International Debt

– in the House of Commons at 2:05 pm on 12 May 1989.

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Photo of Tom Clarke Tom Clarke Shadow Minister (Disability) 2:05, 12 May 1989

I beg to move, That this House recognises the crucial role played by the World Bank, and, in particular, the International Development Association, in promoting development and alleviating the debt problems of the Third World; therefore urges Her Majesty's Government to support a generous real increase in the resources of the International Development Association in the forthcoming negotiations for its ninth replenishment; recommends that in future assistance provided by the International Development Association should be on grant terms, and that all outstanding International Development Association credits should be adjusted retrospectively into grants; and believes that measures of debt relief, such as the Brady plan, and new funds for the International Development Association would be a major contribution to restoring economic and social development in the Third World. This will be an all-too-brief debate. I must say first that there are times when I think that I am not exactly the Minister's favourite Member of Parliament. On this occasion, so little do I feature in his thoughts that he does not appear to be listening to the point I am making. However, by way of compensation for keeping him late on a Friday, I assure him that if he finds it possible to accept my rather modest motion, I shall do my best to arrange the kind of reception for him in Glasgow that Daniel Ortega experienced last week.

We have had an interesting debate on the role of voluntary organisations and I feel confident that organisations such as Oxfam, the Catholic Fund for Overseas Development, Christian Aid, the World Development Movement, the Scottish Catholic International Aid Fund and War on Want would feel that the week before an extremely important meeting in London dealing with world debt is an important time for us to have this debate and to give the Minister an opportunity—alas, an all-too-brief one—to respond to what we have to say.

This debate takes place against a background of a cut in aid to Africa of 26 per cent., or £600 million, which does not balance the excellent efforts of organisations such as Band Aid and Sport Aid, which feel that, on top of their efforts, there is a great need for us to address ourselves to the problem of debt. The debate gives us an opportunity to talk about the influence of the World Bank, the International Development Association, and, of course, the Brady plan. We do so in the knowledge that the ninth replenishment meeting of the International Development Association will take place in London next week.

The Minister knows that IDA provides generous loans on generous terms to the poorest countries and that every three years, the replenishment comes up for debate. We hope that the Government will approach the meeting positively. We want to see a generous replenishment next week as we realise that the present figure of $12 billion is somewhat inadequate. We should—and I hope that the Minister will have the opportunity to tell us this—attempt to exceed that figure next week, especially as the United Kingdom share has declined noticeably.

All this takes place at a time when we know that the British people are generous in their approach to these matters, but also at a time when the Chancellor of the Exchequer had a surplus of £15 billion in the last Budget. It is not as though the resources are not available if the will is there. We must not have a world in which the poorest countries are subsidising the rest of us and in which we do not appear to be taking steps to remove the dreadful problem of debt.

I want to quote the words of my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) from the important speech he made on 29 March to the Overseas Development Institute and the Royal Institute for International Affairs. He said: Either way both lenders and borrowers in the 1970s made some awful financial decisions. But the real tragedy is that the resulting debt crisis, far from encouraging forgiveness, has relentlessly ensured that the sins of the fathers have been visited on children in the third world. I am delighted that my right hon. and learned Friend pursues these matters with vigour.

Our contribution and approach should be those of the last Labour Government. They did not have the resources in oil that this Government have experienced, yet under Judith Hart, we had a far better record. The Minister will recall that under IDA 4, the Labour Government's contribution was 11·1 per cent. Under IDA 5, it was 10·6 per cent. and under IDA 6, it was 10·1 per cent. Under the Tories, our share under IDA 7 was 6·7 per cent. and the same under IDA 8, so I look forward to a huge increase to make up for those lost opportunities when the Government tell us about their approach to next week 's meeting, which is important because the replenishment of the agreement will apply until 1993.

The views contained in the motion are widely shared. On the future, the motion makes it clear that grants should be offered in some cases, if only because we have seen in the past that loans do not always make economic sense. I am delighted to say that, on that point, I speak not only for my hon. Friends but for a clear majority in the House. That was made clear in a letter addressed to Mr. Barber Conable, the president of the World Bank in spring 1988, signed by 400 hon. Members including 169 Conservative Members. It said: When IDA started lending to the Third World's poorest countries in the early 1960s, its terms were amongst the most concessional of any aid donor. However, since then the governments of many donors such as the United States, the United Kingdom and the Federal Republic of Germany, have switched to providing nearly all of their bilateral aid to the poorest countries on grant terms. The letter continued: In the discussions beginning this year on the ninth replenishment of IDA, we urge that you put proposals to donor governments that the funds they supply for IDA should then be provided to the poorest countries on grant terms. That letter was signed by Lord Oram, the hon. Member for Broxtowe (Mr. Lester), my hon. Friend the Member for Oxford, East (Mr. Smith), and the hon. Member for Hertford and Stortford (Mr. Wells) and was supported by more than 400 hon. Members altogether.

Having endorsed that aim, as I hope we shall, should we not do something else? Should we not consider that 0024;32 billion of credit are outstanding which the poorest countries owe to the World Bank? Should we not accept that that is a major problem inviting a response? The countries concerned are flat on their backs. Over the years, some of them have grown out of their difficulties. We accept that South Korea, for example, would not qualify for any arrangements; indeed, it might be invited, in its new role and with its new status as a developing country, to contribute to countries whose need is so great.

There is a case for multilateral aid being grant-supported rather than being based on loans. There is also a case —many have supported this view—for writing off much of the debt retrospectively. There is nothing new about that proposal. I shall try to be fair to the Minister, even though he does not always make life easy for me, by saying that even this Government have accepted in their bilateral aid policy that there is a case for grants instead of loans. They have carried on Judith Hart's policy, and I am delighted to see her successor, the hon. Member for Clydesdale (Mr. Hood) here. I give the Government credit for doing that, but why do they not apply that important concept to multilateral debt and introduce it into the meeting next week. The World Bank has a major influence on these matters. It is the largest source of multilateral aid to Africa at the moment, accounting for 25 per cent. of the total.

An article in The Times of 5 April, referring to the recent meeting of the Group of Seven said: The meetings of the Group of Seven, International Monetary Fund and World Bank which ended yesterday were characterized, as usual, by surface harmony. All the participants claimed to support the letter of the communiqués while going on to interpret them in ways which were blatantly at odds with each other. There is a need for some form of leadership, but not of the sort that we have seen so far in the Government's representations.

In a previous debate I asked the Minister to comment on the Brady proposals. We have had little debate so far on these matters in the House and, especially, on the Brady proposals. I refer the Minister to a comment in the Financial Times on 19 April: By emphasising voluntary debt reduction, accelerated with financial support from the International Monetary Fund and World Bank, the US has implicitly recognised that—at least for countries taking the right kind of economic measures —ability to pay should be a factor in deciding what countries should pay. It added: One could not expect banks to support the moral argument. However, there are strong financial arguments to suggest that they should try to embrace the Brady proposals as convincingly as possible. For reasons out of my control, time is not on our side, but we sincerely ask the Minister and the Government at least to consider the contents of the motion. We recognise the awful problem that debt represents to the developing countries—to the poorest of the poor. We see no good in the Chancellor seemingly giving with the one hand and then very definitely taking away with the other. Debt represents an enormous problem. It leads to hunger and to poverty, which strike a major blow to the quality of life of millions of men and women in the Third world.

I believe that Great Britain has a contribution to make towards the economic and social development of the developing world. Next week we have a responsibility to make such a contribution to solving those problems. I urge the Minister to consider these matters seriously, because poverty in the Third world represents perhaps the biggest threat to peace apart from nuclear weapons. The problem invites a major response from the Government and from the Minister.

Photo of Mr Chris Patten Mr Chris Patten , Bath 2:16, 12 May 1989

I am glad to have the chance again to discuss in the House the important issues of aid and development. I congratulate the hon. Member for Monklands, West (Mr. Clarke) on his good fortune and his choice of subject.

The motion refers to the "international debt crisis". That well-worn phrase can tempt us to see the problems of sub-Saharan Africa and Latin America in the 1980s only in terms of international debt. That would be wrong. Those two regions in fact owe not much more than half of total developing country debt. There are some very heavy debtors in Asia. Yet Asia in the 1980s, unlike Africa or Latin America, demonstrates a consistent run of strongly positive growth in per capita income figures. We should, perhaps, rather talk of Africa and Latin America suffering a "development crisis", and not focus purely on debt in seeking the causes or the remedies of those countries' economic difficulties.

The motion, perhaps rather unhelpfully, refers us not to the causes of debt problems, but to their remedies. I propose to deal briefly with the situation in Africa, before turning to comment on the recent proposals for middle-income debtors, which are specifically mentioned in the motion. I have often said before that the key to Africa's economic recovery lies in the policies pursued by African Governments. More and more are now pursuing economic reform programmes agreed with the International Monetary Fund and the World Bank. There are also encouraging signs that economic performance in recent years has been better in those countries which have adopted adjustment programmes than in those which have not.

However, we have long recognised that many countries in sub-Saharan Africa, with incomes typically around $350 a head, will never be able to repay all the debts that they owe. We have played a part in recent initiatives to alleviate the debt burden of sub-Saharan Africa. In April 1987 we launched an initiative to help those poorest, most indebted countries, which were prepared to shoulder the difficult responsibility of restructuring their economies. The initiative called for the writing-off of old aid loans and the rescheduling of other official debt on concessional terms.

Britain has taken a lead in implementing the first part by cancelling nearly £1 billion of old aid loans or providing equivalent relief. The Chancellor's second proposal formed the basis of the agreement reached at the Toronto ecomomic summit in June 1988. Nine countries have now had their official debt rescheduled on concessional terms in the Paris Club and more are likely to follow in the next few months.

In the multilateral institutions, the Government have played their part in providing financial support for the poorest debtor countries pursuing economic reforms. We have agreed to provide up to £327 million over 14 years to subsidise loans from the International Monetary Fund's new enhanced structural adjustment facility. That is enough to subsidise one sixth of total lending and makes us the largest single contributor to the subsidy account. Seven of the poorest most heavily indebted countries already have programmes supported by that facility.

At the World Bank we have pledged £250 million over three years in association with the bank's special programme of assistance for Africa. I shall speak later of our specific contributions to the International Development Association, a subject referred to in terms in the motion and to which the hon. Member for Monklands, West referred at some length.

The position of Latin American countries is very different from that which I have just described. Their incomes per head are typically five or six times as high as those in Africa. The bulk of their debt is owed to commercial banks. Given that they are starting from a higher base than African countries, it is even more true that prospects for growth depend on their economic policies. Economic reform can do more than debt reduction to improve the prospects for growth and for rising living standards. It can also do more than debt reduction schemes to help countries to overcome their debt difficulties. Sensible policies form the basis for a long-term recovery of creditworthiness. They are also important in meeting short-term financing needs. Confidence in a country's economic management will encourage investors to put their money into a country and will discourage residents from putting their savings elsewhere and adding to the problems of capital flight.

Photo of Mr Stuart Holland Mr Stuart Holland , Vauxhall

Surely the Minister recognises that one feature of the Brady plan is that it recognises that debt cannot be repaid. Is the Minister not aware that Brazil has halved its imports since 1981 and that that has had a major effect on United Kingdom exports? Studies, such as that carried out by Gabriel Palme of Cambridge university, have shown that up to a quarter of a million jobs in the United Kingdom have been lost because of forgone exports to indebted countries. Therefore, it is not simply a question of internal management, on which the Minister has made some substantive point, but a matter of looking at global trading as a whole.

Photo of Mr Chris Patten Mr Chris Patten , Bath

May I, like my hon. Friend the Member for Oxford, West and Abingdon (Mr. Patten), say that if this is the last opportunity that the hon. Gentleman will have for intervening in one of my speeches, that makes this an even less happy day than would otherwise be the case, given that it is another birthday for me. I have always enjoyed the intellectual jousts that I have had with the hon. Gentleman in the House and I hope that the fact that he is moving to the humbler surroundings of Florence will not mean that we shall not have the opportunity of such exchanges in the future.

However, I do not entirely accept the hon. Gentleman's description of the Brady plan, to which I look forward to returning. I am not convinced that the hon. Gentleman is right in what he says about our exports to Brazil. I think he will find that there has been hardly any change in the last few years.

Photo of Mr Stuart Holland Mr Stuart Holland , Vauxhall

What about Latin America?

Photo of Mr Chris Patten Mr Chris Patten , Bath

The hon. Gentleman referred specifically to Brazil. With me on the Government Front Bench is the Minister for Trade, who knows much more about these matters than I do, but I do not think the position is precisely as described by the hon. Gentleman.

Just as in Africa, debtors in Latin America require external finance to support their economic reforms. That is why we have supported the recent decisions of the IMF interim committee to encourage further voluntary debt reduction by the commercial banks. But that raises questions about the respective responsibilities of the public and private sectors. I do believe that the right sort of debt reduction can have an increasing role to play in meeting those financing needs.

Many have called for what I consider the wrong sort of debt reduction—debt reduction brought about by taxpayers bailing out the banks. All along we have taken the view that management of their existing debts is a problem that banks must sort out with debtors. If the banks have lent unwisely, they must face the consequences.

In their negotiations with debtors, banks have developed a range of innovative financing arrangements. Some of those involve an element of debt reduction. Chile, for example, has reduced its debt by about a quarter, largely by means of a vigorous debt-equity programme. But overall, the impact of debt reduction has so far been small in comparison with the total stock of debt.

In the years since 1982, Governments have done a great deal to help middle income debtors. We have provided financial assistance through rescheduling Paris Club debts and providing new lending through the IMF and the World Bank. We have also maintained a strong commitment to an open multilateral trading system and general stability and growth in the world economy.

The consequence so far has been that Governments have done more than their share. Commercial banks have rescheduled principal payments. The Paris Club has been prepared to reschedule interest, too. Together with substantial new lending by the IMF and World Bank, this contribution from the official sector has provided far mote resources for debtor countries than the new money and debt reduction provided by the banks. Overall, while exposure of commercial banks to the 15 most heavily indebted countries has risen by 17 per cent., that of the public sector has risen by 107 per cent.—over six times as fast.

That injection of funds by Governments and the international institutions has given the banks some breathing space to restore their balance sheets. The danger of systemic collapse of the banking system has been averted. Banks are now in a position to increase the rate of debt reduction. But we believe that this remains a matter for commercial banks to negotiate with the countries concerned. To abandon now our policy that Governments should not finance reductions in bank debt will only increase the already disproportionate burden being borne by taxpayers.

The agreements reached at the IMF and World Bank spring meetings in discussion of Secretary Brady's proposals to which the hon. Member for Monklands, West referred in interesting terms, are designed to support this sort of voluntary negotiated debt reduction—what I referred to earlier as the right sort of debt reduction. Secretary Brady's initiative consisted of ideas for further work. It was not a blue print. The interim committee agreed, with United Kingdom support, that those ideas should be pursued further. It also reiterated the cardinal principals of the existing strategy—the need for fundamental and convincing economic reforms in debtor countries, the need for a case-by-case approach, and the principle that official creditors should not subsidise private lenders. It was agreed that the IMF and World Bank should set aside a part of their policy-based lending to facilitate debt reduction operations for countries undertaking sound economic reforms.

It was agreed that the two institutions should work out specific proposals to put to their respective boards, and we are now playing a full part in the further detailed work that is going on. No details have yet been decided. We are also participating fully in the international review of tax regulatory and accounting obstacles to debt reduction which Secretary Brady has proposed. In those further discussions, Britain will seek to ensure that, as agreed, official lending supported by the taxpayer will not substitute for private lending. We shall, therefore, be looking particularly carefully at proposals for additional interest support mechanisms. We want support for debt reduction to go where it can be effective—to countries undertaking strong economic reform programmes. We shall want to see——

It being half-past Two o'clock, the debate stood adjourned.