The House always listens with interest to the hon. Member for Fife, Central (Mr. Hamilton). He is not afraid to speak out against his party or the Government of the day if he feels strongly about certain issues. I agree with the latter part of his speech about the need not to interfere with free trade, and that the interests of the developing countries would be served least by erecting protectionist barriers. There, however, my sympathy with him ends. I can in no way support the thrust of his argument that we should substantially enhance the development programme at the expense of the defence budget. It is true that we shall spend about 10 times as much on defence this year as on official overseas aid, but the question is not whether we would spend more on aid if we spent less on defence. If we had no defences, the question might be whether we could spend anything on overseas aid.
If we dismantled our defences and broke up the collective security system of Britain and Western Europe, we might be relegated to the suppressed satellite status of countries such as Poland. We must ask what contribution such countries can make to the needs of developing countries. I cannot accept that the hon. Gentleman is right in his judgment. I would not go as far as my right hon. Friend the Member for Daventry (Mr. Prentice) and suggest that the Secretary of State for Defence and the Minister for Overseas Development should sit down together and regard their budgets as one. I accept that there is a relationship between the two, but they are distinct matters. It is important, as a first priority of Government, to defend our people and maintain a growth in real defence expenditure.
The Government's record on overseas development is not without distinction. More than £1 billion will be spent on official aid this year and next year. That is considerable both in real and in relative terms. Only four OECD countries will spend more this year on overseas development than Britain. As my right hon. Friend the Minister said, it is the quality as well as the quantity of development assistance that is important. I gain confidence from the fact that about two-thirds of our bilateral aid goes to the poorest countries and that Britain is a signifacant contributor to forms of multilateral assistance for the least developed countries.
The International Development Association, which is attached to the World Bank, contributes considerable amounts to the poorest countries. Britain will be contributing more than 10 per cent of the funding of the sixth replenishment of the IDA. It is worth noting that that compares with 5 per cent. for France and 5.4 per cent. for the Gulf countries, which include Saudi Arabia, the United Arab Emirates and Kuwait. We should be proud of that fact because it is a real contribution to the developing world.
The Opposition motion is both cynical and inaccurate. It deplores cuts in the aid programme, yet conveniently forgets that the Labour Government made cuts in 1978 when forced to do so. We might be better able to assist the developing countries now if they had not indulged in a spending spree with taxpayers' money when they were in office. The figure of 11 per cent. referred to in the motion assumes a certain rate of inflation, but the actual reduction in money is about 2 per cent. I assume that the difference is accounted for by an assumption about the rate of inflation.
A significant factor about the development budget is that that money is largely converted into foreign currency and spent abroad. Therefore, movements in the exchange rate are as important a factor as the rate of inflation. If one argued that the rate of exchange of sterling were to rise by 11 per cent. during the next year, which is not impossible because fluctuations in currency have been at least as large in recent years, we would be spending more in real terms. The figures can be very misleading, and the House and the public should be aware of that.
The motion accuses the Government of "callous indifference" and a lesser commitment to the plight of 800 million people living in poverty. My hon. Friend the Member for Woking (Mr. Onslow) asked who they were. The World Bank has assumed the figure of $635 per capita as its definition of poverty, which produces a figure of 750 million people. Perhaps the Opposition have chosen to round up the figure by 50 million—but what is 50 million to them if they are trying to stir up trouble with the Government of the day? Most of our aid goes to the poorest people. My right hon. Friend the Minister gave details of specific help to sub-Saharan countries—agricultural schemes, population programmes, water supplies and energy resources.
The Government accept the principle of 0.7 per cent. of GNP being the target for overseas development aid. But they are wise enough to recognise that we have no prospect of meeting that if our economy is unsound and if no action is taken to curb the burden of public expenditure and the rate of inflation.
I find it deeply offensive that the Opposition assume a monopoly on moral conscience about overseas assistance. I feel as strongly as they that we have obligations to the developing world and that we must strive energetically to narrow the growing gap between the world's rich and poor. It would he imprudent as well as cruelly deceptive if we pretended that our aid programme bore no relation to our economic circumstances. Worse, it would make more probable an even larger cut in later years. The best means to ensure that we can make the contribution that humanity, national security and self-interest demand is by putting our house in order and increasing the national wealth at our disposal.
I congratulate the Foreign Affairs Select Committee on its work and contribution to the subject. I read the reports that it produced before the Cancun summit. It played a significant part in impressing on the Government the importance that many of us attach to following up the Brandt report and taking the conference seriously. Are we doing any more than paying lip service to Brandt's objectives and to the contents of the Cancun communiqué? I confess that the language of compromise and hesitancy surrounding many official statements in response to Brandt has not reassured me that Britain, as a developing country, has yet grasped the significance of the Brandt report conclusions or begun to tackle them in a practical way.
I wish to give one example of the garbled verbiage emanating from Cancun. The communiqué states:
The Heads of State and Government confirmed the desirability of supporting at the United Nations, with a sense of urgency, a consensus to launch Global Negotiations on a basis to be mutually agreed and in circumstances offering the prospect of meaningful progress.
If that sort of state emanates from a meeting of Heads of State—despite the comments about reaching an emotional understanding rather than formulate a practical programme—I must despair. Now is the time for action. That extract of the communiqué related only to a proposal for further talks rather than action. An action programme is needed to implement some of the proposals referred to by the Brandt commission and our Select Committee—for example, on food, trade, energy and finance.
I wish to comment on one of those broad areas, namely, the financial flows and institutions. The financial crisis facing most non-oil developing countries has worsened in recent years because of the 1979–80 oil price rises, the international recession and the level of interest rates. The three causes are related, but they have had a compound effect on countries without indigenous energy resources, whose principal exports are primary commodities, raw material and minerals, and which already have substantial debt charges on accumulated foreign borrowing. The result was that in 1981 the oil-importing developing countries incurred a balance of payments deficit of $97 billion. That enormous imbalance would have been impossible to sustain were it not for the petrocurrencies which were recycled through international banks, not least in Europe and this country, and multilateral institutions such as the IMF and the World Bank.
However, a significant factor in this recycling of finance from oil rich to non-oil poor is that much more of the finance flowing into developing countries is in the form of loans rather than investment. Eventually those countries must repay the former. On the latter they only have to generate a rate of return.
My fear is that we are building up a much bigger financial problem for those countries, and that many banks may encounter great difficulties in the future. I fear that a lot of the money simply will not be repaid. The fears expressed by the right hon. Member for Lanark (Dame Judith Hart) that a major bank might collapse as a result of the inability of a major country or authority to repay its loan may be realised if the borrowings of those countries compound in the way that is happening now. That is recognised by the World Bank and its IDA affiliates, but it is insufficiently recognised by Governments and the banking system elsewhere. The answer lies in promoting investment rather than lending to the developing countries, and in particular in encouraging the oil rich countries, individuals, and monetary authorities to place long-term investments—not loans—in projects which can make a return and generate hard currency income through exports. It also emphasises the need to back with official aid schemes that are likely to earn foreign currency for the countries in question. Our aid disbursements rightly emphasise agriculture and infrastructure schemes such as roads, electricity and water supply. However, we should not lose sight of the advantage of backing income-generating schemes in those countries. The less-developed countries will have to pay their way much more in the new world financial order, and we can best help them by backing ventures that will generate jobs and hard currency in the years ahead.
What else should we do? I want to mention three areas—interest rates, exchange rates and the financial institutions. In recent years high interest rates have placed an impossible burden on developing countries, which cannot escape the necessity of financing their trade with credit or their development plans with foreign loans. High interest rates internationally are a direct consequence of inflation, and without more co-ordination between the developed countries to produce a more stable and secure international financial framework we shall continue the spiral and self-defeating process of competing against one another for liquidity in the system and maintaining the exchange rate of currencies.
In my judgment, the answer is to pursue, as Her Majesty's Government are doing, economic policies designed to lower the domestic rate of inflation and to enable interest rates to fall by reducing the demands of the non-productive public sector of the economy on the nation's resources. However, it is not enough to- get on with that task at home and ignore what is happening abroad. Financial markets and national economies are more interdependent than ever before, and much can be done within Europe and between Western Governments to co-ordinate plans for economic recovery.
In the context of high interest rates, loans made by the International Development Association assume greater importance. I understand that the IDA can lend money for up to 50 years, interest-free, and with periods of up to 10 years' grace—the only financial commitment being a commitment fee of 0.75 per cent. a year. I fully support the large contribution that the Government make to the IDA, but I understand that the IDA can lend only to Governments. In view of what I said earlier about backing more income-producing schemes, should there not he more flexibility in the recipients of loan finance from the IDA?
In its proposals for reform of the world monetary system, the Brandt Commission laid great emphasis on the need for stable exchange rates. This is a matter of great importance for non-oil developing countries which have seen their financial obligations and their balance of payment deficits rise in large part because of movement in exchange rates.
Brandt discussed various ways in which exchange rates could be stabilised. For some time, my preference has been for action on a regional block basis to iron out sharp and damaging fluctuations to currencies. In our case, it means that we should become full members of the European monetary system. Failure to do so has acted as a detriment to trading within Europe and as an unstable influence on international currencies. In my view, it would be the first step to having a European currency and greater stability and order in the international financial system.
I welcome the fact that internationally we have greater use and acceptance of special drawing rights. That is a good sign of the extent to which there is a common and accepted settlement system which the International Bank for Settlements and Redevelopment is using to advantage. Experience of the EMS in recent years shows that we have little to fear, in practice or theory, in becoming full members. I hope this country will join the EMS, not only because I regard that as an essential political step in Europe, to demonstrate' our unity with it, but also because it will produce more stability and have a practical and beneficial impact on the developing countries.
Finally, I shall say a word about the institutions themselves. I pay tribute to the contribution of multilateral institutions such as the IMF and the World Bank. Last year, the World Bank lent over £12 billion on 250 projects in 50 countries. Many new multilateral and bilateral institutions have sprung up in recent years, especially in the Middle East. However, I question whether some institutions with grand names which imply development assistance are moving fast enough, giving money and employing the right criteria and expertise in development assistance abroad.
I think particularly of the Sudan, a country that was mentioned by the hon. Member for Kingston upon Hull, West (Mr. Johnson). That country is bigger than the whole of Western Europe. It is the biggest country in Africa. It has enormous untapped mineral and agricultural potential. Nevertheless, for a decade the rich Arab oil-producing countries have been promising substantial financial assistance to make it the garden of the Middle East, promising to pour money into stock and agricultural development. The money simply has not arrived. The Arab development fund for agriculture—I forget the exact name of the institution—promised to make available substantial sums for that development, but it has not arrived. There is absolute poverty in that country and throughout Africa, and resources in terms of food production which the world will not be able to do without during the next 20 years are going to waste. There is therefore an urgent need for some of these fine-sounding multilateral institutions that are set up by Arab countries to deliver the goods and demonstrate that the promises that they make to help countries are being translated into reality.
There is also an urgent need to rearrange the shareholdings of the IMF so that the quotas can be reviewed, and to increase the borrowing to capital ratio, as proposed by both the Brandt commission and the Select Committee. I hope that my hon. Friend will comment on that matter when he winds up.
Institutions must manage projects, as well as provide the finance for them, to ensure that there is less wastage, inefficiency and corruption, because those factors bring into disrepute the substantial efforts that we and other countries make toward development assistance.
I live uneasily with the reduction in funds that has been announced for development aid. However, because I believe that the paramount importance of redressing our economic problems is that it offers the hope that we shall be in a position to increase aid in real terms—and much more than otherwise would be the case—in future years, I am prepared to go along with the Government tonight. I assure my hon. Friend that I shall be in the vanguard of those who will press for a greater allocation to overseas development in future, but he can rest assured that he has my support for the proper priority of looking to our home front first—reducing the rate of inflation—while maintaining a substantial and a record absolute amount of money for these worthy recipients.