Examination of Witness (Questions 87-99)
DR NEIL
MCCULLOCH,
DR DAVID
MCNAIR
AND DR
DIRK WILLEM
TE VELDE
4 MARCH 2009
Q87 Chairman: Thank you very much, gentlemen,
for coming in. I am sorry it is slightly later than expected but
I think you will agree the first session was an interesting and
provocative one for us. Perhaps we can start on this. We are looking
at aid under pressure: the impact of the global downturn and how
it may affect development in the poorest countries. Are you able
to give us an assessment of what you think the impact will be?
Having just heard Dr Moyo's assessment or read her accounts, do
you agree that the crisis actually offers opportunities or is
it all downhill for poor people in poor countries?
Dr te Velde: I think that the
global financial crisis will have a major effect on African countries
as well. It started in developed countries but it is now clear
that there are lots of countries that are now going to be affected,
including African countries. We can do some back-of-the-envelope
calculations on that, but we estimate that there might well be
an output loss of about US$ 50 billion for sub-Saharan Africa
alone. There are a number of channels through which that can work:
there could be a decrease in remittances; a decrease in export
revenues; a decrease in foreign direct investment; and there might
also be a decline in the dollar value of aid. We can also do some
back-of the-envelope calculations on that.
Q88 Chairman: Given that Dr Moyo
was almost implying that it might lead to a resurgence of self-help,
people being innovative, do you think that is right?
Dr te Velde: I would certainly
agree that growth innovation is important. The question of course
is: how is that being stimulated? If we look at evidence around
the world, does the recession actually help innovation and growth?
I am not so sure whether that is the best way to stimulate innovation
and growth. I can say that there is a window of opportunity now
to engage in good economic policies to respond to the crisis.
We have short-term economic policies, fiscal policies, monetary
policies. There are also long-term policies, such as private sector
development, policies that could be improved—infrastructure
development. I think there is a question mark over this. There
is a window of opportunity and some countries are more protectionist
in a crisis; that would be quite dangerous. We see in the West
that there is a danger of becoming more protectionist and therefore
I cannot say for sure that the crisis will stimulate more growth
and innovation.
Dr McNair: Thank you for the opportunity
to come and address the committee. Some of what Dr Moyo says we
would agree with. The financial crisis is clearly going to impact
on the poorest worst. Dirk has talked about a fall in financial
flows, a fall in aid, fall in foreign direct investment and also
trade finance, the oil that keeps the global trading system working,
but we do not see this as a completely negative picture. In a
sense, the financial crisis does present a unique opportunity
to address some of the global issues which impact negatively on
development. There is no doubt that aid is under pressure, but
now is not necessarily the time to renege on commitments but to
show deeper commitments, and not just through aid but through
policy, solidarity and addressing some of the policy coherence
issues around development. We are very encouraged to see the Secretary
of State's comments to this committee when he was last here that,
in addition to supporting developing countries through ODA[5],
we need to look at the impact of our policies on trade, on climate
change and on tax and essentially support the capacity of developing
countries to raise their own revenue for development. I think
one of the big things that has been highlighted in this crisis
is that external sources of finance are very much pro-cyclical,
whether that is investment or ODA or foreign direct investment.
We need to think very carefully about the role of domestic resource
utilisation, which was very much a theme of the Financing for
Development Conference in Doha in November. It is very encouraging
that DFID and their tax team are doing a lot of work on supporting
the revenue authorities in developing countries and we would very
much support that.
Dr McCulloch: Thank you for the
opportunity to come before the committee. The question was about
the impact of the crisis and whether there are opportunities arising.
One of the first things that the Institute of Development Studies
did when the crisis really broke in a big way last October was
to try and assess what southern voices were saying about the impact
of the crisis, and so we immediately put together a less well-known
book Voices from the South, which I have submitted to the
committee. That is a compilation of the views of 21 southern thinkers,
academics, policy makers, journalists and so forth from 14 different
developing countries as to what they felt the different channels
of impact of the crisis might be. I agree with both David and
Dirk: I think the immediate impact of the crisis is likely to
be extremely negative. One of the areas where I do not agree with
Dambisa Moyo's book is that it is putting forward the idea that
there are easily available alternative channels of capital. Of
course, that reflects the fact that the book was written over
the last couple of years and so the channels that it mentions
are trade, foreign direct investment, capital markets and so forth.
All of these are suffering major shocks, as Dirk mentioned, in
the current climate and so aid in that context is rather more
important. It was very revealing that—
Q89 Chairman: But she is not wrong
that they are the right instruments for development?
Dr McCulloch: Absolutely right.
I think it is very important to tap these alternative sources
of finance, but in the particular climate, as David mentioned,
I think it may be extremely difficult to do so. Kenya has already
found itself unable to issue a sovereign bond as a consequence
of the downturn. Just to come to the issue of whether there are
opportunities, I think there is at least one very important opportunity
particularly for Africa and that is to try to move towards the
institutionalisation of social protection. I was just looking
at a new book by Frank Ellis from the University of East Anglia
and Stephen Devereux from IDS on social protection in Africa.
I was really struck by the fact that social protection efforts
throughout Africa are very piecemeal, many of them DFID-funded—there
are very large social protection funds funded by DFID in Ethiopia
and many other countries—and yet very lacking in comprehensive
coverage in a continent which has particular need at this time
for more effective social protection. So I do wonder whether or
not the crisis may provide an opportunity if you like for social
movements within developing countries to argue for much more effective
and much more comprehensive social protection. Lesotho has already
done it in the form of social pensions and so forth. I think there
is a real opportunity in a sense for DFID to be part of the support
for a social movement in a variety of African and other countries,
which would push for more comprehensive social protection.
Q90 John Bercow: I do not know how
well you think so far DFID has taken up the challenge of helping
developing countries to respond to this and specifically whether
you think that DFID has sufficiently sophisticated and robust
analytical tools to be able to assess the particular needs of
different partner countries on a worthwhile basis.
Dr McCulloch: I think there has
been a little cottage industry generated over the last couple
of months in trying to define vulnerability. I know IDS and ODI
have both come up with ways of attempting to assess how vulnerable
countries are. DFID have one, the World Bank has one and so forth.
Of course the nature of the impact on different countries is going
to be very heterogeneous; it depends on the nature of your current
account deficit; it depends on the state of your finances, of
your ability to respond in a counter-cyclical world; it depends
on your reserves and on your exposure to debt, and so on and so
forth. My personal view is that DFID have rightly identified social
protection against the potential shock to domestic absorption,
which this crisis will entail as a major area where they should
be putting more emphasis. They have already indicated that they
will support this Global Vulnerability Fund, which the World Bank
has talked about. One of the areas where I strongly agree with
Dambisa Moyo's analysis is that it worries me slightly that this
will be a huge international fund from Western donors to support
social protection. It is important that DFID are careful not to
actually undermine the ability to generate domestic political
demand throughout the developing world for those things, rather
than it being funded entirely externally.
Q91 Andrew Stunell: You have made
the case that social protection should be the number one priority
and if DFID follows that through, then there are consequences
in terms of the UK aid programme. That is to say, we will be spending
more on social protection and less on something else. I wondered
if I could hear from each of you what you think the something
else on which less is spent should be.
Dr te Velde: Thank you very much
for that question. Let me say first that I think DFID has been
doing quite a number of things in response to the crisis and it
is also trying to assess vulnerabilities. It is working together
with other institutions, as Neil mentioned, with the World Bank
and the IMF, which has just put out a paper yesterday, on vulnerabilities.
It has also commissioned us to co-ordinate a 10 country case study
on the effects of the global financial crisis on developing countries
and six of the country case studies are in Africa, all led by
African researchers. The other thing that it has done is to try
to support the commitments that it has made, commitments to reach
0.7% of GDP, with aid staying at that level. It has also tried
to do that internationally and to work with European partners.
I think that is a very good thing. Then, in terms of where aid
could be spent in order to respond to the crisis, the first task
is to make sure that the disbursement channels are right. It is
important that funds can actually deliver now and not next year
or the year after when recovery might be taking place. The recession
is hitting this year. In terms of the specific areas where it
could be spent, there are three types of responses: the short
term response is fiscal stimulus in terms perhaps of budget support;
then social protection issues; but we should not forget long-run
development. One of the most effective ways to get yourself out
of a crisis is to engage in good and appropriate policies to stimulate
growth in the long run. One of the areas of aid on which we have
focused in the last year or so is aid for trade; first, thinking
about more aid for infrastructure, aid to help trade take place.
That is an area where aid can be effective. DFID has recognised
that and is rightly putting money and funds into that area.
Andrew Stunell: Perhaps before the other
gentlemen answer, you have answered the half of the question I
did not ask. I can see where we might spend it but what programmes
would you judge can take a scaling back?
Q92 Chairman: DFID is going to have
to find some money from somewhere and it has already re-ordered
its priorities, so it has less money to spend and it has also
changed its priorities.
Dr McNair: To be honest, I do
not feel sufficiently qualified to suggest where DFID should cut
money. The only thing that I would say is that we need to ensure,
as Dr Moyo said and both Neil and Dirk have said, that our aid
budget supports the democratic structures that are in place and
supports the capacity of developing countries to manage those
budgets and should not at any point undermine or in a sense put
money in without consideration for those democratic parliamentary
structures.
Dr McCulloch: Let me give you
the political answer and then the real answer. The political answer
of course is that DFID does not have to cut. DFID is a long way
from meeting its obligations and existing commitments. If one
looks at the track of expenditure, we are still supposed to be
hitting our 0.56% by 2010 and our 0.7% by 2013. Unless something
pretty dramatic happens over the next two or three years, that
is simply not going to be met. If DFID did take that target seriously,
then it would be ramping up aid substantially and so there would
be more than enough money to be able to fund additional funding
for social protection without cutting other areas. That is the
ideal world. The reality of course is that it will be shuffling
money around in different budgets. I had a look yesterday at the
sectoral allocation of funds of DFID expenditure over the last
few years, the last five years or so. One of the things that struck
me most interestingly was the huge growth in expenditure on government
and civil society. That is particularly interesting because we
have been talking about strengthening government systems. The
reason why that money has gone up is because people have recognised
the desire for greater ownership, therefore greater money flowing
through government systems, and therefore they need to strengthen
those systems through better support for public financial management,
training accountants, better procurements systems and so forth.
So I would very much not like to see a cut back on that, but that
is the area that has grown most rapidly in the last few years,
and certainly during a crisis it would be a mistake to cut back
on the social sectors—health, education, sanitation, water
and so forth—and similarly we would almost certainly not
want to cut back on the infrastructural work which is likely to
create jobs and build useful infrastructure to enable the progression
out of the crisis at the end. That is one possibility. I did want
to qualify that, though, with one comment. You said that I had
made it clear that social protection is where the money ought
to go. One of the key findings that comes out of the literature—there
is a lot of confusion in the literature—is the damage that
is done by aid volatility. It is the fluctuations and sudden changes
in fashion in aid which actually damage growth prospects for many
developing countries. I feel this very keenly. I worked in a DFID-funded
poverty project which achieved a wonderful star rating and then
was closed down because the DFID representative told me that they
were spending all their money on harmonisation. This sudden change
in fashion can be quite harmful. What I think we need to be doing
is focusing, as you were pointing out, on aid quality, but we
can do that perhaps with much better local knowledge, including
not just local DFID staff but staff from the country, as to what
works in that particular context. If DFID's government and civil
society projects are really delivering the good in that particular
country at that particular time, do not cut them. Everybody who
works in a local office knows which are the good projects and
the things which are really functioning and which do not. We do
not rely, in my view, nearly enough upon that local knowledge
to steer our aid programme. We believe that we can sit in London
and steer it and say, "All right, now we are going to focus
on this, and therefore we have to cut back on that".
Q93 Chairman: Dr te Velde, you talked
about a rainbow stimulus—blue, red and green—as a
means of combating recession. I wondered if you could briefly
explain what you mean and how you balance across those sectors.
Then I have a supplementary question to that.
Dr te Velde: Let me first say
that there is now a range of institutions calling for a fiscal
stimulus to combat recession and that developed counties are engaged
in a fiscal stimulus and if developing countries, particularly
the poorer developing countries, cannot engage in a fiscal stimulus,
then those fiscal stimuli in developed countries and in the richer
developing countries might become a beggar thy neighbour economic
nationalism against the poorer developing countries. The World
Bank has called for a US$ 15 billion Vulnerability Fund for developing
countries. Yesterday, the IMF suggested that US$ 25 billion, maybe
up to US$ 140 billion, was needed to address the effects of the
global financial crisis in concessional lending. So I think that
there is clearly rationale for a fiscal stimulus in that sense.
The fiscal stimulus of course has most effect if it is put in
those places where it has the most effect on addressing the crisis.
The general consensus in the literature is that it has particularly
large effects in those circumstances where consumers are most
clearly constrained. It might not have a big effect in those circumstances
where consumers have just over-spent and any fiscal stimulus might
still be saved rather than spent. That might well be the case
in developing countries. That could be in the form of transfers
of money, although I think much of the literature, at least the
literature that I am aware of, in terms of spending on aid for
trade, would suggest that aid that is spent on stimulating the
supply side of economies through investment, in infrastructure
and on aid for trade, is particularly effective. In that sense,
a stimulus that supports the private sector to develop, much in
line with what Dr Moyo mentioned this morning, could be very effective
in a number of countries. I do not think we should forget the
long run in all of this. We know that there are market failures
currently happening. We know that these have affected the financial
markets, but we also know that the greatest market failure of
all is in climate change and related to activities on the environment
and in terms of the adoption of new technologies. In particular,
in developing countries what might be really helpful is to stimulate
innovation and growth policies so that countries can engage in
the adoption of new technologies, which could also be greener.
In that sense, we could think about a green stimulus. I think
there would be a number of stimuli.
Q94 Chairman: You have given a number
of ranges of figures that people have suggested for the size of
the stimulus should be in size. Bob Zoellick[6]
has suggested that 0.7% of the developed countries' stimulus packages
should be targeted to developing countries. I am not entirely
clear what that figure amounts to. It is a rising figure at the
moment. I am not sure, for example, whether the UK stimulus package
is £20 billion or £500 billion, depending on which bits
you regard as stimulus.
Dr te Velde: The number is about
£15 billion. The idea, at least in the eyes of the World
Bank, is that 0.7% of the global fiscal stimulus should go to
developing countries and the global fiscal stimulus at the moment
is worth around $2 trillion, in their eyes.
Q95 Chairman: Is that a reasonable
proposition? Looking at the UK's position, you have already indicated
that DFID's budget is under pressure because of the exchange rate
more than anything else. Should the UK be identifying a specific
proportion of the stimulus and saying, "Actually, we should
be identifying that and contributing it towards either our own
bilateral funds or to World Bank funds for that purpose?"
Dr te Velde: I think it is important
that the aid system can play the counter-cyclical role. There
are a number of ways through which that can be done bilaterally
but primarily I would have thought multilaterally. There are a
number of instruments like IDA[7]
or the EDF[8]
and IMF.
Q96 Chairman: I want to tease a bit more.
The Prime Minister has already acknowledged that the UK's budget
is under pressure and he is saying, "I hope the international
institutions will step up to fill the gap". The point I am
pressing you on is: do you think the British Government should
find some additional money to put into that over and above DFID's
current budget?
Dr te Velde: I think so, yes.
Q97 Mr Hendrick: Could I ask you
all what you feel that the multilateral banks should be doing
really to help with the problems of the financial crisis?
Dr McCulloch: It is very much
related to the issue of the fiscal stimulus. I very much support
Dirk's idea that we need to make a distinction between short term
and longer term. In the longer term and for a very long time,
this committee and many others around the world have been looking
at the quality of aid, and that is a very important debate. In
the short term, there is a huge financing gap and that financing
gap will not matter at all for some countries because they can
deal with it themselves through their own reserves; for other
countries it will be extremely serious and give rise to major
adjustment within the country. There is good academic evidence,
indeed by Paul Collier, that for countries that experience major
shocks of that kind, whether it be from export prices or whatever,
you can at least ameliorate some of the damage which is done by
significant injections. The International Monetary Fund (IMF)
obviously has a very important role to play in that but the World
Bank has a very important role to play because it is a large pipeline.
I was reading something from the Brookings Institute just a week
or so ago, which was pointing out that there is a very large sum
of money that is stuck in the disbursement pipeline. This is not
money that needs to go through the umpteen steps of the World
Bank approval process and go up to the board and be approved;
this is money that has already been approved by the board and
which is still sitting in a bank account which has not actually
yet been disbursed. I think there is a very strong case for giving
fairly large amounts of money basically as budget support to plug
the gap during the immediate crisis. That of course is not a model
for how we would like aid to continue in the longer term. I think
for aid to continue in the longer term, we get back to all of
the issues associated with how we improve the quality of aid in
the longer term. One of the key issues there will be taking seriously
the commitments which were made in the Paris Declaration. I was
rather saddened to look at the performance under the Paris Declaration,
the OECD's Better Aid document, which I am sure you have seen.
It shows that really the performance on the commitments which
we all made in 2005 has been pretty poor. There have been some
areas of progress but we are really nowhere near meeting the targets
which were set for 2010 in terms of the amount of money that is
going through budget systems or the degree to which country aid
programmes are genuinely owned by the governments that are receiving
them.
Dr McNair: One of the best ways
to address the complex problem probably at the moment is to stimulate
widespread employment. I agree with Neil's point that if multilateral
banks were to stimulate employment domestically through investment
in the kinds of green jobs that President Obama was talking about,
that could be a very positive role. We need to be careful that
the lending that is done by multilateral banks is not subject
to the kinds of harmful conditionality which in a sense in some
ways has led to this crisis—the idea of liberalisation of
financial services, which leaves some developing countries more
vulnerable to the kinds of capital flight that would happen in
a crisis.
Dr te Velde: There are a number
of multilateral and regional institutions that could help: the
regional development banks, the African Development Bank, the
Asian Development Bank and the Inter-American Development Bank.
Then there is the IFC[9]
as part of the World Bank group that could help, and there is
the IMF. All these institutions need at least to examine whether
they can front-load some of their disbursements. Could the IDA
front-load its disbursements? That will be important. Four weeks
ago I was in Cambodia and there the global financial crisis is
also having a major effect on that country. It was growing at
a very rapid rate of more than 10% and now it is likely to grow
at much less than 5% this year. The Asian Development Bank is
talking to the Cambodian Government on the early disbursement
of infrastructure funds. At the same time, we need to think about
longer run growth policies. I was in Kenya last week in discussions
about the global financial crisis and the effects that it has
had on the East African Community members. There, one of the issues
that officials and representatives of the private sector do acknowledge
is that further support for custom officials to speed up and discuss
the procedures and to improve the investment climate might well
be helpful for countries to grow faster and export more and therefore
to get out of the crisis faster. In that sense, support by IFC
and the World Bank in order to speed up the investment climate
will be helpful.
Q98 Mr Hendrick: The G20 will be held
on London shortly. On the agenda is reform of the international
financial architecture. What do you feel needs to be done to the
international financial architecture in order to create the best
arrangement to deal with the crisis that they have at the moment
and stave off any possible future crises?
Dr McCulloch: I was reading through
Douglas Alexander's speech to Chatham House just a few days ago.
I think he is quite right in saying that there needs to be far
better representation of developing counties on the board of the
Bank and also throughout the international financial institutions.
I think that was needed a long time ago. This may well be the
moment when we really start seriously pushing forward an agenda.
The difficulty of course is that in order to increase representation
for some that means decreasing representation for others and getting
people to agree a reduction in their vote is fraught. I notice
he did not say in his speech that Britain would be happy to take
a lower voting share and yet those are the issue which are going
to need to be addressed and not just in the World Bank but in
other representations.
Q99 Chairman: DFID has just appointed
a full-time director for the World Bank.
Dr McCulloch: What I thought was
much more interesting and innovative in his speech, which I very
strongly support, is the idea of getting greater decentralisation
and local knowledge. The World Bank, for example, has already
done a great deal of decentralisation; it is much more decentralised,
for example, than the Asian Development Bank with much larger
local offices. It is still the case that most World Bank officials—and
I speak as a former one—spend most of their time serving
the Washington machinery and then speaking directly with senior
officials in the developing country rather than getting out into
the country and finding out what the issues are, finding out who
the key political players are, finding out who the key heads of
the organisations are. There is no incentive mechanism within
the operations of these institutions for you to do so. DFID officials
are in a similar position. I was always struck, sitting as I was
in Jakarta for several years, how much time DFID officials spend
dealing with London and dealing with the various diktats that
come from London rather than going round the country and meeting
with Indonesian civil society and so forth. We need to think creatively
about how we change the internal mechanics and the internal incentives
and indeed the internal reward mechanisms to ensure that the staff
of the large institutions have a better grasp of what the key
issues are. Doing that will have a much bigger impact upon aid
quality than a large number of these recording, box ticking systems
that we have put in place.
5 Official Development Assistance Back
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President of the World Bank Back
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International Development Association Back
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European Development fund Back
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International Finance Corporation Back
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