A ‘Monterrey Consensus’ Might Replace the Washington Consensus
By Matthias Georg Wabl, for the Chronicle

The first major conference that has been undertaken by the United Nations in close partnership with the World Bank, the International Monetary Fund, the World Trade Organization, other UN agencies and representatives from civil society and the business sector stands to become a turning point in the fight to reducing poverty and improving living conditions in developing countries.

The Conference - formally known as the International Conference on Financing for Development (March 2002, in Monterrey, Mexico) - aims to establish more concrete actions rather than declarations. Its goals are to: increase private foreign direct investment (FDI) and official development assistance (ODA); fight corruption; reduce debt; grant better market access for developing countries; ensure sound macroeconomic policies; and strengthen international tax cooperation. However, there is no consensus among participants as to how these goals should be reached.

Donor countries, in particular the 22 member States of the Organization for Economic Cooperation and Development (OECD), insist that funds must be used more efficiently in aid-receiving countries to fight corruption and improve governance. Until developing countries improve their performance in these areas, many donor States would not increase their ODA substantially.

On the other hand, receiving countries claim that donors are not complying with several commitments made in previous Declarations. They ask for higher and faster debt reductions, whereas the World Bank sees economic growth as the more important factor. Developing countries demand more financial aid, since ODA has steadily declined, from 0.35% of national income in 1990 to 0.22% in 2000. This figure runs counter to the target adopted by UN Member States for an ODA of 0.7% of national income. In fact, only five of the 22 OECD donor States have met that target. Total ODA in 2000 amounted to $53.7 billion and, according to World Bank estimates, twice this amount would be needed annually to reach the development goals by 2015. Therefore, non-governmental organizations propose a legally binding international treaty to make donor countries comply with this goal.

The consensus on the draft document reached by the Preparatory Committee openly reflects these different approaches. The ‘Monterrey Consensus’ recognizes that “a substantial increase in ODA will be required”, but does not endorse the Secretary-General’s call for doubling ODA from $53 billion to at least $100 billion per year. Specifically, the United States blocked language in the text that would have committed rich countries to the UN decade-old target of raising development aid to 0.7% of gross national income, from the current 0.22% average.

In addition, sharply falling growth rates in developed countries in 2000 undermined the likelihood of meeting this target, because finance ministries are inclined to cut budget posts for foreign aid to ensure sound domestic macroeconomic policies. Donor countries generally refer to rising private investment, which would offset the declining governmental aid budgets. FDI from OECD countries almost tripled, from $41.6 billion in 1993 to $119.5 billion in 2000. However, critics argue that foreign investments are often not sustainable socially since profit, rather than development interests, drive them. Total flows from donor countries slightly increased in the last decade, according to OECD figures. ODA, export credits and private flows combined amounted to $165.7 billion in 1993 and $190.3 billion in 2000, meaning that the increase in private investment hardly offset the fall in official aid.

Another controversial issue is the developing countries’ access to Western markets. Critics argue that OECD members protect their agriculture and textile markets through high subsidies for farmers and high tariffs for textile and agricultural imports. A totally open access for those products would bring several billion dollars of additional income each year to developing countries. In any case, there is a consensus among participants that trade liberalization benefits both developed and developing countries. Some NGOs, however, criticize the whole system of trade liberalization, saying that only Western countries benefit from it.

Tax havens are said to account for $50 billion of tax losses annually in Western countries. Developing countries also forfeit billions in tax revenue every year since they must also lower their corporate tax rates to attract foreign business investment. Closer international tax cooperation is, therefore, on the agenda in Monterrey.

The Conference provides a unique chance for major international organizations to bundle their efforts and improve policy coordination. However, even the World Bank’s conservative estimates show that higher ODA is necessary if the goals are to be reached by 2015. In a best-case scenario, meaning improved policies and higher efficiency, at least $39 billion a year in additional funding is needed. If developed countries take their commitments seriously, they must not only increase the ODA provided but also ensure its efficient use.

If the Conference succeeds, a so-called ‘Monterrey Consensus’ could replace the ‘Washington Consensus’. Whereas the latter focused on economic policy and trade liberalization, the Monterrey consensus could stand for a more encompassing, holistic approach: economic and human development, together with additional financial resources from donor countries. But the resources must match the rhetoric.



Links:
The Monterrey Consensus (Links to a PDF file)
International Conference on Financing for Development