Examination of Witnesses (Questions 260-279)
RT HON
DOUGLAS ALEXANDER
MP, MR ANTHONY
SMITH AND
MS RACHEL
TURNER
22 APRIL 2009
Q260 Andrew Stunell: If we go a step
further, the obvious dollar transaction is for oil. Oil has been
going down, as you say, but in broader policy terms they get the
pounds that you send them and, after that, it is their problem.
Would that be a fair summary? Your allocations do not vary to
take account of those fluctuations.
Mr Alexander: It would not be
a fair summary, not least because we want to make sure that the
money we give them is spent on what we give them the money to
spend it on. It is not as if we hand over a cheque and then it
is over to them. We have an understandable interest on behalf
of the taxpayer in following how money is spent. One also has
to recognise the extent to which there are currency appreciations
and depreciations in some of our partner countries. There are
constant currency changes and it is a matter of record that we
do not offer a running commentary on those. One has to ask the
questions in terms of not least the administrative burden of trying
constantly to be changing one's aid programme, not least given
our expectations in terms of aid predictability, depending on
what happens to the level of sterling, the dollar or the partner
countries' currency. In some of the conversations that we have
had, there has very clearly been virtue in the relative simplicity
of predictability on the basis of the contributions and the undertakings
that we have given, albeit that that takes place in the context
of a global market in which there are floating currencies.
Q261 Andrew Stunell: Could I just
rephrase the question a little more neutrally then? Given that
over the last 18 months there have been severe fluctuations, particularly
in oil but also in food and commodity prices, and there have been
fluctuations in sterling, has that new climate of volatility led
you to give any consideration to, in the future, developing something
which is more reflective of those changes; or do you intend to
carry on on the basis you have just outlined?
Mr Alexander: That was part of
the Prime Minister's work at the G20, was it not? If one says
volatility is one of the attributes of a globalised market involving
more than a trillion dollars crossing gross national boundaries
every day and a failure of global regulation, it was exactly to
try and address some of the inherent instability that has been
revealed by this unprecedented crisis that we worked to gather
20 global leaders together and build a consensus. That requires
reform both of the IMF and the World Bank. It requires a greater
degree of global supervision of those currency markets and it
requires a new international regulatory order. All of those are
areas which we are keen to pursue but which require consensus
beyond the United Kingdom. That is why we worked hard to get the
communiqué in London but we are continuing to work. I will
be working in Washington at the weekend with the World Bank. Alistair
[Darling] will be there as Chancellor at the IMF to take forward
the kinds of proposals that were agreed in the communiqué.
Q262 Mr Hendrick: The largest single
beneficiary of the recent G20 summit was the IMF. Looking at some
of the commitments that the IMF is making, it would seem that
many of the countries it is assisting it is assisting in the area
of balance of payments problems. Clearly, many of these developing
countries have pressing needs. We talked about social protection,
where there are obviously some very important commitments being
made, but other problems include the need for development of infrastructure.
With this emphasis around balance of payments and other problems,
how effective do you think that money is going to be if it is
not really looking at some of the other development needs?
Mr Alexander: In the first instance,
I think there was a recognition ahead of the G20 summit that the
IMF was under-capitalised for the task that was being given to
it. In some ways, some of the confusion as to the respective roles
of the Bank and the Fund over a number of years has arisen because,
in past balance of payments crises, there simply has not been
adequate capital within the Fund to be able to deal with it independently,
so calls have been made on the World Bank to engage effectively
in crisis management. One of my hopes coming out of the G20 summit
in London would be that we will be able to move towards a clearer
alignment of respective responsibilities between the Fund and
the Bank. In that sense, the uplift in capital from about US$250
billion to about US$750 billion for the Fund we regarded as being
vital because of the signals it sent to global markets in terms
of the confidence and the capacity to work together and to secure
those additional resources. Also, candidly, because we expect
there will be very significant calls on the Fund's reserves in
the months to come. In that sense, if we were to avoid a situation
in relation to eastern Europe or other parts of the world where
we are simply not going to have sufficient resources for the Fund
to discharge its classic responsibility in terms of avoiding a
balance of payments crisis, there did need to be those additional
resources secured. That should not in any way undermine the sense
of purpose that we have about reform of how the Fund works as
well as the level of resources available to it. In that sense,
we did work ahead of the summit and there is going to be work
continuing after the summit to try and strengthen some of the
changes that we want to see, not simply in terms of how the Fund
is governed but in terms of how it operates in low income countries.
Ms Turner: On the role of the
IMF in low income countries, we think that IMF financing is extremely
important. The type of financing that you get from the IMF is
critical for countries to see them through the crisis. The kind
of fast disbursing support that comes from the fund is exactly
what many low income countries need at the moment. It comes quickly.
It does not have long appraisal times like investment projects
from the multilateral development banks, for example. The outcomes
at the summit on the IMF we think were really good on the IMF
for low income countries. There were two key parts to that. The
first is that the access limits for low income countries were
doubled. The G20 leaders agreed to call for a doubling of those
access limits and we are fairly confident that that will get through
the IMF board. That means that countries can have twice as much
of their quota allocation as they could have before. Before, they
had a limit of 75%. That would double to 150%. That applies to
both the exogenous shocks facility and to the main IMF poverty
reduction and growth facility. The reason why doubling access
limits was so important was because the IMF had sufficient financing
for low income countries which went unused. The binding constraint
was the access limit, which was related to quota and in this current
environment that was just not helpful. The second agreement at
the summit was that gold sales would be used to increase the amount
of concessionary IMF funding. We hope that that will be discussed
at the spring meetings this weekend and that a decision will be
taken soon about that. As part of that, there are ongoing discussions
about how concessionary IMF financing for low income countries
should be. There is the possibility, not yet agreed in the board—but
it is something that we think is important to discuss—that
the concessionality of IMF financing should be improved. IMF financing
is currently about 30% concessional compared with IDA's[4]
60% for example. Now that gold sales are on the agenda, we have
the possibility to talk about more resource to further bring down
the terms of providing support for low income countries.
Q263 Mr Hendrick: Some of the figures
bandied about around the G20 were very impressive indeed. However,
some of the pledges that were made included existing commitments
and contributions by particularly Japan and the European Union.
How much new money was pledged at the G20, obviously taking out
the money pledged by Japan and the EU? What commitments have been
made to meet the pledge that $100 billion will be made available
to the multilateral development banks? Finally, on the gold reserves,
how much do you think the gold reserves will raise? How much of
an impact do you think that will have?
Ms Turner: I will start with the
multilateral development banks, the extra $100 billion. Prior
to the crisis, the multilateral development banks as a group—in
that definition we do not include the European Investment Bank
but that is the Asian Bank, the African Bank and the Inter-American
Bank, the World Bank and the EBRD[5]—were
planning to lend about $200 billion over the next three years.
The additional $100 billion is made up of the multilateral development
banks doing more with their existing balance sheets. The World
Bank particularly has a lot of capacity on its balance sheet to
do more. It agreed to do an extra $60 billion. The remaining extra
$40 billion has come from additional capacity in the other multilateral
development banks but also from a capital increase in the Asian
Bank. Those are real, new resources that are coming off the balance
sheets that were not already there.
Mr Alexander: We have been arguing
for some time—to be fair to Bob Zoellick, he moved quickly
on this—for that lending because if ever there is a point
at which the Bank should be fulfilling its role now is that time.
Difficult though it is to argue that, notwithstanding a very strong
credit rating agency profile at the moment, the Bank could do
more with its balance sheet, that is what we had been arguing.
It did not appear as if the headline was around the Bank after
the G20 communique. It was in large measure because the Bank management,
working with shareholders, had already taken the decision effectively
to trim rates of lending; whereas the headlines were attracted
obviously to the uplift in resources.
Q264 Chairman: Does that not sound
a little bit like the multilateral banks doing what the commercial
banks just did that got us into this mess in the first place?
Mr Alexander: No, because we have
very great confidence in the strength of the balance sheet of
the World Bank. It is triple-A rated and we would not, obviously
not least in these circumstances, wish to compromise the creditworthiness
of the Bank. We are absolutely convinced—and in fact Bank
management came to be convinced of this as well—that, if
there was a time at which the World Bank was fulfilling its responsibility
to recognise market failure where it existed, step in and provide
additional resources and capital to those countries where capital
was drying up, now was the time to use the strength that had been
accumulated in the balance sheets.
Q265 Chairman: Conversely, it implies
that it was being rather cautious before.
Mr Alexander: Candidly, that has
been the position that we have argued for some time, certainly
since I have been at the Bank as the British governor. I have
been arguing that the very strength of the balance sheet was not,
in and of itself, going to make as effective a contribution to
tackling poverty as if, obviously within the bounds of responsibility,
it was using its balance sheet effectively.
Q266 Mr Hendrick: Coming back to
the gold reserves and the restatement of contributions by the
EU and Japan—
Ms Turner: This is really the
Treasury domain, the role of the IMF for middle income countries
is where these really big numbers are. The IMF had existing capacity
of $250 billion going into the summit. What was agreed at the
summit was additional, new resources for the IMF of $500 billion
that would be made up in various ways, including the idea of market
borrowing that was agreed as a possibility at the summit, but
also including voluntary lending from G20 members and from the
EU. The new resources were $500 billion. The other big, new number
agreed at the summit was the new SDR allocation.
Q267 Mr Hendrick: Does that include
the Japan and European restatement?
Ms Turner: The Japan $100 billion
is included in the existing IMF $250 billion, I think, but I will
check that for you. Certainly to get to the new resources for
$500 billion there is still work to be done and that is going
to give focus for the Chancellor at the spring meetings, to really
keep the energy and pace in that.
Mr Alexander: I was with the Prime
Minister when he travelled to Brazil and Chile in the week before
the summit. At that point, we were working to put together what
was inevitably but ultimately successfully our portfolio of different
sources of new resources for the IMF. At that point, the Japanese
were committing, if I recollect, $100 billion as a bilateral loan.
You can support the IMF as a bilateral loan. The European Union
is doing so as well. You can support the IMF by supporting at
the G20 a decision to borrow commercially on international markets
because the IMF has that facility. You can talk to your partners
in South Africa and persuade them that gold sales would not be
a bad thing for the IMF but would provide additional, new sources
of support, critically to help secure support for SDRs which were
controversial ahead of the summit, but again around which consensus
was reached. There is no secrecy about the fact that those large
numbers came from a range of different sources. In some ways differently
from the Bank, the range of different financing routes for the
Fund is quite diverse and in that sense we were working every
channel in the run up to the London summit to see how we would
get up to the level of resources that we judge will be required
in view of the crisis.
Q268 Mr Sharma: Oxfam and ActionAid
have expressed their concern that the large increase in funding
for international financial institutions has occurred without
the implementation of the promised governance reforms. How do
you respond to those concerns?
Mr Alexander: With the greatest
respect for the question, if I had a pound for every time Oxfam
and ActionAid expressed concern, I would probably have almost
as much money as the IMF. In that sense, they were generous in
their comments in relation to the progress that we made in London.
They are right to recognise that the Fund needs both resources
and reform, as does the Bank. As a governor of the Bank, it is
my responsibility as distinct from the Fund where Alistair [Darling]
leads. In relation to our thinking on the Bank, it might be helpful
to share with the Committee my thinking ahead of the spring meetings
taking place this Sunday. We do want to see the Bank delivering
on the commitments that it has made—for example, the tripling
of the level of lending—and meeting its countercyclical
obligations and moving rapidly to respond to the financial crisis.
We do not want to lose sight of the need for a more fundamental
reform. At the last meeting in October I argued, along with colleagues,
to see an additional African seat on the board. I argued that
we should have an open, merit based, transparent selection process
for the presidency of the Bank. I argued that there needed to
be more fundamental reform of what has come to be called phase
two of the reform of the Bank. In that sense I will be this weekend
in Washington urging that we seize the opportunity provided by
the G20 summit which asked that the reform process for the Bank,
known as phase two, looking at issues of voice and accountability,
be accelerated so that we would be in a position whereby shareholders
would take forward that work between now and the October meeting
of the Bank, ahead of decisions being reached next spring in 2010.
In addition, the management have established the Zedillo Commission
looking at issues of internal governance in the Bank. We would
hope that they would be in a position in the Zedillo Commission
to put forward proposals at the same time, around October, in
order that there could be decisions reached in the spring of 2010.
The third process which has been established as a direct consequence
of the summit was the request that the chair of the G20, the Prime
Minister, look at both the IMF and the World Bank in the immediate
months to come. I will be briefing colleagues on the World Bank
board in terms of the emerging thinking of the Prime Minister
in relation to the World Bank and the IMF. I hope that gives you
some assurance that we are not simply writing a cheque for the
IMF and walking away. We think there is both a need for resources
and for effective reform in the IFIs. We need to be taking forward
those processes simultaneously.
Q269 Chairman: For clarification
on the gold reserves, how much are they selling as a proportion?
Ms Turner: The decision has not
been taken by the board yet. The language in the agreement was,
"We have committed that additional resources from agreed
sales of gold will be used together with surplus income to provide
$6 billion in additional concessional finance for the poorest
countries over the next two to three years." Exactly how
much gold is sold to deliver that is something that is going to
have to go through the IMF board. Part of the issue is about the
extent to which some of the proceeds would be used to subsidise
resources as well as extend resources. It is quite a complicated
equation. There is a set of options that have been worked up for
the board and decisions will be taken. We do not have the answer
yet but we are really pleased it is happening fast. It is great.
Q270 Chairman: The other thing that
Bob Zoellick called for was for people to put 0.7% of their stimulus
packages into the Vulnerability Financing Facility. When we met
him we had a discussion with him about that. The Department has
committed £200 million to the Rapid Social Response Fund
and you are also putting money through CDC into the Global Trade
Liquidity Programme. Do you consider that to be your response
to that specific call?
Mr Alexander: Bob Zoellick's proposal
did not find favour at the summit.
Q271 Chairman: Why am I not surprised?
Mr Alexander: There was not a
widespread consensus in favour of the proposal. While it was always
stretching, although I have great respect for Bob Zoellick, I
am not sure it would have been the most effective response the
G20 could have taken, partly because—as we have reinforced
today in terms of decisions taken by the Chancellor in the Budget—all
was held to the centrality of 0.7% GNI as being what we should
be urging and working to secure from our partner countries in
the OECD and in the G20. In that sense, I was concerned when this
proposal was first publicised in the newspapers that it could
provide something of a "get out of jail card" for countries
who were not meeting the bigger obligations that they had in terms
of prior commitments they had made to overall spend as a proportion
of their economy and they could instead say, "We have quite
a small stimulus package and we are managing 0.7% of that."
From a policy point of view, we were always of the view that the
important prize is to sustain commitments that have been made
by major donor countries and, at the same time, to recognise the
urgency of what we were being told by developing countries ahead
of the summit. That was not specific to 0.7% of all the stimulus
packages. They were saying, "We need major, significant,
additional resources from the IMF. We need to make sure that we
are able to effectively get money out of the door in terms of
social protection and other issues from the World Bank."
Critically, there was a great deal of concern which was why we
worked very hard in terms of the new Global Trade Liquidity Fund,
because there was very real concern being expressed that, with
90% of global trade being reliant upon trade financing and effectively
that market having failed in recent months, the G20 needed to
act quickly in relation to trade financing. We did consider the
proposal. Of course we talked to Bob about it, but ultimately
we reached a judgment that the goals we were working towards,
in terms of our individual support where we provided money in
terms of social protection and in terms of our stewardship of
the overall process, were better focused on the IMF, on the Bank
more generally and those who owned the trade financing piece as
well.
Q272 Chairman: I take your get out
of jail point but Bob Zoellick would say that it is fine to refinance
the IMF. The IMF has an important role but poor countries are
being very hard hit by the downturn in richer countries and they
need specific spending programmes, whether it is infrastructure
or offsets for the loss of trade or whether it is east African
horticulture or what have you. Whatever you call it and however
you deploy it, that was his fundamental point. He says, "Here
you are, rich countries, putting money into your economies. It
is fine to refinance the IMF but where is some hard cash that
can be spent now in poor countries over and above what is already
committed?"
Mr Alexander: If all we were doing
was refinancing the IMF, important though that is, that argument
might have found more favour. I think this is something of a fallacy
which is abroad amongst some commentators on development budgets
but the poorest people in the world would have suffered more if
the global financial crisis had led to the collapse of the banks
last September. As surely as people in the United Kingdom, people
in developing countries, had an interest in avoiding the melt
down of the global financial core last September, that is why
I make no apology for the actions that were taken in the United
Kingdom, in the United States and elsewhere in securing stability
of the global financial architecture at that point. Secondly,
however, we do recognise that there need to be sources of financing
directed into developing countries in addition to the IMF resources
which will be critical in standing behind the central banks and
governments in developing countries as surely as the OECD countries.
That is in particular why we have supported already an uplift
in terms of capital in relation to the Asian Development Bank.
It is why we are already engaged in discussions with the African
Development Bank. On your point about infrastructure, we are already
engaged in discussions.
Q273 Chairman: I agree with that
and we have applauded you for it, but that was a commitment you
made before this crisis really hit. We as a Committee recognise
that the UK to a substantial degree is more than pulling its weight
compared with many other countries. It seems to me that the president
of the World Bank should be making the point on behalf of the
poor is that something extra has happened which has made life
infinitely worse. "You are finding money for your own bail-outs.
Are you prepared to put a percentage of that, whatever that is,
into very practical measures?" We were looking in Kenya and
Tanzania, on a different inquiry on horticulture and the particular
flower company we went to had secured contracts which meant they
were protected. Most of the others were losing sales of cut flowers.
The countries were losing tourists and they were losing trade
in a whole variety of different areas. They were looking for something
to carry them through. That is the point.
Mr Alexander: I am not a person
who needs to be convinced of the need for continuing support for
developing countries—
Q274 Chairman: I know you are not.
Mr Alexander: — if you look
at the conversations that have taken place in Government in recent
weeks which have resulted in the fact that today as a British
Government, notwithstanding the very real financial pressures
that both British citizens and the British economy are facing
as a result of this global financial downturn, we have reconfirmed
our commitment to the ODA[6]
targets that were set at the beginning of the Spending Review.
As a Department, we will see in excess of an 11% rise for the
remainder of the Spending Review in terms of our bilateral budget.
We are working hard both to keep the promises that we have made,
to identify new sources of financing and, as I say, I would cite
the example of trade finance as an issue which has emerged post
the crisis and needs to be responded to. I would secondly identify
the issue of making sure that the World Bank, which has very considerable
resources, actually meets its obligations in the unprecedented
circumstances of this crisis as well. We have worked collaboratively
with the Bank to effectively triple the level of lending that
is going into those countries.
Q275 Mr Hendrick: Just following on from
that point, Chairman, I do not think there is any doubt about
the Government's commitment, the Department's commitment and your
commitment, and that was made clear in today's Budget Statement
as well. Just coming back to Bob Zoellick, do you not think if
Bob Zoellick had maybe packaged his argument differently, and
rather than 0.7% using a figure that did not relate exactly to
what people should be doing in terms of their GDP anyway, it would
have come across a bit better? Is there not a figure to be aimed
at, either a percentage or an absolute figure, that Bob Zoellick
could have made a much stronger argument on and maybe would have
got a better result on?
Mr Alexander: I am renewed in
my admiration of Bob Zoellick, he is a talented man. I think he
felt attracted to 0.7% for each stimulus package because of the
coincidence obviously with 0.7% of GNI as the UN gold standard.
My view, respectfully, is different in the sense that I think
to introduce 0.7 into the debate that dealt with financing—
Q276 Mr Hendrick: 1% would have been
more powerful because it would not have seemed like 0.7, it would
have been more than 0.7.
Mr Alexander: This is a judgment,
but my judgment is to identify either 0.7% or 1% of an entirely
variable figure is far less potent than making the longstanding
and even more urgent case now for 0.7% of your total economy because
where you get the big numbers, the commitment, the clarity is
around a group of political leaders reaffirming a commitment to
what is a fixed proportion of their global economy as distinct
from spending a lot of capital trying to secure what in some circumstances
would be 0.7%, or in your case 1%, of a stimulus package that
would be entirely driven by national circumstances.
Q277 Mr Hendrick: So you do not think
it was right to actually earmark any proportion of the stimulus
package to this?
Mr Alexander: I think it is entirely
right to identify the fact, as Bob Zoellick has done on innumerable
platforms, that the needs of the poorest people in the world need
to be recognised in this crisis in a way that tragically in past
crises they have not been. If we agree on the end, then I think
we can respectfully disagree as to what is the most effective
means by which to ensure those needs are addressed. I believe
that by continuing to urge, implore and work with other countries
in the G20, the OECD and elsewhere to secure their longstanding
commitments to provide the commitments that we reaffirmed today
here that the United Kingdom would deliver in and of itself very
significant additional resources beyond that which are reaching
the developing world today.
Q278 Chairman: Some NGOs are saying
nevertheless that what is going to happen in this situation is
the best that the poor can hope for is that they will stay where
they are and, indeed, your own figures suggest that staying where
they are means going backwards unless there is something extra.
I think you made a very powerful case for saying that, of course,
if everybody just fulfilled their commitments that would get us
there, so I do not think there is any point in pursuing that,
but at the same time you can see the Committee sees a resonance
in what Bob Zoellick is trying to do and the way he is trying
to push people who perhaps have not responded in other ways.
Mr Alexander: To be fair to Bob,
I think he did exactly what was expected of him at the summit,
which was to be a voice for the poor, and in that sense there
was great integrity in what he was endeavouring to do in making
that case powerfully to other leaders.
Mr Hendrick: Paraphrasing Bob's approach,
what he is saying is if you are putting your hand in your pocket
to give this extra to get the world economy going again, why not
just give a small fraction of that to the Vulnerability Fund.
I do not think there is anything wrong with that but what you
are saying is by coming up with any figure and the fact that that
stimulus package is much smaller than countries' GDPs makes it
seem less relevant or too small a target in terms of a contribution.
Q279 Chairman: Or a cop-out.
Mr Alexander: My point would be
to say the prize coming out of the G20, I believe, and this partly
reflects the conversations that I had, so if you sit there with
the Prime Minister as he works hard to convince President Lula
in Brazil to make new and additional commitments, if you sit there
and listen to the case that he makes to other leaders that the
needs of the poor need to be respected, one of the insights you
garner as one of his secretaries of state is the fact that we
need to be promiscuous as to what countries can do and are willing
to do in terms of different channels of financing. In some instances
it is appropriate that countries that have large surpluses say,
"We're going to make a bilateral loan to the IMF", and
in other circumstances there are countries that are not meeting
their aid commitments and you can say, "Listen, you have
got a moral obligation to move towards the commitments that you
have made where you are adrift at the moment". In other circumstances
you can say, "Can you work with us together in the World
Bank to triple the level of lending that the Bank can deliver
because if there was ever a time that the Bank needs to fulfil
those obligations, that time is now". In that sense, I am
not convinced that it would have delivered better development
outcomes for the poorest people in the world if we had spent what
political capital we had going into those negotiations in trying
to deliver a single channel of financing as distinct from sitting
down with leader after leader after leader around the world and
saying, "What can we do together to actually address the
needs of the world's poorest people?"
4 The International Development Association-the development
arm of the World Bank which focuses on the poorest countries. Back
5
European Bank for Reconstruction and Development. Back
6
Official Development Assistance Back
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