Examination of Witnesses (Questions 80-99)
MR PETER
HARDSTAFF, MR
MATT PHILLIPS,
MR STEPHEN
RAND, MR
PATRICK WATT
AND MR
SIMON WRIGHT
25 OCTOBER 2005
Q80 Mr Singh: Given those responses,
do you welcome DFID's change in terms of conditionality? Is that
a model you will be pushing for with the World Bank and IMF?
Mr Watt: We have welcomed the
DFID/HMT paper on conditionality and change of policy. It really
is too early to say what impact, if any, it has had. DFID has
not yet completed the operational guidance note that will go to
DFID offices in developing countries to tell staff how best to
implement the new policy. At the moment, the situation in terms
of how DFID works on this issue is fairly chaotic. DFID undertook
an evaluation earlier this summer to try to establish a baseline,
so that it could measure progress on its new policy, and it found
it was actually unable to establish a baseline because there were
really no systematic rules across the countries where DFID works
in terms of how conditionality is applied, in terms of what the
criteria are for disbursing aid. I think one of the first things
we need is a transparent and predictable system, in terms of making
it clear to recipient governments where aid will be given and
in what circumstances. Once you have it in place, you can then
measure progress on this new conditionality policy. I think we
have seen the pledge made this year but now we need to follow
by looking at the implementation, and I think it is one thing
that perhaps the IDC could usefully revisit at some point in 2006.
Q81 Mr Singh: Your judgment is reserved,
at the moment, on the new policy?
Mr Phillips: I think we might
just want to add, though, that we also need to see from DFID a
strategy for internationalising this policy approach. The Government
took the decision—for instance, the recent World Bank/IMF
annual meetings—that it wanted to concentrate particularly
on the debt deal, and some of the other issues which it might
otherwise have pushed (in particular real progress, moving forward,
on conditionality) was put on the back burner for that period.
There is much work to do to get the UK Government out of its bracket
of feeling isolated on this issue, in terms of finding the alliance
of countries within the Bank to internationalise the policy approach.
Mr Watt: Perhaps I may add to
Matt's point. It is an important one, that even if DFID steps
back from the use of policy conditions in its own bilateral aid
programme, an increasing share of DFID aid, particularly aid that
has been provided as direct budget support, is effectively tied
to World Bank conditions. It is very rare for DFID to provide
direct budget support to a government if the World Bank is not
doing so. We cannot just look at this issue in isolation; it really
has to be looked at in the context of DFID's role as a close partner
of the World Bank and in the context of the UK's role as a major
shareholder on the bank board.
Mr Rand: The British Government
over the last few weeks has been expressing concern that they
were the only ones who seemed to be raising the issue of conditionality,
and they were looking for allies. We were encouraged—and
I hope they were—that the new Norwegian Government, recently
elected, said they would back the line on conditionality. We hope
and think that is something to do with the fact that the Norwegian
Debt Campaign have been emphasising this issue. It is always encouraging
when campaigns pick up on an issue and governments are responsive,
and I hope the UK Government will feel there is more they can
do to find allies. Because it is one thing to say that no-one
else is interested but there are always things we can do and things
the Government can do to find more people who really want to work
on this particular issue in the coming year, as it is a crucial
one with the review going through the World Bank.
Q82 Joan Ruddock: I would like to
challenge you, really, and say: Is this not your job? Economic
conditionality, we all agree, has been a disaster for so many
countries and there are so many examples in which you can demonstrate
this. Just to say: DFID must get around and persuade other countries;
Britain must find other allies—yes, but surely this is where
the campaign needs to be particularly internationalised in order
to get to these international financial institutions. I think
Stephen said at one point you have been monitoring this, but it
seems to me that you ought to be more proactive. How optimistic
are you, given this long, long history, that countries are going
to have the freedoms to follow their own economic policies? I
assume you are saying DFID's emphasis on good governance is entirely
acceptable to governments. There is a difference obviously between
some of the aspects of good governance and pursuing economic policies.
Mr Phillips: We would point out
that difference. I think that brings us back to that debate about
what it is going to take to change the international institutions
and the international community in terms of what they are prepared
to do on these kinds of issues, and there clearly is a big block
there. Economic policy conditionality is one issue that has been
extremely strong from the South—we have been listening to
those voices for an extended period and sharing the analysis there
has been over these issues—and this is where we really feel
the governments are going to have to listen. I do not disagree
that the campaigning has to be even stronger in years to come,
but we should not let the world's institutions and governments,
including this one, get away with saying that there has not been
any pressure, because there has. There are plenty of examples
out there, so how come they are continuing to pursue the policies
in the way they are?
Q83 Hugh Bayley: Could we for a moment
look at the other side of the argument. What should a developing
country do if its budget, including the aid it receives, is not
in balance? It will build up more and more debt if its public
sector is spending more than it is gathering in taxes and receiving
in aid.
Mr Hardstaff: A huge amount depends
on the individual country circumstance. If you look at the UK
and what we have done, this Government has broken the mould, in
some respects, in the UK in terms of deficit spending. It is reverting
back to what some call Keynesian economics, but the Government
in this country has spent a deficit in order to invest. Obviously
the situation is different in many developing countries, but you
have to look at the individual circumstance, and deficit spending
is not necessarily and always a bad thing and not balancing your
budget is not necessarily and always a bad thing. This is one
of the key problems we have seen with the IMF and World Bank,
that there is not that recognition that it is possible to spend
in deficit and invest.
Q84 Hugh Bayley: How long would the
business cycle be in your example? Gordon Brown has made it very
clear that there are periods in the cycle when you can borrow
so long as in the business cycle as a whole you are raising as
much as you are spending. Otherwise, you have problems of high
inflation and a depreciating currency, which is devastating for
so many developing countries in terms of trade. Surely you have
to look at the macroeconomic picture.
Mr Hardstaff: This is where you
have to look at individual country circumstance, but the problem
we have seen is that the IMF and World Bank do not seem to do
that and they impose fiscal austerity and balanced budgets on
every country no matter what situation they are in. I would argue
that in some circumstances deficit spending can be useful over
a period, to invest in the economy and to attempt to grow it.
I am not saying you should never try to balance your budget; I
am also not saying you should always try to balance your budget.
It is a question of country circumstance, from my perspective,
and the ability to be flexible about that. We have not seen that
degree of flexibility from the IMF and the World Bank.
Q85 Hugh Bayley: But you have to
address the problem, do you not? If you fail to address the problem,
you have economic disaster.
Mr Hardstaff: Each government
has to address its problem in the way that it sees best.
Mr Watt: Clearly there comes a
point where putting aid into a country which is macroeconomically
fundamentally unstable is not going to achieve a great deal. If
you look at a country like Zimbabwe, providing direct budget support
to a country like that would achieve very little. So there are
extreme cases out there. There is a question about the extent
to which donors should be using aid and loans as a lever, to try
to put in place what they see as appropriate macroeconomic policies—partly
for the reasons Pete has just mentioned—and to what extent
donors should take a step back and perhaps be more selective about
where they provide aid. So, rather than try to use aid and loans
necessarily as a lever to achieve policy change, be selective
in how and where they give aid. If you are looking at a country
where the macroeconomics are fundamentally skewed, there are ways
of raising that in a dialogue with the government without having
to make it a rigid condition. If the government is not interested
in listening, then probably you are not going to change their
mind anyway, in which case you probably need to be exploring different
ways of providing aid to that country—perhaps providing
it through civil society organisations or to local government.
I think in extreme circumstances you can see situations where
donors would step back from funding a government directly, but
I think those are extreme circumstances. If you look across low-income
countries, there is a fairly strong consensus about basic macroeconomic
stability. I think the problem has been, as Pete was saying, that
the Bank and Fund have been taking an unduly rigid approach to
deficits, a zero deficit approach, and that has been a problem
in a number of countries we have been working with.
Mr Phillips: If I might add to
that the useful work that the Commission for Africa did in this
regard, where it was really talking about the concept of fiscal
space in economic cycles. That would be quite revolutionary in
the Bank and the IMF in terms of getting them to move on that.
The Commission for Africa said that that should be taken to the
World Bank and the IMF this year or the beginning of next year
and should be turned into changes in policy, but that strategy
seems to have not moved anywhere. So, your point is well made,
but generally speaking we do not want to see hyperinflationary
Latin American economies of the 1970s either. We know those do
not work for poverty eradication. Fiscal space is a crucial point
and over economic cycles is worth exploring as one of the options,
but remembering just how much investment is needed in the developing
world when you have a majority of the population in Africa, for
instance, who are under 18. You really need to spend on public
expenditure, like health and education, at a proportion of your
government spending which is much higher than is needed in the
developing world, just simply to break the cycle of poverty and
invest in your human resource to be enabled to participate in
global economic progress. That requires investment at levels which
are different from what should be expected in the developed world,
and that is why we need a different approach to the fiscal space,
which works for poverty eradication and which is not about imposing
a one-size fits all economy.
Q86 Chairman: We are going to be
meeting these international institutions next month, so we will
have some opportunity to explore the balance of those arguments.
Mr Rand: Part of our concern in
the Debt Campaign has been about what is done in the process of
dealing with debt now to make sure there is not a new debt crisis
in the future and that relates too to this issue. One of the problems
is countries are taking new loans to solve expenditure gaps. We
would maintain, again on a country-by-country approach, that it
may be there has to be a consistent grant process, for exactly
the reasons Matt has explained, but one of the concerns is: Where
is the process for making sure that new lending, new grants are
actually not going to deliver a new debt crisis in the future?
That is a big issue.
Q87 John Barrett: I would like to
move on to trade. We are very close now to the WTO ministerial
in Hong Kong in December and I would like to introduce three issues
which are all linked. The first is the ending of export subsidies;
the second is the pace of opening up markets in developing countries;
and the third will come to me when I have gone through the first
two. Europe and the United States have discussed the date of 2010
as the realistic date for ending export subsidies. Do you think
this is realistic? The phrase "smoke and mirrors" has
been used by some civil society groups regarding the US comment
on the 2010 date. In your view, is the political will there to
end export subsidies from the EU by 2010?
Mr Hardstaff: On the issue of
the political will, it is not at this stage clear whether the
political will exists in Europe as a whole. We have seen a memorandum
from 15 countries, including France, suggesting that they have
concerns about whether or not the Trade Commissioner has overstepped
his mandate. What we have on the face of it appears to be that
commitment, so, yes, I would like to think that there is the political
commitment by 2010, but behind the scenes we have seen a certain
amount of politicking in Europe. We wait to see really. We will
only know once they have made that final commitment, as it were,
in the World Trade Organisation. Rhetorically, we do seem to have
that commitment, so that is useful.
Q88 John Barrett: I remember that
the third issue was: What do you expect to see come out of the
ministerial? We have seen discussions in the past collapse because
sometimes people have thought that "no deal" is better
than a "bad deal". One issue that crops up again and
again is the pace and scale of opening up a market in still developing
countries. Clearly, if export subsidies ended at the same time,
we would still have regulations relating to the food that gets
into our supermarkets. Ending export subsidies on their own is
not suddenly going to allow beef from Sudan into Tesco, because
there are other issues as well as the financial subsidies. I would
like to tease out the pace and scale of opening up of developing
countries' markets. How do you see the developed countries pressurising?
Is it forced liberalisation? Are we putting on too much or too
little pressure? Are we heading in the wrong direction? Jumping
forward to that ministerial in Hong Kong, is there a danger that
a bad deal will be agreed? Is a bad deal worse than no deal?
Mr Hardstaff: In terms of the
pressure that is being exerted on developing countries within
the WTO, there are a couple of striking examples of that. One
is that Europe, with a number of other countries like Australia,
Canada, New Zealand, I think, in the WTO, has been pushing what
is called "benchmarking" in the General Agreement on
Trade and Services (GATS). We have been told that the GATS is
a flexible agreement; that countries only make commitments if
they want to; and that they only commit to the extent that they
feel is necessary and in line with their development circumstances.
That has now been abandoned, seemingly, by the European Union,
which is pushing for a series of minimum standards for liberalisation
commitments from developing countries in this current negotiation.
That essentially is forcing developing countries, if this benchmarking
system is agreed, to make a certain level of commitment. Previously
we had been told it was a very flexible, development friendly
agreement. That is completely going against, first of all, the
rhetoric we have heard on GATS, that it is flexible, and, secondly,
this whole idea that this is a development round and that the
interests of developing countries are taken into consideration.
The GATS, for its flaws, had the potential to allow countries
to go as far as they wanted. The second is the whole issue of
the deal. It has been made very clear by the Trade Commissioner
that the only way that developing countries will get a deal on
agriculture is if they do what Europe wants on industrial tariffs
and on services. Developing countries must open their markets
to European multinationals in services and they must open their
markets to European industrial products and that is the trade
off that is being demanded. That, I think, is a fundamentally
flawed perception of what the development round should be. It
is also flawed in terms of the idea that this is somehow a commensurate,
comparable trade-off. Europe is telling the developing world that
in return for the political and perceived economic pain that we
will go through with further agriculture reform, in return they
must implement policies that will cause them infinitely more difficulty
in terms of their development prospects. That kind of deal is
fundamentally anti-development. The real problem that we face
in the run-up to Hong Kong is the idea that, in return for something
that we should have done a long time ago that will probably be
of benefit to our environment, hopefully consumers and the wider
public, we are asking them to do something that will undermine
their development prospects in the future. This is where we have
a major problem in terms of Europe's approach in the WTO.
Q89 Chairman: You are quoted as saying,
"The UK is forcing liberalisation on poor countries by pushing
for a system of compulsory benchmarks." DFID are saying:
"Benchmarking is designed to lower the conditionality; indeed,
we are trying to clarify what it means but it is just trying to
set a framework." Are you not slightly overstating the position?
Mr Hardstaff: I think we may be
talking about two different things. The DFID quote on benchmarking
may be in relation to the World Bank and IMF. Or is it in relation
to GATS and the WTO?
Q90 Chairman: No, it is in relation
to their own guidelines for their own aid.
Mr Hardstaff: These are two separate
things. DFID aid and the benchmarks that are attached to DFID
aid is a separate issue.
Q91 Chairman: You are saying that
the UK is forcing these benchmarks.
Mr Hardstaff: Benchmarking in
the General Agreement on Trade and Services in the WTO is something
that Europe, with the agreement of the UK, is pushing to get developing
countries to sign up to, a minimum set of liberalisation—
Q92 Ann McKechin: Could you define
what the developing countries are? I understand there are only
a very small number of requests made and they are actually more
interested in countries like India, Brazil, South Africa, rather
than sub-Saharan African countries. I wonder if you could define
that for us.
Mr Hardstaff: In the benchmarking
proposal, the EU has said of the least developed countries, more
or less, "Do what you can." To the rest of the developing
countries, which includes India, Brazil, China, and it also includes
extremely poor countries like Bolivia, Pakistan, Papua New Guinea,
Nicaragua, Honduras—it is a very wide category we are talking
about in terms of developing countries—those countries will
have to meet a minimum set percentage of sectors to be signed
up to under GATS. That is completely disregarding what has been
said before on the flexibility of each of these countries to choose
whether or not to make commitments and the extent to which they
should make commitments.
Q93 Chairman: That creates a huge
complexity in the negotiations, does it not? You are also in a
movement whose slogan is "Trade justice, not free trade."
That implies you are against free trade. In Stop Forced Liberalisation[1]—and
we are engaged in a real discussion about what we mean by that—you
say: "Our call for trade justice stems from the evidence
that the free trade model has been responsible for increasing
poverty, harming the environment, and eroding labour standards
across the world." That is a pretty devastating indictment
of the whole free trade movement of the last 30 years, is it not?
Mr Hardstaff: The Trade Justice
Movement is against free trade. It is calling for trade justice,
not free trade. Free trade is getting rid of every single tariff,
every single trade-affecting subsidy, every single trade-affecting
qualification, requirement, technical standard, environmental
health and safety regulation. We are against that. The Trade Justice
Movement is for managing trade to benefit the people in the environment.
Q94 Chairman: I think that is your
definition of free trade.
Mr Hardstaff: You could ask anybody
for their definition of free trade and you would get something
different from each of them.
Q95 Chairman: Perhaps I could ask
you more specifically. The whole point about Hong Kong is nevertheless
to move to a freer trade environment after, rather than before,
on a negotiated basis. The implication, following John Barrett's
question—and I do not want to put words into your mouth,
but this is my impression—is that you do not want to deal
with Hong Kong issues.
Mr Hardstaff: We are calling for
Europe to do what it should have done decades ago in terms of
agricultural reform. At the moment, we are seeing Europe not doing
that. In fact, there is a major concern that the mandate of the
European Trade Commissioner on domestic subsidies goes only as
far as existing CAP reform. At the moment, the European Trade
Commissioner does not have the mandate to go beyond existing CAP
reform. That is a major concern. Secondly, we would like to see
that developing countries have the ability, the flexibility, to
use a whole range of different trade policies to achieve development.
As we have seen with China, South Korea, Thailand, Malaysia, those
countries that have successfully developed, they have used a mix
of import tariffs, subsidies, investment regulations, weak intellectual
property law—a whole range of different policies—to
achieve development. We are fighting for developing countries
to continue to have that flexibility, and for some of the poorest
countries to increase their flexibility because they have been
undermined by World Bank and International Monetary Fund policy
conditions.
Q96 John Bercow: Of course you are
perfectly entitled to define free trade in the terms that you
do, but I would have thought on the whole it is probably a good
idea to have regard to the need to avoid excessive eccentricity,
and, if you will forgive me for saying so, simply to say free
trade means getting rid of all environmental regulations, all
health and safety—
Mr Hardstaff: No, I did not say
that.
Q97 John Bercow: You did. You said,
all environmental—
Mr Hardstaff: I said trade-affecting.
Q98 John Bercow: I beg your pardon?
Mr Hardstaff: Trade-affecting,
that is what the agreement on sanitary and phytosanitary measures
is about. It is about getting rid of trade-affecting environmental
health and safety regulations. It is about regulating governments.
Q99 John Bercow: Okay. We can have
a debate about that. I think there would be a general view that
there is a distinction between 19th century liberalism and its
interpretation of free trade and the connotation of the term in
the modern political debate. In a sense, the argument is between
those who want to see freer trade and those who do not—and
the Chairman can argue his own point of view—but for those
of us who are sympathetic to a gradually extended liberalisation,
the motive force is not some hidden agenda to get rid of all social
protection, rather it is to try to ensure that over a period markets
are freer. If you genuinely do not agree with that, then so be
it, but I think the historical evidence on the effectiveness of
markets is pretty clear, and their superiority over command economics
is loosely demonstrated. When you talk about policy space and
the right for developing countries to pursue their own journeys,
is that, in your mind, an absolute, or is there any sense that
that policy space needs to be time limited? Could I just put it
to you that if you want the developing world to be part of an
international system in which there is some sense of global responsibility
and global interdependence, it seems to me you cannot credibly
have it both ways. You cannot on the one hand say, "We want
the help of others in the spirit of mutual concern, on the basis
that the rich world has a responsibility to the poor and we are
all in this together, we are one world and one set of human beings,"
and on the other hand say, "By the way, we will take all
your aid, we will take the debt relief, we will take the benefits
of extended access to western markets, but at no stage in our
lifetime do we envisage these developing countries will have to
open up their own markets." Quite apart from the fact that
I think that would be politically unrealistic, do you think it
might also be a source of considerable economic sloth?
Mr Hardstaff: There are various
issues bound up with your question. First, yes, I agree, there
is a distinction between freer trade and the concept of free trade
and what that means and how that is defined, whoever defines it.
The Trade Justice Movement is calling for "managed trade".
In some cases, that means liberalisation, because I have already
talked about CAP reform being an obvious one. In some cases, that
may mean regulating trade. That may mean using tariffs, subsidies,
regulating investment and so on. In relation to the issue about
time-limited policy space, the difficulty, if you like, is the
differentiation between developing countries. What you were talking
about is that, surely, in return for aid and loans and debt relief
we should be demanding that these countries engage in the international
system and make these commitments. The poorest developing countries
already have. They already have liberalised. And it was a disaster
in Africa—an absolute disaster. De-industrialisation in
countries like Zambia because they opened up to imports. We have
to differentiate between them and China, Brazil, India. However,
I would point out that those targets that Europe and the US most
covets—I would say, China and Brazil, India, Indonesia,
South Africa, for example—have about 1.5 billion people
living on under $2 a day, so to suggest that these are somehow
legitimate targets for radical liberalisation I think is mistaken.
These countries have huge problems still and I still argue that
these countries need the range of flexibility that has helped
them get as far as they have done. Now, in terms of the poorest
African countries, the difficulty we are now facing is that these
countries are being asked, demanded, to lock in the policies that
they have been told or forced to implement by the IMF and World
Bank, to lock in those policies through the WTO, to legally bind
them. That is putting them in a straightjacket. If what we have
seen in the 1980s and 1990s is anything to go by, that is seriously
calling into question their ability to pursue development and
achieve the Millennium Development Goals. There was talk earlier
about: Can we achieve the MDGs? and I think it is really worrying
that for countries in Africa, Asia and Latin America that have
de-industrialised due to liberalisation, those policies will get
locked in and they will not have the space to get out.
1 Stop Forced Liberalisation: The Trade Justice
Movement's 2005 Challenge to the UK Government, Trade Justice
Movement Policy Briefing, June 2005 Back
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