Examination of Witnesses (Questions 240-259)
RT HON
DOUGLAS ALEXANDER
MP, MR ANTHONY
SMITH AND
MS RACHEL
TURNER
22 APRIL 2009
Q240 Chairman: That is obviously
the point of concern. I notice the ODI's[1]
evaluation of certain countries is pointing out that this comes
on top of the food crisis which was focusing our minds nine months
ago. In reality, that does not appear to have gone away, although
prices have come down a bit. They are still historically quite
high. I was surprised in other contexts to see Ghana, for example,
identified as a country which is particularly at risk, primarily
because it is a net food importer. I am not particularly wishing
to ask you about Ghana but it does suggest that there will be
unequal and unexpected impacts. I think you told us something
about your own internal vulnerability index. Are you able to give
us any further idea on that?
Mr Alexander: Yes. Let me just
say a word in relation to that 90 million figure that I suggested.
That has been worked up by our own economists and it reflects
the cumulative impact of the food crisis eight or nine months
ago that you spoke of and the rise of fuel prices. For example,
when I previously travelled to Ethiopia, given that it is a net
importer of fuel, they were very deeply concerned in terms of
the rising fuel prices and now there is the added concern as a
result of the economic downturn. You are right to identify Ghana
as one of the countries that is being impacted. Foreign direct
investment (FDI) for example in Ghana was 16% lower than in the
previous year, 2008, and they are now witnessing year on year
remittances falls. Combine that with, exactly as you describe,
the food situation and there are real challenges. I would ask
Anthony to say a word or two in terms of the vulnerability index
which we shared with the Committee previously and then I would
maybe ask Rachel to say a word or two about the global vulnerability
assessment which was one of the outcomes of the G20.
Q241 Chairman: Presumably that might
alter the way you distribute your programme. You might change
priorities.
Mr Alexander: Yes, and we can
share our thinking with you. It has affected in some instances
some judgments that we have made in terms of the sequencing of
announcements—for example, we front loaded payments on social
protection in Ethiopia—and at the same time it may affect
judgments that we make in terms of intra-country transfers as
well.
Mr Smith: As you know, a number
of exercises are being conducted by organisations on vulnerability
and we have already shared with the Committee the vulnerability
matrix that was prepared by our chief economist earlier in the
year. That was a helpful analysis of a number of the structural
issues which would affect the likelihood of countries to fall
into very serious impact from financial crisis. They are reliant
on exports, on primary commodities, their manufacturing capacity,
and their fiscal situation, etc. What we are trying to do now
is move forward a step to getting the hard data coming in, relying
less on, if you like, the theoretical analysis of structural issues
and getting more and more information and more and more hard data
about what is actually happening in those countries. As I think
you know—I think the Secretary of State referred to it at
the last session—we commissioned ODI jointly with the Dutch
Ministry to conduct a number of case studies in a representative
set of countries. The initial results are coming in now. We have
some information, for example, which describes the balance of
payments shocks in Uganda because of falling coffee prices and
rising import costs; Kenya's falling share price index; a reduction
in FDI flows; tourist arrivals; the number of miners out of work
in Zambia; the relatively limited impact in some countries like
Bangladesh, although their vulnerabilities are clear; some thematic
issues coming through as well about falling remittances which
is fairly widely reported and is quite high globally; the way
in which a fall in FDI, foreign direct investment, would translate
into a reduction in per capita income in certain regions like
sub-Saharan Africa and the impact of things like a fall in cross-border
bank lending in Africa and what impact that would have on poverty.
We are taking that emerging hard data and other information from
our country offices and beginning now to look at what further
steps we can take to adjust our activities in response.
Mr Alexander: I do not know if
the Committee would be interested in the ODI case studies.
Q242 Chairman: We do have a copy
of the ODI case studies.
Mr Alexander: Essentially, we
have done the 10 low income country studies and we have also done
the thematic studies of which Anthony spoke. We have also tasked
all of our country heads to report regularly to our own chief
economist who is the holder of this data. We then work with the
IMF and the World Bank information that is available to us and
that has really informed what we are doing. Anthony is absolutely
right. Our key change since the last time I spoke with you is
to try and move beyond a quick modelling exercise to understand
what we anticipated would be the impact, to move into a position
where there is real-time data. In part the experience, short though
it is, that we have garnered within the Department informed our
thinking about the global poverty alert which we then worked hard
to secure support for in the G20. It might be helpful if Rachel
said a word to you in terms of how that will inform the work that
we and other departments are doing as we move forward.
Ms Turner: You might have seen
that in the London summit, in the G20 summit, leaders endorsed
a new global vulnerability alert. This is an idea that we have
been working on since the beginning of the year with the UN, with
the Secretary General, based on a concern that there was not sufficient
effort and attention going into monitoring the impact of the crisis,
particularly on the poorest and most vulnerable people. We have
now agreed to go ahead with a new monitoring process based in
the UN, building from monitoring that is already happening, quite
often led through the UN family at country level, but also working
with civil society, with academics at country level, to make sure
that we get some much faster, real-time data not only at country
level, because often data collection is happening at country level,
but that we are extracting and using that at global level and
that we are getting data and information in a form that is useful
for leaders and that is useful at the political level. That is
something we feel we have not done well in the past so we are
very pleased that we agreed this new process at the summit. It
will report in September, its first main report, but it will stay
nimble producing targeted information for specific events as they
come up during the year.
Q243 John Battle: This is the global
poverty alert system, is it not?
Ms Turner: Yes.
Q244 John Battle: It will be a special
unit then through the UN and it will be getting into real-time
information so people can send text messages in and the information
will be put together, which I really welcome. We have come through
from the vulnerability index that you have built up, coordinating
it. Really, it is a single network, is it not, rather than an
international body? The crucial question is, who is the information
targeted at? You vaguely mentioned world political leaders but
sometimes we have lots of information and nothing happens. Who
is the information that you have gathered together with this unit
going to target to make something happen quickly? As well as collecting
the information quickly I suspect we need really fast real-time
responses to the problem as well. Are there any ideas around that?
Ms Turner: Absolutely. Our diagnosis
is that often at country level we do have some quite good real-time
data. We have the vulnerability assessment processes led by the
UN, led by groups of donors. That often stays quite stuck either
in very technical units at country level or maybe making its way
up to decision-makers at country level. First of all, it is about
targeting decision-makers at country level and that does need
to be improved, getting some of this key data out of the technical
units where it often sits. I have seen that myself and we have
talked about that before. Also, it is getting that data at the
political level. We are really pleased that the London summit
recognised the impact of the crisis on poor people, that we have
finance ministers in a room really talking about this. It is also
about getting data to the political level.
Mr Alexander: In terms of it being
available at the political level, we would expect coming out of
the London summit that it will be functioning and available to
leaders by the time of the General Assembly in September, reflecting
your point about the urgency. This is not a commitment which we
are expecting will take years to deliver. It should be functioning
during the summer. We would expect that it would inform the work
not just of the UN but also of the Bank and of the Fund. I fully
take your point that information is no substitute for action but
on the other hand, if you have the political will allied to the
right real-time information, that is a powerful combination as
we saw in London.
Q245 John Battle: I definitely welcome
the information. The Institute of Fiscal Studies, if you remember,
put on television a few weeks ago how every man, woman and child
not yet even born in Britain had a debt around their neck of £1,276.
They had aggregated the borrowing. I said, "Why do we not
do that for the whole world internationally and then see what
the bill is and then see what the reaction is?" because it
will be millions, would it not, in terms of the whole population,
but it would make sense of the development debate. I simply put
it to you that if we had some way of this unit being able to inject
a sense of real urgency and action into the World Bank and the
IMF and countries who unlike Britain have not honoured their Gleneagles
commitments yet, because they are pulling back on them—I
will not name which countries but we know which they are—who
ought to be honouring their commitments now as part of taking
on this massive trade deficit that is doing so much damage. I
think people are under-estimating. A 9% drop in trade off for
these countries is a decimation of their economies. We have collected
the data but we are not using it as a sufficiently strong political
driver into the places where it needs to go.
Mr Alexander: That is a very fair
point. Immediately ahead of the London summit Bob Zoellick and
the Bank published some figures which were picked up our own Prime
Minister in terms of up to 400,000 children's lives being lost
as a result of the economic downturn. It is effective, credible
evidence being deployed in the service of action that will matter.
Historically, much of that responsibility has fallen to the Bank
and I think Bob Zoellick as president has been alive to the obligation
he has to publicise those figures. Our hope would be that, having
the endorsement of the G20 leaders in London a couple of weeks
ago, these will be publicly available sources of data. The point
you make in terms of texting is true. It was very clear at the
time of the communiqué that there was an intention to see
the most modern methods that can be used so that from remote locations
information can be garnered quickly. There are very exciting examples
in terms of texting and other means by which that information
can be collected. I think your point is well taken. The real challenge
will be once that information is produced in these international
fora. Is it then picked up in a way that will be a driver to action?
John Battle: To be fair to you, if you
had not got that far and if it had not been for your leadership
and DFID's leadership, there would not even be the system to press
for the action so I thank you for that and I think you should
get recognition for it. Well done.
Q246 Chairman: Bob Zoellick also
had an informal meeting with us at his request while he was here
for the G20. He made the particular point that he thought the
progress of the recession would almost be reversed in developing
countries. He said it was a series of waves. Also, I think he
said anybody who was trying to make any projection should approach
it with considerable humility, given that nobody saw where we
were heading in the first place. He then said that, whereas in
the developed world it was the banking system that triggered the
downturn of the real economy, it is the consequences of the downturn
in the real economy which might essentially undermine the banking
system in developing countries. First of all, do you accept that
analysis and, if you do, is that going to be part of the alert
system, because clearly that could create a secondary wave of
problems that we have not contemplated yet.
Mr Alexander: Bob has been arguing
that for some months. In conversations I had with him ahead of
the summit and with the Prime Minister, he made exactly that point.
I think that in part explains why, even several months before
the summit, we were already looking seriously at what role the
IMF could play in response to this crisis. At the point at which
you had major fiscal stimulus allied to significant bank recapitalisation
in OECD countries, we were very concerned that you could see a
domino effect that Bob was warning of. If you have major national
economies and central banks standing behind central parts of the
global financial architecture in the developed world, there would
not be that level of assurance and security in terms of developing
countries. That is why one of the key prizes that we were seeking
to secure at the G20 meeting was the very significant uplift in
funds for the IMF, not simply because there was a clear expectation
that there would be significant additional calls from the IMF,
from countries like Turkey or in eastern Europe, but also to make
sure that there were the additional resources that were required.
Part of that financing of course also involved decisions taken
in relation to SDRs[2]
and in terms of the impact I think it is about $24 billion in
terms of low income countries that will be additional liquidity
provided which will be available to those central banks and to
those countries as well. It was something that was on our minds.
To be fair to Bob Zoellick, he was on to it earlier and had been
raising it for a number of months. That in part explains the decisions
that we took.
Q247 Hugh Bayley: You are putting a greater
emphasis on social protection as part of the response. As I understand
it, you have been looking at your existing bilateral programmes
and adjusting them, both in terms of the current year spend and
future year spend, to provide additional resource for this new
social protection priority. Can you give the Committee some idea
of how much money you are seeking to find for social protection
and where it will come from?
Mr Alexander: In terms of our
planned bilateral response for social protection, prior to the
crisis we had planned to spend approximately £105 million
on social protection and related issues in 2009-10 and £100
million on social protection in 2010-11. After the crisis, we
estimate that this has increased by £50 million in 2009-10
and £50 million in 2010-11. Additional resources have come
from contingency out of unallocated funding and by reallocation
so total bilateral spend, separate from multilateral spend, on
social protection is now estimated at £150 million in this
financial year, 2009-10, and £150 million in calendar year
2010-11. We are supporting social protection in approximately
30 countries and examples of the new financing are that we are
considering £35 million additional under phase two which
I mentioned. That is the government of Ethiopia's productive safety
nets programme, the extension of new support for children affected
by HIV and AIDS in Zimbabwe and additional money, approximately
£9 million, for economic opportunities in Pakistan.
Q248 Hugh Bayley: In round terms
it is £50 million extra this year and £50 million extra
next year. You say some of that has come from contingency but
have other parts of the funding come from cutting back other bilateral
programmes?
Mr Alexander: No. There were unallocated
resources within our bilateral programme. Ethiopia is maybe the
clearest example of that to accelerate and allocate towards social
protection, given the urgency of providing the cash transfers
and the kind of support we give in Ethiopia.
Ms Turner: In the run-up to the
summit we did an exercise around social protection and complementary
interventions to try and find out what the multilateral development
banks as well were planning to spend on social protection, because
it has been a key concern of ours that in past crises the multilateral
system, particularly the World Bank, has not really focused on
the poorest people. The system knows how to protect balance of
payments and it knows how to protect a budget but really has not
in the past worked out how to protect poor people. We are quite
optimistic about the plans that we are now seeing from the World
Bank, the African Bank, the Asian Bank and the Inter-American
Bank on their increases in social protection, looking to new investments
in social protection of about £12 billion between 2009-10
and 2011, which is a significant amount of investment in social
protection. It does feel different to the past.
Q249 Hugh Bayley: You have contributed
£200 million to the Banks' social response fund?
Mr Alexander: That is right.
Q250 Hugh Bayley: That comes all
from the current year or over a series of years?
Mr Alexander: The £200 million
will come over three to four years.
Q251 Chairman: We heard representations
from the Local Government Association saying that they have established
relationships with a lot of developing countries and believe they
can do more. In a lot of cases, it is about personal development—in
other words, seconding staff who have particular professional
expertise and working with them. They have given us some examples
of waste management in Sierra Leone, which they said helped reduce
malaria; climate change resilience in northern Uganda, fair trade
generally and a lot of other things. What they were saying was:
is there some scope for more cooperation through DFID and the
LGA? They were saying the staffing would be paid for by their
councils but they would be looking to DFID to help with travel
and accommodation. They felt there would be occasions when it
might extend the reach of programmes that DFID were doing. I ask
on their behalf whether you think there is scope for more co-operation?
Mr Alexander: From recollection,
I cannot recollect having met the LGA. I may have. I certainly
have met the Commonwealth Local Government Association and discussed
the work we are doing. Only this morning I also signed a letter
to Bob Winters, the Lord Provost of the City of Glasgow Council,
who had raised very similar issues with me in a meeting I held
with him. The terms of that reply which I am happy to furnish
to the Committee essentially said that we are keen to look at
this issue in the course of our consultation on the White Paper
and offer to facilitate a meeting between Bob and his officials
from the City of Glasgow with our teams who are looking at exactly
this issue at the moment as we anticipate the White Paper. In
that sense, I will certainly bear that in mind. It may well be
worth me getting in touch with the LGA.
Q252 Chairman: I declare an interest
in that I was lobbied by Richard Kemp, the leader of Liverpool
City Council. He happens to be the international officer for the
LGA.
Mr Alexander: I will get in touch
with the LGA after this.
Q253 John Bercow: In response to
written questions from the Committee on the Spring Supplementary
Estimate, the Department told us that the cost of the exchange
rate movements in the course of 2008-09 amounted to £122
million. That opens up the question of how those costs have been
met, where have savings been found and whether some programmes
have had either to be abandoned or cut.
Mr Alexander: I do not have the
particular figures that you are speaking of, although I recollect
the question. Our latest estimates are that the value of sterling
aid has fallen by 26% since last August and the value of the euro
aid has fallen by 14% since August last year. We do have obligations
in terms of fixed payments which we make as a Department. As you
will be aware, the EU budget and contributions are fixed in euros
but it is right to recognise therefore that there have been some
examples where we have had to bear costs that were unanticipated.
We do have contingency resources available to us in those circumstances.
For example, in some cases, we have sought to procure some goods
and services in sterling and euros. In other cases the change
in support is offset by a fall in commodity prices. I cannot give
you a definitive example of a programme that has been cut or reduced.
I can assure you that we have been monitoring very closely the
impact of the changes that have taken place in currency regimes
in recent months. We have seen a 6% rise in sterling against the
dollar in recent weeks and as a consequence of that in terms of
our own financial management and also our own programmes.
Q254 John Bercow: I think it is right
to say that of that 122 million figure which came to us as a result
of a written question, £110 million is for EU programmes.
The vast majority of it is for that. I think £10 million
is the cost of capital charges and a couple of million is for
administration costs. I note you say you cannot tell us today
that any particular programme has been postponed or cut but I
suppose, looking forward, what I am interested to know is whether
the Department has or will make an estimate of the likely cost
of sterling depreciation in the current financial year.
Mr Alexander: Fluctuations in
the values of currency are a constant feature of the international
current markets. In that sense we are not in a position where
we comment publicly on the level of sterling. That has been the
longstanding position of the Government and as a government department
we are bound by that. This results in periods of increases in
aid in certain circumstances and decreases in other periods. In
that sense, it is not as if we are at this point betting for or
against sterling.
Q255 John Bercow: Thank you for that.
Let me put it a slightly different way. I think it is clear that
the Treasury expects departments to manage the impact of exchange
rate fluctuations. It would be an extraordinarily heartening and
unexpected development if that were not the case, but it is not
very surprising to hear that it is the case. What would be useful
would be to be reasonably assured that the use of the reserve
to which I think you referred a moment ago was minimising the
impact on country programmes.
Mr Alexander: For clarity's sake,
I spoke in terms of our own contingencies held within the DFID
budget. We have not made any claim on the reserve in relation
to currency depreciation. It might be helpful if I write to you
and set out the position, because clearly this is an issue of
concern to the Treasury.[3]
We are not the only government department dealing with denominated
currencies and in that sense there are expectations laid upon
us, perfectly reasonably, by the Treasury in terms of how we manage
the resources that have come to us through the Spending Review.
Q256 Chairman: It might be helpful if
you could give us a little bit more in a paper on how you manage
that. You have said that fluctuations in currency are the norm.
How do you build that into your planning? You have said on another
occasion, "We had unallocated resources", which of course
is a convenient answer when people are saying, "If you were
really spending at the limit, you would have to cut programmes."
I am not criticising but I think it is quite helpful and important
that the Committee understands how you do manage resources and
what you hold back to allow for that and how it works. Otherwise
people immediately assume that if it is coming from there something
else does not happen.
Mr Alexander: Sure.
Q257 Andrew Stunell: There are two
elements to the currency fluctuation problem, one of which is
you having to take money from somewhere to prop up those budget
heads which are paid for in euros or dollars. There is also the
question of direct payments which are made in sterling to developing
countries, where their anticipated use of that is going to be
greater than the reality because the international value of sterling
has dropped. Is there any part of your thinking which takes account
of that or is it just hard luck on the receiving countries that
the pounds they have will not go as far as they had planned and
you had expected?
Mr Alexander: The currency depreciation
of which I have spoken over a number of months has coincided with
a period when, to the benefit of many of the countries in which
we are working, we have seen falls in the level of the price of
oil, food and some other commodities. In that sense the transaction
is not all one way but it is an inherent feature of any agency,
including the Government's Department for International Development,
that there are going to be currency fluctuations. It is not unprecedented
that there have been variations in the level of dollar aid and
sterling aid that is provided. That does vary over time in terms
of its impact on purchasing power, but the only issue is not that
of currency levels. There are also other factors. For example,
commodity, oil and food prices.
Mr Smith: We have spoken a little
bit about this with our regional divisions. It is possible to
overstate this impact because it does depend on the way in which
the money is used in each country. If it is spent in local currency,
it just depends on what that currency's exchange rate is at the
moment. Exchange rates have fluctuated quite a lot in many of
our partner countries as well. It is not an even picture across
the world. If there is direct procurement in dollars, there will
be an impact but that is not uniformly the case. There is quite
a wide range of circumstances that applies across all of our partner
countries. It is not a uniform impact.
Q258 Chairman: We came back from
Tanzania where there was a 20% depreciation of sterling against
the local currency. Do you pay them in sterling, in Tanzanian
shillings or is it up to them? How does that work?
Mr Smith: The commitment is almost
always in sterling, so we pay in sterling.
Q259 Chairman: They can hold it or
change it according to their own judgment?
Ms Turner: Yes. We pay it in sterling
and they can immediately decide what they do as part of their
reserves management.
1 Overseas Development Institute Back
2
Special Drawing Rights Back
3
Ev 156 Back
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