Inreasing
international financial
cooperation for development
through, inter alia, ODA
United Nations, A/ AC. 257/ L.
2, June 2000
"Increasing international financial
cooperation for development through, inter alia, ODA
6. Enhancing official development assistance
(ODA): reinvigorating the commitment to fulfil the 0.7-per-cent
target, including renewed leadership based on best practices, improved
advocacy and sound information policies that address misperceptions
and differentiate ODA for economic growth from global public goods
financing; increasing the effectiveness and efficiency of ODA,
through, inter alia, enhanced ownership and better coordination of
initiatives such as the comprehensive development framework, the
United Nations Development Assistance Framework, and the poverty
reduction strategy papers; special needs of Africa, the least
developed countries, small island developing States, landlocked
developing countries and other developing countries with special
difficulties in attracting financing for development.
7. Exploring innovative sources for financing
for development: considering innovative global instruments, including
tax cooperation and global public goods financing mechanisms;
enhancing the contribution of multilateral development institutions,
in particular the World Bank and regional development banks, in
financial innovation in support of development; promoting national and
international public/ private partnership."
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United Nations, A/AC.257/24,
March 2001
"Heading IV: Increasing
international financial cooperation for development through, inter
alia, official development assistance
Albeit weakened in its effectiveness by low
levels, ODA plays an essential role as a complement to other sources
of financing for the development of developing countries, particularly
in the case of countries in Africa, LDCs and other low-income
countries where ODA flows continue to represent the bulk of external
financing.
ODA can help countries to reach adequate
levels of domestic resource mobilization over an appropriate time
horizon while they expand their human capital and productive capacity
as well as diversify their export bases. ODA can also help countries
improve their enabling environment for private sector activity through
infrastructure and institutional development and, thus pave the way
for robust growth.
But ODA resources will only make an effective
contribution to development if based on national policy ownership and
enhanced partnerships among national, regional and international
actors, civil society and the private sector. It should not be seen
merely as a transfer of financial resources but also as a vehicle for
access to knowledge and capacity building.
At the same time, we are confronted with a
growing challenge of fostering an enhanced provision of global public
goods (GPG). The financing of this new agenda should not be allowed to
come at the expense of the former. ODA allocations to support
developing countries' national efforts should be topped-up by
additional, issue-specific, GPG financing
The challenges in the area of international
financial cooperation for development thus fall into four broad
categories: 1) measures to strengthen the rationale and political
support for enhanced levels of international development assistance
resources; 2) improving development assistance modalities, and hence,
aid effectiveness; 3) addressing the GPG agenda and facilitating
resource additionality for that; and 4) exploring possible new and
innovative sources of development financing:
Strengthening the rationale and political
support for enhanced levels of international development assistance
resources
What could be the key components of a global
information and advocacy campaign, particularly in developed
countries, highlighting the mutual interest in and the relevance and
urgency of international development assistance? In this context, how
best to mobilize and harness the support for achieving the Millennium
goals and other internationally agreed targets as an integral part of
the effort to mobilize ODA resources in line with the target 0.7% of
donor country GNPs, including through appropriate time-frames?
How to ensure that attention to the
Millennium goals and other internationally agreed targets, such as
those pertaining to health and education, is complemented by adequate
focus on economic growth and development?
Improving aid delivery channels and
modalities
How can the efforts of aid agencies to
simplify and harmonize operational policies and procedures be enhanced
to reduce transactions costs and increase delivery efficiency, and,
closely related, how can the capacity of developing and countries with
economies in transition for designing and managing their own
operational policies and procedures be strengthened? How can progress
on untying aid be accelerated?
How best to enhance cooperation between
donors and recipient countries so that resources are available on a
timely basis to respond to improvements in domestic policies and the
ensuing opportunities for investments in areas key to the achievement
of the Millennium goals and other internationally agreed targets,
through the development of comprehensive poverty reduction strategies
by developing countries and matching commitments from donors for
co-ordinated and harmonized support?
How to strengthen ongoing co-ordination
processes of nationally-owned development efforts such as CDF/PRSP,
UNDAF/CCA, including though enhanced transparency and participation,
as well as through better coordination with efforts in other areas
such as trade?
Are existing mechanisms adequate to ensure
that sufficient resources are provided to sustain a range of ODA
mechanisms and channels that matches the short and long-term needs of
developing countries while providing a sound balance between diversity
of channels and efficiency in aid delivery? How can gaps be best
identified and proposals brought to the attention of governing bodies
of the relevant institutions to fill them according to the mandate and
capabilities of each institution?
Bearing in mind that South-South cooperation
conducted between developing countries with relatively similar natural
and cultural conditions can promote the transfer of appropriate
technology in an efficient manner, how best to harness regional and
subregional triangular cooperation as a delivery tool?
How best to facilitate the effective
participation of ODA recipient countries, as a collective, in
international aid policy discussions aimed at forging strong
partnerships to enhancing the effectiveness of aid in generating
growth and eradicating poverty?
GPG provision and financing
How to differentiate, in a practical way, ODA
for primarily national development purposes from GPG financing, as a
tool for budgeting and advocacy strategies? How could national sector
ministries (e.g. environment or health) and/or treasury departments be
encouraged to contribute to the financing of GPGs falling into their
respective mandate (to avoid diversion of aid resources)?
How to use multilateral and bilateral public
financing for GPGs as an incentive to encourage and leverage private
contributions? What other incentives can be provided so private
resources are mobilized for GPG financing?
In respect to which GPGs would it be
important and desirable to explore on a priority basis new financing
modalities, including payments by one country to another for services
rendered?
How best to pursue a more efficient system of
managing knowledge as a GPG, aimed at both the promotion of innovation
through adequate intellectual property rights protection as well the
promotion of the widest possible utilization of available knowledge
for development through public-private partnerships and the active
engagement of the international institutions? How best to utilize ICT
as a major strategic tool for capacity building in developing
countries and countries with economies in transition?
Innovative sources for development financing:
How best to explore this issue in the context
of the analysis requested by the resolution adopted by the General
Assembly at its twenty-fourth special session of June 2000?"
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Report
of the Secretary-General
to the Preparatory Committee for the
High-Level International Intergovernmental Event
on Financing For Development
United Nations, A/AC.257/12,
January 2001
" Increasing international
financial cooperation for development through, inter alia, ODA
(...) Donors should be called on to ensure
that resources are provided for debt relief without detracting from
the resources that were already intended to be available for
development assistance to low-income countries. Debtor countries
should, in parallel, ensure that resources freed up by debt relief
measures are used to support growth and poverty reduction-oriented
programmes. To ensure that further debt problems do not emerge,
efforts should be made to improve debt management, and new financing
for all low-income countries should be on highly concessional terms
or, in the case of countries with severe limitations in their capacity
to pay, on grant terms.(...)
A campaign for the millennium development
goals should be established. The campaign would have a limited
lifespan of five years. Its mandate would be to consolidate
information collected by different agencies and Governments on
progress towards the goals in different countries, on cost
implications at each stage, and on resource availability to fuel this
progress.(...)
Donor countries should be called upon to
redouble every effort to increase the amount of ODA and meet
international commitments in this regard without any further delay.
Donors should undertake an immediate commitment to avoiding any
declines in ODA and, in the case of countries where ODA still accounts
for well under 0.7 per cent of GNP, they should pledge to honour
existing commitments to steady increases in real ODA flows within a
defined time frame. Donor countries should also be urged to explore
determinedly not only how they can improve the amount of ODA they
provide but also the flexibility with which resources are made
available.(...)
Donor countries should be urged to ensure
that adequate resources are provided through the different
multilateral aid agencies, so that they can fulfil their mandates and
sustain a range of ODA mechanisms and channels. This range must match
the needs of developing and transition economy countries while
providing a sound balance between diversity of channels and efficiency
in aid delivery.(...)
Regular reviews of the volume and composition
of ODA and related flows should be maintained with a view to, inter
alia, identifying critical gaps. All relevant international
organizations should review the range of development needs and
instruments and consult with each other to identify these gaps. It is
particularly important to identify situations in which development
assistance is not reaching regions with large concentrations of people
living in poverty. Based on this review and with the assistance of the
Economic and Social Council, coordinated proposals should be made to
the governing bodies of the relevant institutions to fill the gaps
that are of most relevance to the mandate and capabilities of each
entity.
The high-level event should
consider, as part of its deliberations, the results of a rigorous
analysis of the advantages, disadvantages and other implications of
proposals for developing new and innovative sources of funding, both
public and private, which the Secretary-General will commission in
accordance with the request made by the General Assembly in its
resolution S/24-2."
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Joint
Statement of the Co-Chairmen
at the Conclusion of the First Part of the
Third Session of the Preparatory Committee
United Nations, 8 May 2001
"International policies: Official
development assistance (ODA) can be a catalyst for FDI to developing
countries through technical assistance to increase national human and
institutional capacity and support infrastructure investment.(...)
Official development assistance
There was a consensus regarding the
continuing need for ODA resources and the importance of the 0.7 per
cent target for ODA.8/ Delegates also shared the view that a strong
partnership provides an important paradigm for cooperation, as
proposed in the "Compact for Africa’s Recovery" of the
Economic Commission for Africa.9/ Several reasons were given why ODA
remains critical. These included:
Recognition that for many developing
countries, ODA is the most significant source of external financing.
It is particularly critical for many African, least developed,
land-locked and small-island developing States.
Acknowledgement that, even when private flows
are available, ODA provides financing for activities and inputs that
do not attract private flows, including, inter alia, basic
infrastructure, particularly for rural populations, human resource
development and environmental protection.
Towards policy priorities
Seeking to generate strong political will in
all countries to mobilize necessary ODA resources and ensure their
effective use. While some delegates favoured a global outreach
campaign for raising public awareness, especially in donor countries,
several articulated their preference for better-targeted and
cost-effective national campaigns to generate the necessary political
support.
Highlighting the important role that ODA
would play in reaching the International Development Goals contained
in the Declaration of the Millennium Summit, as well as serve as a
catalytic agent in both directly and indirectly improving the policy
environment in developing countries, in turn attracting domestic and
international private flows and improving their ability to respond to
opportunities for increased market access.
Reaching agreement on performance-based
approach: enhancing mutual accountability, emphasizing development
outcomes and simplifying procedures.
Focusing on measures of aid effectiveness as
an important complement to increased ODA volume, and as an essential
element in building public support.
Working towards greater flexibility in aid
provision, including in untying aid and increasing responsiveness to
individual country circumstances; in this regard, building on recent
developments, particularly the recommendation of the Development
Assistance Committee of OECD (ad referendum until 11 May) to untie aid
to least developed countries.
Global public goods provision and financing
There was convergence of views on the growing
importance of global public goods (GPGs) and on the following points:
Need to agree on making a definition of GPGs.
Where the issues are unambiguous, however, such as combating HIV/AIDS
and other infectious diseases, early agreement should be reached on
action. Mobilizing genuine international cooperation to generate
additional resources for GPGs that are not diverted from ODA, as well
as private-sector resources. Recognizing the existence of not just
global but also of regional public goods.
Innovative sources for development financing
There was general agreement that the analysis
requested at Copenhagen +5 to examine innovative sources of funding be
conducted, with attention to applicability and realism."
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High-Level
Panel on
Financing for Development -
Recommendations & Technical Report
United Nations, A/55/1000, 26
June 2001
"Estimates of need
It was beyond the scope of this Panel to make
precise calculations of the international resources required to fund
these roles. Our estimates are only indicative, but they show clearly
that for three of the four roles, there is a very large shortfall of
resources.
Development aid. No estimates have been made
of how much official development assistance is needed in total. Such
estimates would need to be built up from individual country estimates,
which are not available. We have used only rough, albeit conservative,
estimates of how much would be required to achieve the International
Development Goals.
The results show that meeting the
International Development Goals alone would require an extra US$50
billion per year of official development assistance—almost double
the ODA that is currently provided. And the broader need for ODA,
beyond these crucial goals, is certainly much greater than this
additional US$50 billion.
The state of humanitarian aid cries out for a
more systematic donor effort. At present, humanitarian aid is financed
out of official development assistance and takes some 8 percent of the
ODA budget. Some emergencies have been tragically underfunded. The
global need for humanitarian aid is unlikely to decline in the near
future. Donors need to make a long-term commitment to fund
humanitarian relief to a specified minimum standard, using a built-in
mechanism for burden sharing, and providing a specific line item in
their contingency budgets so that unexpected crises can be funded
without diverting funds from elsewhere. Achieving a reasonable minimum
standard of response to humanitarian crises would cost $8-9 billion in
a typical year, an increase of at least $3 billion from recent
spending levels. Furthermore, proper humanitarian assistance will not
be possible without adequate funding of the United Nations, which is
today grossly underfinanced. This issue should be urgently tackled by
the international community.
It is fortunate that world concern with the
supply of global public goods is at last awakening. But the
recognition of new needs has rarely brought with it additional
funding. Estimates suggest that 15 percent of aid budgets are devoted
to the supply of what are really global public goods, and are
financing activities that often benefit donors more than recipients.
Beginning to address the need for global public goods in a more
satisfactory manner will probably require at least $20 billion per
year, four times the current spending level.
Going forward, it is imperative to separate
finance for development and humanitarian assistance from finance for
global public goods and to provide adequate finance for each of these
causes. A primary aim of the Financing for Development Conference
should be to secure adequate mechanisms for the future financing of
these needs. (...)
More development aid needed
The inescapable bottom line is that much more
funding is needed for official development assistance. Almost half a
century ago the international community accepted that rich countries
have a responsibility for helping poor countries get development off
the ground. In 1969 the Pearson Commission formalized this by calling
on donor countries to give 0.7 percent of their gross national product
in ODA—a target that was endorsed by the United Nations and by many
donors. In practice, in 1999, ODA stood at a mere 0.24 percent of GNP
for the aggregate of the 22 members of the OECD’s Development
Assistance Committee.
If the DAC members actually delivered ODA
according to the 0.7 percent target, aid would increase by about
US$100 billion per year. With this amount available for international
development cooperation, it would be possible to pay for global public
goods, to provide sufficient humanitarian relief, and not only achieve
the International Development Goals but also provide much more
satisfactory levels of official development assistance for the
take-off of developing countries.
The Panel urges the Financing for Development
Conference to obtain a commitment by the industrial countries to
implement the aid target of 0.7 percent of GNP.
Making aid more effective
Aid has not been yielding as much value for
money as it could. Part of the problem has lain with donors: aid has
become too tied, too uncoordinated, too conditioned, too thinly
dispersed, and its administration too distant from local decisions and
needs. A long-standing problem is that donors have often used aid to
advance their own foreign policy goals or to promote their own
exports, rather than to maximize its impact in reducing poverty or
promoting growth.
Fortunately, this situation has started to
change. The OECD countries recently took a significant step to improve
aid effectiveness, by banning the practice of tying aid, albeit with
some qualifications.
Also to be welcomed are the World Bank’s
introduction of a Comprehensive Development Framework, to assist
donors to coordinate their support for a country’s own strategy, and
of Poverty Reduction Credits, as well as the IMF’s efforts to link
some external financing to support for domestically developed poverty
reduction strategies.
Further improvements are still needed, to the
point where aid is directed overwhelmingly toward countries with high
levels of poverty and good policy environments and fully respects the
ownership by the recipient country of its development strategy.
We recommend that the donor community
voluntarily and prudently adopt a common pool approach to official
development assistance. For a given recipient country, donors would
put their aid resources into a common pool to support the financing of
the development strategy designed and implemented by the government,
in consultation with its people and donors. This approach would
prevent donor coordination problems. It would eliminate the tying of
aid to goods or services produced in the donor country.
To adopt a common pool would require a
drastic change in attitude on the part of some donor countries. But it
is now time to pursue that change.
A campaign for the International Development
Goals
Foreign assistance gets far too little public
and political support in all but a handful of the industrial
countries. In most industrial countries, and prominently in the United
States, the public has little awareness of the moral issues or the
dictates of self-interest in alleviating poverty elsewhere in the
world. For half a century, populations in many of the industrial
countries have lived with a stark inconsistency, between the calling
of their ethical beliefs to have compassion for others, and their
indifference to the conditions of the poor in poor countries. They
still believe that poverty outside their own borders will have scant
consequences for their own countries and their own well being. And
they have little idea of how meager is the actual record of foreign
aid giving. In the US, for example, polls show that the public greatly
overestimates what that country contributes in aid.
The International Development Goals may be an
effective catalyst for political support for development aid. The
challenge is to persuade the politicians and publics of industrial
countries that aid expenditures are both morally compelling and a
vital investment in building a more secure world. A campaign that
centered around these goals would need to undertake public education
and awareness programs and would require active political involvement.
It would need to combine the enthusiasm that the debt campaigners
brought to bear for HIPC debt relief with the professional expertise
of the key international agencies and the financial support of private
foundations. We invite altruistic institutions to take up this
challenge with a well organized, well funded, massive campaign to
create the needed public awareness.(...)
Innovative sources of finance
Modern globalization calls for global
governance, respectful of individual sovereign States, but properly
equipped to address global problems such as poverty, security and
pollution. Sovereign States must empower the multilateral system to
overcome its many challenges. For official development assistance,
humanitarian aid and global public goods, the system needs more
resources than are being provided by traditional sources of funding.
There is a genuine need to establish, by international consensus,
stable and contractual new sources of multilateral finance. The
international community must recognize that it is in the common
interest to provide stable and contractual resources for these
purposes. Politically, taxing for the solution of global problems will
be much more difficult than taxing for purely domestic purposes. But
like all political decisions that are taken for the next generation
and not just the next election, this one should be assessed carefully
against the alternative scenarios, including the very dangerous one of
continuing polarization, exclusion, confrontation and insecurity in
the world. If only out of self-interest, new sources of finance must
be considered without prejudice by all parties involved. The Panel has
considered many suggestions for innovative sources of finance.
We believe the International Conference on
Financing for Development and the Globalization Summit should first
discuss whether or not the world should have global, and not only
sovereign, imposition of taxes. Next, if global taxation is considered
desirable, they should proceed to discuss seriously the pros and cons
of two such sources: a currency transactions tax and a carbon tax. We
advise that before any political discussion, these possible new
sources of international finance be examined purely on their economic
and development merits and shortcomings.
A currency transactions tax, or Tobin Tax, is
a tax on all spot conversions of one currency into another,
proportional to the size of the transactions. Proponents of the Tobin
tax believe that it would dampen speculative operations in
international financial markets and would raise large revenues.
Sceptics argue that it would be too complex to implement, and that its
economic effects would be somewhat ambiguous. They observe that given
the ease with which financial transactions can 26 26 Page 27 28 27 A/
55/ 1000 shift location, the tax would need to be implemented
worldwide at a uniform rate, and that in practice it would be
enormously difficult to get the necessary international agreement for
this purpose. They also stress a second practical difficulty: given
the possibility of bypassing spot foreign exchange markets by using
derivative instruments, the tax net would need to be extended to
encompass all derivatives that traders might use to undertake
equivalent transactions, notably to the futures and options markets.
Third, the sceptics question whether such a tax would have any
systematic effect on speculation. Finally, they point out that what
might look like very low rates of tax are actually very high in
relation to buy-sell spreads, and thus that a Tobin tax might greatly
reduce the volume of foreign exchange transactions, with unpredictable
effects on the revenue that such a tax might yield.
The Panel believes that further rigorous
technical study is needed before any definitive conclusion is reached
on the convenience and feasibility of the Tobin tax. If global
taxation is considered desirable, the Conference and the Summit are
likely to find more promise in a carbon tax — a tax on the
consumption of fossil fuels, at rates that reflect the contribution of
these fuels to CO2 emissions. This tax could serve two important
goals: limiting the rise in global temperatures associated with
burning these fuels, and raising revenue. Adhering to the sound and
fair principle of "make polluters pay", it would create
price incentives to economize on the consumption of fossil fuels. It
would guide production to less damaging sources of supply and create a
further stimulus to bring science to bear in saving energy. The
appropriate forum would need to agree on what proportion of the
revenue thus raised would be retained by each country and what would
be directed to finance global public goods and ODA. Revive special
drawing rights. Consideration should also be given to reviving the
special drawing rights (SDRs) created by IMF in 1970. The original
intent of the SDR system was to allow international reserves to be
increased, in line with need, without imposing real costs on the
average country. In effect, no allocation has been made since 1981.
Developing countries have had a strong need in recent years to build
up reserves to reduce their vulnerability to crises, and have financed
this build-up either by running current account surpluses or by
borrowing on terms much more onerous than those associated with SDRs.
The result is a large flow of what is sometimes called "reverse
aid". To prevent it or at least reduce it, IMF ought to resume
SDR allocations."
Associated Technical Report:
" Official Development Assistance
ODA has long been the principal source of
funds for financing development. The international community accepted
almost half a century ago the principle that rich countries have a
responsibility for helping poor countries get development off the
ground. In 1969 the Pearson Commission formalised this by calling on
donor countries to give at least 0.7 per cent of their GNP in ODA, a
target that was endorsed by the United Nations and by many (but not
all) donors. Yet only five countries—Denmark, Luxembourg, the
Netherlands, Norway, and Sweden-–have ever achieved the target, and
they have continued to do so in recent years. On average, ODA as a
percentage of donor countries’ GNP was already falling when the
international community first adopted the 0.7 per cent target, and it
has continued to decline almost every year since then, at least until
1997. At $56 billion in 1999, it stood at only 0.24 per cent, on
average, of the GNPs of the 22 members of the OECD’s Development
Assistance Committee (DAC). (Even if one excludes the United States,
which never committed itself to the 0.7 per cent target, the average
was only 0.33 per cent in that year.) Most donor countries have a long
way to go before their citizens can take pride in having reached the
target that their governments endorsed so many years ago.
One can draw some hope from the fact that a
couple of donors have begun to increase the share of their budget they
devote to aid, and that the aid effort has edged up since 1997.
Nevertheless, even if the HIPC initiative is financed entirely by
additional resources, rather than by diverting existing ODA, this
alone will not prevent the 2015 goals being missed for lack of
financial resources. Given the threat to the future of the rich world
posed by the ever more glaring contrast between its wealth and the
misery of the world’s billion-plus absolute poor, the prospect of
missing the 2015 goals for lack of maybe $50 billion a year is a
matter of profound concern.
It would be unrealistic to expect any
substantial increase in the volume of aid in the absence of widespread
political concern in the donor countries with the issues to which aid
is addressed. But perhaps the International Development Goals that
arose out of the major conferences and summits of the 1990s, and which
were strongly endorsed in the Millennium Summit Declaration, provide a
foundation for rekindling political momentum behind the aid programme.
The public in the donor countries need to be made aware of the goals,
the stake that they have in achieving them, the resource costs of
doing so, and the role of aid in their financing. This message needs
to be conveyed particularly to the citizens of those countries that
lag furthest behind the 0.7 per cent target. A Campaign for the
Millennium Goals might track the progress being made towards achieving
the goals, highlight any shortfalls, and identify remedial actions.
Such a campaign would need to combine the enthusiasm that the debt
campaigners brought to bear in their successful campaign with the
professional expertise of the key international agencies and the
financial support of private foundations.
If the DAC member countries actually
delivered ODA equal to 0.7 per cent of their GNP, aid would increase
by about $100 billion a year. Despite the margin of uncertainty in
estimating the cost of achieving the human development goals, this
would surely be enough to provide every lower-income country that
seriously pursues the 2015 goals with aid sufficient to avoid their
attainment being jeopardised by a lack of external resources. It could
pay for additional debt relief to deserving HIPCs. It would permit
full funding of the Dakar Global Initiative on Education and of the
programme now being developed by the Commission on Macroeconomics and
Health to deal with the health crisis in Africa. It would permit the
extra expenditure of perhaps $7.5 billion a year needed to achieve
universal access to reproductive health facilities. It would allow the
CGIAR centres to be properly financed. The problem is not finding
worthwhile ways of spending an extra $100 billion, but persuading the
politicians and the general public of the rich countries that these
expenditures are not only morally compelling but a bargain investment
in building a more secure world.
New and Innovative Sources of Finance
One response to the growing concern with
securing an adequate supply of global public goods would be to seek
new financial resources for the international community. Present
expenditure on global public goods—around $5 billion a year—is
financed from a wide variety of sources, and revenue from these cannot
be expected to keep pace with the increasing perceived need. The
Financing for Development conference should therefore consider the
desirability of establishing an appropriate global source of funds,
both to permit the adequate funding of global public goods and to
pre-empt the danger that the aid programme will be further
cannibalised to meet these needs. If a high yielding tax source were
established, it might be possible to use some of the revenue to
supplement ODA.
The candidate that has attracted the most
attention is a currency transactions tax (often called a ‘Tobin
tax’, after the economist and Nobel laureate James Tobin, who
originally suggested the idea). This would be a “small”
tax--something between 10 and 50 basis points (0.1 to 0.5 per cent) is
often mentioned–imposed on all transactions in the foreign exchange
market. Advocates claim two advantages for such a tax. The first is
that, because the tax would fall most heavily on those taking
short-term positions, it would deter short-term speculation and thus
help stabilise exchange rates. The extra cost of the tax would be
inconsequential for traders and long-term investors. The second
alleged advantage is that, given the enormous turnover on foreign
exchange markets, even a modest tax rate could raise huge sums. For
example, a tax of as little as 10 basis points on the current trading
volume of $1.6 trillion a day would yield about $400 billion a year.
Opponents of the tax have pointed to two
practical difficulties as well as disputed both of the claimed
benefits. One practical difficulty arises from the need to extend the
tax base beyond the spot foreign exchange market to encompass all
derivative instruments (such as futures and options) that might be
used to undertake equivalent transactions. The problem would be how to
achieve equivalent taxation of spot and derivative instruments, which
would be necessary to avoid inefficient shifting from one to the
other. A tax only on the value of the derivative contract would be too
low to achieve equivalence, but one on the value of the underlying
assets would be so high that it might wipe out these markets[19] . The
other practical difficulty arises from the ease with which financial
transactions can shift location, especially with current information
technology and telecommunications. This means that such a tax would
have to be implemented not just in the major financial centres, but
worldwide. It is difficult to imagine that the necessary unanimity
among all the world’s countries and jurisdictions could be reached.
Even if it were, financial engineers might succeed in creating new
derivative instruments able to escape the tax net.
Critics have also argued that a currency
transactions tax would be unlikely to contribute to stabilising the
foreign exchange market. Advocates implicitly assume that most foreign
exchange turnover not explained by trade or longer-term capital
movements is engaged in speculation. Even if that were so, it is not
clear that a tax of 10 basis points would do much to curb speculation.
The fact is that the large and sudden shifts in capital flows
characteristic of financial crises are driven by hopes or fears of
gains or losses in the tens of percentage points, not a few basis
points. In any event, it turns out that the advocates’ assumption is
wrong. Much of the turnover results from what is called ‘hot
potato’ trading, where dealers shuffle positions around following an
initial large foreign exchange transaction (for example, to finance
trade) until a new short-run equilibrium portfolio position is
established a few minutes later[20] . The typical margin on such deals
is around 1 basis point. A tax of 10 basis points would therefore
amount to a tax rate of about 1,000 per cent on these transactions.
Rarely is it possible, even within a jurisdiction, to collect taxes
that high: those subject to the tax usually find a way to avoid it.
Finally, even if an equitable basis for
taxing spot and derivative transactions could be devised, even if all
countries agreed to collaborate in imposing the tax, and even if the
tax base were not eroded by the invention of new derivatives, the
market could still be reorganised as a broker market. Foreign exchange
traders would switch from acting as dealers, drawing on their own
inventories of currencies to consummate transactions, to acting as
brokers, bringing together buyers and sellers who then transact
directly. The results would be a marginal inconvenience to those
wanting to buy and sell foreign exchange, and an unknown but possibly
drastic fall in the volume of transactions. It is not clear why there
should be any reduction in speculation and volatility: indeed, by
impeding price discovery, it has been claimed that such a tax could
increase volatility .[21]
Critics have also queried the revenue-raising
potential of a currency transactions tax. Here the critical question
is how great the fall in trading volume would be upon introduction of
the tax, especially if the market reorganised itself in response as a
broker market. Admittedly, only a very drastic decline in volume would
suffice to subvert the revenue-raising potential of such a tax, but
some critics argue that such a decline cannot be ruled out.
In sum, the merits of a currency transactions
tax remain highly controversial. The Panel believes that further
rigorous study is needed before any definitive conclusion is reached
on the feasibility and convenience of a Tobin tax. However, the Panel
also believes that it is worth asking whether a currency transactions
tax is really the only option, or whether other potential tax bases
exist that might be harnessed to raise revenue to pay for global
public goods.
In fact, a number of other suggestions have
been advanced in the past. For example, it has been proposed that an
international tax be imposed on use of the ‘global commons’,
meaning the high seas, Antarctica, and outer space. The international
community might, for example, impose a tax on seabed mining (if and
when it starts), on ocean fishing, or on the launch of space
satellites. None of these, however, seem likely to generate
substantial sums in the near future. Other possibilities would be to
tax various international transactions, such as international trade,
air travel, or arms exports. The Panel did not judge any of these to
be likely candidates for winning international agreement.
An alternative tax proposal that merits very
serious consideration, if a global tax is considered desirable, also
happens to be one that would create an incentive to increase the
supply of an important global public good. The public good in question
is the control of global warming, and the proposed tax is a tax on
carbon emissions.
Scientific evidence has established, beyond
all reasonable doubt, that the continued emission of carbon into the
atmosphere will, on prospective trends, result in a significant rise
in average global temperatures. No professional consensus has yet been
reached on the likely magnitude of the costs of global warming, and
therefore one cannot make an informed assessment of the optimal
expenditure on restraining carbon emissions. Nonetheless, it has been
clear for a long time that the threat deserves a policy response.
A carbon tax could take the form of a tax on
the consumption of fossil fuels, at rates for each type of fuel that
reflect its contribution to global carbon emissions. An agreement
among countries that each would impose such a tax at or above some
minimum rate would bring into play various economic incentives. The
higher prices for carbon-based fuels would guide energy production to
less-damaging sources, encourage consumers to economise on the use of
carbon fuels, and raise the returns to scientific research in
energy-saving technology. In the version of the proposal being
explored here, industrial countries would agree to transfer that
portion of their tax receipts corresponding to the agreed base rate to
the international organisations responsible for financing the
provision of global public goods[22] . (Developing countries would be
allowed to recycle all their tax receipts into their own economies.)
One use of the resources thus generated would be to pay developing
countries for actions that sequester carbon from the atmosphere, such
as the preservation of forests or reforestation. This would make sense
because the evidence is that sequestration will be a low-cost way of
combating global warming for the next couple of decades. The balance
of the tax revenue would be retained by the countries that collected
it, allowing them to reduce fiscal deficits, cut distortionary taxes
on effort (like income taxes), or increase worthwhile public spending.
The Financing for Development conference
should consider whether or not to establish an international tax
designed to generate revenue for financing the supply of global public
goods. The international community should recognise a carbon tax as a
promising possibility for this purpose.
Another promising approach to easing
financial constraints on developing countries might be described as
‘new and innovative’ even though it is, in one sense, over 30
years old. That would be to revive the use of the Special Drawing
Rights (SDR) created by the IMF in 1970. SDRs were invented for the
purpose of providing a secular increase in the world stock of monetary
reserves without requiring countries to run surpluses or deficits.
Such imbalances force countries to incur costs in earning or borrowing
reserves, while large deficits in reserve-issuing countries may
threaten their financial stability. No allocations (that is,
distributions) of SDRs to IMF member countries have been made since
1981, for several reasons. One is that industrial countries have
perceived no benefits from receiving SDR allocations since the advent
of full capital mobility and the increase in the SDR interest rate to
the average short-term rate in the five largest industrial countries.
These countries are now able to borrow on the international capital
market on terms similar to what they would receive if they took an
allocation of SDRs. Another reason is that any allocation other than
in exact proportion to IMF quotas would require amendment of the IMF
Articles of Agreement. This impedes the use of SDRs in ad hoc schemes
intended to benefit particular groups of countries, or to prevent
outlaw countries benefiting along with others. An example will
illustrate how serious an impediment this is. The Fund agreed in 1997
to make a special, one-time allocation of SDRs designed to equalise
the ratio of cumulative allocations to current quotas for all member
countries; the required amendment to the Articles is still in the
process of ratification four years later.
The cessation of allocations has severely
prejudiced the interests of developing countries. Unlike the
industrial countries, they are not in the happy position of being able
to borrow additional reserves in the market on SDR-like terms, yet
even so, many have sought to build up their reserves in recent years
so as to diminish their vulnerability to crises. Developing countries
now hold reserves of over $850 billion, close to $300 billion more
than before the Asian crisis broke. The additional reserves not
financed by current account surpluses have been borrowed on terms
distinctly more onerous than they would receive on SDR issues; indeed,
emerging markets are currently paying an average premium of about 8
per cent over U.S. Treasury bond rates. The result is a large flow of
what is sometimes called ‘reverse aid’, which in the aggregate is
not far short of the flow of conventional aid from the DAC countries.
The original intent of the SDR system was
precisely to allow international reserves to be increased in line with
countries’ need, without imposing real costs on the average country.
The IMF ought to resume SDR allocations so as to limit the real costs
now being imposed on the average developing-country member. Now would
be a good time to resume allocations, in that the original concern was
not just with the cost to a typical country of having to earn or
borrow a secular increase in its reserve holding, but also with the
impact on the financial fragility of the country issuing reserves. For
many years the latter was not much of a concern, but the unprecedented
size of the U.S. current account deficit that has emerged, in part as
the counterpart to this desire to build up dollar reserves, is now too
large for comfort. Substantial SDR allocations might help to shrink
the U.S. deficit while allowing other countries to continue to build
up the reserves they feel they need to guard against financial
crises."
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United Nations, 09/17/01
"Revitalizing ODA
25. ODA plays an essential role as a
complement to other sources of financing for the development of
developing countries, particularly in the case of low-income
countries, SIDS and landlocked developing countries where ODA flows
continue to represent the bulk of external financing. We underscore
the need to substantially increase it, till achieving the annual level
of 0.7% of industrialized countries GDP to ODA, in order to contribute
sufficiently to complement the national development efforts of
developing countries. A doubling of ODA, required as a minimum to
achieve the multilaterally agreed development goals, should be an
urgent priority.
26. We commend the donor countries whose ODA
contributions reach or even exceed the target of 0.7% GDP and urge
others to follow their lead.
27. To invigorate the political support
required to mobilize more ODA, we request the Secretary-General to
launch a global information and advocacy Campaign for the Millennium
Goals, with the active involvement of all relevant stakeholders, in
particular civil society and altruistic organizations. This campaign
should be designed to raise public awareness in developed countries of
the urgency of increasing international development assistance, as a
vital investment in building a more secure world for all. The campaign
should focus also on intermediate targets identified in the context of
the implementation of the Millennium Goals.
28. To improve the participation of ODA
recipient countries, as a collective, in forging strong partnerships
to enhance the effectiveness of aid in support of their nationally
owned development strategies, we call on the UN Development Programme
to explore ways and means to facilitate the coordination among aid
recipient countries so they can act as an effective interlocutor for
the OECD Development Assistance Committee and, thus, become full
participants in global aid policy discussions.
29. We call on the multilateral and bilateral
financial and development institutions to:
Give primacy, in their assistance, to
development strategies and programs that are developed and owned by
recipient countries. Avoid burdensome restrictions such as tied aid.
Increase the concessionality of development financing, including
through greater use of grants, while ensuring full additionality of
resources to prevent the financial burden from falling on developing
countries or eroding the lending capacity of multilateral development
banks. Urgently carry out a major program to harmonize operational
policies and procedures, to reduce transaction costs and make
disbursement and delivery more flexible. Develop proposals to give
recipient countries greater influence over the design of technical
assistance programs and more control over the use of available
resources for these purposes, including through mechanisms geared to
ensure a flexible and unconstrained choice of providers Deepen their
efforts to harness triangular cooperation as a delivery tool, through
specific mechanisms in support of regional and sub-regional projects
of South-South cooperation.
30. To support the goals above, we invite
donor countries to increasingly channel their aid through common-pool
mechanisms sustained on reciprocal obligations built around nationally
owned development strategies of recipient countries. As a first step,
donors should consider immediately applying this common pool approach
in support of the New African Initiative and, within a timeframe of
five to ten years, in support of all low-income countries, SIDs, and
landlocked developing countries.
Enhancing financing for global public goods
31. We recognize the need to foster a much
enhanced provision of global public goods (GPGs), such as control of
communicable diseases, environmental protection, financial stability,
and knowledge for development. As an adequate provision of GPGs is in
the interest of all, we agree that their financing should not be at
the expense of development assistance, but rather be additional.
32. For transparency and efficiency, we also
agree that GPG financing should increasingly come from the respective
budgets of concerned national sector ministries or agencies, and, when
appropriate and feasible, by multilaterally agreed global mechanisms.
To support this objective, we request the World Bank and the UNDP, in
consultation with relevant stakeholders, to jointly develop proposals
for establishing a dual-track accounting system to differentiate ODA
for primarily national development purposes from GPG financing,
including in the area of technical assistance for capacity building.
33. We call on the multilateral and bilateral
financial and development institutions to contribute to the
strengthening of public-private cooperation for the provision of GPGs,
including through the identification of GPG priority actions for which
a concerted effort of coordination and resource mobilization needs to
be undertaken, and the use of public financing for GPGs as leverage
for private contributions.
Innovative sources of multilateral
development financing
35. We also recognize the need to explore
innovative sources of multilateral finance to support official
development assistance, humanitarian aid, and global public goods.
36. We will examine, among other
possibilities, the desirability and feasibility of carbon taxes,
currency transactions taxes and the resumption of the issuance of IMF
special drawing rights, as well as the strengthening of public-private
partnerships in support of development and the possible enhanced role
of institutions such as philanthropic foundations. In this regard, we
will give careful consideration to the results of the rigorous study
commissioned by the Secretary General to consider possible innovative
sources of multilateral finance."
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United Nations,12/06/01
"Increasing international financial
cooperation for development
32. Revitalizing ODA. Official development
assistance plays an essential role as a complement to other sources of
financing for development, especially in those countries with the
least capacity to attract private direct investment. ODA can help a
country to reach adequate levels of domestic resource mobilization
over an appropriate time horizon while human capital, productive
capacities, and export supplies are expanded. ODA can also help to
improve the environment for private sector activity and thus pave the
way for robust growth. For countries in Africa and the least
developed, small island, and landlocked developing countries, ODA
still provides the bulk of external financing and is critical to
achievement of the Millennium development goals.
33. ODA cannot be effective in the absence of
sound policies and good governance. Hence, a major priority is to
build development partnerships among donors and recipients on this
foundation, particularly in support of the neediest. The Millennium
development goals and other internationally agreed development targets
can help countries set short- and medium-term national priorities as
the foundation for external partnerships of support.
34. Along with substantial policy
improvements in the recipient countries, ODA must at least double if
the Millennium development goals are to be achieved. We underscore the
need to increase overall ODA to the annual equivalent of 0.7 percent
of industrial countries’ GNP, including ODA of 0.15 to 0.2 percent
of industrial countries’ GNP for least developed countries. We
commend those donor countries whose ODA contributions reach or exceed
these targets and urge others to follow their lead, undertaking
multiyear commitments to advance through predictable steps.
35. To raise the political support that is
needed to mobilize more ODA, we request the Secretary-General to
launch a global information and advocacy Campaign for the Millennium
Goals. This campaign should be designed to raise public awareness in
industrial countries of the urgency of increasing international
development assistance, as a vital investment in building a more
secure world for all. The campaign would highlight best practices in
the use of aid, especially aid for poverty reduction and economic
growth. It will require the active involvement of all relevant
stakeholders, including civil society organizations.
36. Recipient and donor countries, as well as
international institutions, should strive to make ODA more effective.
In particular, we call on the multilateral and bilateral financial and
development institutions to intensify efforts to:
§ Harmonize their operational policies and
procedures, reduce transaction costs, and make ODA disbursement and
delivery more flexible.
§ Avoid burdensome restrictions such as aid
tying, and shift from project-based to budget support mechanisms for
aid delivery.
§ Increase the concessionality of
development financing, including greater use of grants, while ensuring
full additionality of resources.
§ Give recipient countries more influence
over the design of technical assistance programs and more control over
the use of technical assistance resources.
§ Deepen triangular cooperation, including
South-South cooperation, as a delivery tool for assistance.
To support these goals, we invite donor
countries to consider immediately applying these measures in support
of the comprehensive strategy that is embodied in the New Partnership
for African Development, as well as in support of least developed,
small island, and landlocked developing countries.
37. Global public goods financing. To hone a
common approach to global public goods, such as the eradication of
HIV/AIDS and other major infectious diseases, we need a participatory
process for defining such goods and setting priorities and formulating
strategies for their provision. That process will require stronger
public-private cooperation. Also needed is a dual-track accounting
system to differentiate global public goods financing from ODA, since
development assistance should not be reduced to pay for global public
goods. In some cases, ensuring that global public goods activities are
anchored in national and global strategies will require fully
additional funding. In others, flexibility and reinforcement of
existing mechanisms will help countries take ownership of global
public goods-related national programs and put them into practice.
38. Innovative sources of multilateral
development financing. We recognize the value of exploring innovative
sources of multilateral finance to supplement existing sources of
official development assistance, humanitarian aid, and global public
goods financing. In this regard, we will give careful consideration,
in all appropriate forums, to the results of the study requested to
the Secretary-General on possible innovative sources of multilateral
finance.
39. Strengthening multilateral development
banking. Multilateral development banks continue to play a vital role
in serving the financing needs of developing and transition countries.
They contribute to guarantee an adequate supply of finance to
countries that lack adequate access to international private capital
markets, and partly offset the excessive volatility of such markets
that affect countries that have access to them. Regional development
banks and sub-regional financial institutions add flexible financial
support to national and regional development efforts, enhancing
ownership and overall efficiency.
40. We will ensure that the long-term
resources at the disposal of the international financial system,
including regional and sub-regional institutions and funds, allow them
to adequately support long- and medium-term economic and social
development; technical assistance for capacity-building; and social
protection schemes. We will also enhance their overall lending
effectiveness through increased country ownership, more focused
conditionality, and closer coordination with the private sector."
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