do not think there has been any criticism about
what you have done vis-a-vis not taking forward the privatisation
of CDC and everyone recognised the reasons you acted in the way
you did. The concern this Committee have—colleagues will
ask questions which will speak for themselves—is that the
rates of return you have asked CDC to make mean that they have
almost entirely had to retreat from investment in agriculture
unless they can identify exceptional entrepreneurs to invest in
agriculture and that increasingly they are going to be obliged
to invest in power projects. Power projects may well be of considerable
value in improving the infrastructure of countries, but that is
going to be one of the consequences of the model you now have.
The anxieties the Committee have are much more around where the
investment in agriculture is going to come from. If that is going
to come from other mechanisms such as development funds, then
that may well satisfy colleagues' concerns. Those are the concerns. (Clare
Short) There is something the Committee ought to understand
because I have watched this story flow. When we restructured the
staff in order to go with the new CDC, quite a lot of staff who
had done loans for agriculture with very low rates of return,
where you would never get the private sector to follow, were made
redundant, with good packages. They have been going round mounting
a campaign, saying CDC is getting out of agriculture and it is
a betrayal of the poor and so on. They got some press coverage
and then I saw it come back in the Commons; that is how a civil
society works. The Committee needs to be aware of groups with
vested interests. We understand and respect the work they did,
but it was based on that model of focusing only on agriculture
and on very low rates of return and that the idea for the new
CDC cannot work. The second thing to say is that agriculture is
a difficult sector because the trade rules are skewed against
investment, particularly in Africa. Seventy or 80% of Africa's
exports come out as commodities unprocessed; that is Africa's
tragedy. The importance of Doha is to get decent investment in
infrastructure so more agri-processing will take place in Africa,
then you get the jobs and the value added and the growth in the
economy. If you stick only with agriculture and no agricultural
processing, then you will not get any private sector to follow
and you will not get the economic growth that poor countries need.
They are not the rates of return we have asked for. If you look
at rates of return in Africa they are phenomenally high because
Africa is seen as such a massive risk that the private sector
will only go there for very high returns. If you look at the private
sector which is there and the returns they are getting, they are
phenomenal. The job of ending conflict, improving the enabling
environment is to reduce the risk so that the private sector will
come in for a lower rate of return. We are working on that very
hard. CDC has to live in the world as we have it at any point
in time and if it is going to make investments where realistically
the private sector will follow, it has to look at what the private
sector is looking for. The beauty of the new funds mechanisms
is that the Norwegian development funds have come into one of
them, Aureos, so you can have a fund which is expecting a lower
rate of return which is leveraging more ODA money into it and
you can go into different sectors. Let me say on power, that power
is absolutely key to development. I remember when I went to Nepal
I went to a rural remote village and sat down on the floor with
some women. They said they needed electricity. They could not
cook, they had to go and get water, it was dark at night. It is
wrong to see power as not wanted by the poor and important for
them. There are so many people who are ill because they use wood
and biomass to cook inside their houses, etcetera. Power is honourable
and it is a sector and the poor want it and it enables people
to be more productive. In lots of poor countries there are constant
power cuts and therefore businesses cannot thrive and it tends
to have been a sector which was owned by the public sector, very
inefficient, as it tends to be across the developing world, highly
subsidised, sucking away subsidies which should be going into
health and education and providing inefficient, subsidised services
to an elite. That is the pattern. Reforming power is essential
for the economy, but also to get those subsidies out of it so
they can be properly spent on the needs of poor people. It is
absolutely important that CDC moves into power. Remember there
are always groups who do not like reform and there was a group
doing very low rate of return unprocessed agriculture in CDC,
most of them are no longer there and they have been going round
badmouthing the report. They have had the badmouthing and the
criticisms they have made taken up. It is called democracy.
Mr Battle
102. I should like to go back to the potential,
the vision of CDC and what it could do, not just in the limited
field of crude geographical commitment, but on a much wider and
deeper vision of qualitative, new kinds of investment instrument,
new models for investment. I get the impression that when you
used that expression win-win what we are struggling for is a model
which is pulling together two ends which seem to be totally irreconcilable.
One is a very narrow old-fashioned, economic model on the financial
rate of return, with its whole notion of blind investment to get
the rate back, go for the best option. That could be in a hotel
anywhere, including in a geographically poor country. At the other
end is an increasing understanding that economic efficiency and
social obligations to include the poor in development are crucial.
How we pull those two together seems to be the kind of area in
which you are suggesting CDC should move. It is very interesting
that in the inner city areas of Britain the figure is exactly
the same. Forty per cent of incomes of inner city dwellers where
I live leaves the neighbourhood and we have no banks there now,
so who invests in inner city neighbourhoods? The same question,
the question of investment in poorer areas. How do you reconcile
that? Can we move away from narrow measurements of financial return
on capital? How can we do that if we do not do the prior analysis?
How do CDC know whether they are contributing to the eradication
of extreme poverty if they do not systematically assess investment
proposals on the basis of their wider economic rather than just
financial return? If they do not relate them to targets for poverty
reduction, millennium development goals and the rest, can we build
that into the process before investment takes place or are we
still crudely measuring the impact of a trickle down of investment
after the event? (Clare Short) I represent an inner
city seat which curls round the heart of Birmingham and most of
the centre of the city is also in my constituency, so I do not
think it is the same question. If people bank in the centre of
the city because they shop there, it does not mean Ladywood necessarily
loses out unless—and you get this in the inner city—people
do not have the confidence to travel into the city centre to take
up jobs which are available. So I just want to say that it is
not the same. The money leaving the country is different from
a locality within a country where people can cross the boundaries
of their locality to get jobs very nearby. It is not the same.
103. May I just explain? I am not complaining
about the position of where the banks are. I am perhaps asking
why some inner city neighbourhoods have no investment while other
areas develop a strong sense of investment. There is a pattern,
but it is a different question. (Clare Short) Indeed.
It is a very important question for constituencies like yours
and mine but I do think it is very different. The elite are very
rich in poor countries. People often miss that. They have a lot
of money, they invest it, they save it, most of it is coming out
of their countries. It is very noticeable that Asia keeps its
savings. They might not always be invested in things which immediately
benefit the poor, but they stay in their country, whereas Africa's
savings come out of Africa and this is a real issue for Africa
in terms of its economic growth and the potential of the private
sector. I do not agree with the overall thrust of your question.
It is not for the private sector to carry all social obligations.
It is for the private sector to have responsible investment which
is not environmentally destructive, which treats labour properly,
as under the ethical codes which CDC works under, but it probably
will not be able to go to the most remote communities where the
very poorest are to make its returns. If it can make responsible
returns, generate jobs, you might see people migrating from the
most remote areas, because the whole world is urbanising faster,
getting more jobs, or some of their family members are getting
jobs and sending money back and creating economic growth in the
country which lifts up more people and pays more taxes which contribute
to public services. I do not think you should burden CDC, or the
private sector, with meeting every single one of our social objectives.
It should be responsible and beneficial investment which is ethical
within a well-managed state but then make sure that taxation is
fairly distributed, that people in remote communities which are
not receiving benefits are helped in other ways. The quality of
investment matters, but it should not have to carry all of the
obligations of a well-run state. There was an old-fashioned model
of saying, in the neo-liberal days—if I may use a semi-neutral
term to describe that period—which really went too far,
"Let the market rip. Roll back the state and the price mechanism
works for everything". So, like in Africa, charges for health,
charges for education, the poor were driven out of public services.
The whole world agrees that some of that went too far. A lot of
the private sector in the old world of investing in developing
countries, where corruption was winked at and it was often the
sectors you could get into after you had done your bribing where
you could get your high rates of return, often minerals, oil and
so on, or very dubious investments in the public sector, hospitals
and things, which led to some of the debt we are now trying to
remove from some of these countries. That is the old-fashioned
private sector with no ethics, often into very badly managed economies.
The world is moving on and the best of the private sector beyond
CDC understands now that with information flowing across the world,
with increasingly fussy consumers, who want to buy that rug or
shopping list supermarket, that they want an assurance that those
things have not been procured in a way which is ripping off people
or poor countries; thus the ethical trading initiative, which
came out of consumer power. Lots of big powerful companies are
worried about their reputation and they are joining up with all
these different ethical codes, not just cynically, but to protect
their business. This is a fantastic opportunity for us in development
to get more and more responsible private sector investment and
the private sector wants it too. If we can manage to create the
conditions in developing countries, where that kind of investment
can flow in, it really can speed up economic development and the
reduction of poverty. That is a shift in the political and economic
take across the world but also the leading edge in that most constructive
players in the private sector are thinking differently.
104. I would argue that it has gone further
than that. It is not just a question of ethics or social responsibility
in that interest in the poor is tagged on as a moral obligation.
I do think some thinking now is saying that it is good economics
to include the poor. Some of the work done in Latin America is
looking at even the value of the poor who live in shanty towns
to contributing to the economy, not that they hang around and
wait for work. There is a new analysis to say that linking the
programmes, the investments, to see where the poor figure in all
of this, is a different way of looking at the questions. I am
not suggesting CDC are not there. (Clare Short) The
private sector has always sold coca-cola to the poor, most of
the poor of the world have no health services and what they buy
they buy privately. The private sector is not fussy anywhere in
the world; it will sell its stuff to anyone. There is more and
more understanding that if people are included, if they can consume
more, if they are educated, if they are going to be productive
workers, that is beneficial for everybody, including the economy.
105. Just to go back to the question I asked,
how can CDC, or will it, measure its impact even in the terms
you describe, in terms of corporate and social responsibility?
If the only measures are on narrow financial return and not wider
economic, will you be broadening the measures? That is what I
am asking. (Clare Short) No, it is operating under
a very stringent ethical code and it will operate under those
and it also does not do pornography, tobacco, arms, gambling.
It has these tough conditions which means it will not creep into
any of those sectors and it has to meet all these environmental
and labour conditions and then it has to make the kind of return
which brings benefits to a country but also attracts other private
sectors to flow behind it. Those are its tests. You must not ladle
onto it everything that the state needs to do.
106. No, I am not. I know it is what the state
ought to be doing. It is the question of how subtle the economic
analysis of the contribution of the poor to the future is. That
is the question. It is not a moral question about whether you
invest in alcohol, gambling or pornography. It is about how you
measure the impacts on the poor. (Clare Short) I am
sorry, you are putting together too many things. There is growing
understanding, take Latin America because I know you have expert
and long historical engagement with Latin America, that a gross
error has been made in Latin America.
107. I am not responsible for it. (Clare
Short) No. It is the most unethical continent and the elite
who are incredibly rich and own all the wells and all the land
and all the rest thought they could have a successful economy
and leave out a lot of their people and it is a less successful
economy. The degree of inequality is holding back the development
of Latin America as well as creating political—
108. I am not holding it up as a model. (Clare
Short) No, I know you are not. Please, you ask a question
and I am giving you a really very serious answer. I am saying
that I think you are trying to impose on CDC a question which
belongs to the whole of the values of government, the values of
the IMF and World Bank and how it promotes economic development,
who is included. You are pointing to the fact that the poor doing
better is good for business as well as being good for the poor.
I agree with that completely and it gives us a possibility of
an era of really much more rapid advance in development. You cannot
put the whole of the policy obligation which flows from this new
analysis onto CDC. It has to be shared across all the instruments
we use in development.
Alistair Burt
109. May I take you from win-win to quick wins?
The longer the period of anticipated return on an investment the
more edgy investors tend to get. I am wondering whether you feel
there might be a call for CDC to be putting more attention into
shorter term investments rather than longer term in order to demonstrate
the quick wins which might build up confidence and therefore make
investors feel rather happier. (Clare Short) When I
took advice at the beginning of the restructuring of CDC from
people operating in the private sector, they said the thing which
will kill it is unpredictable political interference. Therefore
what we must do is establish a structure where the requirement
to invest in poor countries is entrenched, where the ethical code
is entrenched, where any political powers are absolutely transparent
and the rest is left to the management of the organisation. I
have followed that advice and I believe it is the right advice.
That is a CDC question. It is not for me and I do not have the
powers and I should not have the powers and it would be a recipe
for disaster for CDC if I could poke in and say I think they ought
to invest a bit more here or they need a quicker return there.
It will not work if political powers are used like that. I do
not have them and we have created a model where no politician
will be able to interfere in that kind of way in the investment
decisions of CDC.
110. Do you think a move to more development
results based investment would frighten off investors? (Clare
Short) The development based investment is entrenched in the
70:50 requirements. If we had privatised CDC and left it to the
market, it would have become another organisation, it probably
would have built on its expertise in developing countries and
shifted to middle income countries. Left to the market, it would
not stay in South Asia and Africa with such high ethical standards.
So that is entrenching a very, very strong development objective.
Then the ethical code on the sectors it cannot go into. The labour
has to be properly treated, the environment has to be considered,
these are proper conditions which private sector operators would
not have, except some of the companies which are moving themselves
very strongly in that direction. That entrenching of human concerns,
proper treatment of people, development interest, is my entrenchment
of development. Beyond that I say, "Please CDC, go off and
be efficient and demonstrate that you can invest in these markets,
attract other private sector money to follow you and the private
sector can grow and the economies of these countries can grow."
111. I am interested in and understand your
sense of having almost an arm's-length relationship in certain
respects so that CDC can run itself and therefore convince investors
there is an absence of political interference. (Clare Short)
It is not arm's-length: it is no arms at all. It is entrenched
development interests and then no interference.
112. How you make the distinction between the
two is interesting. You do not feel able or prepared to comment
on whether or not having a look at some shorter investments might
be good news, yet you are very confident on the conditions and
principles which you set out as being the government's responsibility
to set out. How do you choose between the things you commented
on and the things you do not? (Clare Short) Honestly,
with respect, you are not listening to the logic of what I am
putting. I do not have any interference of any kind whatsoever
in any individual investment. The most we do if someone writes
and complains is write to CDC and get them to answer somebody
who complains. That is absolutely right. The duty of the government
and my duty to try to get this model right is to entrench transparently
the development requirements and then allow CDC to be an efficient
organisation. If you ask me why I entrench that or why we made
this decision and why we are modifying it, all the things for
which I am responsible, I shall answer you fully. I am not trying
to evade. I just never, ever interfere in those questions. I have
a presentation once a year of how it is done and where we are
strong and I take a lot of interest in how CDC is doing, but I
do not give them any instruction or any interference of any kind
whatsoever in where they put their investments. It would be foolish
of me to answer that question because it has nothing to do with
what CDC is doing.
113. You made a comment earlier about rate of
return and emphasised as far as Africa was concerned, that there
were some quite spectacular rates of return and what CDC was looking
for was not out of line. We understand that the IFC rate of return
is lower than that expected from CDC. Do you have any particular
comment on that, particularly in relation to whether or not it
might be worthwhile thinking that there is a developmental case
for CDC to make some investments with a lower financial threshold
of return, maybe not if they do them singly, but perhaps if they
do them through a joint venture fund with DFID or something like
that? What is your sense of that? (Clare Short) The
first point I make is that IFC's track record is not that impressive.
It keeps trying to change its strategies and has had trouble finding
its niche and role in development. I shall ask Barrie to come
in on this in a minute, because he has lived with this for a much
longer time. Secondly, it is not trying to do what we are trying
to do with CDC. It is the public sector money investment arm of
the World Bank trying to invest public sector money in the private
sector, but it is not trying to get the partnership with the private
sector which is the essence of what we are trying to get: to expand
the investment through the reorganisation of CDC. It is a different
beast. I have ceased taking a lot of interest in what IFC is doing
and if it is interested in partnering CDC where it sees CDC pushing
forward the boundaries and thinks that would be a good place to
put its money. It has a different test, does it not? The World
Bank operates on a test because they do concessional loans and
so on, they have rules on rates of return. It is a completely
different beast. (Mr Ireton) The IFC tends to operate
in more middle income countries on balance, whereas we have tasked
CDC to emphasise the poorest countries. On this trade-off point,
the Secretary of State has put it extremely well of course, but
in the old days we used to struggle with investments and say,
"Does this earn foreign exchange? Does it employ people?
Is it in a disadvantaged area?", all these things. We had
a lot of apples and oranges which we were trying to add up. (Clare
Short) The public sector doing private sector investment. (Mr
Ireton) Exactly; all those things. What we have tried to do
is to sort a lot of this out. What we have tried to do is say
yes, the governments of these countries ought to be having good
policies and that is their responsibility with our help and dialogue.
The private sector job is to invest productively in growing the
economy, in a regulated way and therefore its prime function is
to look at financial rates of return. In a better world that we
are gaining now, we do not have to make lots of sophisticated
economic—though lots of economists do this—cost benefit
analyses which say this is the perfect project in a very imperfect
world. Somebody very dear to me, when I asked this question about
cost benefit analysis, said "Today we are actually trying
to improve the world". That really is what we are trying
to do. So we are laying on CDC the responsibility to invest ethically
and responsibly, to demonstrate you can actually have profitable
investments in poor countries and we, DFID, are working with those
countries to bring about a change in the environment you well
understand. (Clare Short) I am desperately trying to
reduce the rate of return in that if we can resolve these conflicts
in Africa, if there is less political risk, if there are better
banking systems, if there is less corruption in the regulatory
arrangements, the ports work better, contracts are enforced, private
sector will go to poor countries for a lower rate of return. That
is where I and DFID and World Bank should come in, not by telling
the private sector where to go because the private sector includes
your pension money and you might in theory think it is good to
have a lower rate of return in poor countries, but you want your
pension fund to look after you when you are 80.
Tony Worthington
114. You have explained extremely clearly what
CDC is about and I find that very valuable and I do not quarrel
with a word of it. It is what you have left behind which is the
problem. The great bulk of economic activity today in Africa is
not ready for the market. It is done very ineffectively. You say
you leave the policy to the governments. It is an area where the
UN organisation which should be responsible is very, very weak.
There just seems to me to be—vacuum is too strong a word—policy
inadequacy in areas like agriculture in Africa which really does
need tackling. Now that the role of CDC is clarified, my feeling
is that we now need to move on to look at how in shorthand terms
African agriculture can go to its pre-market stages, its pre-export
stages. I should be grateful for your thoughts on that. (Clare
Short) I think that if you seriously mean that the bulk of
the economic activity in South Asia and Africa is not ready for
the market, then I think you are wrong and I disagree with you.
But you are sentencing Africa and South Asia and the poor of the
world to continuing decline. If you look at the countries in Africa
which got poorer in the 1980s and early 1990s, they have population
growth faster than economic growth. Wherever that happens you
have invincible growth of poverty and you cannot help through
the public sector. You can provide health and education but if
there are no livelihoods, if people cannot get jobs, if they cannot
earn and their income levels are going down, they are getting
poorer with all the flows from that and the public services of
a country cannot work. I profoundly disagree with you. Look at
some of the reformers in Africa. Mozambique is one of the poorest
countries in the world and it is still very poor, but it has had
nearly 10% economic growth for ten years. Of course the fruits
of it are not fully evenly distributed across the country and
all these things have to be attended to. It needs to maintain
those sorts of levels of growth for another ten years or so and
it really will be in a position to lift up its people. If you
look at South Korea, which was as poor as Ghana in the mid-1960s,
it grew its economy consistently and consistently and consistently
and Africa needs to do that. If you look even at the rural poor
in, say, Tanzania, until the reforms which have come in recently
the bureaucratic controls were so great, there were no markets,
they sold their produce to para-statals who did not collect and
never paid, they had rotting food waiting to be collected. Then
there were state-owned poor quality manufacturing or processing
factories in the city, highly subsidised and the rural poor were
giving the food for less than market prices and taking the impoverishment
of that economic model. That economic model has completely failed.
The Bank of Tanzania in which the rural poor used to save, because
the poor save, because the poor know they are going to have crises
in their lives, they are savers, would never give credit for anything,
for a tractor, for a motorbike, for a sewing machine, things the
poor used and there were no markets. Now, with the reforms which
are taking place in Tanzania, there are little markets. The little
subsistence farmer grows a little bit more than he can consume,
takes it to market, gets a little bit of cash and it is starting
to improve the livelihood of the country. Tanzania also has famous
game parks, tourists coming in, spending a lot of money, some
hotels, creating employment, creating a tax base. It is just not
true that the private sector cannot work in some countries. Look
at the Soviet Union. Look at the failed development model in some
of the poorest countries where everything was run by the state
and you did not get any economic growth and you got an invincible
rise of poverty. I absolutely do not agree that there are economies
which are not ready for the market. I did not say we leave the
policies to the governments, but you have to have an efficient
modern government with laws. You need a legal system which enforces
contracts, you need to reduce corruption, you need order and stability,
you need ideally healthy and educated people, you need proper
regulatory arrangements, so there is no monopolistic abuse of
price and so on. All of that was in the old development model.
We do not leave it to the government, we work with the governments
of developing countries to create a modern, effective, enabling
environment where the economy is well run. In lots and lots of
countries where there is no foreign debt, there is very high domestic
debt because the government borrows massively and then interest
rates are massive. Any local business which borrows to develop
is absolutely diminished by the levels of interest rates. We work
on all these things with the World Bank and with others, to try
to create a modern state with efficient government institutions
which create the conditions for the enabling environment. Lastly,
on policy inadequacy in agriculture in Africa, part of the whole
policy inadequacy was thinking that institutions like CDC would
give loans for very inefficient agricultural sectors and that
was the only hope of agriculture in Africa. As a department we
have produced two or three leading edge documents on the way in
which agriculture needs to be reformed to help in the reduction
of poverty. A lot of the policy on reducing hunger has been wrong
because it was all about food self sufficiency in a country rather
than making sure the poor can get access to food. There is an
analysis on how agriculture can develop and a third one, which
has just gone out to consultation. We ought to give these to you
as a committee. Of course there needs to be more intelligent strategies
about agricultural investment, but I come back to the point I
made at the beginning. Without changes in the trade rules Africa
will not go to where its comparative advantage should lie, which
is agricultural processing. Everything, cashew, coffee, tea, all
comes out of Africa unprocessed. The only thing in there which
has a fair trade price is the original cocoa bean. Ninety per
cent plus of the price is made in Europe. If you look at the tariff
escalation on chocolate and if you started trying to make chocolate
in Africa, which could be done with refrigeration and so on, it
could be a 100% tariff escalation. We have to fix the distortions
and the dumping on world markets which really prevent Africa moving
towards the agri-processing which is its natural comparative advantage.
115. May I make it clear that I am not condemning
Africans to perpetual poverty. (Clare Short) If you
think there is no place for the private sector, you are.
116. No. We all go along with all that you said
about the wickednesses in our world in trading rules. There is
also a sort of assumption around that if we just sort all that
out then everything will be okay. I think what you are indicating
is that there are now new policies, consultation documents, coming
forward from within the department which are saying we need to
look at agriculture and poverty in a different kind of way from
five years ago. You are absolutely right, that is what we should
be looking at as a committee as well. We are seeing the inadequacies
of the old policies and why we need to change the emphasis much,
much more towards agriculture. When I said markets, I accept that
there are many goods quite rightly sold in local markets and we
are doing a lot to stimulate that. In terms of the interaction,
particularly in agriculture, between African agriculture, apart
from the price things, the trade rules and so on, there is a huge
amount of work to be done to help those countries to make contact
with our markets. We thought CDC was doing that. (Clare
Short) But it was not.
117. Yes; it was not. (Clare Short)
CDC's investment in agriculture was in raw agriculture, it was
not in processing. It was not in the value added which Africa
needs. It just was not. Since 1997, we have shifted our rural
work to livelihoods. You should not just go rural/agriculture.
There are landless people and there are poor people who make a
bit of money from their crops, the women of the household might
make handicrafts or clothing which they take to the market and
they commit more money there. They can do a bit of fishing. The
poor of the world are so creative and diverse. Some of the family
members will migrate and be working in the city and sending a
bit of money. We have focused much more on how to improve the
lives of the poor in rural areas and we have been working at that
for a considerable time. For example, research shows masses of
money is spent in developing countries on agricultural extension.
If you closed it all down and just built rural roads, you would
get more economic development. We have been working on lots of
these things, but we have also produced these three very important
documents—and they are influencing the debate internationally—in
the recent past on reducing hunger, the contribution agriculture
can make to development and the third one. I shall let you have
those. It is a fantastically important question and there has
been a lot of misguided policy in the past. There has been a lot
destroying agricultural production in order to subsidise manufacturing
in the cities in the way I described as the story of Tanzania,
which has been a disastrous failure, particularly in Africa. We
have to learn those lessons and not just continue with some of
that. I am afraid there are some elements of those who have been
briefing against the reorganisation of CDC, honourable and good
people that they are, who are living with those old models which
do not work.
Hugh Bayley
118. I can accept your prescription about the
importance of agriculture for economic growth and for pro-poor
development in Africa and the importance of getting more value
added through processing in Africa. You have made the case very
powerfully and I accept it. I am not sure that CDC accept it.
We were told in June last year by Lord Cairns that the value of
the agricultural part of CDC's portfolio was 11% and we were told
this morning by Paul Fletcher that he would expect that part of
the portfolio to remain at around 11%, growing slowly as CDC's
portfolio as a whole grows slowly. If agriculture is as important
as I believe you believe it is to sub-Saharan Africa, should that
proportion of CDC's portfolio not be growing with an increased
emphasis, as you stress, on processing? (Clare Short)
No. I have been talking to Tesco and the other big retailers to
try to find out what would be required to get them investing more
in Africa, which is right next to Europe, to get bigger production
and the processing and the value added. The first thing I learn
is that there are intermediary companies which do the sourcing,
there is no direct link with the big retailers. In the case of
Ethiopia, which of course has 60 million people, close to Europe,
a successful airline in terms of cargo, world famous coffee, $100
a head GDP, desperately, desperately poor country, how can you
get the value added in the processing? At the request of Prime
Minister Melez, we asked the private sector to go and to report,
what it would take, what kind of reforms would be needed in Ethiopia
for the private sector to go and invest there and get the value
added and the increased investment. To get to agricultural processing
it will not be CDC. If you look at how globalisation brought benefits
through manufacturing to Asia, where of course they had a lot
of people and they invested in educating their people, it was
companies moving there and bringing with them all sorts of expertise
and investment in order to get the comparative advantage of the
lower cost labour and so on. A lot of the agricultural processing
change will come in that kind of way to Africa, but my understanding
is that CDC—and I am not directing the investment policy—are
looking to move more into agricultural processing. Good. I hope
we can encourage more of that kind of thing. Let me say that it
is not the only thing. For example, call centres, if we can get
modern telecoms into Africa. We have call centres in Asia. Different
time zone. Africans are fantastically proficient at languages.
You get illiterate people who speak five languages in Africa and
it is in the same time zone as Europe. There are other sectors,
if we can get the continent sorted out and get modern investment.
CDC cannot answer all the problems of all this historical failure
to put things right. Its job is to get more investment into Africa
and South Asia where the poor are and its job then is to try to
lead where the private sector will follow. If it is very difficult
at the moment to get investment in agricultural processing because
of all the other barriers to it, then CDC should not go there.
After all, World Bank and the IMF and governments should sort
out the conditions which are making it very difficult to get productive
agricultural processing.
119. I agree the bank and donors and above all
the WTO need to clear the decks to make it possible and to open
up our markets to African produce. Yes, I agree with that. If
I were a macro-economist working for the African union or one
of the governments, in terms of food processing and the sale of
agricultural produce, I would identify two growth markets. One
would be within the urbanising parts of Africa, the people who
have gone to work in your call centre, if you like, or a tyre
factory, or work in paid employment or in some very small business
activity, trading in the market in an urban centre, who do not
produce enough food on their own land to feed themselves; maybe
they produce some food but not enough to feed themselves and therefore
they need to make some money in the cash economy in order to purchase
food. As population grows and as urbanisation continues, there
will be an increasing number of Africans who have a little bit
of money and need that primarily for buying food. You must find
ways within Africa of incentivising farmers to produce food and
incentivising business to process it to some extent, and to distribute
it to meet that urbanised need. There is a growing market which
will continue to grow. I should have thought CDC, through its
agricultural investments in the past, which have not always been
successful, had learned a lot—you learn through failure
as well as success—and had a lot of skills which could be
applied to creating that food processing and distribution business
in Africa, which is needed by poor people and which is not automatically
happening through local entrepreneurs. Could CDC not do more in
that field? (Clare Short) On your first point, you
must know the market women of most cities in Africa. As urbanisation
is growing, and it will grow further, and as some of the gross
inefficiencies of the statist economies are dismantled, you are
getting more and more natural markets and people growing some
surplus and bringing it to market and supplying food to urban
populations. You move on from there to say that there will be
more processing. I again insist that you do not know and I do
not know whether that is the best investment for CDC in Africa.
CDC's job in Africa is to invest responsibly and ethically in
sectors which will grow and succeed and where the private sector
will partner it and follow it. It is not for you or me to say
what will produce agricultural processing. That is why I go and
talk to Tesco or I go and talk to the sourcing company. There
are people out there. Apparently the Channel Islands, not just
Jersey, are massive producers of tomatoes for the European market.
They were finding a place, they were finding co-operative arrangements
with the local state and where they could get land and train people
and then they invested over ten years in the productive capacity
and the kind of tomatoes we like to buy, etcetera. Africa could
have more and more of that, I am sure of it. We need to ask the
private sector what it would take, what would take them there.
Africa's coffee comes out as green beans and Germany is a major
coffee exporter, the absolute logic of globalisation because labour
is cheaper in Africa and it is so close to Europe. If we could
just get the conditions in the continent, the end of conflict,
more regional integration, that is where it is going to go. If
you were a macro-economist, or if I were a macro-economist, it
would still be a politician operating in the public sector and
you would make a lot of mistakes and I would if I thought I could
tell Africa best how to develop its markets in the private sector.
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