Tag: Speeches

  • Oliver Dowden – 2022 Statement on the Publication of Resilience Framework

    Oliver Dowden – 2022 Statement on the Publication of Resilience Framework

    The statement made by Oliver Dowden, the Chancellor of the Duchy of Lancaster, in the House of Commons on 19 December 2022.

    I wish to inform the House that I am publishing the UK Government resilience framework further to the commitment made in the integrated review for greater strategic planning in this vital area. With the increasing volatility and inter-connectedness of risks and hazards, a strong resilience system is more important than ever. In March 2021, the integrated review committed the Government to developing a new resilience strategy to strengthen our approach to preparedness and civil protection. This new framework delivers on that commitment and takes a systemic approach to all national threats.

    The UK Government’s resilience framework articulates our ongoing plan to strengthen the systems and capabilities that underpin the UK’s resilience to all civil contingencies risks, from extreme weather to supply chain challenges or public health emergencies. It is ensuring that as well as managing immediate crises, we maintain a greater collective focus on preparation and preventing crises from happening in the first place.

    The framework is built around three core principles:

    A shared understanding of the risks we face is essential: it must underpin everything that we do to prepare for and recover from crises;

    Prevention rather than cure wherever possible: resilience-building spans the whole risk cycle so we must focus effort across the cycle, particularly before crises happen; and

    Resilience is a ‘whole of society’ endeavour: so we must be more transparent and empower everyone to make a contribution.

    Work is already underway across Government to deliver on these principles and act on lessons from recent crises, but the framework outlines our further ambition on priorities such as:

    Becoming more transparent on the risks we face so that businesses, charities, individuals and all levels of Government can prepare.

    Protecting the most vulnerable in our communities and helping responders to target support effectively before, during, and after emergencies.

    Strengthening accountability on resilience within Government and externally, including through an annual statement to Parliament on civil contingency risk and resilience.

    Ensuring that local resilience forums have the resources, capacity, information, and capability needed to plan for and respond to the risks that we face.

    Incentivising and supporting businesses, including operators of Critical National Infrastructure, to strengthen their resilience to real world risks.

    Implementation of the proposals in the framework has already started. We have already made changes at the centre of Government to strengthen our approach to long-term resilience and short-term crisis management, and to embed a culture of resilience in all Government Departments. We have refreshed the classified national security risk assessment and will update the public version, the national risk register, in the new year.

    The Prime Minister has approved a new sub-committee of the National Security Council on resilience which I will chair. I look forward to establishing the committee in the new year, when the terms of reference and membership will be published in the usual way.

    I have requested that a copy of the resilience framework be deposited in the Libraries of the Houses of Parliament.

  • Graham Stuart – 2022 Statement on Household Energy Bills Support

    Graham Stuart – 2022 Statement on Household Energy Bills Support

    The statement made by Graham Stuart, the Minister for Energy and Climate, in the House of Commons on 19 December 2022.

    Following is a statement on energy bill support schemes.

    Help with household energy bills—widening the support

    On 29 July, details were announced of the energy bills support scheme, which is now providing a £400 discount on electricity bills to households across Great Britain, delivered over six months. On the same date we announced that energy bill support scheme alternative funding would be developed to deliver the same level of support to households without a domestic electricity account.

    The Government announced further support in September with the energy price guarantee, which is reducing energy bills for households across the United Kingdom. It currently brings a typical household energy bill in Great Britain for dual-fuel gas and electricity down to around £2,500 per year and, at an equivalent level of support, in Northern Ireland to around £1,950 per year.

    Energy policy is devolved in Northern Ireland and it would normally be the responsibility of Northern Ireland Ministers to put in place support for households with energy costs. In the absence of a functioning Executive but in consultation with Northern Ireland Ministers, the UK Government committed in August to develop and deliver a scheme comparable to that being delivered in Great Britain.

    I am now able to update the House on both the energy bill support scheme alternative funding process in Great Britain and a scheme for Northern Ireland to ensure payments reach all eligible households this winter.

    Energy bill support schemealternative funding

    The energy bill support scheme alternative funding is for households in Great Britain who are not eligible for the energy bills support scheme which started delivering in October, as they do not have a direct relationship with a domestic electricity supplier. This includes many of the most vulnerable in our society. Those set to benefit include residents of park homes, some care home residents, tenants in certain types of private and social rented homes, homes supplied by private wires, residents of caravans and houseboats on registered sites, farmers living in domestic farmhouses without a domestic electricity connection, and households off-grid.

    It is important to note that most households who do not have a direct relationship with a domestic energy supplier benefit from a discount on their energy bills through the energy bill relief scheme, which is already providing support to intermediaries such as landlords and park home operators. The Energy Prices Act 2022, passed earlier in the year, ensures those benefits are passed on to consumers who do not pay their energy bills directly to an energy supplier.

    In January we will publish details on eligibility and open a portal on gov.uk offering a short online application process for those eligible households to apply for energy bill support scheme alternative funding. A helpline will be available for those unable to apply online. Applications will be validated, and payments processed by the relevant local authority. The £400 Government credit will be paid this winter to all eligible households who apply.

    Northern Ireland energy bill support scheme

    For Northern Ireland we have developed and will deliver a separate and bespoke energy bills support scheme, working with the separate Northern Ireland electricity suppliers, and respecting the very different nature of the energy market in that part of the United Kingdom. This scheme will also deliver for households this winter, with payments starting in January.

    The payment will be for £600, comprising £400 for the energy bills support scheme and £200 for the alternative fuel payment, which all Northern Ireland households will receive, given the high level of alternative fuel use. The single payment will reach customers through their supplier, either direct to the relevant electricity bill payer’s bank account, or as a voucher which will need to be redeemed into a bank account or as cash.

    We are making funds available to suppliers for this purpose by the end of this year, so suppliers will be able to start paying customers in January.

    A further announcement will be made in respect of alternative funding support for those in Northern Ireland without a domestic electricity supply.

    I have also written to Northern Ireland energy suppliers setting out expectations for them to suspend all debt recovery and enforcement activity until the end of January, as well as to provide payment holidays until the end of January when customers are struggling to pay their bills.

    Alternative fuel payment scheme

    I can also set out today our intended timings for the £200 alternative fuel payment scheme for households in Great Britain who use fuels such as heating oil, LPG or biomass to heat their homes. Payments will commence in February, with most payments being made that month through electricity suppliers. More details about how we will target the scheme will follow soon in the new year. Households that will not receive automatic payments will be able to apply to the same gov.uk portal used for the energy bill support scheme alternative fund from February.

    The Treasury has approved these extensions to the energy bills support scheme.

    I will continue to update Parliament.

  • Geoffrey Robinson – 1998 Speech on Tackling Skills Shortages

    Geoffrey Robinson – 1998 Speech on Tackling Skills Shortages

    The speech made by Geoffrey Robinson, the then Paymaster General, at the Joint Hospitality Industry Congress conference on 1 July 1998.

    Introduction

    Thank you for inviting me to speak at this conference.

    I’m here today to welcome the role this industry can play in the Government’s economic strategy – a strategy to deliver economic and employment opportunities for all.

    Economic growth brings a general increase in personal disposable income.  And, as people earn more, they demand more and better opportunities to spend their leisure well.  So stable economic growth brings particular opportunities to the hospitality industry and those who work in it.

    The hospitality industry has the potential to generate a high proportion of the jobs we need if we are to succeed in our ambitions for Britain.  The wide range of employers represented here today shows the breadth of the opportunities available – in hotels,  restaurants, tourism and leisure – small firms and large employers – in all corners of the UK.

    That means you need a wider range of skills than exists in any other industry –  catering, cleaning, managing, marketing and – customers.  Your industry that thrives – or  fails – through the level of customer service which it offers.  So it needs more people as it grows, not fewer.

    And yet – despite the range of jobs that your industry has to offer – you face skills  shortages on a massive scale.   You employ over 2 million people and need to recruit  around 300,000 people each year.  And yet only 6 per cent of those vacancies can be  filled by suitably qualified college leavers.

    So we see evidence of skill shortages and upward pressure on wages – at a time when youth and long-term unemployment still remains unacceptably high.  That’s a symptom of structural problems in the labour market – a structural problem we need to work together to address.

    A new partnership

    As Chris Smith will outline later this morning, we need a new partnership between  the Government and the hospitality industry.

    Gone are the days when the solution would have involved either exclusively private or public sectors.

    Today, we must work together.  Only by doing so can we really understand the nature of the challenges facing us and put together solutions that tackle them.

    There are already many ways in which we are already working with you.  I have no doubt Chris Smith will say more at lunchtime about the strategy he is developing with the Tourism Forum.  I know he has been very encouraged and impressed by the industry’s  willingness to work with the Government on the strategy, and the time, energy and commitment Forum members are bringing to the work.

    The New Deal is perhaps the best known partnership between public and private  sectors and is a classic example of how the objectives of both Government and industry go hand in hand.  How the industry can solve its recruitment problems while Government can meet its objective of moving people from welfare into work.

    What the Government has done

    Funded by the Windfall Tax, the Government has set up the New Deal programme to help the young and long-term unemployed, lone parents and the disabled.  Almost £4 billion have been put in to this programme, along with firm support from the Chancellor and Prime Minister.

    Earlier this week, the New Deal was extended to the long-term unemployed over 25.   We will provide a new employment subsidy – £75 a week – to support employers who recruit someone who has been out of work for over 2 years.  That’s another element of our strategy in place.

    But whether we’re talking about:

    • the young person who needs work and  training to make a proper start to
      their working life;
    • a new start for an older worker – whose  risks being left on the scrapheap after
      a lifetime of skilled employment;
    • a new employment opportunity for a lone  parent who’s child has started school;
    • or a better deal for disabled people,one thing is clear.  We can only succeed if we work with the grain of business.

    The New Deal needs to be the smart solution for your business.

    What industry can do

    And I firmly believe that the New Deal is a smart solution.  It can provide high  quality, skilled employees.  The resources are in place – and the programme has made an encouraging start.  It is now down to business to fulfill its role in the partnership and make sure it happens.

    Over 15,000 employers that are signed up to the New Deal.   And I’m pleased to say the hospitality industry is leading the way on the New Deal – many leading names in the industry have signed up.  And, round the country, small and medium sized  firms in  this industry are signing up as well.

    New Deal Training Centres

    But New Deal is not just another employment initiative, like the many we have seen in the past.  The difference is that it’s tailored to the needs of the individual, and to the needs of business.

    I welcome the innovative industry-led solutions to the work and training elements  of New Deal.  But this really needs the commitment of industry to make it work. We need your creativity and know-how about the industry to make sure together, we can  deliver.

    And, from my own contacts with industry representatives, I know this industry is working to make the most of the New Deal.  The New Deal training centres – started in Kentish Town – will, I hope, grow into a  network of centres in every region of the country.  40,000 people will pass through the New Deal Training Centres – the biggest  single commitment to the New Deal so far.

    The scale of this ambition is a tribute to a number of key figures in the industry, whose names I won’t mention, and the staff of the Kentish Town Centre.  And I also pay tribute to the constructive role played by the local authorities in Camden and Westminster – who helped make this particular public-private partnership a reality.

    Conclusion

    The framework is now set.  The New Deal is in place.  Now it is up to you to get  involved, and get signed up.  It is in your interests to see this project come to fruition – a highly skilled workforce is vital for your success – as well bringing wider social and economic benefits.

    I welcome the development of the national network of Training Centres and very much urge you to continue to be fully engaged.

    This is a bold commitment.  But one where the rewards are great.  So it is in all our  interests to see it succeed.

  • Gordon Brown – 1998 Speech to the Commonwealth Finance Ministers Meeting

    Gordon Brown – 1998 Speech to the Commonwealth Finance Ministers Meeting

    The speech made by Gordon Brown, the then Chancellor of the Exchequer, in Ottawa on 30 September 1998.

    NEW GLOBAL STRUCTURES FOR THE NEW GLOBAL AGE

    INTRODUCTION

    Our meeting here in Ottawa reaffirms the partnership between our countries that is an indispensable foundation of international stability and prosperity.

    Never in all of economic history have so many depended so much on genuine economic cooperation among all the nations of the world.

    Our shared commitment to open trade and orderly progress has been a driving force for growth in all our countries – even in countries that not so long ago seemed likely to be permanently left behind.

    We must never forget that the path of open trade and open capital markets that we have travelled in the last 30 or 40 years has brought unprecedented growth, greater opportunity and the prospect of better lives for millions across the world. But there is still massive poverty in a world where millions are denied opportunity, and the new economy has brought greater risks of insecurity as well as new opportunities.

    What began last year as a local and regional crises centred in a handful of Asian countries, with its effects most sharply felt in Asia, has spread from Asia to Europe and North and South America becoming what is now a global problem affecting us all.

    No sensible policy-maker wants to turn the clock back to protectionism and insularity. But to move forward, we need vigilant and active governments, acting together through reformed international institutions, to ensure that the prosperity that has been achieved by some can be extended to all.

    Today’s problems are problems of the modern age. They could not have happened in the way they have when finance was confined within sheltered and wholly national financial systems. So these are new global problems which will require new global solutions.

    So it is particularly appropriate for me to set out a new agenda for reform at this meeting of Commonwealth nations, with finance ministers representing all regions of the world from developing,emerging markets and developed nations – and to do so the week before the meetings of the IMF and the World Bank in Washington.

    The key challenge now is to devise procedures and institutions – nothing less than new international rules of the game – that help deliver greater stability, and prosperity for all our citizens in industrialised and industrialising economies alike.

    THE CURRENT SITUATION

    First the current situation.

    With Japan and one quarter of the world in recession, growth in world output and trade will weaken over the next year.

    Asia’s unprecedented slowdown is turning out to be deeper then expected, but in some of the affected countries progress in restoring economic stability is being made.

    With some currency appreciation in both Thailand and Korea,interest rates have been reduced to below pre-crisis levels. And the latest trade data show that export volumes grew rapidly in the first quarter.

    The continued pursuit of transparent and credible policies,through IMF programmes, has brought further signs of recovery.

    But there is a long way to go and macro economics policy should now be focussed, on creating the right conditions to support domestic demand and export-led growth.

    As the recent G7 statement has made clear, the G7 countries-North America, Europe and Japan – as well as the IMF and the World Bank, stand ready to support all emerging market countries which are prepared to embark on strong sound policies which will involve structural reform.

    But when the balance of risks in the world economy has shifted from inflation to slower growth, the G7 countries must now assume greater responsibility.

    The necessary improvement in trade balances in affected countries could either come from domestic stagnation or export-led growth. It is in our shared interests to achieve this export led growth , but this will only be possible if, by sustaining world demand, the industrialised world is the engine for that growth.

    As I said in Japan recently, all industrialised countries must now bear their fair share of the burden of adjustment. No one country can either escape its responsibility or be required to bear the whole burden with all the risks in protectionist sentiment that this would entail.

    I believe that from our respective continents each G7 member should now resolve to play our rightful role and take action to ensure that our economies can both sustain growth and remain open to trade:

    in the UK we have taken the tough action on monetary and fiscal policy which allows us to steer the course of stability in an uncertain and unstable world and will continue to promote domestic demand growth, open trade, investment and employment opportunity for all; in Europe too, as the statement following last weekend’s meeting of Europe’s finance ministers and central bank governors demonstrated, we will be working to ensure that the euro promotes stability and growth. And the European contribution will include a commitment to employment creation within a policy of structural reform;

    and the vigilant action of the US Federal Reserve yesterday is designed to sustain domestic demand growth. I know that the US government believes that maintaining free trade, free from protectionism, is an important element of its response. I know also that the administration is working very hard to ensure ratification of the NAB and the IMF quota increase. We should support and encourage them to step up their efforts in these areas;

    I know too from my recent visit to Japan that my Japanese colleagues are focussed on their efforts to stimulate domestic demand through fiscal and monetary policy. And, to help restore market and consumer confidence, the Japanese government must lay out a clear timetable for action to restore health to the banking and financial sector. But vigilance today must be matched by a willingness to reform the international financial system to secure greater stability tomorrow.

    THE UNDERLYING CAUSES OF THE EMERGING MARKETS CRISIS

    Recent years have witnessed global capital flows on an unprecedented scale. Net private capital flows to emerging markets has risen from $31 billion in 1990 to $241 billion in 1996 (before falling back to $174 billion last year). Yet massive flows one way one year can become massive flows the other way the next. In Asia’s case net inflows of $40 billion in 1996 turning to net outflows of over $30 billion in 1997- a turnaround, which in contrast to the Mexican crisis years, has not been offset by a reallocation of flows to emerging markets elsewhere. Instead a general flight to quality and safe-haven buying has occurred. And as global investors have been radically changing their attitudes towards risk, borrowers in Latin America and the Caribbean have faced a steep rise in bond spreads. In many countries in the region these have now risen to rates not seen since the Mexican crisis in 1995. Stock markets have also fallen sharply, down 30 to 40 per cent in Brazil and Argentina since early August. But the emerging market contagion has been even wider than that – in South Africa the rand has fallen to record lows.

    Better risk management in future will lead to more stable capital flows. But it is a matter of concern that many emerging market economies are now being been caught up in the turmoil, regardless of the strength of their macro-economic fundamentals.

    What we are facing however is a temporary setback, to progress in global trade and investment, not a permanent retreat indeed I believe that the essential answer to the problems of the moment is not less globalization, but more. In other words not new national structures to separate and isolate economies, but stronger international structures to make globalization work in harder times as well as easy ones.

    But we must understand we are in a new world.

    Trying to turn the clock back by re-erecting national financial barriers is neither realistic nor sensible.

    International investment flows bring huge benefits to all countries.

    And we must build new operational rules and the institutional architecture we need for the global financial system of the coming century.

    First, we must tackle the weaknesses in economic and financial policy, and in corporate governance, which the crisis has exposed in many emerging markets.

    In many cases, excessive short-term foreign currency borrowing occurred because of the perception of an absence of currency risk due to exchange rate pegs, implicit and explicit government guarantees and directed lending practices which compounded the inefficient allocation of capital.

    Borrowing was in many cases used to finance investment in economically unsound projects and governance in the corporate and financial sectors was often weak. In some cases, currencies became uncompetitive, resulting in large current account deficits. Moreover, when the financial crisis hit, fiscal policy was, in retrospect, kept too tight.

    However at the root of these problems was a destabilising lack of transparency in economic policy-making right across key economic and financial indicators which in turn led to confusion and undermined market confidence.

    Second, this was compounded by weak financial supervision, poor corporate governance, and ineffective prudential regulation,which has led some to raise questions about the speed and desirability of capital liberalisation.

    Recent events have demonstrated the dangers countries run when they open their capital markets in this new global economy if their financial systems are weak or vulnerable.

    Third, recent months have exposed problems of transparency, poor risk assessment and inadequate supervision in developed countries’ financial markets too indeed in the past week we have witnessed.

    The vulnerability and riskiness of some highly leveraged,secretive and speculative hedge funds. But we have also found some major household financial institutions, with ordinary household deposits backed up by implicit and explicit guarantees, risking and then losing substantial sums first in emerging markets and then through hedge funds , a combined exposure which, in some cases, was not known in advance.

    So the difficulties are not just a problem for emerging markets. While all too many analyses of the current crisis focus exclusively on the problems in debtor countries, it is a fact that there have also been problems in creditor countries.

    Fourth, the international community did not understand sufficiently early the true nature of Asia’s problems and how best to tackle them.

    In most cases these were not traditional sovereign debt problems or fiscal problems but instead private sector debt and financial sector problems. We did not have in place procedures and mechanisms to identify problems before they become crises and to manage crises once they began.

    Fifth, this crisis is about people and not just about economic statistics. Insufficient attention has been paid to the human side of the crisis and our common responsibilities to put in place help for the poor and the unemployed. We must never forget that behind the headlines and the numbers flickering on dealers’ screens are men and women whose jobs, incomes and futures are threatened by these events.

    And when the response to the crisis will inevitably involve difficulties and obstacles which will have to be overcome, we have so far failed to build a shared understanding of the need for reforms, securing a social consensus behind them, just as we have failed to alleviate the impact of recession on the poor and the unemployed.

    Five weaknesses – weaknesses in economic and financial policies,underdeveloped financial sectors in emerging markets, ineffective supervision, poor crisis management, unacceptable social protection – but together they expose an even more fundamental common problem. For fifty years we have had national policies for regulation,supervision and crisis management for what were essentially independent relatively sheltered national economies with discrete national capital markets and limited and slow moving international capital flows.

    We are now in the era of interdependent and instantaneous capital markets.

    Individual economies can no longer shelter themselves from massive fast moving and sometimes destabilising global financial flows , and it is obvious that if we are to respond to this, we need reform at both national and global levels.

    First, national policies for supervision regulation and crisis management will have to keep pace with the speed and scale of global financial markets.

    And second, as British Prime Minister Tony Blair said in New York last week, a new global framework will have to offer, at an international level, new and more sophisticated regimes for transparency, supervision, crisis management and stability similar to those which we have been developing at the national level to deal with domestic instability.

    So the challenge we face is not to weaken support for the IMF and World Bank and other international institutions at a time when the need for surveillance and coordination across the world is more pressing but to strengthen them by building the operational rules and institutional architecture for the new global financial system.

    AN AGENDA FOR REFORM

    So let me now therefore set out my specific proposals.

    First, to tackle national weaknesses in economic and financial policy and governance in a global economy requires not only sound policies but also sound procedures and institutional arrangements.

    So what are the “rules of the game” and what are the institutional changes we need?

    There is in my view only one answer to the uncertainty and unpredictability of ever more rapid financial flows.

    In today’s global economy, governments need to deliver stability by setting out clear objectives for fiscal and monetary policy and having the openness and transparency necessary to give credibility to the process.

    Greater openness in procedures as well as in the dissemination of information will not only reduce the likelihood of market corrections by revealing potential weaknesses at an earlier stage but will generate a better understanding of the reasoning behind decisions and encourage better decisions and wider support for the policies.

    The international financial institutions have a vital role to play in boosting the international credibility of national policymaking by setting standards for policy making, and monitoring or policing those standards through regular surveillance and endorsement of sound reforms. These new disciplines are the key building blocks of the new international financial architecture.

    Last year we proposed at the annual meetings a code of good practice for fiscal policy to introduce greater transparency and new disciplines into the world financial system and ensure that countries undertaking good policies are properly recognized.

    Already the IMF has published this Fiscal Code and is now preparing a guidance manual on how to implement the code.

    The right next step for us to take is to extend the principle of transparency and openness into monetary and financial information and procedures. At the Spring Meetings in Washington this year,I asked the Fund to look at the case for extending these principles to develop a code of transparency on monetary and financial policy.

    A code which requires countries to provide a complete picture of usable central bank reserves, including any forward liabilities,foreign currency liabilities of the commercial banks and indicators of the health of the financial sectors, with suggestions for improving and speeding up publication of data on international banking flows.

    While I welcome the fact that the Fund board will be considering the code of transparency on monetary and financial policy later this year, I urge the Fund to take forward work on developing and implementing the code as quickly as possible, in consultation with the World Bank and the Bank for International Settlements.

    There is a third set of procedures that should be formulated into a code of practice to improve transparency in the corporate sector since crises can arise as a result of private sectorim balances and poor corporate governance, as in Indonesia.

    This suggests we need more work to establish more stringent international codes in areas like accounting standards,insolvency regimes, corporate governance, securities markets and other aspects of private sector behaviour.

    Some of the work on developing a code of good practices on corporate governance is already underway. For example, the OECD is producing a report on standards and guidelines on corporate governance which should be ready by spring of next year. But again we need to develop and implement the code, as soon as possible and put in place the procedures to ensure effective implementation. This will require close collaboration with the IMF, World Bank and the OECD.

    These codes will help produce an environment in which financial markets can operate better. They should reduce the risk of future failures, and mean that when failures do occur the financial system is robust enough to withstand them. But they will also, I believe, do something more profound, but also vital to success.

    By improving public understanding of why and how decisions are made, by improving the accountability of governments, companies and international institutions. They will help build public understanding and support for the policies that deliver economic growth and prosperity. And as we all know, the existence of that public support can be an essential ingredient in building the market confidence needed for success.

    But for these three codes to be effective we must ensure that institutions are equipped to monitor and implement the new rules of the game. As I have set out, this means an enhanced role for the international financial institutions in implementing and promoting the codes for fiscal transparency, and for monetary and financial policy. Monitoring these codes is an essential part of the Fund’s surveillance work.

    All three codes should be used by Fund and Bank staff during Article IV consultations and Country Assistance Strategies. I believe that the IMF and the World Bank should publish assessments of how well all countries, both developed and developing, are implementing the codes.

    So far our approach has been a voluntary one. But countries that want to be part of the global economic system cannot pick and mix which good and bad policies they want to pursue. That is why we should consider whether all countries should accept regular surveillance of how they are meeting the codes.

    Where possible the results of this surveillance should be made public. We should consider the case for publishing in a timely and systematic way all the key surveillance and programme documents, Press Information Notices, Article IV reports, and country assistance strategies should all be made public. In most cases there is a strong argument for publishing letters of intent thereby making it clear to the public what has been agreed between the authorities and the IMF.

    But the IMF and World Bank’s surveillance will at times involve confidential discussions, particularly when a country is heading in a dangerous direction. In such circumstances it may well be best for the Fund to give a private warning to the government.

    But if the Fund is ignored and the situation gets worse the Fund should make use of “tiered responses”. For example the Fund could warn a country that it would give it a public ‘yellow card”if policies were not changed within a reasonable time limit.

    That is also why I believe proper implementation should be a condition of IMF and World Bank support and why immediate action to promote transparency in policy making, financial sector reform and corporate governance should be key components in any reform programme which the IMF and World Bank agree in the coming months. And that is also why a soundly-based IMF programme along these lines should be pre-condition for a any G7 national support. Because through the effective implementation of the codes we can extend good fiscal policy, monetary policy and corporate governance throughout the world and help prevent crises occurring.

    We must also find ways to improve the IMF’s own accountability,to ensure that it performs its responsibilities in an open and transparent way that enhances public confidence. We need a systematic approach to internal and external evaluation of the Fund’s own activities, including a new full-time evaluation unit inside the IMF but reporting directly to the Fund’s shareholders,and in public, on its performance.

    Financial sector reform in emerging markets

    Second, the problem of weak supervision and lack of prudential standards in supervision in emerging markets.

    There are those who argue that instability is the inevitable result of free capital movements across national boundaries,while others blame speculators who exploit capital mobility for short-term profit. What is clear is that short-term capital flows can be destabilising and can disrupt markets when investors are insufficiently informed and educated and institutions lack credibility.

    I do not believe that a permanent retreat to capital controls, as an alternative to reform, is the answer. Doing so simply damages the prospects for stability and growth.

    I continue to favour an approach to capital account liberalisation which is bold in concept, but cautious in implementation.

    But the need for caution in implementation is now clearer, and more important, than ever. Orderly liberalisation will require sound banking and financial systems and appropriate macroeconomic policies, consistent with our monetary and financial policy code. Without these important pre-conditions being in place, countries will remain vulnerable to capital market volatility.

    The IMF and World Bank must deepen our understanding of the pre-conditions for successful capital market liberalisation by emerging market economies. We need to make clear the risks of moving too fast if these pre-conditions are not in place.

    Equally, countries that seize upon unilateral actions as a substitute for necessary reform and co-operation damage the prospects for their own economies and the world system.

    One useful contribution to this process is the Commonwealth code of good practice for promoting private capital flows and coping with capital market volatility, agreed last year and based on an exchange of experiences amongst Commonwealth partners. The code is based on sound principles of openness and transparency, good governance and strong policy credibility, and the need for a co-operative international approach between the official community and private investors. It recognises both the potential benefits and the potential risks associated with private capital flows, and describes a range of policy options which countries might use depending on their particular circumstances.

    But neither the IMF nor the World Bank alone are currently equipped to carry out the surveillance and assist in the development of emerging countries’ financial systems to help them build the capability for capital liberalisation, pointing out the regulatory weaknesses and vulnerabilities which must first be addressed.

    That is why I proposed at the spring meetings an institutional innovation, creating a joint department of the IMF and World Bank to carry out this work. I know that some tentative steps in this direction have already been agreed. But I remain convinced that the bolder option is worth serious consideration. It could be implemented quickly, and with goodwill from both institutions could be made to work to improve advice and help to emerging market countries pursuing reform.

    Supervision of global financial markets

    But there is a second, broader, role which a joint department could play in co-operation with other international regulators.

    The events of recent months have pointed out inadequacies in our understanding of the interrelationships between financial markets between countries, particularly between developed and emerging market economies, inadequacies in the quality of risk assessment and gaps in the international regulatory system.

    Events in Asia have demonstrated the dangers emerging market countries run in this new global economy when their financial systems are weak or vulnerable. But they have also demonstrated that the stability of financial centres in developed countries are also threatened by instability and speculation and have also demonstrated the importance of better risk assessment.

    Developing better standards and systems for financial supervision and regulation within each country will help to combat this but the international financial institutions have a vital role to play.

    There are important jobs being done by the international regulatory organisations in setting standards for financial supervision and regulation within each country. The Basle committee has published a comprehensive set of core principles for banking supervision. Implementation of these will strengthen banking systems and is essential for promoting stability in the global financial system.

    I welcome its establishment of a liaison group and consultation group to monitor their implementation within Basle participants. This process needs to be strengthened and broadened. I encourage all countries who have not yet adopted Basle minimum standards to do so as a matter of urgency.

    I urge the Fund and Bank to work closely together with the Basle committee and other international financial regulators to exchange information, ideas and experience – and to include supervisors in Fund and Bank missions. They should also look at setting target dates for implementation of Basle minimum standards. And should consider asking each country to provide an annual assessment of how far it meets the Basle principles.

    I also welcome the Basle committee’s work on improving transparency and risk assessment. Events in the banking sector in the last few weeks have emphasised in particular the importance of its work on an improved supervisory framework for banks’ derivatives and trading activities, and on developing codes for the management of credit and operational risks. I hope these codes can be implemented as soon as possible.

    Out of these developments comes the recognition that our institutional response will need to go beyond the existing surveillance role of the IMF and the necessary provision of technical assistance and financial support by the Fund and Bankto help countries restructure their financial systems.

    We need regular and timely international surveillance of all countries’ financial systems and of international capital flows,not just to point out weaknesses, but to ensure these weaknesses are addressed and to identify systemic risks to the global financial system. We need to incorporate the expertise of national and international supervisors and regulators, who can bring to the international system their experience of strengthening financial sectors and dealing with systemic risk atthe national level.

    This means developing a new international framework to bring together the IMF, the World Bank, the Basle committee, and other international regulatory groupings to focus on global financial stability and supervision. I believe we need to consider far-reaching reforms.

    While there is no need for a wholly new and self-standing institution, there is a clear need for much closer co- ordination and coherence between, and reform of, existing institutions. That is why we must urgently examine the scope for a new and permanent Standing Committee for Global Financial Regulation, bringing together not only the Fund and Bank, but also Basle and other regulatory groupings on a regular – perhaps monthly – basis. This would recognise that the key challenge facing the global economy occurs in areas where all these organisations have responsibility and expertise. It would be charged with developing and implementing a mechanism to ensure that the “rules of the game” – the necessary international standards for financial regulation and supervision – are put in place and properly co-ordinated.

    This Standing Committee for Global Financial Regulation could also play an important role in strengthening the incentives on the private sector to improve its risk assessment. It could act as the focal point for better information sharing between the international financial institutions, governments, and the private sector – so that the risks are fully revealed. Recent events have shown that it is particularly important that we have greater transparency of hedge funds, which wherever they are formally registered can have an impact on global financial markets. But recent events have also suggested that better information may not be enough. We also need to consider strengthening prudential regulation in both emerging and industrialised countries and particularly for cross-border activities. The Basle committee is looking at the scope for revising its capital ratios as they apply to short-term lending, and I encourage it to put forward proposals as a matter of urgency.

    The Standing Committee for Global Financial Regulation could also help to find better ways to identify systemic risk. In the UK, we published last year a Memorandum Of Understanding, setting clear divisions of responsibilities and establishing a regular system of meetings and surveillance to ensure cooperation between our national financial institutions to identify and address systemic risk at an early stage. This sets out a clear framework for regular cooperation between the Treasury – which is responsible for ensuring the whole system works in the public interest protecting the interests of taxpayers, the Bank of England – which is responsible for the stability of the system as a whole – and the new Financial Services Authority – which is responsible for supervising and monitoring financial institutions. But systemic risk is not confined to national boundaries. What we need is an international memorandum of understanding which would establish the proper division or responsibility at the international level. We need to explore how this could be done to reduce the chance of crises occurring.

    Dealing with crises

    Just as we need new international machinery for crisis prevention,so we also need a better, more systematic approach – involving public and private sectors – to dealing with crises when they do occur. We need to ensure that the international community is able to respond to short -term liquidity crises in countries that are committed to reform, and to help such countries maintain access to the capital markets.

    In a crisis, the first need is always to act quickly to stabilise the situation. But we have to find ways to do this without bailing out private investors. We need private companies to take risks, but with a proper assessment of those risks and to take responsibility when things go wrong. And we need public institutions that help to make clear what the risks are, and provide a framework when things go wrong – a framework to which the private sector contributes as well as the public sector.

    There is action to be taken here at the national level. For example, the avoidance of misconceived implicit or explicit government guarantees of private liabilities, and the improvement of national bankruptcy laws. Action on both is now underway in several Asian countries.

    At the international level, I would like to see the IMF indicate that in the event of a crisis, and where a country adopts good policies, it may be prepared to sanction temporary debt standstills, by lending into arrears, in order to enable countries to reach agreements with creditors on debt rescheduling. By making this clear in advance, private lenders would know that in future crises they would be expected to contribute to the solution as part of any IMF-led rescue.

    And there needs to be a mechanism for the Fund to liaise with private sector creditors and national authorities to discuss the handling of debt problems at times of potential crisis.

    The IMF should remain at the centre of this framework, which should include the new standing committee for global financial regulation to co-ordinate the identification of systemic risk. We need to have clearly defined procedures for deciding when and how to provide liquidity support. And we will need to address many difficult and complicated issues as a mater of urgency, not least the future funding of the IMF.

    A code of good practice on social policy

    Fifth, we need to respond to the human dimension of the crisis. I want today to set out my proposal for a code of good practice no social policy. A proposal I will be putting to my colleagues in Washington next week.

    We need to set out guidelines for dealing with the social consequences of the global economic problems. And we should not see this just in narrow terms of creating social safety nets.

    Rather we should be trying to create opportunities for all to contribute as well as benefit, through training, education and in other ways – in other words modern, active welfare systems.

    Good economies, as many now acknowledge, depend on good social relationships and therefore on the building of trust. And countries and companies engaging in reform need a shared understanding of the challenges they have to meet, whether it is by dialogue, social partnership, policies that lead to a sense of fairness because there is equality of opportunity or by other means by which democratic participation is improved.

    Creating national support for the policies needed for economic growth depends on there being adequate systems for helping people who are victims of economic crises. This is indeed a clear role for government in the new fast changing global economy: not guaranteeing that nothing will change, or leaving people defenceless against change, but helping equip people to adapt to and master change.

    So we should aim to create decent working conditions everywhere. All the international institutions should share in the task of promoting core labour standards in all countries and decent levels of social welfare and protection.

    We need to promote the international development targets on universal primary education and on reduction in infant and maternal mortality rates, as well as provision of clean water and sanitary conditions for all.

    The World Bank should help governments in all affected countries in Asia to get social support systems in place as soon as possible.

    It is the poor and the unemployed who have most to lose if reform fails, and it is because we are committed to putting their interests at the heart of our response that we need this code of good practice on social policy.

    And the World Bank has a key role to play in developing and promoting a social code, to ensure that governments have in place policies to strengthen social systems and tackle the social impact of sudden shocks to the financial system.

    In the design of IMF programmes to help countries in crisis the IMF and the World Bank must also ensure that the reforms they demand are consistent with the code of good practice and, as far as possible, preserve investment in the social, education and employment programmes which are the foundation for growth. I hope that, with the support of the development committee, the World Bank working closely with the IMF will draw up such a code of good practice on social policy as soon as possible.

    CONCLUSION

    Let me say in conclusion that in the new global economy, neither the United Kingdom, you – our Commonwealth partners, nor any other country can afford the easy illusion of isolationism. We are all shaped by and must work together to shape the forces at work in our global economy.

    These four codes of good conduct for policy-making, codes agreed by the international institutions, but accepted by national governments and the radical institutional changes I have set out today would, in my view, offer a new framework for economic development.

    This will give new hope to the poorest and most vulnerable countries. But it needs to be combined with measures to reduce unsustainable debt. I shall have more to say on this later today. The HIPC process must be accelerated and we must do more beyond HIPC for those countries facing unsustainable domestic debt. By increasing the number of countries in the HIPC process to reach decision point before 2000, speeding up debt relief to post-conflict countries especially those with arrears to the international financial institutions, and securing a wide-ranging review of the HIPC initiative by the middle of 1999 to include consideration of debt sustain ability criteria. We are determined to secure maximum progress by the millennium.

    The questions I have dealt with today are sophisticated and technical. But we must never forget that they are also human questions. They involve the living standards of people as well as the level of financial transactions. They involve not only the value of capital or trade or investment, but the deepest values of our societies.

    The responsibility of all of us who lead in the era of globalization is to meet the authentic problems of our times with a vision, an intelligence, and an energy which will make the world economy stronger, more stable, and more prosperous – ultimately more open not just to the free flow of goods, but to the rising tide of people’s aspirations everywhere.

  • Stephen Byers – 1998 Speech to the FSA Conference

    Stephen Byers – 1998 Speech to the FSA Conference

    The speech made by Stephen Byers, the then Chief Secretary to the Treasury, to the FSA Conference on 24 September 1998.

    Introduction

    1. The UK financial services industry is highly successful and immensely important to the UK economy. It accounts for 7% of our GDP. It employs over 1 million people. And of course millions of people rely on its services. Most, if not all individuals at some time purchase, and rely on, financial products from pensions and insurance to securities and derivatives.

    2. Financial services provide an example of how the UK can compete on quality and excellence both at home and throughout the world. At the heart of the UK’s financial services industry is the City of London, one of the world’s leading financial centres. The London Stock Exchange is the largest trade centre for foreign equities in the world. And the Foreign Exchange market here is the largest and most important in the world, with a daily turnover of around 500 billion dollars.

    3. So an efficient and effective financial services industry is vital for our prosperity, stability and international competitiveness. Millions of people depend on the availability of modern financial services and fair and honest markets and advice.

    4. To secure the future of the UK financial services industry, it is vital to ensure the UK enjoys a high degree of confidence and is seen as a clean place to do business. Central to this is an effective regime of regulation.

    5. An effective regulator needs a robust structure. It must hold a high degree of market confidence. It must offer protection to customers. It must be able to effectively tackle malpractice and financial crime. And this should be within a framework designed to ensure maximum cost effectiveness.

    6. Recent events in Japan and elsewhere have shown that highly developed economies require highly developed and transparent systems for supervising financial services. Where supervision is ineffective and fails to command confidence the health and growth prospects of the whole economy can be threatened.

    7. Clean and transparent markets and robust financial institutions are vital to the success of any economy, particularly at a time of global economic turmoil. London and the UK already have an excellent reputation. The creation of the Financial Services Authority is an opportunity to enhance that reputation further and create real competitive advantage.

    8. The introduction of the euro on 1 January next year will also have significant implications for the financial services industry.

    9. We are the first British Government to declare for the principle of monetary union. The fact is that it would not be in our economic interests to join next January as there is not the necessary convergence with the rest of Europe. In order to ensure a genuine choice in the future, we must also make the necessary practical preparations now. We are working closely with business to do just that.

    10. The introduction of the euro will present huge challenges and opportunities to the Financial Markets. Not just in preparation but also because of increased competition for business.

    11. I am confident the industry and the City of London will maintain its competitive advantage. There are plenty of institutions that are gearing up to take advantage of the new opportunities that EMU will offer. We need to meet that competition head on, and we are well placed to do so. But no one – no institution – can rest on its laurels. The Government is determined to do everything it can to enhance London’s reputation as one of the world’s foremost financial institutions, and by far the largest in our time zone.

    12. That is why we’re preparing Britain for the euro. And why we’re determined to put in place a regulatory environment fit for the 21st Century. London and the UK must be the market of choice for the global industry. All of us – Government and industry need to do what we can to achieve that goal.

    Economic stability

    13. An essential precondition for a successful economy is a platform of economic stability. Stability allows industry to plan for the long-term future.

    14. The action taken by this Government will ensure the necessary slowing of the economy so we get back on track for steady and sustainable growth and avoid a return to the boom and bust.

    15. The first building block for high levels of growth and employment is a stable economic framework. It is essential to enable individuals, families and businesses to plan ahead with confidence. That is why the Government has taken the narrow party political advantage out of interest rates by giving the Bank of England independence.

    16. The Bank has raised interest rates to 7 1/2 per cent in order to get inflation under control. Long-term interest rates have fallen to their lowest level for well over 30 years. Of course, the Government understands and recognises the concerns of manufacturers, but what businesses fear most is a return to the cycle of boom and bust which brought record levels of business failures.

    17. And that is why we have reduced government borrowing from 27 billion Pounds to 8 billion Pounds. A commitment to spend only what we can afford. We have implemented a significant fiscal tightening, equivalent to 3 1/2 of GDP over the 3 years from coming into office. And we have maintained a tight control over public spending – as we promised in our manifesto.

    18. The Comprehensive Spending Review put in place firm three year plans for each department. These plans fully meet our fiscal rules, and at the same time provide an extra 19 billion Pounds for education and 21 billion Pounds for the NHS.

    19. At a time of instability in the international economy, no country is immune from the effects caused by the problems currently being experienced in Asia and in Russia. But as the balance of risks in the world economy has shifted, we are committed to preserve the conditions for sustainable growth and financial stability in the UK.

    20. These decisions are right for the UK as a whole, and also for the financial services industry.

    21. Amidst the uncertainty, we have to keep our nerve.

    22. We need to respond in two parts.

    23. In the short-term, it is crucial that emerging markets and developing countries press ahead with reform. The lesson form the current crisis is not that market disciplines have failed, but that in a global economy, with huge capital flows, the absence of such disciplines can have a devastating effect. Countries must put in place the right policy framework – monetary policy targeted at low inflation, sound and sustainable fiscal policies and structural reforms designed to improve the supply side performance of the economy. Tax systems that work. Strong properly regulated and full transparent banking and financial systems.

    24. And we need to consider how to strengthen the existing international financial system to meet the new challenges of the global economy.

    25. There are a number of key priorities.

    26. Promoting greater accountability and openness will strengthen the incentives on governments to pursue sound policies, will enable markets to price risk more accurately and should help all countries to manage more effectively the risks of global integration.

    27. We must continue to work towards our goal of liberal capital markets, but we must be cautious about how we do so, ensuring that the right pre-conditions – in particular sound financial systems – are in place

    28. And also, at a time when we are calling for greater accountability, transparency and disclosure o the part of governments, it is essential that the international financial institutions apply these principles themselves.

    29. Recent developments have also underlined the vital importance of sound, properly regulated financial institutions. The IMF and the World Bank need to give this issue much higher priority, working more closely together and with the main international regulatory organisations.

    30. Work is already going on in many of these areas. As the impact is international, so the response must be international too. We must design a new international financial system for a new international financial age.

    31. Just as the FSA is now the single regulator for UK owned complex groups, we need a co-ordinating supervisor to oversee the affairs of every large internationally active bank and other financial company.

    Why reform?

    32. It is reform of our own system of regulation that I now turn. Reform of our system of regulation has been well overdue. Under the existing system, in order to undertake a full range of financial services business, authorisation has had to be sought from as many as five or six separate regulators. This fragmentation has created scope for confused lines of communication and a lack of clarity about who was responsible for what.

    33. And the system has been far from easy for the consumer to understand. Nine regulators, eight complaints handling schemes and four compensation schemes. Hardly user friendly!

    34. And the system could also be inconsistent. Each of the regulators operating under a different set of powers, resulting in inconsistent treatment of similar sorts of regulatory issues.

    35. Perhaps most importantly, the regulatory regime no longer reflects the reality of the development of financial services markets. In the modern world UK banks and other financial services businesses offer the full range of services from mortgages through share dealing to arranging pensions and life insurance. It simply does not make sense for these businesses to be overseen by a number of different regulators, particularly when the new activities could clearly have a significant impact upon the financial health of the core business.

    Financial regulation: what we’ve done so far

    36. Since coming into office in May 1997, we have already made considerable progress in reforming the regulatory regime.

    37. We quickly confirmed we would be setting up a single regulator, the FSA. The FSA came into being last October with responsibility for regulation under the Financial Services Act. It is to be responsible for the full range of financial regulation, including a grater independent element in the oversight of Lloyd’s. And with Royal Assent to the Bank of England Act, it acquired responsibility for banking supervision this Summer.

    38. The single regulator will replace 9 existing regulators. Organisational consolidation is already well under way, and should see all the regulators housed under the same roof by the end of the year.

    39. The single regulator will bring many benefits. Firms will no longer be regulated by multiple bodies and there will be no duplication of effort. Regulatory requirements can be rationalised.

    40. For the consumer, the structure will be rationalised with single points of access for the public for enquiries, complaints and compensation.

    41. And the industry will benefit because bringing different regulators together will make regulation more cost effective.

    42. The UK will be an even better place in which to invest, both for institutions and individual investors. The new regime will bring competitive advantage to the financial services industry in the global marketplace. And it will allow individuals to invest and save for the future with greater confidence.

    Draft Financial Services and Markets Bill

    43. One of my first acts as Chief Secretary was to approve the publication of the draft Financial Services and Markets Bill for consultation. This will give the FSA the full range of modern statutory powers.

    44. The new regulatory system will be an improvement on the current arrangements. Accountability will be enhanced. The new regulator will have a Board appointed by and accountable to Ministers with its objectives clearly set out in legislation. And it will be required to consult on new proposals for rules, and to demonstrate that the benefits exceed the costs.

    45. Cost effectiveness is a vital building block for the new regime. Inappropriate, overburdensome regulation would make it difficult for UK businesses to compete effectively in the global market place and increase costs for consumers unnecessarily. The Bill recognises the difference between professional wholesale markets and retail markets. There will be a statutory requirement for the regulator to use its own resources in the most economic and efficient way and the non-executive members of the Board will report annually to the Treasury on this.

    46. Above all, I hope we will see a new emphasis upon high standards, while giving firms the opportunity to decide how they should be met. I don’t want to see 40 rules where the same effect could be achieved through 4. We will be looking to the regulator to ensure that the management of firms are fit to take on their central responsibility for the health and conduct of their firm. But where the FSA is confident in a firm’s staff and systems, then management must be left free to manage.

    Market confidence

    47. The Bill also introduces a new range of measures designed to further enhance confidence in UK markets. These include a new civil regime for dealing with market abuse. The draft legislation gives the FSA the power to levy civil fines against those who abuse the financial markets.

    48. Examples of the kind of behaviours we are aiming to deter are:

    • artificial transactions which give the market the wrong impression as to the real supply and demand for an investment;
    • abusive squeezes whereby the position of one player in the market, who has temporary control over the supply of a product, results in arbitrary prices; and
    • misuse of privileged information which is not available to the rest of the market.

    49. These behaviours upset the normal operation of the markets, reduce their efficiency, and can have significant impacts on the wider economy.

    50. This new regime, which extends to both regulated and unregulated persons, will fill a gap which currently exists in the regulatory system and help safeguard the proper operation of the financial markets. This is in all of our interests.

    51. The market abuse regime will not replace the criminal offences in this area. As now, where market abuse is serious and deserving of criminal punishment, those concerned will be taken before the criminal courts. There is no question of our being soft on City crime. We have given the FSA an explicit objective to reduce financial crime, which will include action to prevent and punish insider dealing, financial fraud and money laundering. We will be giving the FSA wide investigation powers in these areas and, for the first time, the power to prosecute such cases.

    52. The FSA will also be given powers of intervention and discipline in respect of regulated persons that are at least as extensive and as flexible as those of the various regulators which are being brought together. Among those disciplinary powers will be a power to levy fines on regulated institutions. This is a power currently enjoyed by the self-regulating organisations on a contractual rather than a statutory basis. Putting this powerful regulatory sanction on a statutory basis will we believe greatly enhance the FSA’s authority and effectiveness.

    53. It is right to arm the regulator with an effective array of sanctions, but these must be balanced by a satisfactory appeals mechanism. That is why we are proposing to create a new single tribunal to consider appeals against the FSA’s exercise of its powers. The tribunal will be entirely independent of the FSA, and will be managed as part of the Court Service.

    54. Naturally, there are limits to what the FSA can do in a global market place. We have to recognise the complexities of regulating an industry which operates across national boundaries and which includes international businesses engaged in a range of financial activity. The new regulatory structure will take full account of this international dimension.

    55. Extensive cooperation between the FSA and regulators in other countries is clearly very important. The FSA will be able to play a significant role in such cooperation in the appropriate international organisations. It will also have powers to assist overseas regulatory bodies. The draft legislation enables the FSA to use its powers of intervention when requested to by an overseas regulator. We also intend to give the FSA new powers to conduct investigations on their behalf. We want to ensure that the FSA has stature and is a power in the international regulatory community, and is universally regarded as a leading world regulator.

    Consumer protection

    56. The Government is strongly committed to consumer protection. Of course, Caveat Emptor is an essential part of any regulatory system. Yet a regulatory system must make sure the customer has sufficient information to make an informed decision. The personal pensions mis-selling episode showed a broad cross-section of individuals could be misled into buying the wrong product for their needs.

    57. Customers should be aware of the risks attached to any product. And they should know what their investment will cost. It is in everyone’s interests that customers have the confidence to buy the products they need.

    58. And so the FSA will be given statutory responsibilities to protect consumers and to promote public understanding of the financial system.

    59. We want public awareness of financial services to be a high priority for the FSA and the industry. The aim is to ensure that consumers have the ability to understand and question the advice and literature they are given. I also hope the FSA and firms will take action to improve the transparency of the firms’ literature.

    60. And if things do go wrong, the Bill provides for easier access to the ombudsman and compensation schemes.

    61. I welcome the recent announcement by the FSA of progress towards the creation of a single ombudsman and the co- location of the existing schemes.

    62. This is a significant step towards delivering the consumer protection that is vital in building confidence in the industry.

    Consultation process

    63. Reform of the financial services regulation is already well under way. It is vital to maintain the momentum towards reform. To do this, we need input into the consultation process from the industry and consumers.

    64. We are determined to have high quality legislation ready for introduction to Parliament. So the Government is committed to a genuine and open consultation process. This is an opportunity for the industry to play a part in shaping the regulatory regime of the future. I strongly urge you to respond to the consultation and let us have your views. It is in all our interests to get this right.

    Conclusion

    65. The UK financial services industry and City of London in particular, enjoy a pre-eminence internationally.

    66. These reforms of the regulatory regime will enhance our position. They will increase the confidence of the public in the financial services industry. And they will make the UK a more attractive place to do business.

  • Gordon Brown – 1998 Speech to the Federation of Bankers Association

    Gordon Brown – 1998 Speech to the Federation of Bankers Association

    The speech made by Gordon Brown, the Chancellor of the Exchequer, in Tokyo on 16 September 1998.

    1. Introduction

    I want to begin by thanking you for the invitation to speak to this distinguished audience at this decisive time for the world economy. I am pleased to have the opportunity to share with you our analysis of the serious challenges we face, which we must urgently address both individually and collectively. We have  experienced the opportunities that flow from the new age of globalization.  We have benefited from the accelerating integration of the international economy.  Now we must manage it though more difficult times.

    And I welcome this dialogue with key policy makers in Tokyo – because Japan has a key role to play not only in ensuring recovery from present difficulties, but in constructing permanent structures for stable long term global prosperity.

    Japan is a highly valued economic partner across the world. In Asia, it is of course the largest economic force, accounting for 61 per cent of Asian GDP. In Europe too, we value highly the strong and successful trade, foreign direct investment and financial relationships that have grown so rapidly in recent decades to our mutual benefit. And Britain, in particular, has very good reason to value our strong relationship with Japan. Last year, Japanese direct investment in the UK stood at £2.6bn, nearly 40% of total Japanese investment in the EU.

    My visit today, representing the British Government, the current chair of the G7, reaffirms the partnership between the G7 countries as an indisputable foundation for international stability and prosperity.  Our shared commitment to open trade and orderly progress among the G7 has been a driving force for growth – – even in countries that not so long before seemed likely to be permanently left behind.

    Now the trend is stalled, and in some places even reversed – but I believe that is a temporary setback, not a permanent condition.  I believe that the essential answer to the problems of the moment is not less globalization – – not new national structures to separate and isolate economies, but stronger international structures to make globalization work in harder times as well as easy ones.  Our urgent need is closer co-operation, continuing dialogue, and an unwavering commitment to open commerce.  We must not let temporary instability put global progress at risk.

    As the economic weather turns, as a storm in one region threatens to spread, there are easy but dangerous shelters – a return to protectionism, the breakdown of co-operation, the rise of beggar thy neighbour policies.  But this can only yield furtherdeterioration, not renewed growth.

    Protectionism anywhere is a threat to prosperity everywhere.  Closing off national economies only increases national and international instability. And in Asia and across the world, it is the poorest, the most vulnerable members of society who suffer the most from financial crisis and stagnation.

    So I come here today to affirm our common resolve  to pursue a strategy of international stability and renewed growth.  All countries must actively work together to sustain domestic demand and maintain open markets for investment and trade upon which our shared prosperity depends. What is necessary is closer international co-operation to achieve stability and sustained growth, open trade and strengthened financial systems.

    That is a point upon which all G7 finance ministers have been agreed in our dialogue in recent weeks. And I am pleased to be here to discuss these issues in person with my colleague, Kiichi Miyazawa, as I will be in the coming weeks with other finance minister colleagues.

    Recent events, coming after the onset of instability in Asia last year, also emphasise the importance of the work that is being done  in the G7, the IMF and World Bank and other international groups to consider how to promote sound domestic policy-making and strengthen the international financial system. The globalization of the economy and the expansion – and recent instability – of world capital markets present new challenges for both emerging markets economies and industrialised countries alike. The challenge of devising  procedures and institutions which establish internationally agreed rules of the game, recognising the proper role of government in delivering greater stability, prosperity and opportunity for all citizens within an open global economy, is the key challenge which faces us.

    So today, I will explain what governments must do now to address the instability we currently face. And I will set out some of the key issues that need to be addressed at the annual meetings of the IMF and World Bank in Washington next month.

    2. The world economic situation

    Our starting point must be to recognise the strengths which explain developments in the world economy during the 1990s,  but also the weaknesses in national and international policy-making that have been exposed by recent events. The two driving forces for change have been technological change which made possible a global marketplace and the lowering of barriers to trade and capital flows as more and more countries wanted to be part of this global marketplace.

    Since the establishment of the GATT in 1947 average industrial tariffs of developed countries have fallen from nearly 40% to less than 5% through eight rounds of multilateral trade liberalisation.  The most recent of these – the Uruguay Round promises to increase world incomes by some $500bn per year by the year 2005.  The Uruguay Round marked a major reduction in (non-tariff) trade barriers: agriculture and services were included in the GATT for the first time.  Since then we have seen Agreements to liberalise markets in Financial Services and Information Technology.  At Birmingham, the G8 pledged to resist protectionist pressures.  At the fiftieth anniversary  celebrations of the GATT in May, world leaders renewed their commitment to open markets in trade and investment.

    At the same time, we witnessed global capital flows on an unprecedented scale as investors perceived new investment opportunities in markets which were previously not open to them or too risky to contemplate.  The Asian financial crisis was preceded by a period characterised by record private capital inflows into emerging markets and a substantial compression of spreads across a wide range of emerging market credit instruments.  Net capital flows to developing countries  roughly tripled over the last decade to more than $150 billion a year.

    The terms of new bond issues by developing countries improved significantly in the early 1990s – the average spread at launch for US dollar denominated issues declined, in retrospect excessively, from over 400 basis points in 1991 to a low of less than 200 basis points by 1994 .

    This irreversible global economic integration in capital and now also product markets has been accompanied by impressive growth in the world economy. During the 1990s, global output has expanded by on average of over 3 per cent each year, with developing countries growing at an average of 6% and countries in Asia by an average of 8%.

    But in the last year, the trends which accompanied strong growth rates in emerging markets have been reversed.  The end of last year saw a collapse in private capital inflows to emerging markets, leading to dramatic falls in Asian exchange rates and  stock markets – of as much as 80 per cent in some cases.The Asian crisis countries themselves witnessed a turnaround of $70 billion in bank lending with net inflows of $40 billion in 1996 turning to net outflows of over $30 billion in 1997.  And unlike in the case of the Mexico crisis, the reduction in capital flows to the crisis countries was not offset by a reallocation of flows to emerging markets in other regions.

    The growth performance of these countries has also gone sharply into reverse – on a scale unprecedented in contemporary economic history. After strong growth in previous years in Asian economies, the economic crisis has been a particularly jarring experience for the citizens of these countries as well as international policy-makers and investors. And with the growing realisation that recovery is taking longer to occur than had been hoped, there has been a significant reassessment of risks to international lending in emerging markets.

    It is right for policy makers to admit that the causes of these complex events are not yet fully understood and will require continued  analysis.  Moreover, the factors explaining the onset of economic difficulties and loss of investor confidence in each of the countries affected are different, and it would be wrong to engage in misleading generalisations.

    In Thailand, for example, the first country to be affected, the immediate cause of  the economic downturn was an unsustainable asset price boom, compounded by macroeconomic policy errors, which exacerbated the situation, rather than helping to solve it.

    In Indonesia and South Korea by contrast, macroeconomic policy errors were not to blame for the loss of investor confidence, while recent events in Russia represent a particular combination of economic and political instability, leading to a loss of  investor confidence and, in turn, macroeconomic breakdown.

    However, some common themes do emerge in all affected countries in Asia. Excessive short–term foreign currency borrowing occurred because of the perception of an absence of currency risk due to exchange rate pegs, implicit and explicit government guarantees and directed lending practices which compounded the inefficient allocation of capital, as well as weak supervision and prudential standards.

    Borrowing was in many cases used to finance investment in economically unsound projects and governance in the corporate and financial sectors was often weak. In some cases, currencies became uncompetitive, resulting in large current account deficits. Moreover, when the financial crisis hit, fiscal policy was, in retrospect, kept too tight. However underlying all these factors and at their root, was a lack of transparency in economic statistics and policy making which led to confusion and dented market confidence.

    In Asia, a period of adjustment was inevitable. What is striking is, first, that the scale of this adjustment should be so severe – as evidenced by the falls in equity and currency markets and in output in many Asian economies. Secondly, these  financial pressures have spread across emerging markets from Asia – to Eastern Europe and recently Latin America.

    In hindsight it is clear that investors were not making fully prudent assessments of the risk associated with their lending decisions. Last year we witnessed the first decline in private capital flows to emerging markets this decade, and a general reassessment of risk. The widening of spreads in emerging markets has continued following the Russia crisis, rising from around 600 basis points to 1600 basis points.   Recently we have seen a general flight to quality and safe-haven buying by increasingly risk-averse global investors.

    While some sharpening of risk management may bring benefits  in the medium term, it is concerning that even some of the best performers amongst emerging markets are now being been caught up in the fray.  Even those with sound macro-economic fundamentals, such as Hong Kong, have not been immune from short-term speculative attacks.

    These developments illustrate why it is so important that we take extremely seriously the sort of correction we are currently witnessing. Industrialised economies have felt the impact of falling demand in emerging markets. The general increase in investor risk-aversion has also led to volatility in the major world markets.  In the US and Europe, stock markets have fallen significantly, while bond prices have been pushed higher. With inflation low or falling in many parts of the world and with the slowdown in demand in a number of economies, especially emerging markets, the balance of risk in the world economy has shifted, as the statement by G7 countries and central bank governors earlier this week made clear .

    3. Stability in the world economy

    My primary concern today is how international co-operation can help to deliver sustainable growth, open trade and the proper functioning of banking systems.

    Economic stability

    The first priority for Asia is to restore a platform of economic stability on which growth depends.  The economic situation in much of Asia remains difficult, as the slowdown is turning out  to be greater than expected. But progress has been made in restoring economic stability in some of the countries directly affected by the crisis, through full and timely implementation of the necessary reforms, in conjunction with the IMF.  In both Thailand and Korea, we have seen significant currency appreciation this year, and this has allowed interest rates to be reduced to below pre-crisis levels.  Moreover, the latest trade data show that export volumes grew rapidly in the first quarter. I also want to mention the vital contribution which  China is making to global financial stability.  Its policy of  maintaining a stable exchange rate is an important and  responsible one in difficult times.

    With the continued pursuit of  transparent and credible  policies, we can see further signs of recovery.  Macroeconomic  policy should now be focussed, on creating the right conditions  to support domestic demand and export-led growth.   Structural  reforms, particularly in the financial sector, must also continue alongside action to put in place adequate social safety nets.  Since the beginning of the crisis, I have argued strongly that more emphasis needs to be placed on social spending to limit the impact on the most vulnerable in society.

    As our recent statement made clear, G7 countries, as well as the IMF and the World Bank, stand ready to support countries in all emerging markets, which are prepared to embark on a course of strong and sound policy action. Of course, for the IMF to do this and be ready to help in times of crisis, it needs adequate resources now. I am glad to say that the British Government has taken action to play its part in doing this, and I urge others to do the same as a matter of urgency.

    In Russia, economic progress can only be secured if there is political stability and a genuine commitment to both stabilisation and structural reform. As the G7 officials discussed at their meeting in London earlier this week, the international community remains ready to cooperate further with Russia in support of sustained efforts towards stabilisation and reform.

    Inevitably, trade flows will change as the world adjusts to the recent swings in capital flows. In the Asian crisis countries, we have seen significant improvements in trade balances, with a combined annualised surplus of $80 billion in the first five months of 1998, compared with a deficit of around $40 billion  annualised in the same period last year.

    But the necessary shift from trade deficit to surplus in emerging markets can either be achieved by domestic stagnation or export-led growth. It is in our shared interests to achieve the latter, but this is only possible if the industrialised world provides the engine for that growth by sustaining demand in the world economy. All industrialised countries – in Europe and Japan as well as North America- must bear their fair share of the adjustment. No one country can either escape its responsibility to play its part in sustaining global demand or be required to bear the whole burden and thereby encourage protectionist sentiment.

    We must demonstrate both that we have learned the lessons of history, and that we have adapted our approach to the modern global economy of the late 1990s.  We are not going to bury our heads in the sand in the face of instability as policy-makers have done before.  Equally, we must guard against repeating the precipitate policy mistakes which, for example, the UK made following the 1987 stock market episode when policy was kept too loose despite domestic inflationary pressures.

    This is a crucially important task, in particular for monetary policy makers.  I know from my conversations with Eddie George, the Governor of the Bank of England that central bank Governors in the industrialised world are fully focussed, as Monday’s statement by G7 Finance Ministers and Central Bank Governors demonstrated, on the need to maintain demand growth in the current global environment.

    In the UK, as result of the decisive action the Government has taken over the past year in monetary and fiscal policy, the UK macroeconomic fundamentals are now sound and Britain is now back on track to achieve a return to stability as the platform for sustained growth. Recent evidence of reductions in inflation and earnings growth is encouraging.  But further progress is essential, if we are to maintain an economy which combines sustainable growth and low inflation.

    Prospects for sustainable growth with low inflation continue to depend on responsible wage behaviour in both the private and public sectors, where pay must be related to what the economy can afford.  It would be the worst of short-termism to pay ourselves more today at the cost of higher interest rates tomorrow and the missed growth and job opportunities that would inevitably follow.

    It is vital also that measures are taken to put the Japanese economy back on the path of sustainable growth.  Japan has a particularly important role to play as the second largest economy in the world,  by far the largest economy in the Asia region, and a key export market for the crisis economies.  Japan is clearly not responsible for the Asia crisis.  But Japan can be part of the solution.   That means using macroeconomic policy tools to boost domestic demand and restore business and consumer confidence.  The G7 has welcomed the efforts you have been making and the fiscal package you announced in August. The world economy needs an early return to growth in Japan and decisive  action to that end.

    Trade policy

    Vigilance is required not just in domestic macroeconomic policy but also in trade policy. We must guard against the risk that worries over cheap imports from Asia will encourage misguided calls for a retreat into protectionism.

    The world that made this protectionist mistake earlier in the twentieth century, in the decades before the Bretton Woods institutions were created, must not make it again, on the eve of the twenty first century.

    It is therefore critical that we resist these pressures and stand by the pledges we have made at Birmingham, ASEM2 and the OECD and WTO Ministerial meetings to maintain the liberalisation of international trade and investment.

    The successful completion of the WTO financial services negotiations in December of last year was a tribute to all the participants. We must not allow current market difficulties to stand in the way of further trade liberalisation and opportunities for growth.

    I want to give you three further examples of how the G7 and the UK can signal its commitment to promoting free trade and  resisting protection.

    First, we need to move quickly to a new round of trade talks that will take multilateral liberalisation forward, not backwards. We are therefore fully committed to European Commission proposals for an early start to the Millennium Round of trade negotiations with a fully comprehensive liberalising agenda covering Agriculture, Services, Competition and Investment.  It is in the interests of everyone to work hard to make sure these talks deliver. These talks should start in the year 2000.  I propose that we work with the WTO to ensure that preparations for negotiations start now to ensure a prompt start to the Round. We should also consider whether there is any case for bringing that date forward.

    Second, anti-dumping.  Arguably the misuse of anti-dumping measures as a way of protecting domestic markets is the biggest current threat to international competition. We need to be more watchful than ever in current circumstances. Recently, the UK has strongly opposed the imposition of measures against amongst others China and Indonesia in the case of unbleached cotton. And we will continue to do so in similar cases.

    Third, we shall be looking critically at our own rules and measures. For example, The Voluntary Restraint Agreement on Japanese cars exports to the UK expire at the latest at the end of 1999. The UK is and will remain firmly committed to the liberalisation of the UK and  EU car markets.

    Financial stability

    The third area where vigilance is essential is in banking and other financial supervision and regulation.  The G7 can take the lead in maintaining the momentum of global domestic demand, and safeguarding the openness of the global trading system. But if we are rapidly to restore investor confidence, and emerge from the current turbulent period stronger than we entered, it is essential that countries facing financial pressures take the urgent and necessary  steps to strengthen their own national financial systems, in co-operation with the private sector and the international community. This will involve difficult decisions to tackle corporate and financial sector weaknesses,  and to develop better systems of supervision and regulation.

    Of course it is not just emerging market economies that need to be vigilant when it comes to financial stability.  An equal responsibility lies with the G7 countries.  In London, the home of the world’s largest international financial centre, we take our responsibility to ensure open, transparent, orderly markets very seriously.  I know the governments and regulators of other major international financial centres do so too.

    In London, market participants have absorbed the impact of recent instability without serious difficulty.  Of course we are not complacent.  The Financial Services Authority – the new universal regulator of banks, securities and insurance – is monitoring the situation closely.

    Here in Japan, the restoration of financial stability is a top priority in order to ensure that efforts to stimulate the economy can be effective. I hope financial reform legislation can be passed quickly and look forward to the implementation of these measures in a speedy and decisive manner.

    It is vital that a solution is found and that confidence is restored.  This is essential to put the economy on a sound footing.  Continuing financial sector instability will make  Japan’s economic recovery much more difficult by hampering efforts to stimulate domestic demand. A transparent, well-regulated and reinvigorated financial sector will play a large  role in putting the Japanese economy back on its upwards trajectory. The same applies throughout Asia.

    The UK fully supports the efforts which you are making, and  recognises the importance of co-operation amongst supervisory authorities. For many years there were close links between banking supervisors in the Bank of England and their colleagues in the Japanese Ministry of Finance and the Bank of Japan. Both in Japan and in the UK, this year has seen the establishment of new universal financial regulators: the Japanese Financial Supervisory Agency and the UK Financial Services Authority. In the months since our two FSAs were created they have already built up strong links, reflected in day to day contact on individual issues.

    But I believe we can and should do more to enhance mutual understanding and co-operation. One of the best ways of doing this is for supervisors from one organisation to spend time at the other. As a first step, I can announce that next month
    supervisors from the Japanese FSA will go to the UK FSA for an intensive exposure to the way that UK undertakes supervision. And we are planning a similar visit to Japan by UK supervisors as well as longer secondments in both directions.

    We also need enhanced and targeted surveillance of financial sector stability by the IMF and the World Bank working in close co-operation.   And greater co-operation between the IFIs and the international regulatory organisations (Basle, IOSCO, IAIS)  is also important.  The Basle liaison committee, which combines representatives of developed and emerging markets and of the IMF and World Bank, is a good example of this sort of co-operation.

    The G7 is also considering with the IMF and World Bank how to improve co-operation between the two institutions in the areas of financial stability and surveillance including transparency in both public and private sectors, and will come forward with proposals.

    4. Strengthening the financial architecture

    I have set out the action which the G7 together must take to counter the threat to prosperity and jobs posed by this short- term instability. But this instability should not prevent consideration of the long-term implications of the recent crisis for both domestic policy-making and the institutions of the global economic system – sometimes referred to as the financial architecture.

    We start by recognising that the global economy has changed the environment for domestic policy making. In the global market place national governments, dependent for investment funds on the day to day confidence of international investors, must pursue consistent and credible policies that guarantee stability. Rewards for doing well have been substantial. But punishment for those countries who perform badly is now more instantaneous and more severe than in the past, with the risk of contagion as investors become more risk averse.

    This can be seen from the way in which the Asian crisis, and now the Russian crisis, came unexpectedly – the speed with which the capital markets have moved, with sentiment swinging from excessive optimism about prospects to a deep pessimism, the accompanying volatility of exchange rates and the way in which deep-seated flaws in financial systems in emerging markets have been exposed.

    Despite these changes, we are still operating with essentially the same institutional structure that was set up over 50 years ago when the world was facing a very different set of problems. The Bretton Woods twins, the IMF and the World Bank, were designed to help the world recover from a devastating World War.

    The World Bank was given the task of reconstruction and development, the IMF was to look after payments imbalances, and particularly prevent the beggar-my-neighbour devaluations.  Later the Bank for International Settlements  was formed and developed a limited role in bringing together the Central Banks of different parts of the world.

    We need to examine how we can reform this architecture to improve the workings of the global economy and facilitate both trade and capital flows. We must learn from what we have done right over the last 50 years but also from the problems that have emerged most recently in the current crisis.  So let me start by setting out the key issues that need to be on the agenda of the meetings in Washington early in October.

    There are those who argue that instability is the inevitable result of free capital movements across national boundaries, while others blame speculators who exploit  capital mobility for short-term profit. What is clear is that short-term capital flows can be destabilising and can disrupt markets when investors are insufficiently informed and educated and institutions lack credibility.

    So one part of the  answer to the uncertainty and unpredictability of ever more rapid financial flows is to introduce new disciplines in economic policymaking: clear long- term policy objectives, the certainty and predictability of well-understood procedural rules for monetary and fiscal policy, and an openness that keeps markets properly informed and ensures that objectives and institutions are seen to be credible.

    Greater openness in procedures as well as in the dissemination of information will provide markets with a better understanding of fiscal and monetary policy, reduce the likelihood of market corrections by revealing potential weaknesses at an early stage, and encourage governments to develop more open policy making processes and internationally recognized yardsticks for assessing fiscal policy.

    I welcome the progress made in agreeing the Code of Good Practice on fiscal transparency that the UK originally proposed a year ago in Hong Kong. The Fiscal code has now been agreed. The IMF already plans to issue a manual to provide more guidance on how to construct and present fiscal policies.

    The issue now is how the Code should be used in practice.  I believe that it should be disseminated widely to extend good fiscal practice throughout the world, and that countries should be required to report on how they are applying it. The IMF should report on its implementation as part of Article IV consultations and that it should become a key component of programme conditionality.

    But the fact that, in some Asian countries the difficulties began not in macroeconomic policy but in inadequate financial regulation shows why it is right for us to extend the principle of transparency and new discipline in policy making from fiscal policy into monetary and financial information and procedures and corporate governance. That is why I have proposed that we supplement the code on fiscal transparency by asking the IMF to prepare a code of good practice on financial and monetary policy, in consultation with the world bank and the BIS and asking the OECD to draw up a Code of Good practice in corporate governance.

    The monetary and financial code will need to ensure that countries provide a complete picture of usable central bank reserves, including any forward liabilities, foreign currency liabilities of the commercial banks and indicators of the health of the financial sectors. We must also find ways of improving and speeding up publication of data on international banking flows.

    These Codes of Conduct, policed by the IMF, can help private sector lenders and investors when they make country risk assessments, enable them to make sound lending decisions country by country and so reduce the tendency to brand all emerging economies  in the same way. We also need to do more to encourage – or even require – prompt publication of IMF Press information notices and the conclusions of Article IV missions.

    Sound macroeconomic policy, open and credible institutions and procedures and a healthy financial sector are essential pre- conditions for orderly capital account liberalisation.  The recent turbulence in global financial markets has demonstrated the importance of ensuring that all the necessary pre-conditions have been met, sequenced in the appropriate way.

    I continue to favour an approach to capital account liberalisation which is bold in concept, but cautious in implementation.  Bold in concept because open capital markets allow efficient use of capital and the transfer of technology and expertise, and have brought substantial benefits to industrial and developing economies alike in recent decades.

    But the need for caution in implementation is now clearer, and more important, than ever.  Orderly liberalisation will require sound banking and financial systems and appropriate macroeconomic policies.  Without these important pre-conditions being in place, countries will remain vulnerable to capital market volatility. I believe that this work must also be extended, working with the IMF, to deepen our understanding of  the pre-conditions for a successful capital market liberalisation by emerging market economies. We need to make clear the risks of moving too fast if these pre-conditions are not in place. Equally, countries that seize upon unilateral actions as a substitute for necessary reform and co-operation damage the prospects for their own economies and the world system.

    Finally, given the key role that IMF plays and continues to play, we must now find ways to improve the IMF’s own accountability to ensure that it performs its responsibilities in an open and transparent way that enhances public confidence. We need a systematic approach to internal and external evaluation of the Fund’s own activities, including a new full- time evaluation unit, inside the IMF but reporting directly to the IMF’s shareholders, and in public, on its performance.

    We will return to these and other long-term issues of crisis prevention and alleviation in Washington in three weeks time.

    5. Conclusion

    Let me say in conclusion that in the new global economy, neither the United Kingdom, Japan nor any other country can afford the easy illusion of isolationism.  We are all part and ultimately product of events happening in our global economy.  Never in all of economic history have so many depended so much on genuine economic co-operation among the leading industrialized nations.

    We must never forget that the path of open trade and open capital markets that we have travelled in the last 30 or 40 years has brought unprecedented growth, greater opportunity and a better life for people across the world.  No sensible policy- maker wants to turn the clock back to protectionism and insularity.  But to move forward, we need active governments, acting together through reformed international institutions.

    The questions are sophisticated and technical.  But we must never forget that they are also human questions.  They involve the living standards of people as well as the level of finanacial transactions.  They involve not only the value of capital or trade or investment, but the deepest values of our societies.

    We must make markets work – – in tough times as well as easy ones.  That is the burden and honour of all of us who lead in the era of globalization.  I believe we can meet the authentic problems of our times with a vision, an intelligence, and an energy which will make the world economy stronger, more stable, and more prosperous – – ultimately more open not just to the free flow of goods, but to the rising tide of people’s aspirations everywhere.

  • Rishi Sunak – 2022 Comments at JEF Summit

    Rishi Sunak – 2022 Comments at JEF Summit

    The comments made by Rishi Sunak, the Prime Minister, in Riga on 19 December 2022.

    Prime Minister Krišjānis, thank you so much for hosting the summit. Thank you for hosting us all.

    As you said, it’s an incredibly important time for this group to come together and discuss first and foremost the situation in Ukraine.

    Volodymyr and his people have really inspired us all.

    They have demonstrated that thanks to their determination, Putin is realising that he cannot win on the battlefield.

    And that means he is now escalating the conflict in a way that is bringing about quite frankly appalling consequences for the people of Ukraine.

    I saw it myself when I visited recently and I’m sure we’ll hear more about it soon.

    The JEF nations, all of us around this table are some of Ukraine’s closest friends and allies.

    We’ve taken a lead in supporting them thus far and I know we will continue to do so.

    For me, I think there are three priorities for us to consider as we think about next year.

    I think the first is ensuring that we deliver more military aid and that military aid evolves to meet the situation that we are now facing.

    That means more air defence systems, it means artillery, it means armoured vehicles.

    For our part in the United Kingdom, we have pledged to match or exceed the £2.3bn in aid that we provided this year next year and I would very much hope and encourage others around the table to do whatever they can to continue the strong support.

    I think secondly, as Krišjānis alluded to, we must be clear that any unilateral call for a ceasefire by Russia is completely meaningless in the current context.

    I think it would be a false call.

    It would be used by Russia to regroup, to reinforce their troops and until they have withdrawn from conquered territory, there can and should be no real negotiation.

    But what we can do is think about that time now.

    Think about what we will do with regard to security assurances and that is the planning that I think this group can play an important part in.

    And I think thirdly and lastly, we must continue to focus on degrading Russia’s capability to regroup and to resupply and that means going after its supply chains and removing the international support.

    Particularly I’m thinking of Iran and the weapons that it is currently providing to Russia, which we should be very strong about calling out as we have done in the United Nations.

    But also the economic consequences for Russia must continue to be severe and in that vein, the new oil price cap that the G7 have instituted and others have followed, I think, can be very helpful.

    In conclusion, I’ll just say that I think our collective resolve is clear and we have and will continue to support Ukraine.

    And that is first and foremost because their security is our security.

    And, at that moment, it is a great honour for me to invite my dear friend Volodymyr to address us now.

  • Gordon Brown – 1998 Speech to the British Retail Consortium Annual Dinner

    Gordon Brown – 1998 Speech to the British Retail Consortium Annual Dinner

    The speech made by Gordon Brown, the then Chancellor of the Exchequer, on 13 October 1998.

    Just as we must work with our international partners to secure global stability and growth, so we have been taking action at home to set in place a long-term and credible  platform to achieve the stability that is an essential  pre condition for long-term investment, growth and jobs.

    It is in pursuit of our long-term goals – high and stable levels of growth and employment- and the rejection of the short-termism and stop-go polices that have undermined the UK economy in the past- that we have taken tough decisions.

    In the face of rising inflationary pressure and the large structural deficit we inherited, we made the bank of England independent, the MPC raised interest rates and we tightened fiscal policy by 20 billion pounds last year, amounting to 3.5 per cent of GDP from financial year 1996-97 to financial year 1999-2000.

    There must be no return to the boom-bust we saw in the late 1980s and early 90s, when interest rates reached 15 per cent, 1 million manufacturing jobs were lost, nearly 170,000 businesses went under and thousands who faced mortgage misery and negative equity are even now not yet recovered from it.

    We are committed to steering a path of stability based on a stable monetary framework and sound public finances.

    And it is because of the reduction in borrowing and tough action on inflation, which has today seen us meet our inflation target for the second month in succession, that Britain is now better placed to steer a path of stability in these troubled times for the global economy.

    We have consistently taken a prudent and cautious approach to managing the public finances and we will continue to do so. Our projections have been based on cautious assumptions which have been audited by the independent national audit office and our plans have built in margins to cover uncertainties, including the risk of slower growth.  We have worked within the previous government’s spending plans for the first two years and our careful plans mean that current spending is now  set to grow in real terms by less over this parliament than the last.

    As I have said, slower world growth makes it inevitable that growth in Britain next year will be more moderate than previously expected.

    But because of the prudent approach we have followed, even with more moderate growth next year we remain on track to meet our strict fiscal rules over the economic cycle while maintaining our commitment to an additional 40 billion pounds for improvements in health and education.

  • Patricia Hewitt – 1998 Speech on the Global Economy

    Patricia Hewitt – 1998 Speech on the Global Economy

    The speech made by Patricia Hewitt, the then Economic Secretary to the Treasury, at the Fleming’s Seminar in 12 October 1998.

    Introduction

    1. Thank you for inviting me. The current turmoil in the global economy makes the timing of this conference pertinent.

    2. Today, I want to focus on the reform that is needed to respond to globalisation. Both in Europe and the rest of the world. I also want to raise the issue of free trade and capital controls.

    Global change and Europe’s response

    3. Today’s global economic problems are ones of the modern age. They could not have happened when finance was confined within sheltered and wholly national financial systems. These are new global problems which require new global solutions.

    4. Today, in an interdependent and instantaneous global marketplace, nations depend on investment flows from all over the world. And the punishment for getting things wrong can be immediate and severe. The premium everywhere is on monetary and fiscal stability

    5. All countries will benefit from setting clear long-term policy objectives for monetary and fiscal stability that build confidence.

    6. But equally, in today’s deregulated, liberalised financial markets, governments can no longer try to deliver stability through the strict application of over-rigid monetary targets. Stability will come through setting out clear objectives for monetary policy, and having the openness and transparency necessary to give credibility to the process.

    7. There have been considerable advances in stability and prudence over recent years.

    8. Member states have taken the Maastricht process very seriously and this has not been easy.

    9. In the 1990s deficits, which were a high proportion of GDP right across Europe, have fallen very heavily, from a peak of around 6 per cent of GDP to around 2 1/2 per cent.

    10. Inflation, which has been very high in some countries over many decades is now very low, around 2 per cent compared to a 1990 peak of over 5 1/2 per cent.

    11. Of course there is room for more progress on debt, which remains around 72% of GDP. But overall these are big changes signalling big advances in stability and prudence – and these advances have also brought greater convergence.

    Structural reform

    12. Macroeconomic policy will not in itself guarantee the levels of employment and growth that we want to see for Europe and the rest of the world. It is on the supply side that the rate of sustainable non-inflationary growth that an economy can achieve is determined. Structural reforms are essential for any country to remain competitive in this global age.

    13. Reforms of labour, product and capital markets that are now being suggested represent a third way for Europe. A third way which combines our enduring commitment to social cohesion and social justice with a commitment that, through economic reform, we help to ensure that Europe enjoys the rewards of an efficient dynamic economy.

    14. Globalization brings big opportunities and significant economic and social benefits, but it brings risks and social costs too. The benefits are not evenly distributed. People must now respond more quickly to the uncertainty and unpredictability. Jobs may not last as long and skills may quickly become obsolete as technological change accelerates. This can be difficult for people to accept and those who are unable to adapt quickly can get stuck in a vicious circle of social exclusion. But we can be sure that the social costs of doing nothing of isolationism or of protectionism are far higher. Open international markets benefit us all.

    15. In Europe, the challenges may not appear so severe. The EU has some of the most efficient, competitive, and well-regulated markets in the world. But we must be frank. With the advent of the single currency from 1.1.99, prices will become more transparent, exchange rate uncertainty will be reduced, and competitive pressures will sharpen. Less efficient industries will no longer be able to hide behind the fig-leaf of exchange rate uncertainty. If we want to make EMU a success, and if we want our economies to be able to deal satisfactorily with shocks, Europe’s governments must turn to the supply side, undertaking fundamental reform of labour markets, product markets and capital markets.

    16. It is vital that as Governments we take the actions that are needed to help tackle unemployment and raise employment. We need to combine making the structural reforms that are needed in our labour markets with measures to improve the employability of our workforces. We need, for example, to review our tax and benefit systems and make sure that they give the necessary incentives to make work pay and we need to ensure that our education systems are producing school leavers with the written, oral, numeracy and other basic skills that employers need and should expect.

    17. We have already made good progress. At both the EU level and individually within member states we are all doing this. With the Employment Chapter, Employment Guidelines and Employment Action Plans we have a new framework for policy and action at the European level. We have agreed employment guidelines with specific targets for action and each member state has produced Employment Action Plans showing what they are doing to implement. It is only by making the necessary reforms that we will tackle unemployment and raise living standards across the EU. But we have made good progress.

    18. But it is not only in the labour market that structural reform can yield significant results. In product markets, we must strive for a competition policy that creates more dynamic markets, is effective against those cartels and monopolies that hold new businesses and job creation back, and – in large areas where European-wide competition is still inadequate – pushes forward the frontiers of the single market. We must also work to increase competition internationally. So the era of anti-competitive policies is ending. The era of new pro-competitive policies and prosperity is beginning.

    19. In the financial markets, EU states have increasingly opened up to firms from other member states, widening the choice for consumers to let them widen portfolios and diversify risk. Many are working on far-reaching pension reforms which will significantly expand their capital markets. Regulatory and investor protection systems are being improved. But we know that there is much more to be done.

    20. More efficient equity markets have the potential to expand significantly, to the benefit of investment and jobs. The era of ignoring capital market reform is over. The era of pro-investment capital market reform has begun.

    21. There is also significant potential growth for venture capital markets. Britain’s venture capital market has been a significant creator of high quality jobs and companies. But it is much smaller than that of the USA. There is a new interest throughout Europe in examining how to enlist capital as a more effective route to job creation.

    Progress

    22. The EU has made significant progress in advancing the economic reform agenda. This year at Cardiff, Heads of Government agreed that Member States should each produce short annual reports on their product and capital markets, for discussion with their peers. And the Commission will produce a report too, for those common policies which impact on product and capital markets, such as competition and the Single Market.

    23. It will clearly take time to get results – there are no quick fixes with economic reform. But we should be encouraged. Economic reform has been recognised as the next big challenge for Europe in the globalised economy, and together Member States have set out an ambitious programme.

    Free trade

    24. Globalisation requires us to look beyond Europe. We remain committed to working with others to keep markets for trade and investment open while pushing for further and deeper liberalisation for the benefit of all.

    25. The gains from free trade are clear: better quality and more choice at lower prices. Efficient and innovative firms building a dynamic economy with rising growth productivity and living standards.

    26. But some fear free trade and globalisation leading to calls for protectionism. These pressures are increasing in the face of widening trade deficits with Asia. However, these fears are misplaced and must be resisted. The global economic crisis is causing painful adjustment – which is a necessary part of the cure for the crisis. We must not yield to the temptation to fall back on a protectionist response against cheaper imports. This is not an example of ‘unfair’ competition. Trade must be allowed to drive the restoration of global growth levels and re-integrate the countries in crisis back into the global economy. We have already pledged to guard against protectionism – but the surest way to fight protectionism is through further global trade liberalisation.

    27. The free trade message must be kept on the agenda – especially given the slowing of the growth of trade. This is why we are giving our full support to an early start to a millennium round of comprehensive liberalising trade negotiations at the WTO.

    28. The recent turbulence in world financial markets has led to some calls for capital controls. It is certainly clear that short-term capital flows can be destabilising and can disrupt markets when investors are insufficiently informed and when institutions lack credibility.

    29. But a retreat to capital controls is not the solution. This simply damages the prospects for stability and growth.

    30. So we favour an approach to capital account liberalisation which is bold in concept, but cautious in implementation. It has become clear that a host of preparatory reforms are needed before countries can fully benefit from integration into the world economy. Orderly liberalisation requires sound banking and financial systems and appropriate macroeconomic policies – consistent with the codes of good conduct we have proposed fiscal policy and monetary and financial policy.

    31. I hope that all in Europe can firmly back this consensus – both in encouraging properly sequenced liberalisation and in opposing unilateral actions taken as a substitute for necessary reform.

    Conclusion

    32. This programme of economic stability and structural reform will maximise our contribution to global stability and growth.

    33. We will have a Europe that builds on our long standing strengths of stability and cohesion as a continent but which makes reforms where necessary to compete more effectively globally.

    34. And it will mean we are better placed to steer a course of stability in an uncertain and unstable world.

  • Defence Committee – 2021 Evidence Given by General David Petraeus

    Defence Committee – 2021 Evidence Given by General David Petraeus

    The evidence given by General David Petraeus, the Commander of US and NATO forces in Afghanistan (2010-11), at the Defence Committee on 23 November 2021.

    Examination of witness

    Witness: General Petraeus.

    Chair: Welcome to this Defence Committee hearing on Tuesday 23 November 2021. This is our final session looking at Afghanistan. We have two panels today. I am delighted to welcome General David Petraeus, who will be our witness in our first panel. We will be looking at various aspects of Afghanistan, and we may at the end, if time permits, look at Poland, Belarus, Ukraine and eastern Europe as well. We are very grateful for your time this afternoon. You have had a huge amount of experience, firstly in the armed forces—I think it was 37 years. You have had a series of four-star command appointments and were USCENTCOM commander. What is pertinent to our discussions this afternoon is that you were in charge of US and international forces in Afghanistan itself. To kick us off, I turn to John Spellar.

    Q191       John Spellar: General, the US, UK and other allied troops withdrew from Afghanistan following the Doha agreement, but how might the withdrawal through 2020 and 2021 have been better managed from a military perspective?

    General Petraeus: First of all, I think it is important to recognise that there were alternatives. We could have finally acknowledged that although you cannot win Afghanistan, because of the sanctuaries that Pakistan provided or allowed for the Taliban and other insurgent and extremist elements, you could manage it. For all of the imperfections, the flaws and the maddening issues with the Afghan Government, I would submit that it was vastly preferable, not just from our national perspectives, but from the perspectives of most of the Afghan people—certainly the women—to the Taliban Government. It will have a very serious challenge not just governing and providing basic services, but even keeping the lights on and keeping the banking system solvent, among a variety of other challenges.

    There were a lot of ways that this could have gone more smoothly. The biggest would have been to recognise the potential for the psychological collapse of the Afghan security forces. This was not inconceivable; in fact, I publicly said on air some three months prior to their collapse that I did fear a psychological collapse of those forces because of the way in which they are structured. They had to be fairly large—an army of, say, 130,000 to 150,000; they were certainly not at full strength and there were challenges with that—and they had to defend everything around the country that matters: the major population centres and the major elements of infrastructure. There is no alternative to that. They have some help from local police, but not much.

    Then you have a very large reserve, with local reserves out in the provinces but then a central reserve in the major bases of Afghanistan, so you need to have both rotary-wing and fixed-wing air mobility. The US insisted on providing sophisticated US helicopters and planes for transport and close air support, and these required some 15,000 to 20,000 contractors to keep operational. They were way beyond the capacity of the Afghan maintainers, if you will. The Afghans could maintain the old Soviet or Russian systems, but they could not maintain the much more sophisticated—and, to be sure, much more capable—US systems. Once I realised that these were going to be pulled out in addition to our forces, which necessitated the withdrawal of the other coalition forces, which were between two and three times the size of the US ground forces, I feared that the Afghan forces out in these far-flung locations would realise that no one was coming to the rescue with reinforcements—that is where the commandos and other special operators would come into the mix, and they were quite capable—close air support, emergency resupply and aeromedical evacuation capabilities. Once they realised that was not coming, I do not know how you would rationalise continuing to fight.

    In particular, as they discussed, their local political counterparts were getting text messages from the Taliban as the Taliban carried out quite a sophisticated campaign of simultaneous attacks all around the country, augmented by the more than 5,000 Taliban detainees that, as part of the Doha agreement, we had insisted be released by the Afghan Government, which we did not allow to participate in the discussions over the future of their own country. Again, the big mistake here was not anticipating this kind of collapse, hence we first pulled out all of our military along with all the diplomats and all the others to whom we had a moral obligation to withdraw.

    We then had to rush them back in when the Government collapsed and the forces surrendered, essentially. Of course, we had what was on the one hand a very impressive withdrawal of individuals—some 120,000 or so in a matter of less than two weeks—but also a very chaotic process, and one that has resulted in essentially leaving behind many tens of thousands of the former Afghan battlefield interpreters who served with our forces on the ground, and their family members, all of whose security is in jeopardy because of their service with us; not to mention many, many others whose service to the Afghan Government or various other organisations and entities affiliated with the US or coalition elements put their lives at risk as well.

    Q192       John Spellar: Was this a long‑term and systemic problem of assessment by ourselves of the Afghan capabilities, or was it greatly exacerbated during the course of this year?

    General Petraeus: Once again, you withdraw this critical element. There is no other way to structure forces in a country that is vast, very mountainous, in the shadow of the Hindu Kush—in fact, as you know, the Hindu Kush defined the spine of Afghanistan—and has very limited road and other line-of-communication infrastructure. You have to have individuals out there defending all of that and you have to have forces that can respond to it. That requires air mobility, both fixed and rotary wing, depending on how far you are going to have to take the troops that are reinforcing.

    Again, once that critical element may not be present, once you realise that that could be rendered inoperable because of the lack of maintenance—keep in mind, by the way, that in the early weeks of this Taliban offensive, there were impressive responses. There were impressive responses north of Kabul in the Baghlan‑Kunduz areas; there were impressive responses outside of Kandahar, to some degree, and Herat; but over time, the capability of the Afghan forces to respond became limited. Again, once that happens, you cannot conceive of forces out there continuing to fight if they know they are essentially doomed. We would never put our own forces in that situation, yet by our withdrawal of the US forces, the coalition forces and the maintenance personnel, that is exactly what we did in this situation.

    Again, keep in mind that we were the ones who insisted on providing American‑provided stuff. I am pretty sure that when I was the commander—having departed some 10 years ago—we were still issuing Russian types of systems and some old Soviet systems, which again were much simpler: much less capable, but much more maintainable by the Afghan maintenance personnel.

    Q193       Chair: Would you agree that the actual departure—the manner of our departure, but also the general departure from Afghanistan by international forces—has been a humiliation for the west and western forces?

    General Petraeus: I think it was our Chairman of the Joint Chiefs who assessed that it was a strategic setback or a strategic failure, or words of that nature. In that regard, it is important to note that at a time when we most want to show our allies and partners around the world that we are a dependable partner and that we are not a country in decline, this handed would‑be adversaries materiel, if you will, to say, “See, we told you. They’re not a dependable partner, and they are a country in decline.” I do not believe that, and I think it is imperative that we demonstrate that that is not the case. I think that without question the individuals, the senior leaders, and the Administration in the United States and elsewhere recognise the importance of showing—not just talking about, but showing—that we are dependable partners with enormous capabilities and with the willingness to use those capabilities. At the end of the day, that is the essence of deterrence.

    If you draw it out fully into the real global context in which we are operating, clearly the most important of the big ideas—maybe the biggest and most important plate that we have to keep spinning, if you use that metaphorical image of the guy in the circus who has a lot of plates spinning, and the US has to keep more spinning than any other country, albeit with a lot of help from others, including the UK—is that which represents the US and its allies and partners’ relationship with China.

    We obviously very much want to ensure that that is as mutually beneficial as possible—co-operate where we can, compete where we must and, above all, ensure that we deter what could result in real conflict, given the potential enormously dire results of such conflict. The essence of deterrence is an adversary’s perception of our capabilities and our willingness to employ them. Certainly, this situation—at the very least, the optics of which and the reality of which were quite chaotic—does not reinforce the image of the dependability of the United States. It is incumbent on us to reverse that kind of perception, as we did, frankly, in past years, after a red line turned out not to be a red line in some other cases. Inevitably, such cases will come along, and this is certainly one of them. We have to make sure that we demonstrate that this is a one-off, not a pattern.

    Q194       Chair: We will come back to the perception and the consequence of that from an international perspective towards the end of our session. Just wrapping up on the Doha agreement, the Afghan Government was not included in the conversation there whatsoever. Would you agree that that was an error? Secondly, would you also agree that in future, it would be wise to include the British there as well? We offer alternative thought, we can give a different perspective and we can actually help provide an insight, which the United States might benefit from.

    General Petraeus: The challenge is that you have to recognise that the negotiators were trying to get an agreement that would allow us to leave. If that is your objective and you allow the enemy to know that, you are not negotiating from the strongest of positions. Your foundation is pretty weak. Unfortunately, we put our negotiators in that position, starting with the enormously capable Richard Holbrooke, for whom I was the military partner when I was the commander of US Central Command and he was the AfPak representative of the United States, as you will recall, starting around the 2009 timeframe. Fairly early on, in the speech that actually announced the build-up of US forces and also alluded to the fact that other countries had built up as well, there was also the announcement of the eventual drawdown date. From the very beginning, we made it very clear that we wanted to leave. That is certainly understandable; no country wants to continue some obligation forever, but it does not mean that you should tell the enemy that that is the case.

    Q195       Chair: This was the trouble, General. It was Donald Trump’s ambition to leave because it was part of his election manifesto, if you like, to say “Bring troops out” without recognising the consequence of what would happen next. That became the objective, simply to bring troops home, and then all the Taliban had to do was wait.

    General Petraeus: Essentially, and not only that; not only did we give them what they wanted, but we also forced our Afghan partners to release more than 5,000 detainees, so that the Taliban would agree to let us do what we wanted to do and what they wanted to do. Again, that was not one of the better diplomatic accords that we have ever reached in our diplomatic history, to put it mildly.

    Chair: Thank you for that, General.

    Q196       Sarah Atherton: General, I was going to ask about the prisoner exchange and the fact that the Afghan Government were not involved in the Doha agreement, but were effectively signed up to that prisoner exchange.

    General Petraeus: They were forced to do that. They were compelled by our senior diplomats to accede to that. I should note that they got 1,000 or so of their detainees back as well, but that is a pretty lop-sided detainee exchange, if you will. Certainly, the well over 5,000 by and large, according to most accounts, went right back into the front lines and helped enable that simultaneous Taliban offensive of which I spoke earlier.

    Q197       Sarah Atherton: You just answered the second part of my question, which was: how much did that impact on the Afghan Government’s security forces collapse? By the sounds of it, you would probably assess that it had quite a large impact. You mentioned before the Foreign Affairs Committee that the US should have maintained a continued presence in Afghanistan, and I think the UK Government would agree to that, although the US is taking a slightly difference stance. Has the withdrawal damaged the trust of the special relationship, and what about the credibility of NATO going forward?

    General Petraeus: I think I have spent three of the last seven weeks in Europe. One was in Warsaw for a security forum—in fact, Tobias was there as well, as were a number of other individuals from throughout the alliance in Europe. Another week was in Rome, at a major defence industrial company’s anniversary and a variety of other events and activities. Then I had six days in London. Before going over there and resuming international travel, having not done much of that over the course of the previous 20 to 22 months or so, I thought I understood that the relationships had been bruised somewhat—in other words, that our NATO leaders and partners in particular felt that they had not truly been consulted on this. Rather, they had been told that this is what we were going to do, without much dialogue about it. Indeed, many, if not most, of the European countries and, I think it is fair to say, the leadership of NATO preferred to manage what was going on in Afghanistan, rather than to leave.

    Again, the challenge is that you have to accept that you could not win but that you could manage. It would be frustrating, unsatisfactory, maddening and so forth, but demonstratively better than the alternative. We are seeing the alternative now: it is a return of the country to a seventh-century interpretation of Islam. Girls cannot go to school—certainly not high school—and women cannot go to college. Women, by and large, are shut out of the economy and basically told to stay home. The banking system is in freefall and will probably collapse. They had the worst drought in 35 years, except that they now have those about every five to 10 years, and they are going to have a very hard time just keeping the lights on in Kabul, much less keeping people fed.

    Again, I would contend that the alternative to this flawed Afghan Government, however imperfect, was preferable, noting that it would have required us to keep some 3,500 US troops, a very substantial armada of drones and close air support, and other capabilities there. It would have also required us to advise and assist units to help our Afghan partners on the battlefield, in addition to the very important train-and-equip missions that were being shouldered by the coalition effort, and it would have required the critical maintenance personnel who are maintaining the sophisticated US transport and close air support air assets.

    Q198       Sarah Atherton: If trust has been damaged, how do we rebuild it?

    General Petraeus: You have to demonstrate. You can talk about it and say that this is a one-off, and you can certainly make a case for why we withdrew. The President of the United States did as well as you can in making that case in some of his speeches. But that said, it is all about what we do going forward, particularly when it comes to the really significant threats that are out there right now—the one confronting eastern Europe and our NATO allies and partners is obviously that represented by Vladimir Putin’s forces massing on the borders of Ukraine and Belarus. There is also the substantial competition that is ongoing—that is the term in Washington—between the United States and China. Of course, it is the US and all its allies and partners together, because we want this to be a coherent, comprehensive and whole of Governments—with an “s” on the end—approach to China.

    Again, it comes down to what we do about our posture in Iraq. Do we keep forces in Syria? How about at al-Tanf? What about in Africa? What about in other locations around the world? What do we do about eastern Europe? How can we be firmer, but not needlessly provocative, together with our allies and partners? You just have to rebuild it, but we should acknowledge that this has damaged the very important trust between our country and others, including the special relationship with the UK. Again, this has happened in the past, and you have to get through it. We can get through it, and I think we will, but it takes first an admission—maybe not public, but certainly private—that that is the case. I think that is present in Washington. Then it takes actions, based on that acknowledgement, to indeed demonstrate that the US is a very dependable partner and has the capabilities and the willingness to employ the capabilities that are necessary to deter would-be adversaries from taking adverse actions.

    Sarah Atherton: Thank you, General.

    Q199       Chair: Would you concede that our adversaries and competitors have watched very carefully what has happened in Afghanistan? They have seen a hesitance; they have seen us become perhaps more risk-averse collectively. They could certainly try to leverage that.

    General Petraeus: I think that is a fair observation, but I do not want to take that too far. This is the result of a conviction formed at the very highest level of our Government some years ago that this was not worth continuing; in that respect, this is a bit of an isolated situation, if you examine it. But, again, the onus is on us to disprove the notion that we are not a dependable partner when it comes to issues that really matter. In terms of the ongoing situation in eastern Europe—I know we are going to talk about that at the end—the US has already been very firm and very public. US leaders at the very highest levels have called their counterparts and had firm conversations with them. We have discussed this with our NATO allies and partners and with Ukraine as well. There have been trips out there by the Defence Secretary and others. Our NATO allies and partners, and the Secretary-General and others, have all made statements. We have forces deployed on the ground in the three Baltic states, for example. There are considerations on other actions that can be taken to shore up Ukraine and so forth. That is a demonstration that the US is a capable, dependable partner, but we will have to continue to demonstrate that in the months and years that lie ahead.

    Chair: Thank you for that. Emma.

    Q200       Mrs Lewell-Buck: Afternoon, General. Could I move on to the fall of the Afghan Government? Like a lot of people, despite being on this Committee, I am still struggling to get my head around why it fell so quickly. Could you share you views on why that was? Was it a failure of training support given to the Afghan security forces, or was it a failure of planning intelligence from NATO allies?

    General Petraeus: At heart, it was really about that critical element of the Afghan security forces degrading in its operational capacity. That was the ability to reinforce forces who are under pressure around the country with capable soldiers, equipment, close air support, emergency resupply and aerial MEDEVAC. The readiness of the helicopters and planes degraded, as was inevitable, and they got shot up—a lot of them had battle damage and so forth. The 18,000 or so western contractors that used to maintain this alongside Afghan maintainers, while trying to train the Afghan maintainers, were no longer present. Once the troops on the front lines realised that, you saw this, what I term, psychological collapse. They could have fought on, but in many cases the Taliban were massing forces against Afghan elements. Although the Afghans, on paper, had 300,000, half of that is police, so strip those out, and then take out the reserves and take out ghost soldiers, and you are down to smaller numbers.

    The Taliban at these different locations around the country could mass forces that were larger and more capable than the Afghan security forces on the ground defending population centres, critical infrastructure etc. They were essentially doomed. They realised that. Their political counterparts at the local level were texting with the Taliban in a number of cases—again, another element of sophistication of the Taliban offensive, which was simultaneous around the country. And these political figures were saying, “Why should we fight?” Why are you going to destroy this city when you know you can’t win because there is no help coming the way you have anticipated, because of the way the entire structure has been set up?

    That is not to say we were perfect by any means in all our train and equip. It is to say, by the way, that the notions that some have suggested—that we should have made our Afghan security force partners more like the insurgents—are nonsense. They were counter-insurgents, not insurgents. They have to defend. Insurgents can withdraw up into the hills; they can attack at a time and place of their choosing and then withdraw. In this case, the insurgents have pressured enormously—they could literally withdraw back across the border into Pakistan. There is a reason the Taliban leadership is called the Quetta Shura—because it is located outside Quetta, the capital of Balochistan, a province of Pakistan. There is another element called the Peshawar Shura, which again is because it is in North Waziristan not far from there.

    At the end of the day, that was the critical challenge. This is something that, as I said, several months before it happened, I began to worry could be a result of the withdrawal of our forces, which necessitated the withdrawal of the coalition forces, which necessitated the withdrawal of the western contractors.

    Again, could we have done better at various aspects? Sure, we could have. One of the questions that we have to ask ourselves is, was it right to insist that we provide very sophisticated US helicopters and fixed-wing aircraft, or could we have continued to provide Russian or old Soviet types of systems that were less capable but more maintainable for our Afghan partners?

    Q201       Mrs Lewell-Buck: General, I will try to drill down a bit more. You have explained why the fall happened so quickly, but what was happening in terms of the intelligence that was around at that time? How did nobody see it coming? You have given a clear account of what happened and why you think it happened. Why do you think that nobody else spotted that it was on the horizon and put things in place to mitigate it?

    General Petraeus: Obviously I am not inside the CIA any more and I was not privy to the intelligence, so it is pretty hard for me. My understanding is that, as this transpired, the timelines grew shorter. There were some who did say, “We fear this worst-case situation.”

    Certainly, the inability to imagine that was one reason that we ended up in this paradoxical position where we have withdrawn the military first and left the diplomats, development workers, intelligence officers and Afghan partners behind. It is a little bit as if we do not realise how fully damaged the Titanic has been by hitting the iceberg, so all the men leave first on the lifeboats and the women and children are all left behind.

    In this case, we had to go back in with the military in substantial numbers—I think at least twice the number that we had had on the ground prior to our withdrawal—to secure the international airport because of the enormous pressure it was under from people trying to leave. By the way, just as an aside, for all those who say, “It’s great now that the security has improved,” actually, there are attacks all around the country by a combination of the Islamic State resistance forces that are developing and others, and even internecine, if you will, disagreements between the Afghan Taliban and the Haqqani element of it.

    The Haqqani element seems to have prevailed right now, including the individual who is the Minister of Interior, Siraj Haqqani, on whose head was a $5 million bounty. He is the guy picking the governors and a variety of other positions, presumably with the approval of the overall leader of the regime.

    It has been a difficult situation to try to assess. I have a degree of understanding of that, having been a director of the CIA and having tried to anticipate what can happen. At the very final end of the day, what you are trying to do is understand Ashraf Ghani, who all of a sudden just left with a number of his close associates without giving any real notice, presumably because he decided, “Well, we could fight around Kabul, but how much damage will that do to the city?”

    All the leaders, of course, remember the horrific situation in the early to mid-1990s when there was a true civil war between a variety of different factions, some closing in from the north, some from the east and others from the south, all of whom ended up shelling Kabul and doing enormous damage to the city that was still very visible in the early years of our return to Afghanistan. I think Ashraf Ghani decided, “Let’s just avoid that. We can’t win, so let’s just leave and they will take charge of it.” Of course, that left a vacuum that was part of the problem.

    It is hard for me to second-guess individuals without knowing what they said, when they said it, and what basis for that was offered.

    Mrs Lewell-Buck: Thanks, General. I appreciate it.

    Q202       Chair: Before we move on, can I just ask for your thoughts on Pakistan? Were you frustrated with their outside and proxy influence in what was going on in the country?

    General Petraeus: Sure. Obviously, it is very frustrating to deal with Pakistan. At certain junctures, particularly in 2009, Admiral Mullen and I and Ambassador Holbrooke and others invested an enormous amount in relationships with key individuals in the Pakistani Government, especially with the chief of army staff in the case of the military, who really is not just the senior military leader but, in many respects, the most powerful individual in Pakistan.

    In 2009 there was a superb offensive by the Pakistani army against the elements of the Pakistani Taliban—not to be confused with the Afghan Taliban or the Haqqani network or others—that were threatening; they were almost a dagger pointed at the heart of Islamabad from Swat valley. They did a terrific job of conducting offensive operations and then counter-insurgency in Swat, Bajaur, Mohmand, Khyber, Orakzai, South Waziristan. They were closing in on North Waziristan when they seemingly culminated, as that term is used—in other words they could go no farther. The problem was that it was in North Waziristan where you had the Haqqani network headquarters and many of their bases. You also had a number of al-Qaeda elements, the Islamic Movement of Uzbekistan and a handful of others.

    The army never did anything about the Taliban down in Balochistan. Years later, there was a confession by a very senior Pakistani leader that they had an agreement, essentially, with the Balochi leaders that they would do nothing in Balochistan other than run the staff college, which is in Quetta, the capital. They had border posts, as well as the major border crossing into Kandahar province, but nothing else, for fear that they would set off a Balochi insurrection. That meant that the Taliban had free reign inside Balochistan, by and large. There was only one strike ever publicly known in that particular area.

    So Pakistan was very frustrating. Despite professions like, “Okay, we’ll do this” or “We’ll do that,” it never quite materialised. We were totally dependent on the lines of communication into Afghanistan from Pakistan until we got the northern distribution network established during my time as US Central Command commander, but that didn’t help at all. Certainly, it did not help the forces that were down where yours and ours were, in places like Kandahar and Helmand and so forth, nor did it help those in the east, which would come through the Khyber Pass. Those two crossings were essential. We did not want to have to fly everything into the country, as we had to for a 45-day period when they did close those lines of communication in late 2011 as a result of a terrible incident in which a number of Pakistani soldiers were killed in a dispute over whether they were over the border or not. The result was they were dead, and the Pakistanis closed those lines of communication. We saw how problematic that was. It was as problematic as we expected it would be—and as costly as well.

    That was one of the most frustrating elements of the context in which this was carried out. It was the principal reason that, when I did an assessment in Afghanistan as a three-star general coming home from my three-star tour in Iraq—Secretary Rumsfeld asked me to do an assessment of Afghanistan on the way home—the very first slide in that briefing was titled: “Afghanistan does not equal Iraq”. The No. 1 difference between Afghanistan and Iraq was the enormous sanctuaries that the insurgent and extremist elements had in Pakistan. They became more prominent, actually, as the war went on. That meant that you literally could never totally prevail, and therefore you had to ultimately acknowledge that the result was going to be unsatisfactory, but again, as I mentioned, it still might have been managed.

    Chair: Thank you for that; it was very comprehensive. Let us turn to the last few months of the campaign itself and the decision to depart. Derek, over to you.

    Q203       Derek Twigg: General, after you finished your terms as commander of ISAF and director of the CIA, what was your thinking on where we would be on Afghanistan 10 years later?

    General Petraeus: I had a pretty measured expectation of what we would be able to do. The unknown, certainly when I left command in Afghanistan and went to the agency, and frankly even after leaving the agency, was whether we would withdraw based on conditions having been achieved that enabled and supported that kind of withdrawal decision, or whether we would withdraw regardless of the conditions. Of course, ultimately, the previous US Administration and the current one withdrew regardless of the conditions, perhaps not appreciating how bad it would be, but with an expectation that it was going to be much worse than it was while we were there.

    That is the key aspect of this. If you are going to withdraw regardless, you have to accept what will transpire. If you are going to withdraw based on conditions, presumably you can continue to manage the situation longer, but it will be frustrating, costly and all the rest of that. I would have argued that it was sustainable. Sustainability is measured in the expenditure of blood and treasure. We had not had a battlefield loss in 18 months prior to the tragic loss at the gate at Kabul International airport when the suicide bomber blew himself up. Frankly, the cost was vastly reduced as well. It was not trivial; it still would have been in the order of the small tens of billions of dollars, but in a Defence budget of $730 billion or $740 billion, that can be accommodated, especially if you assess that the result could be pretty catastrophic and that you will still have to devote a considerable amount of resources to keeping an eye on extremists and others who could cause challenges for you.

    That is the reasoning, if you will. Again, I was very careful, especially with Congress, to lay out that we would not be able to achieve in Afghanistan what we achieved in Iraq. As you will recall, during the course of the 18 months of the surge in Iraq that I was privileged to command as well, we drove down violence by 85%. We gave entire new opportunities to the land of the two rivers, if you will. That was sustained for three and a half years. It was the Iraqi Prime Minister’s actions that undid that, not the actions of the enemy. His actions allowed al-Qaeda in Iraq—by then Islamic State—to reconstitute itself over the course of a couple of years, which forced us a few years later to have to return troops to Iraq. That was actually a very sustainable situation, but it was undone by the host nation leader, not our actions. They had pretty good security forces at the outset; in fact, we were able to reconstitute those pretty quickly when we went back in to enable them to defeat Islamic State and eliminate its caliphate and so forth, not only in Iraq but, with our Syrian Democratic Forces partners, in north-eastern Syria as well.

    I never assessed that that was going to be possible in Afghanistan. I said we could drive down violence year on year but that we should not expect a transformation of Afghanistan in the way we were able to transform Iraq, given the sanctuaries and the other challenges of Afghanistan, a country that has virtually no money and very little revenue. Iraq could generate $100 billion if oil prices were over $105 a barrel, if we could get the pipelines patched up, the pumping stations all going and the electrical lines providing power to it.

    You had no prospect remotely like that in Afghanistan. There was a very high illiteracy rate, which required us literally to teach individuals how to do basic reading and mathematics before they could do basic training. Just on and on, the challenges in Afghanistan were vastly greater than those in Iraq, even though the levels of violence historically in Afghanistan generally were a good bit below the levels of violence prior to the surge in Iraq and during probably the first four to six months of the surge as well.

    Q204       Derek Twigg: Based on your experiences as commander of ISAF and director of the CIA, do you think that there was ever a possibility of retaining a stable, “democratic” Government, or were the Taliban always going to come back at some point?

    General Petraeus: It depended on what we were willing to do. Again, there is a lot of argument about that here in Washington, but I think that with 3,500 troops, a lot of drones and the right rules of engagement whereby we could help the Afghans fight not just the extremists but the Taliban, we could have sustained a situation. It would have been difficult in the areas that were being contested, but by and large the major population centres, the major infrastructure and so forth could be secured, and I would contend that that is preferable to what it is that we are seeing now in Afghanistan and what we are likely to see in the months that lie ahead, which are going to be brutal. This winter is going to be horrible for the Afghan people. They are going to suffer in innumerable ways, even if we work out methodologies to get humanitarian assistance into the country in a way that doesn’t enable or enrich the Taliban in so doing.

    Q205       Derek Twigg: What lessons do we learn from the collapse of the Afghan security forces in terms of going forward with other partner security forces for the future?

    General Petraeus: If you build them around the importance of a capability to reinforce them when they are under attack, and then you undermine that capability, you should expect a collapse. I mean, that is the simple—again, there are lots of issues that we didn’t get right at the outset.

    By the way, let’s remember that the most important issue here is that we didn’t even get the inputs right in Afghanistan until late 2010, which was nine years on from the invasion and the toppling of the Taliban in late 2001. And that was because very early on we were reluctant even to plant a flag—in other words, to put a headquarters and a two-star or three-star general on the ground. We ultimately did that. Read the book Not a Good Day To Die by Sean Naylor about how chaotic the command and control and operational control situation was during Operation Anaconda, during which Osama bin Laden and many of his al-Qaeda elements were able to escape to Pakistan.

    We then did put a headquarters on the ground, but we shifted focus very quickly to the campaign that was going to be conducted in Iraq. That kicked off, of course, in March 2003. And as Admiral Mullen used to say in later years, “In Iraq, we do what we must; in Afghanistan, we do what we can”. And I was part of that problem, because as a two-star, three-star, four-star commander I was always asking for more, especially as the commander of the surge. We basically got everything that was available in the US military and then some additional coalition forces as well, and we required all of that to achieve the results that we did, especially before the patience of Congress ran out.

    It was only after the drawdown of the surge forces, and then a further drawdown, that we could begin to shift assets to Afghanistan, starting in late 2008 and into 2009, with the Obama policy review. The catalyst for the second review—the big review—was the McChrystal report in the late summer of 2009.

    As a result of that policy review and the commitment for 30,000 additional US forces and other capabilities, and other coalition forces, by late 2010—when coincidentally I was the commander, but again a lot of this was put in motion by General McChrystal and me as his boss at central command and the Pentagon—we had the inputs almost right. By “inputs”, I am talking about the rough level of resources, the right strategy of big ideas, the right people to execute it, the right preparation of our forces, all kinds of programmes, the right organisational architecture, which we also didn’t get right for a very long time, and different elements like the anti-corruption taskforce that General McMaster established when I was the commander, and the Afghan local police, which was probably long overdue but then proved to be unsustainable over time—a whole host of these initiatives—and the effort against the opium trade and the crop substitution and all these others.

    The problem then was we knew that we only had a limited period of time before we were going to have to start the drawdown in July 2011. That was staring us in the face, and as a result we tried to accelerate everything, and that is probably not good because you throw money and resources and everything at it that distorts various elements of the economy and so forth. It makes corruption more possible.

    Again, the big issue here is that we did not even get it right roughly until late 2010. There were nine long years where we missed the opportunity to capitalise on the many early years when there was very little violence, during which the shattered Taliban were in Pakistan reconnecting, regrouping, gradually putting their toe back in the water in Afghanistan and coming back. So by the time we finally committed the forces, it was because they were on the march. Keep in mind that 2008 and 2009 were very tough periods in Afghanistan and, again, it was not until 2010 that we halted that momentum and reversed it, achieved a good bit of progress during the year leading up to the summer of 2011 and then had to start drawing down. Something that we had right from the beginning, and it was really hard, is that we failed to capitalise on the opportunities we had, and as a result we were always reacting to the enemy instead of the enemy reacting to what we were doing. And then, of course, we stated that we wanted to leave; we told the enemy we wanted to leave. How can your negotiator negotiate from a position of strength if the enemy knows you want to leave?

    By the way, in Iraq, I refused to tell Congress that we were going to pull our surge forces out in accordance with a certain timeline, even though I knew we were going to have to do that. There was no alternative. We had already extended our soldiers—the army forces—from 12 to 15-month tours on the ground in Iraq and Afghanistan to accommodate the need in Iraq for those additional forces. We had to draw down. It was, again, inevitable, but the Administration supported me saying to Congress, “I will tell you when the conditions are met.” Happily, the conditions were also met, in part because the enemy knew we were not going to leave and therefore there was a greater inclination to conduct reconciliation as well as we went around and got this comprehensive civil-military counter-insurgency campaign there.

    Q206       Chair: Thank you, General. That was a very comprehensive reply. We are going to slowly turn to the recent evacuation and then look ahead in the last few minutes. Before we do that, can I have two concise responses, please? You mentioned General McChrystal. Back in 2009 he observed in his 60-page analysis, which I think you referred to, that you had an over-centralised model of governance. You know, and we all know now from all our studies of the country, that it has never been run from the centre. Surely, this was something back in 2001 that was a schoolboy error. We should not have been trying to do everything from Kabul. Would you now concede that that is the case?

    General Petraeus: I generally would. For what it is worth, I am literally working on the top 10 reasons we did not achieve all that we should or could have, and this is one of those. I am on a bit less firm ground here, candidly. I was not at Bonn and I was not part of the original political structure. I was riveted on Iraq all the way through September 2008, other than that one assessment that I conducted for Secretary Rumsfeld in September 2005 on the way home from Iraq. I think that is correct and I do have it as one of my top 10 reasons, but I am a little less certain, specifically, about how, for example, provincial governors and provincial chiefs of police have been selected. I would argue that we were sensitive to this. Certainly, when I was the commander, our mutual good friend Brigadier-General Mark Martins and I tried to re-establish the Huqooq system, which is a local legal member whose president district ties into the province and so forth. It is challenging and I am on less solid ground there than in, say, the security areas.

    Q207       Chair: In the same vein, I think the quote of yours that I have used more than any other is, “It is not enough to defeat the enemy; you’ve got to enable the local.” That sums up what should happen in every combat situation and in every area of conflict. When I look at Afghanistan, in so many projects across the country—the copper mine contract that it took forever to sort out; the Salang tunnel, which you will be familiar with; the Kajaki dam—we did not take advantage of the umbrella of security that you created. You probably visited Helmand province. America went there in the 1950s. You can still see the stamps on the agricultural structures that created the irrigation systems that allowed the province, and the River Helmand, to become the bread basket of the country. There was nothing like that, on the scale required, in these 20 years. We didn’t really lean into it, did we?

    General Petraeus: This is my point: especially in the early years, instead of going all in on Afghanistan, we hesitated. We shifted focus, and then ultimately we had to go all in on Iraq. That required everything that we could possibly muster. It meant that Afghanistan was a supporting effort, not the main effort. Had that been different, it is very possible that the outcome would have been much more positive for Afghanistan.

    Let me take advantage of this opportunity to say this. There are people who say, “It all went wrong when we did nation building.” Look, you have to do nation building. If you do not build the host nation’s security forces and critical institutions, how do you hand off tasks that you are performing for the country? By the way, we are now finding how many different institutions were established and performed various roles—some more important than others, to be sure. They are all basically collapsing. Those services, the actions that they took and the activities in which they engaged are all withering or ending. These were all important to the Afghan people. We will see the impact of that, especially during the course of what will be a brutal winter for Afghanistan.

    Chair: General, thank you for that. Let us turn to more recent events. Richard Drax.

    Q208       Richard Drax: General, good afternoon. Time is pressing and you have, I think, answered this question in part already. I noted your comment about the withdrawal; that is what I am putting the spotlight on. You said it was an “extraordinary logistical accomplishment”, but you were not so keen on the lack of “meticulous organisation and co-ordination”; you described the withdrawal as “quite chaotic”. Bearing in mind that hindsight is a wonderful thing, in your view, as a professional soldier, how should it have gone?

    General Petraeus: Again, this hinged on the recognition, which was not present sufficiently clearly, that once this critical component—this ability to reinforce Afghan forces out on the frontlines—was degraded, you would see an epidemic of collapse. What would happen is they would see some units somewhere surrender to the Taliban, and then begin to wonder, “Why are we still fighting if there are no reinforcements coming, and there is no emergency resupply and no close air support?”. You would have this epidemic of surrender. I did somewhat envision this and warn about it some months in advance, when looking at the degradation of the air resupply and close air support capability, but without accepting that that would be the outcome.

    Of course, you could go ahead with what we did, which is pull all the military out except for a security force around the US embassy, and say, “Well, this is done”—except, of course, it wasn’t. Then the Government collapsed, and the Taliban rushed in; and then we were in a situation where all our diplomats, development workers, intelligence officers and a host of others—American citizens and green card holders—were left behind. We had to go back in and get them out.

    Of course, there was panic in the city—a city of some 7 million people, many of whom were trying to get into Kabul international airport. That press meant that it was impossible to have an orderly process—with a few exceptions. I might note with a bit of quiet pride that the CIA—it is publicly known—did a very orderly evacuation of many of the individuals with whom it had partnered in the country, using a very careful method; but that wasn’t available to other elements.

    Q209       Richard Drax: General, can I quickly butt in? That is what happened. I am just asking you what, in your view as a professional soldier, could or should have happened better. For example, should people have been withdrawn far earlier, or should the withdrawal have begun months before? Should there have been more than just one exit point? From a military perspective, you have said it was quite chaotic. It was chaotic because it was rushed—you’ll accept that—but could it have been done better?

    General Petraeus: Obviously, it could have been done better, and with the prescience of hindsight we can map out how it could have been done. You could have done it from, say, Bagram, Kandahar, maybe Mazar-e-Sharif and maybe even Herat, so you get north, east, south, west and the centre of the country in Kabul international airport. It could have been, “Okay, let’s pull all of our diplomats out except for a very, very small number. Let’s close down all these other activities.” Of course, if you do that—we have to be fair to the Administration in this regard—the fear in Kabul and apparently expressed by the Afghan President and others was, “If you pull out everything like that, everyone is going to lose hope and everyone is going to try to leave the country.” I do not doubt that whatsoever.

    By the way, we also did an abysmal job—not just in this case but in the previous Administration, and arguably even dating back a bit to the earlier one before that—in meeting our obligation to those who qualify in the US for a special immigrant visa by having served two years on the ground with our soldiers as a battlefield interpreter. I am part of a group called No One Left Behind—I am on their board of advisers—

    Q210       Richard Drax: General, forgive me. Would it be fair to say that had this pull-out happened in another way, it would have put the fear of God into people earlier that the withdrawal we had was inevitable?

    General Petraeus: You are asking all kinds of hypotheticals, and I have always been uneasy with hypotheticals from elected officials in my own country, as elsewhere. Yes, there are other models that could have been employed, but they had downsides. I am trying to be fair to an Administration that was keenly aware of these and trying to balance all of it, but that in the end did not embrace the potential for what eventually would happen, which was the collapse of the security forces and the collapse of the Government, which then meant that Kabul was going to be undefended. Eventually, they just handed it to the Taliban.

    Q211       Chair: Thank you very much for that. Before we move on to the final points that we talked about, General, you shed a lot of blood, sweat and tears in Iraq. There are now comments being made that politicians in the United States felt that Afghanistan was not moving swiftly enough as an illustration of promoting liberal democracy in another part of the world post 9/11 and another example was required. That was therefore used to justify invasion in Iraq. I am conscious, as I said, of your service there and of the British commitment, but does it resonate with you at all that somehow the politicians in the United States wanted to illustrate the power to promote post-9/11 liberal democracy by choosing another part of the world to expand its interests?

    General Petraeus: I will defer to the individuals who were policy makers. I was a division commander at that time and trying to focus on how to get a division of 15,000 soldiers, 254 helicopters and 5,000 vehicles to Iraq, frankly, to conduct an invasion. There were a variety of motives, I am sure, behind why it was that we shifted focus from Afghanistan to Iraq pretty quickly. There has been a lot written about that, and I just refer you to that.

    Q212       Chair: As somebody who is dealing with what is going on in Afghanistan and Iraq, do you think that the international community lost its way with the opening up of Guantanamo Bay, and the utility of that, as we tried to deal with terrorism in a modern context?

    General Petraeus: Even before the Obama Administration came into office, I was saying publicly on the record that No. 1, advanced interrogation techniques were both wrong in the sense that they violate international law, and do not work well.

    By the way, for what it is worth, nobody has been responsible for more detainees than I have as an American commander in many, many decades. We had 27,000 of them in Iraq at the height of the surge and we had small thousands of them in Afghanistan, and generally, if you want to get information from a detainee and you have the time—so I am now dismissing the ticking time bomb scenario. I should be fair: in the wake of 9/11, there was a sense of a strategic ticking time bomb. I was actually deployed in Bosnia, partly with a special mission unit, part-time as a US hat—albeit a NATO officer—and we were inside the intelligence on all of this. In fact, the first counter‑terrorism operation after 9/11 was in Sarajevo, not in Afghanistan. There was a sense of a ticking time bomb at that time, and we should be fair to those who were engaged in this then.

    That said, again, our experience is that if you want information from a detainee, become his best friend rather than waterboard him. We paid a price for that, and I think Guantanamo was also wrong, in the sense that you need to approach these operations with a law enforcement mindset so that you get evidence, not just intelligence. For what it is worth, in Bosnia, we had FBI agents with us in the operations that were conducted there, and that enabled us to put, for example, the head of the Benevolence International Foundation behind bars in the United States based on the evidence that we found there, not just information that we scooped up and used as intelligence. You have to have a different mindset. By and large, in subsequent years, we have embraced that concept: when we have detained extremists overseas, we have tried to put them into our courts rather than a situation like Guantanamo, which has been so frustrating.

    Q213       Chair: Thank you, General. Just looking ahead, what next for Afghanistan itself? The Taliban spokesman was on the BBC today, saying that this winter—as you touched on yourself—is going to be harsh on the entire country, the 30 million people who are left behind, and blaming UN agencies if there is any form of famine, starvation or humanitarian crisis, rather than themselves taking responsibility for that. How do you see us firstly getting through this winter?

    General Petraeus: It is going to be brutal. Again, the economy has collapsed. The banking system is near collapse; it is certainly not functioning normally, and the drought this past year—the worst drought in 35 years, except they come more frequently now—means that the local sources of food are considerably reduced from normal. Again, this is a country that used to be able to feed itself. It cannot any longer, but it can do much better than it has done this year because of that drought.

    You are also going to have enormous refugee outflows, and I fear that Pakistan will be the recipient of most of this and the brunt of most of this. It is a fragile country to begin with; it is going to experience enormous difficulties, so there is going to be widespread starvation. The lights could go out: again, most of the electricity in the country either comes from the central Asian states by high‑tension wire lines or is generated through refined products sent in by Iran. Are they going to continue to send that if the bills are not paid? Who is going to pay the bills of all the government servants, the security forces and all the rest of that? Again, I think the projection is exceedingly dire.

    Q214       Chair: Finally, turning to terrorism itself, we went into Afghanistan to defeat an insurgency. We have handed it back to an insurgency; we have left space for terrorism to advance once again. Are you concerned that ISIS-K is going to be able to recruit and to advance its training capabilities and, indeed, its threat beyond Afghanistan itself?

    General Petraeus: Yes. By the way, if I could, with respect, we went into Afghanistan to eliminate the sanctuary in which the 9/11 attacks were conducted and the regime that refused to eliminate that sanctuary when we requested that they do that. Since they supported al-Qaeda and allowed them to retain that sanctuary, we had to go in and topple the regime in addition to eliminating that sanctuary. Our most important mission in staying was to ensure that that sanctuary was not re-established, something that al-Qaeda tried to do repeatedly, including during my time as the commander on the ground and later when I was director of the CIA, and it happened subsequently.

    Then, of course, you see the establishment of an Islamic State affiliate—the Islamic State Khorasan group—operating in the Pakistan/Afghanistan region. It has gained in strength, both from the release of its detainees from the Afghan prisons in which they were being held, when the Taliban freed all the prisoners, and now from actually attracting some reinforcements from the ranks of Afghans who want to take on the Taliban. It is a little bit akin to what happened in Syria, where when we did not support the moderate opposition sufficiently in the beginning, the moderate opposition decided, “Well, we will go with whomever has resources and is fighting the murderous Bashar al-Assad,” even if that is an al-Qaeda affiliate or even, for a period of time, the Islamic State there.

    Let’s remember that just a few weeks ago, the Under Secretary of Defence for Policy, the No. 2 policy official in the Department of Defence, stated that the assessment was that there could be an external threat within six to 18 months. That is pretty alarming. So I am concerned about that. We will have to conduct a campaign that is so-called “over the horizon”, which is very challenging.

    Q215       Chair: Okay. Thank you for that, General. Final question: we said we would turn to Eastern Europe. We spoke about NATO feeling bruised from what has happened here, looking to regroup and find a sense of purpose. Perhaps it should return to what it was originally designed to do, which is to act as an effective capability to stand up to Russian intent. Russia and Belarus are agitating in eastern Europe. First, there is Belarus and Poland, then there is Ukraine—surrounding Ukraine with battlegroups. Could you give your reflection on whether you think an invasion of Ukraine is likely and whether the threat against Poland from Belarus has now dissipated, or whether that will also continue?

    General Petraeus: Of course, we should include the Balkan states in that as well—some of course also have a border with Russia.

    I strongly embrace what you said about NATO focusing on that particular threat. Arguably, you could say that Vladimir Putin is the greatest gift to NATO since the end of the cold war. It has given NATO a very substantial reason to live. Especially if you are in eastern Europe, this is a very real concern and a very real threat.

    The challenge for us is how to respond in a way that is firm but not needlessly provocative. In this case, US policymakers, together with NATO leaders and leaders of individual countries, have actually done quite a good job in directly warning their Russian counterparts not to take certain actions, warning of the kind of dire consequences, and imposing additional sanctions in a variety of different ways already, including the ones that were just put on entities connected with the Nord Stream 2 pipeline by the US. That is the way you go about this. That is what we need to do.

    And, of course, we need to do it with special attention—candidly—to France, given that you have the additional element of the AUKUS agreement. However desirable or admirable in certain strategic respects for the Indo-Pacific, it very seriously bruised the relationship between the US and its longest standing ally. I don’t want to remind you of the fact that had it not been for the French fleet defeating the British fleet off of—

    Q216       Chair: Okay—that takes us into a whole other area.

    I mentioned that Ukraine is now surrounded by Russian troops. We know Ukraine is not a full member of NATO. Us demanding that Russia pulls back clearly falls on deaf ears. Should we be doing more to bolster support for Ukraine at this moment?

    General Petraeus: That is what is under active consideration in Washington right now and I do think that certain of the measures that are being considered would be advisable. I am very hesitant in this case to offer specifics about that, but certainly they include the prospects of additional advisers and assistants, and perhaps moving the shoulder-launched anti-tank guided missiles that we ultimately provided to Ukraine to a position closer to the eastern front. Those are not offensive weapons systems; you are not going to run to Russia with that anti-tank guided missile on your shoulder. Those kinds of actions—again, the big idea here is to be very firm but not needlessly provocative. We should not give Vladimir Putin any excuse to take action that we do not want to see.

    Again, it is about what additional sanctions could be in the offing but maybe not actually implemented right now. I know for a fact that that kind of discussion is going on as we speak, not just here in Washington, but between Washington and London and Brussels and a variety of other capitals in Europe.

    Chair: General, we have a quick final question from Richard Drax.

    Q217       Richard Drax: Forgive me, General, but that is the second time that you have used the expression “needlessly provocative”. How much more provocative does Russia have to be before we actually do something?

    General Petraeus: Well, I think we have done something; we have done a lot of things. Again, some of those were obviously responses to the seizure of Crimea and the Donbass, and their continued provision. We have done lots of things over the years. I would contend that we were not as firm as we might have been earlier on, and one can argue that the red line not being a red line in some other instances perhaps gave Vladimir Putin a sense that we would not respond to the initial actions that he took.

    Again, you should never provoke someone; that is my point here. We just have to be conscious of the potential of provoking a bully or giving him a reason to do something. We have to think that through. I do think that should be part of the overarching big idea for guiding this.

    Q218       Richard Drax: How many tanks, men, guns and artillery need to be on the border before we are needlessly provoked?

    General Petraeus: Well, you are the politician; I am the implementer. Why don’t you answer that question for me?

    Richard Drax: I am asking for your military perspective, sir. You are the expert, not me.

    General Petraeus: Okay. We have done a great deal to shore up the Ukrainian defence forces. We have provided a lot of materiel, funding, training, equipment, observers—you name it. By the way, I have been to the Donbass—I do not know if you have. I have been to the front lines in recent years. It is like going into world war one except that it has drones and optics—otherwise, it is trench warfare. We have given an enormous amount of assistance; the question is how much in addition and what should be the character and capability and all the rest of it. I think that is the bigger question.

    Q219       Chair: That is the question. There is a serious amount of hardware now sitting on the border with Ukraine. As a senior military leader yourself, you have to ask how much of that hardware is there simply for show. You would need only a third of that if you wanted to make a statement, but if you were intent on doing something, it just seems that, with the scale of what they have there, it is difficult to think that Putin will not take advantage of that in the very near future.

    General Petraeus: Look, again, that is the kind of judgment that, were I still in the intelligence community, I am sure would be demanded of that community and the analysts. There is no certainty in this; you are going to assess. Look, he has an extraordinary capability if he chooses to do this. It gives him enormous options that could be very dangerous to Ukraine and to security there. He obviously does not want Ukraine to succeed, which is really the biggest of his objectives. The worst nightmare for Vladimir Putin would be a successful and vibrant democracy with a market capitalist system that shows what bright looks like, right on the border with Russia, which has had such a moribund economy that, were it not for oil prices being back above $80 a barrel, would be in very dire straits.

    Q220       Chair: Would you agree that Afghanistan might mark the high-tide mark of post-second world war western liberalism?

    General Petraeus: I am not sure that I would link the high watermark of western liberalism with Afghanistan, because there are plenty of other examples—

    Chair: I say that—maybe I should expand on it—simply because we decided to back away. We retreated. We did not have the strategic patience to see it through. Now we are looking at Ukraine, where a democracy is under threat, and the resolve is not there either to step forward and support it. We are effectively giving space to an adversary—an authoritarian regime—to advance its own interests.

    General Petraeus: Again, there are one or two countries inside the EU that have become illiberal democracies, if you will, and we see that elsewhere. The truth, as judged by the annual assessments conducted of the state of democracies around the world, is that democracy has been under pressure for about a decade or more. I would not link that with Afghanistan or even with Ukraine or others. It is not always about what we have done for a country; in many cases, it is what has happened domestically to a country. My own country, I would submit, has experienced some of these kinds of challenges, and I would contend that the same is true in yours.

    Chair: I do not doubt that.

    General Petraeus: The populism that has featured there, here and in other places has gone farther in a number of other countries around the world, and that in aggregate is really what marks in a sense the high-water mark of democracy. My hope is that we are going to reverse that and, to come back to the most significant elements of the geostrategic context, realise that this is a systemic competition between a Chinese system that in 42 years has achieved results economically that were never even imagined before and US democracies, free market systems and so forth that have experienced various challenges in recent decades in particular.

    Chair: We will certainly have to invite you back to explore China—that takes us to a completely different chapter, which I think will certainly dominate. General, on behalf of the Committee, thank you so much indeed for contributing to our inquiry into Afghanistan. You have illustrated, as we have known all along, why it is important that we have this inquiry and understand what happened in the past so that we can learn for the future. Thank you very much indeed for your time, sir.

    General Petraeus: My pleasure. Thank you.