That reply confirms my impression of the Foreign Secretary's speech. What he said reeked of complacency. He chose all the most respectable platitudes, but gave no sense of the scale and immediacy of the crisis now facing the world. He reminded me of the Spanish tourist in the Highlands who asked a local resident for the local word representing mariana, to which the reply was, "We do not have in our language any word that conveys quite that sense of urgency."
The second report of the Brandt commission records the failure of the industrial countries to take the first report seriously—a failure symbolised by the callous hypocrisy of Cancun. It also describes the consequences that inevitably followed, because every warning given by the Brandt report three years ago has come true. The circumstances are now worse than Brandt then envisaged because, on top of everything else, the industrial world has produced a crisis in its own financial arrangements that could still lead to the collapse of its private banking system.
The suffering that has followed in the Third world has reached new peaks. Income per head in most of the Third world countries has fallen for the first time since the war. There is starvation in many parts of Africa and Asia, and there are riots and civil war in Latin America. Political instability is increasing throughout the Third world. That is reflected in the chilling statistic, reported in the second Brandt report, that arms expenditure has risen from $450 billion in 1980 to $650 billion in 1982, and the increase in arms spending in Third world countries has been even greater than the increase in the industrial countries.
The Opposition believe that the crisis presents us with a moral challenge and that, because the industrial world has a direct responsibility for the suffering in the Third world, we have a duty to help to remove it. The central message of the Foreign Secretary's speech and of the Brandt report was that the industrial world also has a great material interest in working with the Third world to get out of the crisis. The fall in imports by the Third world in the coming year is likely to cut 1 per cent. of the growth that would otherwise have been possible in the industrial countries. One out of six industrial jobs in the United States depends on exports to the Third world.
The second Brandt report is rightly entitled "Common Crisis". Unlike the first report, it concentrates on emergency measures that are urgently needed to prevent a catastrophic further deterioration, while still insisting on a framework of global negotiations between North and South. I hope that the Minister, in reply, will assure the House that the Williamsburg summit will accept, and will be asked by the British Government to accept, the emergency programme as a basis for negotiations with the Group of 77 at the UNCTAD conference in Belgrade which follows a few weeks later.
The urgency of the crisis is imposed by the dynamics and scale of the financial crisis that it includes. The financial crisis now facing the industrial world is the inevitable consequence of the shallow monetarist policies pursued by most Western countries over the past few years. Those policies have brought about the greatest recession since the 1930s and the highest interest rates over the longest period in recorded history.
This has inflicted a double blow on the Third world. On top of having to absorb the dizzy increase in the price of oil inflicted by the OPEC countries, it has had to absorb a similar increase in the price of money to buy the oil inflicted by the industrial world. The suffering of the Third world today owes at least as much to the increase in the price of money that the Third world needs from the West as it does to the increase in the price of oil.
The consequent recession has cut demand for the commodities that are the main source of income for the Third world and cut the price that the commodities command to the lowest for 30 years. As a result, Third world countries have seen a collapse in their earnings at the same time as high interest rates in the industrial world have meant a staggering increase in the cost of servicing their loans. For the past nine months, they and their creditors have been wrestling with the risk of default, which is inevitable unless either their debts are rescheduled or they are allowed to borrow more, or both.
This process has been well described in detail in the fourth report of the Treasury and Civil Service Select Committee, but it is not unexpected to many of us. Contrary to what is stated in that report, it was foreseen in 1979 not just by Mr. Rimmer de Vries, who is given credit for it—he is the chief economist of the Morgan Guaranty Trust Company of New York—but by many in the British Parliament—by my noble Friend Lord Lever, by the right hon. Member for Sidcup (Mr. Heath) and by myself. We have all been warning the world of this risk since the autumn of 1979. We had sniggers from the Conservative Benches then, just as we are getting them now.
The Government's first White Paper on the first Brandt report included the following statement:
The Government believe strongly in the merits of the present world economic system, with its wide reliance on open markets for trade and financial flows.
It is no secret to any of us that the Government's basic economic policy has been founded on a profound conviction of the magic of the market place. The irony is that that has produced a private banking system that can survive only by lending ever more money to bad debtors and that is being bullied into doing so by central banks and international institutions whose function is to guarantee their prudence, not their profligacy. That is what the magic of the market place has done for the international banking system.
So far, the international banking system is a ship that is just keeping afloat, but it is springing new leaks every day. Even as we speak, the Central Bank of Brazil is meeting a group of creditors in London and threatening a moratorium on its debts if it does not get more money. I have no doubt that the Governor of the Bank of England is trying to persuade the private banks in London, against all the rules of banking prudence, to provide the extra money.
There is no doubt — we can all pay tribute to the skills still available in the private banking system—that the rescheduling operation has been successful, but it has so far depended critically not just on international institutions, such as the International Monetary Fund and the Bank for International Settlements, but on the unique skill and experience of two individual central bankers—the noble Lord Richardson and Mr. Paul Volcker, chairman of the Federal Reserve Bank. She who must be obeyed has decided to replace Lord Richardson this summer by a man who has run a successful lawnmower company and who told the world, the week after he was appointed Governor of the Bank of England, that the world banking crisis—if there ever was one—was over. I am afraid he will find that his responsibilites as Governor of the Bank of England are a lot more "bovver" than a hover.
Mr. Volcker, the other pillar of the rescheduling operation, is now a target for attack by the sadomonetarists and the supply-siders in Washington. There is grave danger that he will be removed in August and replaced by a political push-over of limited banking experience. I warn the House that the risks to the international banking system, if Mr. Volcker also disappears in the second half of this year, will be very grave. I know no one in Wall Street or the City of London who does not share that view. But even if Lord Richardson and Mr. Volcker were both to stay in post, the measures taken fall far short of what is needed.
Rescheduling of the type that we have had so far is like applying sticking plaster to wounds that require surgery. Of the list of proposals rightly made in the second Brandt report, so far only one has been adopted. I welcome its adoption. It is the extension of the great general agreement to borrow to all members of the IMF and not only to the richer industrial countries. But the increase in quotas is only 50 per cent. and not 100 per cent. as recommended. It does not come into operation until next year. There is so far no agreement in the IMF that it should be able to borrow from the capital markets, and there is strong resistance in most countries—I hope that we shall get some assurance about the attitude of the British Government when the Minister replies — to a new allocation of special drawing rights weighted heavily towards developing countries. That being so, it is very unlikely that the IMF will have enough money in time to take over enough of the burden from the private banks, especially as the small and medium sized private banks are getting out of lending to foreign Governments while the going is good.
We now risk seeing a very big fall in lending by private banks to the Third world after a series of years in which they have depended very heavily on a big increase in lending every year. If the happens — and there is no reason at the moment not to expect it—there will be a collapse of imports by Third world countries and very probably default by one major country. Such a default could lead to a very rapid chain reaction which could bring down the private banking system. We would then hear fewer sniggers on the Conservative Benches.
On top of those risks there is the fact, to which the Foreign Secretary did not refer, that the large and sudden fall in the price of oil which has taken place in the last month, welcome as it is in the medium term to all countries, has imposed immediate additional burdens on the big debtors who produce oil—Mexico, Venezuela, Nigeria and Indonesia—all of which, incidentally, until the last month or two, were very big importers of manufactured goods from the Western world.
It is very doubtful now, even if the oil price does not fall further — and it may well fall to $25 or $30, or even, as the chairman of BP suggested, to $13 a barrel —whether those countries will be able to carry out the adjustment programmes to which they pledged themselves when even countries such as Brazil, which benefit from the fall in oil prices, have seen riots in the streets and invasion of the presidential palace. The urgency of the situation revealed by those facts was in no way reflected by the speech of the Foreign Secretary.
The greatest strains are certain to fall on parts of Africa, particularly just south of the Sahara, and parts of Asia such as Bangladesh and Bhutan, where the great powers have few direct interests to protect. For them aid is the only possible channel for assistance. I think that the Foreign Secretary recognised that. It is the main function of the International Development Association, which is so threatened at the moment by the American Congress and by cuts already accepted by the American President. But the most dangerous consequences could come in Central and South America, and particularly in Central America.
It is very disturbing to Opposition Members that the United States seems to be tempted to try to solve the economic and social problems, which it is largely responsible for inflicting on the countries of Central America, by brute force and military intervention. When people talk of Finlandisation, I must say that I would feel much happier these days to be a citizen of Finland than a citizen of Nicaragua. [Interruption.] Oh, yes. Conservative Members know very well that the United States Administration at this time is financing armed action from Honduras against the legal Government of Nicaragua, and, we read in the newspapers, is threatening similar action against Cuba and other countries in the area. The United States, in its policies in that part of the world, is a recruiting sergeant for Communism.
There is no mystery about the measures that are needed. They are set out in detail in the report that we are debating. They are not revolutionary Marxist proposals. I doubt whether the right hon. Member for Sidcup would have endorsed them if they had been. They are not even extreme Keynesian demand management proposals. They have been supported by sober-sighted people such as the editor of the Financial Times and, indeed, Mr. Paul Volcker, the chairman of the Federal Reserve Bank in the United States.
The first proposal is that the debts of the poorest countries should be cancelled. As the Foreign Secretary said, the British Government in 1978 — I am glad to have been a member of it—cancelled the debts of the poorest countries at that time. I hope that the right hon. Gentleman will follow that example and will press his friends at Williamsburg to do so.
The second proposal is that we should provide more soft loans through IDA, but at present even the meagre pittance recommended by President Reagan is being held up by the Unites Stated Congress. That is a tragedy and a crime against the poorer people in the world. It is particularly disappointing behaviour by a country which still spends more on potted plants than on foreign aid.
The third proposal is that all countries should aim at achieving 0.7 per cent. of gross national product in official aid in the next five years. The Labour party has committed itself to achieving that. I believe that it is the only British party that has done so. The Government are still outrightly refusing to give any indication of how they will move in that area. [Interruption.] With great respect, the Foreign Secretary knows very well that the Labour Government restored the cut within a year. The Conservative Government cut aid by 20 per cent. in their first two years. I do not think that the right hon. Gentleman is prepared to quantify in real terms the increase that the Government are now offering. The Treasury has not been quite as frank with him on this matter as it has been concerning the direction of our overseas capital flows in recent years. Some of us will be taking a great deal of interest in that aspect in future debates.