§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Lang.]
§ 11.1 am
§ Mr. Geoffrey Rippon (Hexham)We can now have at least a short debate on the important matter raised during questions on the business statement by the hon. Member for Workington (Mr. Campbell-Savours). Although his intervention curtailed this discussion, he has curiously now chosen to leave the Chamber just as he had the chance of a short debate on international monetary reform.
The world depression, which has intensified in the second half of this year and which, according to the OECD report today, is likely to become worse next year, has at last set alarm bells ringing. But even as late as September, at the IMF conference in Toronto, Governments did not seem too deeply disturbed by the situation or aware of the danger ahead. It is true that at the end of the conference, Mr. Sprinkel, representing the United States of America, expressed his Government's desire to put a "burr under the saddle" of other countries to speed up the process of strengthening the monetary system against the danger of collapse. All the member countries of the IMF have now peered over the abyss and they realise that something must be done if we are not all to fall into the pit. However, they must still agree on exactly what is to be done and how soon it is to be done.
I have raised this topic on the Adjournment largely because the Secretary of State for Trade made a statement of frightening complacency in reply to the important debate initiated by Lord Lever in the other place on 15 December. It would appear that the Secretary of State believes that the position should cause concern, but not alarm. He has given the impression—at least to me—that the Government think that everything will be all right, that international institutional reforms are not needed and that, as the institutions have coped before, they will cope in future. I hope that my hon. Friend the Economic Secretary to the Treasury will be more forthcoming today and will convince me—as I would like to be convinced—that I have misinterpreted the Secretary of State.
Mr. Volcker, the United States Federal Reserve chairman, was right to say in Boston on 17 November that the current strains on the financial system were essentially without precedent in the post-war world. We are today reaping the whirlwind created by the folly of equating tight monetary policy with high interest rates and compounding that folly by using unreliable monetary aggregates, such as M3, which we have now happily largely abandoned.
Governments and central bankers are now recanting with all the fervour of heretics about to be burnt at the stake. We are now wisely pursuing more flexible monetary policies. We have seen a change in the attitude of the United States of America in particular. Indeed, I welcome what the chief economic adviser to Mr. Reagan has described as "the eclipse" of the extremists and what the Financial Times described yesterday as "the ascendancy" of the traditional conservative monetarists, such as Mr. George Shultz. His return to the international scene will be a matter for great rejoicing.
About a decade ago, Mr. Shultz was one of the two principal architects of the Committee of Twenty's proposals for a "reformed system" to follow the breakdown of Bretton Woods. Unfortunately, we are still 1079 awaiting that reform. The situation is now so grave that no nation—not even the United States—can ensure a general economic recovery simply by changing its monetary policies. In the immediate future only concerted action to bring about a fundamental restructuring and refinancing of the IMF and the World Bank will suffice.
We have shovelled vast quantities of petro-dollars through commercial banks into Third world projects and have then sat back and watched them being shattered by crippling interest rates, coupled with falling commodity prices. It is estimated that the oil-importing developing countries alone are expected to find about $38,000 million this year to fund foreign debt interest. That is about $21,000 million more than in 1979. Of course, they are going to the wall. Many of them cannot even repay the interest, let alone the principal sum, which now amounts to about $500,000 million of debt in Third world countries.
The Secretary of State for Trade was again rather complacent when he said that in real terms that was only about two and a half times more than the debt a decade ago. It is a formidable problem. If the ultimate objective is to secure an increase in international trade, we cannot just wait for that to happen. The arrangements that the IMF is making with Mexico, Brazil and other debtor countries are holding the position, but only temporarily.
The IMF manifestly has insufficient resources to act as a lender of last resort. I was glad that the Chancellor of the Exchequer played a notable part at the Toronto conference, in seeking to buttress the ability of the IMF to contain the crisis. He recommended then, and is still urging, a minimum of a 50 per cent. increase in IMF quotas. He said "minimum". However, 50 per cent. may not be enough. Are the Government also seeking to increase the resources available to the World Bank and to strengthen the Bank of International Settlements? perhaps the Economic Secretary can tell us how much the United Kingdom may provide.
I should like to express what I am sure is the general satisfaction of the House on the appointment of my right hon. and learned Friend the Chancellor of the Exchequer as chairman of the IMF's policy-making interim committee. He has announced that he is committed to campaigning to obtain an agreed package on IMF quotas by mid-1984, instead of the target date of January 1986. That is good news, but a lot can happen before 1984. It may be many months before there is agreement not only on the quotas, but on the necessary redistribution between the member nations.
Meanwhile, the United States of America has called for an emergency fund to finance large debtors such as Mexico and Brazil. I should be grateful if my hon. Friend will tell us what contribution the United Kingdom will make to that fund, because at present both its size and its working rules are ill defined.
What role do the Government see the commercial banks playing? It has been suggested that they must make more substantial loans to the Third world. How will that be done? The commercial banks already have outstanding debts of hundreds of billions of dollars. They are already under attack for lending too much money too readily and carelessly. What security can they have now that it can no longer be assumed that sovereign nations will never default? Many of the world's lending commercial banks, including those in the United Kingdom, have substantial reserves, but I doubt whether those reserves are strong 1080 enough to withstand the shocks that lie ahead. Nothing less than the restructuring and the refinancing of the IMF and the World Bank will suffice. That gives urgency to the actions of my right hon. and learned Friend the Chancellor during the next few months.
What is the Government's response to Mr. Reagan's important initiative at Frankfurt in calling for a new Bretton Woods conference to improve the working of the world's financial systems and to ensure greater monetary stability? More than a year has passed since the Governor of the Bank of England—who has consistently given wise advice to successive Governments and who has always been on the side of the good monetarists—called for more stable exchange rates to restore business confidence. What are the Government doing to achieve that?
Pegging the exchange rates within relatively narrow limits may have distorted the position. On the other hand, floating exchange rates that were so much welcomed by academic economists a decade ago have not fulfilled their expectations. The rate movements have been increasingly erratic and frequently irrational. Competitive devaluations are proving as great a threat to industry and to economic recovery as competitive interest rates. It is not an easy problem, but I hope that the Government are thinking about how we can achieve a system of managing floating currencies to ensure some stability.
My hon. Friend will agree that international monetary stability is linked to the provision of international monetary reserves. Since the breakdown of Bretton Woods in 1971, and President Nixon's suspension of dollar convertibility, we have had neither a gold exchange standard nor a dollar standard. Today we have a multiple reserve asset standard, the disadvantages of which are becoming increasingly manifest.
That raises the question of whether we should return to a single reserve asset, either the special drawing right or gold, or a combination of both. My right hon. and learned Friend the Chancellor of the Exchequer told the IMF in September 1981 that the special drawing right cannot be a strong unit unless those responsible for the component currencies ensure that those currencies retain their value. That raises the question not only how we can ensure exchange rate stability, but what role gold can play in achieving more confidence. I wish to know the Government's views on the matter.
Do the Government agree that the issue of monetary reserves that can be used for intervention purposes is a problem that must be solved? In that respect, gold might have a useful and important role to play. One thing is certain. We shall never achieve a secure and stable global monetary system without a great act of imaginative statesmanship. I hope that the Government can provide that.
§ The Economic Secretary to the Treasury (Mr. Jock Bruce-Gardyne)I congratulate my right hon. and learned Friend the Member for Hexham (Mr. Rippon) on raising a matter that is of considerable importance to the House and to the country. He did so in a way that gives me time to respond to the points that he made and to try to answer some of his questions.
Before I try to answer some questions, which I accept are significant, I shall say something about the general background to this problem. As I see it, the world is undergoing a transition from a period of high and 1081 accelerating inflation into a period of much more stable prices. That is a profoundly healthy and desirable transformation, because I have always regarded inflation as remarkably similar to a hard drug. Its first applications are enjoyable, but repetition reduces its effectiveness and increases dependence until it is essential for the addict to break the habit.
The gravest danger of the inflation drug is the threat that it poses to the coherence of democracy. In Latin America, where inflation has been endemic, it has tended to lead to military dictatorship. We may console ourselves with the thought that we are light years removed from such dangers in Western Europe, but we must take note of the tendency, even in Britain, in the mid-1970s to seek refuge in corporatist rather than parliamentary alleviations of the symptoms—alleviations which, when they predictably failed, led to the cry that the nation was ungovernable. I am relieved that we have not heard much of that during the past two or three years.
I concede that the transition to more stable prices—what one might call the drying out process, if that is not a dangerously double-edged simile—is delicate and risky. There are dangers of a relapse into protectionism and of cumulative default in the banking system, to which my right hon. and learned Friend referred, leading to a secondary collapse of the international trading system. But, equally, there is the danger that techniques invoked to avoid those hazards may simply lead to a recrudescence of the inflationary scourge from which we are trying to escape. We must try to manage the transition, which is essential to the process of management to which my right hon. and learned Friend addressed his remarks.
There is no division between my right hon. and learned Friend the Member for Hexham and my right hon. and learned Friend the Chancellor of the Exchequer and the Government in his chosen objective. We share his rejection of the follies of protectionism, most of all for a country that depends as heavily as we do on international policies. I was delighted that my right hon. and learned Friend welcomed the appointment of my right hon. and learned Friend the Chancellor as chairman of the interim committee last weekend. As my right hon. and learned Friend said, the Chancellor has made it clear that he attaches great importance to this new role and responsibilities and he is approaching them with considerable urgency.
However, my right hon. and learned Friend the Member for Hexham complained that my right hon. and noble Friend the Secretary of State for Trade, in answering a recent debate in another place, showed what he described as "frightening complacency". He took exception to my right hon. and noble Friend's expression of concern, but not alarm, about the international banking environment. It is a fine judgment as to how far concern goes and when alarm begins. There are anxieties in all our minds and it would be ludicrous to deny that. However, since last summer the international institutions have made significant progress in dealing with the problems of sovereign borrowing.
How do we envisage the role of the International Monetary Fund evolving? My right hon. and learned Friend the Chancellor of the Exchequer advocated an increase in IMF quotas of at least 50 per cent. at the Toronto meeting. Events since then have suggested a need 1082 to put an increase in quotas in place as quickly as possible. My right hon. and learned Friend is much engaged at the moment in trying to accelerate the negotiation and ratification of the review. We shall have to see how the negotiations proceed and the allocations turn out before arriving at the precise contribution that Her Majesty's Government will be called upon to make to the increased quotas. I cannot give my right hon. and learned Friend a specific answer this morning because it would be premature to do so.
My right hon. and learned Friend referred also to the American Government's proposals to build on the general arrangements to borrow with a special and substantial line of credit to be available to the fund in times of major strains upon the financial system. If enhanced borrowing arrangements were to play a role in enlarging the resources of the fund, this might be the quickest and most effective way forward—in other words, using the general arrangements to make resources available to the fund for more general use if the stability of the international financial system appeared to be at immediate risk.
The issues are complex and the interests of many member countries are involved. However, now that my right hon. and learned Friend the Chancellor of the Exchequer has been elected chairman of the interim committee, he intends to play a full part in ensuring that the fund plays its role effectively. He also means to ensure that the fund remains the major international institution that can examine the economies of both industrial and developing countries, and help them formulate adjustment policies and provide the finance while they carry them out. We must ensure that countries are not driven into or encouraged into default. On the other hand, it cannot make sense to provide unlimited additional credit in circumstances where there is every reason to suspect that it will not be used to underpin the necessary adjustment in the financial performance of the borrowing countries. There is a need for additionality and we cannot leave that entirely out of account.
§ Mr. Robert Sheldon (Ashton-under-Lyne)That is just what the hon. Gentleman is doing. By increasing the debt of borrowing countries by whatever means, we are making it harder and harder for them to repay the interest let alone the capital. Unless increased lending is tied up with an arrangement that gives borrowing countries greater opportunities to export their own goods or raw materials, they will never be able to repay the increasing debt that it seems the hon. Gentleman is prepared to give them.
§ Mr. Bruce-GardyneI agree with the right hon. Gentleman to the extent that it must be illogical at one and the same time for advanced industrial countries to participate in schemes for the provision of additional credit for the developing countries and to think in terms of erecting protectionist barriers for their trade and exports. I hope that that is a point that he will drive into the minds of some of his right hon. Friends who occupy places on the Opposition Front Bench. There is a dangerous tendency for them to believe that the provison of additional credit to assist developing countries is compatible with the erection of barriers to their trade. That must be wrong and I agree with the right hon. Gentleman to that extent.
My right hon. and learned Friend asked also about the commercial banking scene. He suggested that perhaps the international institutions and Governments had been 1083 somewhat dilatory about erecting proper supervisory and underpinning arrangements for the commercial banking system. I remind him that in 1974 the central bank governors from the major industrialised countries made it clear that means must be available and would be available to provide temporary liquidity to the Euromarkets and that they would be used if and when necessary. In 1975 the banking supervisors of the major countries agreed to a set of guidelines on prudential supervision which have become known as the Basle concordat. Regulation of the international banking market, like the regulation by individual countries of their domestic banking markets, is not perfect, and I do not pretend that it is. However, a framework of regulation is well-established and it is both wrong and unhelpful to suggest that it does not exist.
In today's markets there are strong reasons for both lenders and borrowers to avoid outright default. In recent years all major problem countries have made considerable efforts, usually successful, to keep paying interest on outstanding loans. Rescheduling is something that we all try hard to avoid, but if it does happen it is not a complete disaster. The effect on the lending banks is not to make them insolvent but to reduce their liquidity and, to some extent, the quality of their assets. Banks are right to worry about their exposure in some cases and to be reluctant to increase it. Nevertheless, there is both justification and need for lending to continue in cases where countries have adopted appropriate adjustment policies but may still require time and accommodation to carry them out. It is there that the need for co-operation between the international institutions and the commercial banks is perhaps most crucial.
My right hon. and learned Friend also talked about the stability of exchange rates. I rather share his scepticism. At the beginning of the 1970s there was the notion that floating exchange rates would provide a panacea. I did not believe that at the time. I thought that they could have dangerous consequences, many of which I believe have materialised. Once this genie has been let out of the bottle it is very difficult to put it back in again. The Bretton Woods system of fixed but adjustable rates was based, in a sense, on what Ibsen called a lifeline. It was based on 1084 the willingness to pretend that rates were fixed although, in fact, they were not. As I have said, once that pretence is abandoned it is difficult to re-establish it.
My right hon. and learned Friend has asked what the Government are doing to achieve greater stability in exchange rates. The most important contribution that we can make in current circumstances to the achievement of this objective is the pursuit and fulfilment of coherent monetary and fiscal policies that are designed to lower the pressure that is created by inflation. The enormous fluctuations that we have seen in exchange rates over the past 10 years are an inescapable reflection of a period of high and accelerating inflation. I doubt whether we can at this stage look to the restoration of a single reserve asset such as SDRs or gold as being the bedrock of a new international system.
As my right hon. and learned Friend recalled my right hon. and learned Friend the Chancellor of the Exchequer saying, the most significant contribution that the currencies participating in the SDR system can make is to restore the responsibility of their domestic, fiscal, monetary and budgetary policies. Crucial in that area is that we continue the progress towards a more modest level of domestic borrowing by Governments in the advanced industrial countries. There is no doubt that the sheer size and prospect of the budgetary deficit in the United States, for example, has played a part in lifting interest rates not only there but in other countries, thereby prolonging and deepening the extent of the recession. Therefore, we believe that progress towards a more modest level of budget deficits is part of the role that Governments must play in resolving the pressures on the international monetary system and preparing the road for a move to recovery in international trade and activity.
I see that my time is up. The Government are grateful to my right hon. and learned Friend for raising this subject. We shall take careful note of what he has said. I have no doubt that he will accuse me of complacency, but I assure him that we take these problems seriously and have every intention of collaborating with our partners in moving towards solutions to them.