§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Garel-Jones.]
11.28 pm§ Mr. Colin Moynihan (Lewisham, East)It is fitting that one of the last debates in this House this year provides us with an opportunity to be forward looking—a chance to draw together opportunities which present themselves for a rare synthesis of altruism and self-interest in the exercise of the power of Government.
To responsible Third World Governments their new task in the coming year must appear daunting indeed. There is an overhang of debt initially increased by overenthusiastic lenders who too frequently over-extended their lending programmes without adequate project preparation and evaluation. Additionally, many developing countries, particularly in sub-Saharan Africa, have severely limited manpower resources on which the donor community places an enormous burden on a relentless roller coaster moving from donor meeting to donor meeting while political pressures at home continue to build up in their absence.
Nor can Third World Governments find much solace in the patchwork quilt of rescheduling measures they are forced to adopt, including conditionality which too frequently appears to sacrifice the painful social policy implications at the altar of severe austerity programmes. Such programmes do little more than buy time—time during which agricultural prices are often forced down by excessive subsidisation and protection from the very Governments whose representatives in long and hard negotiations with developing countries pontificate over the evils of protectionism.
Compound the constraints to development by adding high real interest rates, the prospect of increasing protectionist pressures and the lack of implemented new initiatives to resolve the debt crisis and the prospects of a serious collapse in the international banking community remains a reality. However, there are opportunities to tackle these challenges, but they will require far more political will by donor Governments and the banking sector than has been revealed to date. Among initiatives I hope to see are more debt-equity swaps and interest capping and, where appropriate, the subsidisation of spreads. However, to achieve growth and particularly private sector-led growth, not only will the appropriate macroeconomic framework be required, but new initiatives to permit dramatic reductions in debt will be essential.
I shall outline to the House tonight the predicament of a model Third World Government—one that has followed every international policy prescription issued to it, that is democratic, steadfast of purpose and dramatically successful in the achievement of its principal objectives, yet is still unable to lift its people from the doldrums of poverty and deprivation in which they have languished for several decades because of the overhang of international debt incurred by earlier less democratic and less sanguine regimes. I shall ask Members to stifle the yawn which precedes the anticipated profferment of the Third World begging bowl while I update them on another crisis, related, but this time closer to home, and perhaps closer to their hearts.
1477 A few years ago, cocaine was an obscure drug, used by the rich and the exotic. It is no longer. Cocaine abuse is now the fastest-growing narcotic problem in Britain and other Western countries. Use of the drug has spread from the penthouse to the street. The explosion of cocaine use in Europe and north America has been mirrored by the growth in illict coca cultivation in Bolivia—from a few hundred million dollars worth in 1980 to $2,500 million worth in 1986, with Bolivia currently providing 30 per cent. of the cocaine entering Western Europe. The combination of a strong Government in Bolivia, the vulnerability of that Government to the debt crisis and Bolivia's key role as a supplier of cocaine paste to the international narcotics industry provides a unique window of opportunity for action by the Western powers, hopefully, under the leadership of Great Britain.
I am personally convinced that the opportunity now presented allows a bold new initiative which will tackle a pressing social problem in Britain and other Western European countries, while producing entirely desirable development effects in a deserving Third world country.
Allow me, Mr. Deputy Speaker, to set the scene for the benefit of those hon. Members who are unfamiliar with the details of the Bolivian situation. As recently as July 1985, inflation in Bolivia was running at the almost unprecedented level of 23,000 per cent. per annum. Remember the chaos caused here not long ago by just 23 per cent. inflation and begin to imagine the paralysis induced by 23,000 per cent. Think for a moment of the totalitarian solutions that historically have been imposed as a result of far less severe inflations and marvel then at the achievement of a democratically elected Government in Bolivia in reducing this inflation in six months to a manageable 39 per cent. per annum. The Paz Estennsoro Government have had a remarkable term of office to date, with an economic programme brilliantly conceived by Ministers Juan Carriaga and Gonzales Sanchez de Lozada.
Of course, this stupendous achievement has not been without cost in terms of domestic hardship, and the Bolivian Government must be acutely aware of the need to deliver on their promise to reactivate the economy, and to alleviate the deprivation caused by the economic adjustment programme which has led to thousands being made redundant, while reducing the real income of tens of thousands more whose jobs have survived.
Bolivia is a country blessed with an abundance of natural resources, but the debt-service burden, and the country's pariah status in international financial markets as a result of repayment arrears, have prevented it from raising the capital to exploit its natural wealth. Bolivia's international debt is minuscule by comparison with Latin America's over-borrowed giants. Its $2.5 billion debt, of which $800 million is commercial, pales into insignificance alongside the $300 billion combined total of Brazil, Mexico and Argentina. Yet Bolivia's prospects of being able to redeem its debt are non-existent by comparison with its more indebted but much richer and bigger neighbours. The international financial community has long since discounted its Bolivian debt, which currently trades in the London secondary market at 8 to 10 cents to the dollar, yet has lacked the initiative to find a way out of the impasse without creating the banker's nightmare—a precedent. International bankers frown upon the 1478 repurchase of debt at a discount by the debtor, but are benevolent towards the same exercise by third parties, such as the Governments of Western countries.
The Government of Bolivia have prepared a bold programme for the elimination of the non-traditional, or cocaine-oriented, coca crop, and are determined to push this through despite the economic impact of the eradication of by far the most important industry in a country which is, Haiti aside, the poorest in the western hemisphere.
The Government's programme, recently presented to special meetings of the United Nations and the World Bank, calls for about $200 million over three years in international aid to finance an imaginative and soundly based programme of drug traffic interdiction, crop eradication and alternative development. The Governments of Western countries, if their anti-narcotics policies are to mean anything, will have to participate in, and largely finance, this progamme. There thus arises an opportunity to link debt to drug eradication and to solve two problems at once.
My proposal is essentially this. Rather than donate the money needed to finance the Government of Bolivia's drug eradication and alternative development programme outright, let the Western Governments most affected by the cocaine problem buy Bolivia's commercial debt at a deep discount from the commercial banks which now hold it. Let the Bolivian Government buy back their debt from the Western Governments in Bolivian pesos, which the recipients would agree immediately to re-deposit in the narcotics action fund to underwrite the Bolivian Government's three-year action programme. Relieved of the burden of debt service and amortisation, the Bolivian Government could find the funds to finance the drug eradication programme in this way.
The programme can be non-inflationary if, relieved of the need to service debt, or buy in paper from the secondary market, which the Bolivian Government are preparing to do anyway, the Government of Bolivia can find the peso funds over a three-year period for the drug eradication programme. In this case, they hand over the cash for the outstanding debt, knowing that they will get pesos straight back for the narcotics programme. Moreover, and possibly more important in this case, with capital flight from the cocaine trade estimated at 85 per cent. of the street value of cocaine, approximately $300 million per annum is currently being illegally reinvested into the economy, the larger proportion of which generates domestic demand in essential purchases for the campesino farmers. During the three-year period of an eradication campaign, this income will more than offset the cost of the programme and arguably have a deflationary impact on the economy in the medium term if the programme succeeds.
I have discussed this programme at length with senior economists at the World Bank, where, during part of the summer recess, I worked as a consultant on the Bolivian medium-term economic strategy, and with leading figures in the Bolivian Government. Furthermore, I have acted as an adviser to the private sector in the preparation of a reactivation programme, a Confederation de Empresarios Privadeos, energetically and inspiringly led by Carlos Itturalde. However, most important, I have had the pleasure and privilege of discussing this proposal with five Treasury officials, and as yet have heard no substantial argument against it. It offers a solution to the impasse of 1479 the Bolivian debt—a way out of the precedent trap which the bankers so fear, for the conditionality which Western Governments would attach to their purchase and resale of the Bolivian debt would be unacceptable to any other Latin American Government except Bolivia's political gravity-defying regime. It offers at the same time a way of funding a relatively cheap and critically important Third world development programme with profound implications for the social cohesion of the developed Western economies.
The resolution of the commercial debt crisis will give Bolivia renewed access to international capital markets and the ability to fund the development of its huge natural reserves. The elimination of its narcotics industry will reestablish its sense of national morality and purpose, and will make a major contribution to the elimination of the cocaine menace in the developed western economies. Alternative and comparable schemes can be developed using export credits or swapping debt for private sector participateion in deregulated and overvalued loss-making parastatals which could benefit from short-term international management contracts.
As recognised at the Williamsburg, summit, new and workable arrangements for servicing and tackling debt are required. Constant piecemeal rescheduling will severely restrict the capacity of recipient Governments to invest for development and growth and the corresponding lack of political stability will reduce confidence for the much needed private sector reactivation. There can be no doubt in this Chamber that there is little chance of bridging the north-south divide, or of avoiding a repetition of the appaling famine and poverty in sub-Saharan Africa unless we are prepared to act and substantially reduce the transfer of the meagre financial resources of the developing countries to the West.
My main thrust has been on debt development swaps, perhaps better understood as a debt-drug initiative or as a mechanism for financing development programmes.
In this respect, the current political and economic climate in Bolivia offers us a window of opportunity. This happy coincidence of interest between one of the poorest and most deserving of Third World countries and the developed economies must not be allowed to pass.
I seek an assurance from my hon. Friend the Economic Secretary that the Government will investigate with all speed this proposal for debt-development swaps for Bolivia, and will ensure that our Government will play a leading role in seizing imaginative, original and mutually beneficial solutions to the twin problems of debt and drugs.
§ The Economic Secretary to the Treasury (Mr. Ian Stewart)I begin by congratulating my hon. Friend the Member for Lewisham, East (Mr. Moynihan) on obtaining this debate and on his speech. Before I respond to his interesting proposal, I shall say something more generally about the crucial problem of world debt, the subject with which he opened his remarks.
There is no doubt that the debt problem remains severe, although developments over the past year have had mixed effects on individual debtor countries. For instance, the fall in the US dollar helped those with a high proportion of debt denominated in dollars. Falls in the oil price have 1480 caused severe problems for some oil exporters including Mexico, Nigeria and Egypt while having a beneficial effect on most countries, but falls in other commodity prices have been a problem for nearly all debtors. The key action that we in developed countries can take in response is to pursue policies which will bring long-term sustainable growth in the world economy. We need to keep inflation down, and we need to take steps to keep markets open in the face of increasingly protectionist pressures, particularly in the United States.
I am glad to say that major countries are increasingly co-ordinating their policies to bring about growth. For instance, at the Tokyo summit the seven leaders of the industrialised nations agreed new arrangements for closer policy co-ordination, while in October the United States and Japan were able to announce agreement on a set of joint actions designed to provide Japanese growth and reduce internal imbalances.
On trade liberalisation, we are also seeing progress. The GATT agreement in Punta del Este represented a real breakthrough. We have placed particular emphasis on the need for a reduction of subsidies and protectionism in agriculture. And I might add that at the Commonwealth Finance Ministers' meeting in September I found a warm welcome for the part Britain had played, through our presidency of the European Community, in bringing this into the GATT agenda. The potential gains to developing countries from liberalisation of agricultural policies are far larger than any possible increase in direct aid.
But within this context we also need specific policies on debt. At the IMF meeting in Seoul last year I strongly welcomed the initiative put forward by Mr. Baker and we have continued to give this our support. The Baker initiative calls for developed and developing countries, international financial institutions and commercial banks to work together. Efforts by the developing countries towards structural adjustment in their economies are matched by appropriate associated financing. Such changes in their economies are essential if these countries are to become creditworthy again and so attract voluntary lending. The policy changes and the financing package are designed on a case by case basis to match the varying debt burdens, economic structures and readiness to implement reform of the debtor countries.
There have been some suggestions that the Baker initiative has "failed" and that an alternative strategy is needed, but this is to misunderstand the nature of the initiative, which provides a framework rather than a specific model. The scheme was never intended to be an instant solution, and the progress so far is encouraging. The IMF and the World Bank have taken on the important role of working with the debtor countries to put together the packages of structural reform and new money. With only a few exceptions, the major debtors are co-operating with this approach. In return the World Bank has negotiated $3.7 billion in new policy based loans with 10 of the 15 major debtors and has discussions under way with other countries for a further $5 billion in lending. The developed countries can therefore also do their part by giving wholehearted support to these institutions.
I was very pleased to learn of the agreement reached on Monday this week on the eighth replenishment of the International Development Agency of $12.4 billion—a sum in excess of the $12 billion that we had hoped for. This will enable the International Development Agency to contribute further to resolving the problems of the poorest 1481 of the debtor countries, including Bolivia. I am particularly glad that the United Kingdom was able to increase its contribution by $15 million.
The Paris club, where Government creditors meet to reschedule official debts, is making a major contribution in resolving the financing gap problems of debtor countries. The Paris club has shown its willingness to reschedule on generous terms, including up to 100 per cent. of principal and interest over 10 years. Between 1983 and the beginning of this year the Paris club had rescheduled over $32 billion for 32 countries, and in July of this year agreement was reached to reschedule Bolivia's debts.
Commercial banks are also moving in to support comprehensive policy reform programmes in the debtor countries. The essential point about the Baker Initiative is that it brings together all those with a stake in the debt problem and asks them to play a role which reflects their involvement. Therefore, debtor countries are asked to reform their policies rather than continue with those which contributed to their problems. Creditors—official, multilateral and private—are asked to provide financing in order to help the process of recovery in those economies in which they have a share.
We should be wary of new global solutions or solutions for individual countries which allow any of these participants to evade their responsibilities. All too many suggested schemes involve Governments taking on the risks of the commercial banks, or allow debtor countries to take financial help without the essential associated adjustment. Our ultimate aim must be to see international financial markets move towards operating, without Governmental or institutional intervention. Schemes for alleviating the debt problem must not lose sight of this.
What does all this mean for my hon. Friend's scheme for Bolivia'? First, we do not underestimate the challenge presented by the Bolivian economy. As my hon. Friend has said, since August 1985, President Paz Estenssoro has initiated wide-ranging and courageous economic reforms to tackle the formidable problems that he inherited when he came to power. In particular, the fall in tin and hydrocarbon prices has exacerbated the long-standing balance of payments problem. In the face of these reversals the Government have demonstrated a firm and admirable commitment to adjustment. They have collaborated closely with the International Monetary Fund and the World Bank which have assisted in the formulation of an economic recovery programme which the United Kingdom Government have supported.
Bolivia is one of the poorest countries in Latin America and is the largest recipient of United Kingdom technical co-operation in the region. An official mission from the United Kingdom visited Bolivia in October to identify with the Bolivian authorities key areas of the economy where we could assist Bolivia. We are considering proposals to make available a grant of up to £5 million in balance of payments support in the form of British goods and equipment. The primary requirement for the success of the economic recovery programme is the continued determination of the Bolivian Government to apply sensible and consistent economic policies.
There can no doubt that the present drugs problem in Bolivia is a threat to its viability as a nation. Bolivia is now the world's leading exporter of illicit cocaine and its Government's pledge to take the country out of the drug export business shows great courage. We applaud this step and we are contributing £600,000 to the United Nations 1482 fund for drug abuse control in support of law enforcement programmes there, but the scale of the problem should not be underestimated.
The proposal put forward by my hon. Friend for dealing with the present burden of Bolivia's debt servicing difficulties is an interesting idea. As I understand it, the proposal envisages commercial banks selling to Governments at a very deep discount external loans which they extended to Bolivia in the past and which are now not being fully serviced. To this end discussions are taking place, I understand from what my hon. Friend has said, between the commercial banks and the Bolivian Government.
My hon. Friend's proposal goes on to assume that developed country Governments will somehow be persuaded to provide the necessary finance with which to pay off the commercial banks, and that the commercial banks will be prepared to take the balance sheet losses involved. It would replace substantial debts previously owed to commercial banks with an investment or loan—however one wishes to describe it—for a considerably smaller amount owed to these Governments. The Bolivian Government would then repay developed country Governments this smaller amount in pesos. The pesos would then be used as part of developed countries' help with the Bolivian drug eradication programme.
My hon. Friend is putting this proposal to me rather than to any of my colleagues at the Home Office or the Foreign and Commonwealth Office because of my responsibility for policy on debt. Therefore, it is as a solution to the debt problem that I must assess it, and not in terms of development aid or as a solution to the drugs problem. We therefore need to decide whether it provides a better use of developed countries' funds than our current approach to debt, both generally and in Bolivia.
First, as I have said, the Bolivian Government have made good progress so far in making key structural changes in their economy. We should encourage them further by providing finance in support of further such reforms. Secondly, to the extent that the commercial banks are unwilling to sell the debt back to Bolivia but are prepared to sell it to other Governments, it must be the case that they perceive a risk and a cost in selling to Bolivia which they do not want to bear.
If developed country Governments buy the debt, the banks would be passing that cost and risk on. That would go against the principle that all those with a stake in a particular debtor country should share proportionately in helping alleviate the debt. To go against that principle would be to set a dangerous precedent. The commercial banks would be even less likely to carry their share of the risk in future debt packages in other countries, and we would disrupt the process of returning international financial markets to working without Government intervention.
Therefore, if we are talking solely about a solution to Bolivia's debt problem, I am not convinced that my hon. Friend's scheme is a better use of developed country resources than the provision of new money within the policy framework that I have described earlier. I am not in a position to say whether my Home Office or Foreign Office colleagues would view this as a more effective use of their funds for drugs eradication or aid than the direct funding that they already provide. I also suspect that the 1483 United Kingdom will not be alone among the developed country Governments in having some difficulty with the scheme.
Nevertheless, we shall be looking further at the proposal that my hon. Friend has put forward tonight and we shall consider it carefully. I would not want to rule it out completely at this stage. Certainly we would not want to stand in the way of such a scheme if the commercial banks were prepared to come to an arrangement directly with the Bolivian Government. We should not forget that the exposure of the United Kingdom banks to Bolivia commercial debt is only a small proportion of the whole. 1484 We would have to work in very close co-operation with developed countries if any proposal along those lines were to be taken forward.
I would not want to leave the House tonight in any doubt about our commitment to helping eradicate drugs or to alleviating the debt problem. My hon. Friend's proposal shows great ingenuity in trying to bring those two areas together. I congratulate him on putting it forward for consideration both here and internationally, and I shall reflect upon what he has said.
§ Question put and agreed to.
§ Adjourned accordingly at three minutes to Twelve o'clock.