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close this bookEliminating World Poverty: A Challenge for the 21st Century - White Paper on International Development (DFID - The Stationery Office, 1997, 86 p.)
close this folderSECTION 3 - Consistency of Policies
View the document(introduction...)
View the documentThe Importance of Consistency
View the documentThe Environment
View the documentTrade, Agriculture and Investment
View the documentPromoting Political Stability, Social Cohesion and Responding Effectively to Conflict
View the documentPromoting Economic and Financial Stability

Promoting Economic and Financial Stability

3.56 Economic and financial stability depends crucially on political stability; but the same is true in reverse, and badly regulated financial systems, volatile capital flows, upheavals created by money -laundering or drugs trafficking and corruption can lead in their turn to political instability. Developing countries are particularly vulnerable to such instability, and it is important that there should be a well-managed and regulated set of international mechanisms to support beneficial regulation and stability and bear down on corruption. The international community has an important role in contributing to financial stability, for example, through surveillance by the IMF and work on banking supervision.

Debt Sustainability

3.57 While developing countries finance much of their investments from their own savings, nearly all need to import some of the necessary capital from abroad. While some of this may be in grant form or private investment, loans are also important. But money these countries borrow accumulates as debts and needs to be repaid.

3.58 Often this goes well. The capital is invested wisely, and the country follows beneficial and transparent economic policies. But sometimes a country over -borrows - a problem often made worse by lenders who do not make responsible creditworthiness assessments. Money may be wasted or spent unproductively, for example on excessive military spending. Or sometimes countries may, through no fault of their own, suffer a severe external shock such as a collapse in the price of its exports.

3.59 Countries may then have an unsustainable debt burden (see Figure 15). They may not be able to export and earn enough foreign currency to pay the debt service due each year. Some of the poorest countries now have to pay out over half their export earnings in external debt service, and may have to allocate far more to paying old foreign debts than to health and education (see Figure 16). And the overhang of unpayable foreign debts may discourage new investment and therefore growth, thus creating a long-term barrier to development.

3.60 Britain has long recognised the burden of excessive debts carried by some developing countries. In 1978, the UK started a policy of converting aid loans into grants to the poorest countries, benefiting over 30 countries so far and providing relief of some £1.2 billion. As part of the Mauritius Mandate (Panel 24) we announced that the UK was willing in principle to cancel the remaining aid debt due to the UK from lower income Commonwealth countries at a cost of up to £132 million. Relief will be provided to those countries which are committed to the international development targets and are following sound economic policies which benefit the poor, and which promote responsive and accountable government, encourage transparency and bear down on corruption. We will encourage other donors to follow our lead, and are prepared to extend the initiative to non-Commonwealth countries, in concert with other donors.

3.61 Of course the UK alone cannot deal with the problem. We must work with our partners and fellow creditors. The international community provides debt relief, linked to IMF programmes designed with the debtor country to support approved economic policies. Relief provides balance of payments support during an adjustment programme. Over the last decade the Paris Club of creditors has written off a substantial part of the debts of some poor countries. As part of this process the UK, like others, provides relief on export credit-related debts. Money owed to commercial banks is discussed in the London Club, which generally follows similar principles.


FIGURE 15 - External Debt as % of GNP, 1994

Source: Human Development Report 1997.


FIGURE 16 - Total Debt Service as Percentage of GNP

Source: World Development Indicators 1997.


FIGURE 16 - Total Debt Service as Percentage of Exports of Goods and Services

Source: World Development Indicators 1997.

3.62 Following a British initiative, a new programme of relief for Heavily Indebted Poor Countries (HIPCs) was agreed at the annual meeting of the IMF and the World Bank in September 1996. For the first time, these and other multilateral institutions will provide relief on debt owed to them. In parallel, the Paris Club will increase its maximum rate of debt reduction by up to 80 per cent. The key objective is that any poor country which follows sensible economic policies should be able to achieve debt sustainability, which means that their levels of debt must be affordable without the need for further rescheduling.

3.63 It has already been agreed that the first country to benefit under the HIPC Initiative will be Uganda, which is expected to receive debt relief from multilateral creditors as well as further relief from bilateral creditors in April 1998. A number of other countries will be considered before the end of 1997. As part of the Initiative, the UK will contribute to financing relief on Uganda’s debts to the African Development Bank, which is the only one of the regional development banks unable to support all its own contributions.

3.64 At the Denver summit of eight leading industrialised democracies (the G8) in June 1997, the Government supported further implementation of the HIPC Initiative and the expectation that additional countries would qualify in the months ahead. We also welcomed the news of a preliminary agreement between Russia and the Paris Club. It has since been confirmed that, prior to it joining the Paris Club as a creditor, Russia will write off a large proportion of its nominal claims on poor countries, greatly reducing the unsustainable debt overhang of some of them.

3.65 At the Commonwealth Finance Ministers’ meeting in September 1997, the Government proposed a new Commonwealth debt initiative - the Mauritius Mandate (see Panel 24) - where the UK sought support for an international commitment to deal with the problem of unsustainable debt once and for all.

Money Laundering and Drugs

3.66 Money laundering - the movement of criminally derived funds for the purpose of concealing their true source - is an international problem. It damages and distorts countries’ economies - producing unfair competition for legitimate businesses and handicapping governments’ ability to make proper economic judgements. In extreme cases, money laundering can corrupt the entire political and financial systems of a country. It is the poor that bear the burden of this inefficiency and waste.

3.67 There is a growing consensus about the need for effective anti-money laundering measures as a key element in any strategy to combat international crime. With our partners in the G7 and EU, we have given strong support to the work of the Financial Action Task Force (FATF), whose internationally accepted recommendations set out the legal and regulatory measures that countries should take to combat money laundering. We have also played a leading role in encouraging the establishment of regional task forces, modelled on the FATF itself, which should help all countries round the globe to design and implement comprehensive anti-money laundering strategies. In addition we are pressing the International Financial Institutions (IFIs) - the International Monetary Fund, the World Bank and regional development banks - to take account more explicitly of the need for all countries to have effective and efficient anti-money laundering controls in place. The IFIs also have a role in the provision of policy advice and technical assistance.

PANEL 24

A NEW APPROACH TO DEBT RELIEF

At the Commonwealth Finance Ministers’ annual meeting in September 1997, the UK Government launched its Mauritius Mandate. This aims to ensure that, by the year 2000, all eligible poor countries have at least made a start on having their debts reduced to affordable levels. It also calls for faster implementation of the Heavily Indebted Poor Countries (HIPC) Debt Initiative. Specifically, the Government is seeking firm decisions by the Millenium on the amount and terms of relief for at least three quarters of the countries eligible under the Initiative. And those countries that have already established strong track records of economic reform should receive the maximum possible relief in a shorter time frame than the six years envisaged under the current rules of the Initiative.

The Mandate also emphasises the need to persuade other government creditors to be prepared to write off, where necessary, all categories of bilateral debt (including that most recently incurred), for the international community to analyse whether any gaps exist in current mechanisms and for debtors to have a strong voice in debt negotiations. The UK will provide a lead by:

· contributing around £6.5 million towards reducing Uganda’s debts to the African Development Bank

· cancelling - at a cost of up to £132 million - aid debts still owed to the UK by those lower income Commonwealth countries which are committed to pro-poor and transparent policies

· offering technical assistance in debt management to poor countries, particularly those in the Commonwealth

· pledging, without condition, around £20 million to the IMF, to help it meet its share of the costs of implementing the HIPC Initiative

· confining official credits for heavily indebted, poor countries to productive expenditure, for a two-year period, whilst we seek to negotiate an international agreement covering all poor countries

In launching the Mandate, the Government called on creditors (ie other governments and international financial institutions) to follow the UK’s lead, and urged debtor countries to adopt and keep to the sound policies needed to achieve sustainable development

3.68 Measures to combat money laundering are an essential part of any global anti-drugs strategy. Coordinated action on drugs is a high priority for the Government nationally and internationally. The international illicit drugs trade - cultivation, trafficking and use - is detrimental to the sustainable economic and social development of many countries; and it is a threat to the social fabric of our own society, especially poor neighbourhoods.

3.69 The drugs problem and its contribution to poverty will only be successfully tackled through a wide-ranging strategy covering demand reduction, law enforcement, alternative development and crop eradication. The UK is one of the major donors to the United Nations Drug Control Programme through which we are able, with other donors, to fund a wide range of individual projects. The EU is also a major source of funds for drug-related assistance. We have used this to advantage in the Caribbean, where narco-corruption poses a particular threat to the stability and development of the smaller democracies.

3.70 Other sources of international cooperation and influence are the IFIs. In association with like-minded countries, and to the extent that their statutes permit, we are pressing these institutions to take into account borrowers’ money laundering policies and legislation when considering country programmes, and to seek opportunities to support drugs-related projects in priority countries.

3.71 The Government’s policy will be to focus more drugs assistance on key drug exporting countries or regions, taking account of the gravity of the situation, the extent of recipient country commitment to tackling the problems and the UK’s capacity to help. This can include law enforcement training, equipment, support for alternative development and demand reduction. The UK’s resources are limited and so must be tightly targeted and conditional on effective supporting policies on the part of recipient governments. In geographical terms, the bulk of UK drugs-related assistance (80 per cent) is directed at South East Asia and the heroin transit routes to Western Europe; and the cocaine route in Latin America and the Caribbean. Poverty is one of the root causes of the drugs problem in many developing countries. By tackling poverty and helping to develop legitimate livelihoods for poor people we can help to stem the international trade in drugs.