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Issue No. 132 | 19 April 2002 |
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Brand Spanking
Interview: Generation Next Legal: We’re All Terrorists Now Unions: Holding the Baby International: Taking It To The Streets History: Off the Wall Economics: Financing International Development Satire: Queen Mum's Life Tragically Cut Short Review: Return of The People’s Parliament Poetry: Silent Night
The Soapbox The Locker Room Bosswatch Week in Review
 Free Trade??Where's the Silver Tail?
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Economics Financing International Development
*************** From the devastation of Afghanistan, through to the financial crisis that has beset Argentina; from the reality that over half of humanity lives on less than $2 a day, through to the experience of increasing global interdependence: financing international development is a crucial issue. The international community has begun to focus on the growing and increasingly explosive inequities globalisation entails. At the major international United Nations conferences of the 1990s, such as the World Summit for Social Development, proposals for a more balanced and equitable approach to development were articulated and agreed by world political leaders. The Millennium Declaration of 8 September 2000 articulates clear goals and a framework for action. The conference on Financing for Development offers an unprecedented opportunity for further advances. The decision of the General Assembly in December 1997 to convene a "summit, international conference, special session of the General Assembly or other appropriate high level intergovernmental forum on financing for development" was a breakthrough. Developing countries had been proposing a conference on financial issues for many years. Amongst the reasons noted in the resolution were the continuous decline of official development assistance and the need to "explore ways of generating new public and private resources to complement development efforts ...". It was said at the time that the growth of foreign direct investment in developing countries had led to the expectation that private capital flows could provide the external financial resources needed by most developing countries. One can assume that the proposal for a conference on financial issues must have been more difficult to resist after the Asian financial crisis. Moreover, the realities of the global economic and social situation were also clearly powerful factors. These factors include the following. 1. Global interdependence is growing strongly. 2. After half a century of uneven but often rapid and widespread economic growth, the world is richer than ever before in human history and has unprecedented technological capacity. 3. Yet, despite the resulting opportunity to achieve security for all, half of humankind is living on less than $2 a day and is in or close to poverty, and so is certainly suffering from deprivation and insecurity of many kinds. 4. Inequality of income, wealth, assets and power between and within most countries is high and generally growing. One simple statistic is enough to illustrate this: the 20 per cent of people with the highest incomes receive 86 per cent of total global income.3 5. A particularly powerful symptom of the difficulties of the current imbalances is that, rather than the growth in net capital contributing to developing countries, in recent years a high and growing portion has been going to the US. In 2000 the US received two-thirds of net international capital flows. The International Monetary Fund (IMF) reports that a "striking feature of international capital flows during the year [2000] was the dominant position of the United States as a recipient of flows, compared with 60 per cent in 1999 and an average of about 35 per cent during 1992-97. Net flows to the United States exceeded $400 billion ... including a record level of foreign portfolio investment ...". An accurate recognition of the international economic environment faced by developing countries involves acknowledging that: Most receive little foreign private capital, and what they do receive is often short-term and volatile; Potential foreign investors normally have several location options, putting them in a powerful position to negotiate major tax concessions and infrastructure assistance; Capital flight is a continuing drain on their savings; Exports of their agricultural and manufactured products are still restricted by import barriers in developed countries; Debt service and repayment still absorb a large part of the budgets of many; Concessional support has stagnated. Developing countries account for 85 per cent of the world's population, and that proportion is rising. At the United Nations, where each member state has a single vote, developed countries have 17 per cent of the voting power. At the World Trade Organisation (WTO) developed countries have 24 per cent of the voting strength. At the World Bank and the IMF they have 61-62 per cent, and at the IMF the US has an effective veto. There are no developing countries amongst the G8, and Mexico is the only member of the OECD that could be defined as developing. Also, it is government treasuries that generally have responsibility for national relations with the Bank and the Fund - though some countries send development ministers to the Development Committee - but it is the foreign ministries that have prime responsibility for intergovernmental relations work through the UN. The Preparatory Process The Millennium Assembly of the UN, attended by 147 heads of state and government, including the Australian Prime Minister, adopted a Declaration that begins by recognizing that, in addition to our separate responsibilities to our individual societies, we have a collective responsibility to uphold the principles of human dignity, equality and equity at the global level. ... [And in Para 5.] We believe that the central challenge we face today is to ensure that globalization becomes a positive force for all the world's people. For while globalization offers great opportunities, at present its benefits are very unevenly shared, while its costs are unevenly distributed. The Declaration goes on to express concern "about the obstacles developing countries face in mobilizing the resources needed to finance their sustained development. We will therefore make every effort to ensure the success of the High-Level International and Intergovernmental Event on Financing for Development to be held in 2001", promised the leaders. The establishment of the High Level Panel on Financing for Development was announced in December 2000 and they reported at the end of June 2000. Ernesto Zedillo, who had just been replaced as President of Mexico, agreed to be chair, and the members included Jacques Delors, President of the EU for ten years, Robert Rubin, Secretary of the US Treasury for six years, and Manmohan Singh, the former Indian Minister of Finance. The Zedillo Panel estimates that an additional $50 billion a year is required to achieve the international development goals by 2015. This includes ensuring access to basic education and health services; achieving gender equality in primary education; programs to halve the number of people living with poverty and hunger; halting and reversing the spread of HIV/AIDS; and such goals as halving the number of people without access to safe drinking water. More finance is still needed for secondary and higher education, communications and service infrastructure. Sources suggested by the Panel for these funds include Overseas Development Aid (ODA), improving developing country access to the markets of developed countries, debt reduction, improved tax co-operation, and consideration of a carbon tax. THEMES All six of the themes for FfD are crucially important, but I will briefly discuss only some issues relating to domestic financial resources, ODA and global economic governance. Domestic Financial Resources Development principally depends on what countries do to help themselves. As the facilitator wrote in the draft outcome: "Our point of departure is the recognition that each country has primary responsibility for its own economic and social development." And in the next paragraph: "a critical challenge is to ensure the necessary internal conditions for mobilizing enough domestic savings to sustain adequate levels of productive and human development investments." The draft goes on to discuss a series of policies to this end, including consolidation of good governance and the rule of law, pursuing sound macroeconomic policies, promoting fiscal discipline and ensuring sustainable investments in education, health, nutrition, and social security programs. Both private and public domestic financial resources are required. Crucial to the mobilisation of increasing saving for investment is the growth of a widely accessible retail banking system. Micro-finance schemes and post office saving schemes are other ways of mobilising savings for on lending that are proving successful in various countries. Subsidies for such small credit schemes are a cost-effective way of ensuring the availability of capital for small entrepreneurs with initiative. The total amount of revenue available to pay for public goods is a political choice. There has been a widespread tendency recently to believe that revenue must be cut, under pressure of immutable global forces. In fact, this is a misleading oversimplification. In advanced economies, for example, revenue collections have not fallen at all to date. The average revenue collected as a proportion of GDP in the OECD countries continued to edge up through the 1990s. It has now plateaued, with the falls in some countries having been offset by rises in others. So, while there certainly is tax competition between countries in certain areas - notably corporation tax and perhaps top marginal personal income tax rates - this has been offset by increased collections from other sources, despite the alarmism. Total revenue collections in many developing countries have been reduced as a result of structural adjustment programmes. Reduction in import and export duties, which have been major sources of revenue in many developing countries, have reduced revenue in some countries by as much as 1 or 2 per cent of GDP. Moreover, increases in revenue collections are quite feasible for most countries. Increased collections could commonly be achieved simply by improving the efficiency, comprehensiveness and honesty of tax administrations. Technical assistance to improve tax administration is a particularly cost-effective form of development co-operation. Other possibilities with minimum political cost include: reducing tax expenditures; increasing the progressiveness of tax systems and introducing or increasing taxes on activities widely recognised as being damaging, such as pollution. As well, many reforms are possible that would expand the national tax bases of most countries. Examples include extending income tax systems, introducing domestic financial transaction taxes, resource rent taxes and property taxes, all of which are progressive and contribute to reducing inequities. Taxes and charges are more politically acceptable when linked with the improvements in services they are used to pay for. Furthermore, within many national budgets there may well be scope for reconsidering the allocation of resources, for example by reducing military outlays and corporate subsidies in order to release funds for higher priority human services. Such reallocation has the twin benefits of improving services and of increasing labour intensive employment. International Co-operation on Tax Matters There is a growing imperative to improve arrangements for co-operation between national tax authorities. Increasing international economic and financial interdependence is constraining national taxable capacity in relation to some traditional revenue instruments. Governments are limited by international competition in both the forms of tax and the tax rates they can apply. There is also a growing need to improve international co-operation between taxing authorities so as to: to reduce opportunities for evasion and avoidance; to mitigate international instability; and to avoid the danger of countries striving to increase their revenue in ways that deplete the global commons. These goals require major improvements in international taxation co-operation. A careful study is required of potential means of improving co-operation. This study should include consideration of the possibility of establishing an international taxation organisation. The functions of an international taxation organisation could include: provision of a forum for the discussion of tax matters, including sharing of national taxation experience; the development of definitions, standards and norms for tax policy and administration; the identification of international tax trends and problems; the gathering and publication of statistical information; the production of a periodical world tax report; and technical assistance to national tax authorities. Such an organisation would typically have a governing body representative of the members and be responsible for drawing up broad objectives and major issues of policy; a highly competent staff, hold regular meetings and issue technical publications. The FfD conference may therefore wish to recommend the commissioning of a study of means of improving cooperation between national tax authorities. Vito Tanzi, former Director of the Fiscal Affairs Department of the IMF and currently a minister in the Italian Government, has published extensively and persuasively on the importance of filling this institutional and policy gap The OECD has published excellent studies on the subject and wants to continue to remain active. New and Innovative Sources of Financing The issue of new and innovative source of financing is within the category of domestic revenue, since only national governments have the power to tax. New sources of funding for development are vital, for there are tight constraints on what developing countries can generate themselves; ODA remains depressed; debt relief is sclerotic; further multilateral borrowing is a poisoned chalice; poorer countries continue to be unattractive to foreign investors; and short term financial flows add to the danger of volatility. Many possibilities are available for new and innovative sources of external funding, including a carbon tax and a currency transaction tax. It is clear that carbon emissions are raising global temperatures and that this should therefore be discouraged. An international agreement to impose a tax on the consumption of fossil fuels would contribute to combating global warming. The Zedillo Panel has suggested that this could be structured in a way that could support developing countries by allowing them to recycle receipts into their own economies while industrial countries would be required to pay a part of their receipts to international organisations responsible for financing global public goods. The negotiation of such an agreement, however, would be complex. An equally politically difficult but technically simpler proposal is for a currency transaction tax (CTT) or Tobin tax. A rigorous analysis of the possibility of recommending introduction of a currency transaction tax was mandated by the special session of the United Nations General Assembly in Geneva, and the meeting of European finance ministers has also commissioned a study from the European Commission. Leading figures in several developing countries have also spoken in favour of such a tax including from Brazil, India and Malaysia. It is worth quickly reminding ourselves of the reasons for this interest: 1. A CTT would certainly reduce the volume of short-term international financial flows, reducing the difficulty of monetary management. 2. It would contribute a little to preserving some measure of national monetary autonomy. This was James Tobin's principal original reason for suggesting the tax. 3. At a time when global integration is eroding some national revenue bases, especially from corporate tax, a CTT offers national governments a replacement that is easy to collect and politically acceptable. It is easy to collect because there are so few foreign exchange dealers, and as most of them are banks the incentive for them to conform and so avoid risking their licenses is very great. A CTT is politically acceptable because it taxes wealth holders and therefore is progressive. As a member of Australia's parliament, I received strong and widespread support in advocating a CTT and only one criticism - from an investment banker! A significant new source of revenue could be very attractive to governments and treasuries wanting to reduce other taxes, or to increase essential spending and that appears to be reason for the interest of the British Chancellor. 4. If introduced as the result of an international agreement, part of the agreement could be for the allocation of a portion of the funds for international purposes, such as development. A doubling of the current level of official development assistance would scarcely be enough to enable the achievement of such Millennium targets as universal access to primary education and basic health services. Governments at settlement sites could collect a tiny levy from all foreign exchange transactions. Applying the levy at a uniform rate to wholesale trades at the point of bank settlement would make it possible to collect (without the hazard of avoidance through diversion from taxed to untaxed jurisdictions), provided only that the authorities issuing the currencies which are acting for the time being as vehicle-currencies (five or six at present) would co-operate. Such a tax would discourage very short-term financial movements, while making little impact on foreign direct investment or trade. Imposing a penalty tax on dealings with tax-free jurisdictions would minimize avoidance. The global daily currency turnover, of around $1500 billion in 1998, could well fall significantly if such a levy were introduced. A low tax rate of 0.1 per cent would generate substantial total revenue for governments, perhaps over $150 billion a year. The Zedillo Panel, while expressing scepticism of the proposal, also explicitly supported conducting a rigorous analysis of it. Official Development Assistance As well as domestic resources, an effective strategy for international development and social justice requires major additional international financial resources to fund economic and social programs, peacemaking and peacekeeping, protection of the environment and other global public goods, and to achieve a more equitable distribution of income, wealth and power. It is simply morally untenable for those who live comfortably in rich countries to neglect the impoverished half of humanity. Economic justice alone suggests that the beneficiaries of globalisation compensate the countries that receive little or no benefit. Of course, the sceptics argue that additional funds for development would be wasted, and that is a risk. But there is extensive experience now in implementing development strategies, and in allocating funds in ways that minimise these risks. To conclude, it is relevant to suggest some examples of sources of additional resources. Despite enormous benefits, the rich countries have generally reduced compensating flows of aid during the 1990s and debt reduction has been very limited. The unweighted average ratio of aid to GNP in Development Assistance Committee countries fell from 0.44 per cent in 1986-87 to 0.39 per cent in 2000.8 The biggest beneficiary of globalisation, the US, is also the smallest donor relative to national income, contributing only 0.1 per cent of GNP in 2000. Donor countries must redouble their effort to increase the amount of overseas development assistance and set target dates for achieving their commitment to provide 0.7 per cent of GNP for aid. This continues to be essential because it is impossible for many developing countries to attract significant private funds, and they can only escape the poverty trap with additional external funding. Recently there has been significant movement. The EU's Development Council, which includes the development ministers of all the member countries, supports the call by the World Bank for a doubling of aid, and envisages asking each member government to establish a timetable for meeting the aid target. Poul Nielsen, the EU Commissioner for Development and Humanitarian Aid, recently said that, "In view of how the world looks after 11th of September, ... there is a new understanding of interdependency." Gordon Brown, the British Chancellor, made a major and important speech to the Federal Reserve in New York in which he endorsed the Zedillo Panel's recommendation to double ODA, saying that, "If we are to move with the urgency that the scale of today's suffering demands, we must each, as national governments, be bold and acknowledge the duties of the richest parts of the developed world to the poorest and least developed parts of the same world." Global Public Goods An intellectually powerful paradigm through which to evaluate and consider the reform of the international system is that of global public goods. Though the term may sound unfamiliar, global public goods are not at all strange in practice. The importance of the framework for international infrastructure, such as the International Air Transport Association, the International Telecommunications Union, the World Meteorological Organisation and the International Monetary Fund is clear. The most recently negotiated global public good was the International Criminal Court. Public goods are freely available to all roads, basic health services, and public open space generally without competition or exclusion. One advantage of considering global public goods rather than the far broader issue of global governance as a whole is that the debate is immediately concrete and specific. Gaps and weaknesses can be identified and means of filling or strengthening them discussed. An extension of the range of global public goods is essential in many areas such as the control of diseases like malaria and AIDS, protecting the environment, reducing international crime, reducing financial volatility, extending distance learning, and to resolve or at least manage international conflicts more effectively. An example of a gap in the framework of global public goods is the inadequacy of co-operation about tax issues between countries. Global Economic and Social Governance The functioning of the institutions of international political economy needs urgent reform. The evolution of international political and economic institutions lags well behind the deepening of global interdependence. This holds true in particular for the institutions needed to make globalisation work for all. Interest in reducing the global democratic deficit and improving the political effectiveness of international institutions in achieving goals such as those articulated by the Millennium Summit is growing. The Zedillo Panel has argued that "Despite recent worthy efforts, the world has no fully satisfactory mechanism to anticipate and counter global economic shocks." Further: "... global economic decision-making has become increasingly concentrated in a few countries. Tensions have worsened as a result. For a range of common problems, the world has no formal institutional mechanism to ensure that voices representing all relevant parts are heard in the discussion." The Panel describes several vacuums in global governance, such as the lack of any agency to provide some global public goods and the struggle of some existing agencies "to respond to problems for which they are ill-equipped or lack a precise mandate." The Zedillo Panel endorses the recommendation of the Commission on Global Governance to "create a global council at the highest political level to provide leadership on issues of global governance. ... through its political leadership it would provide a long-term strategic policy framework to promote development, secure consistency in the policy goals of the major international organizations and promote consensus building among governments on possible solutions for issues of global economic and social governance." Recognizing the political difficulty of launching such a council, the Panel has suggested as a first step convening a Globalisation Summit "large enough to be representative and small enough to be efficient." The establishment of a permanent global council within the structure of the UN would involve changing the Charter, an especially complex political task. An alternative, which is immediately possible, is to upgrade the existing Economic and Social Council (ECOSOC). A simple means of increasing ECOSOC's effectiveness would be for it to meet more regularly, for a day or two, whenever economic or social circumstances suggested that would be useful. If there is a financial crisis or a natural disaster, ECOSOC should meet immediately to discuss responses. Conclusion Improvement of global governance is essential. New policies and institutions are required. The economic and social forums of the UN must be strengthened, and the international economic and financial institutions reformed. The extension of the range and depth of global public goods is necessary, as are rapid increases in finance for development. An additional $50 billion a year is required to achieve the goals for the provision of basic education and health services, and the other global goals, by 2015. This could be achieved through such measures as improved national tax administration, aid at the target level and the introduction of currency transaction or carbon taxes. In a generation, we can expect that many of these proposed reforms will have been implemented and the debates about them will seem anachronistic. To paraphrase Hugh Stretton, the task for those concerned about equitable global development is to articulate simple visions, design the complex policies necessary to implement them and to ensure competent implementation. Advocates, networks and parties that do that will be basing their work on fundamental moral and political values, and responding to the felt needs of the majority of the people. ------------------------------------------------------------ John Langmore is the Director of the ILO Liason Office to the United Nations, a former member of the House of Representatives in the Parliament of Australia, and a former member of the Evatt Foundation's Executive Committee. See John Langmore's report on the outcome of the conference: Modestly hopeful Monterrey at http://evatt.labor.net.au/news/22.html. For John Langmore's complete pre conference paper see http://evatt.labor.net.au/publications/papers/21.html
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