Financing the future
Questions as to where the resources will come from to carry out goals set at the 1992 Earth Summit are at the heart of negotiations leading up to the Summit review by the United Nations General Assembly in June 1997. The shorthand term for these goals is "sustainable development", which according to one frequently used definition entails economic objectives (equity, efficiency and sustained growth), social objectives (empowerment, participation, social mobility, social cohesion, security of cultural identity and institutional development) and ecological goals (ecosystem integrity, carrying capacity, biodiversity and protection of the global commons).
In Rio de Janeiro in 1992, the Earth Summit secretariat estimated that over $600 billion a year, through the year 2000, would be needed in the developing countries to carry out activities listed in Agenda 21, the Rio action plan. Included in this figure, it was noted in the Agenda 21 text, is "about $125 billion in grant or concessional terms from the international community". As most donor governments set a target of increasing their development aid to 0.7 per cent of their gross domestic product (GDP) as soon as possible, and as 0.7 per cent of the combined GDP of donor countries was roughly equal to $125 billion, the Agenda 21 statement of how much money was needed for sustainable development became widely understood as a commitment to provide that amount of financial resources.
Many developing countries considered increased official development assistance (ODA) a crucial part of the Rio agreements, under which they placed environmentally beneficial restrictions on the exploitation of natural resources--restrictions which did not exist when the developed countries were industrializing.
Given that ODA had been rising steadily during the post-World War II period, and further that in 1992 the demise of the cold war seemed to promise the world a huge peace dividend, the $125 billion target set at the Earth Summit did not seem at the time to be unrealistic. But the end of the cold war was more effective in eliminating great-power rivalry as a motivation for aid than it was in bringing about widespread disarmament.
As it turned out, ODA fell from 0.33 per cent of GDP in 1992 to 0.27 per cent in 1995, to the frustration of developing countries. These countries continue to call for confirmation that donor countries will strive to commit 0.7 per cent of their GDP to development assistance.
The ensuing debate has concentrated on the question of North-South financial flows, but attention is also being directed to the much larger amount of resources that need to be mobilized domestically, in both the developing and the developed countries, to achieve sustainable development (see box ).
In contrast to stagnating ODA, foreign investment in developing countries has nearly tripled since the Earth Summit, with net private flows--foreign direct investment (FDI) and portfolio investment--to these countries reaching approximately $230 billion in 1996. As a consequence, it is argued that private flows will have to play a decisive role in financing sustainable development. Certainly, many countries that have been primary beneficiaries of global investment, especially in East Asia, have seen significant reductions in poverty and a rising standard of living. And a number of studies indicate that enterprises run by transnational corporations pay higher wages and usually produce less harmful impacts on natural environments than do their domestic counterparts in developing countries.
Even those who are not private sector purists have argued that regulating and channeling private investment for the public good, including FDI, is a pragmatic means of promoting sustainable development. To ensure that private investment supports rather than undermines environmental sustainability, it is necessary to implement environmental policies and regulations in the host countries, according to a just-released UN study, Finance for Sustainable Development: the Road Ahead.
But the likelihood that transnational corporations will spearhead a drive to sustainable development has been questioned in several quarters, notably among environmental action groups and the developing countries.
One important consideration is that three-quarters of cross-border investment flows to the developing world go to only 12 countries, and over the past three years, Sub-Saharan Africa has benefited from only 1 per cent of such flows, according to a 1997 World Bank report, "Advancing Sustainable Development".
In preparing for the June General Assembly review, the United Nations Commission on Sustainable Development has emphasized that debt relief should be part of the overall financial package for achieving sustainable development. The recent World Bank--International Monetary Fund initiative to reduce the burden of highly indebted poor countries is not a panacea, but it does inaugurate a positive new paradigm for international action on attacking poverty, building national self-sufficiency and promoting sustainable development.
In addition to the question of the quantity of ODA is the issue of its quality. A "20/20 initiative" was presented to the 1995 Social Summit in Copenhagen, urging that at least 20 per cent of ODA, as well as of national budgets, should be devoted to meeting basic human needs. In addition, environmental and social action groups have called for the "untying" of foreign aid, i.e., eliminating the use of aid to advance the commercial or geopolitical interests of donor countries, so it can be devoted to its primary objectives of advancing sustainable development and eradicating poverty.
Government subsidies, especially on economic inputs such as energy, water, pesticides and fertilizer, tend to be inefficient as a means of either supporting living standards or promoting businesses, according to the United Nations Department for Policy Coordination and Sustainable Development, the secretariat for the Commission on Sustainable Development. Subsidies, except in cases of market failure, generally distort economic incentives by channelling investments to less-efficient enterprises. Since they are in essence a form of regressive taxation, they work against the poor. And by making natural resources artificially cheap and disguising the actual costs of use and replacement, they lead to depletion of water, forests and fisheries and the overuse of fossil fuels and fertilizers.
Removal of subsidies can be politically difficult, as benefits are concentrated on well-defined interest groups while costs are widely diffused among consumers and non-subsidized producers. Nevertheless, budgetary pressures, economic crises and efficiency considerations have led to considerable subsidy reductions. A 1996 World Bank study estimates that environmentally damaging subsidies have been reduced by half during the 1990s, although they still total more than $400 billion a year. The UN study on Finance for Sustainable Development finds that China and Russia have achieved significant reductions in energy subsidies, and several Asian and Latin American nations have cut agricultural subsidies and raised charges for use of natural resources. New Zealand, the Netherlands and the United States are among the developed countries that have taken steps to reduce agricultural subsidies, via domestic policy decisions as well as multilateral negotiations.
Charges on pollution, tradeable emission permits (which allow firms to sell governmentally assigned "pollution rights" to other firms for whom pollution reduction would have been more costly) and deposit-refund schemes will advance environmental goals more effectively and at a lower cost than traditional command-and-control regulations, economists argue. Empirical studies have concluded that widespread application of such economic mechanisms would enable developing as well as developed countries to reduce the cost of achieving pollution-control objectives by as much as 60 to 90 per cent.
There is already a considerable body of experience that bears out the effectiveness of these measures, if accompanied by strong institutions in the environmental sector and complementary use of a regulatory approach.
User charges and environmental taxes produce a double benefit (as does the removal of environmentally damaging subsidies): they generate fiscal resources while pushing consumer and producer behaviour in a more sustainable direction. They achieve the latter objective by causing prices of goods to reflect more of the social and environmental costs of production and consumption. This raises economic efficiency in the broad, social welfare sense, and makes market forces into an ally of the environment.
The major funding source for protecting the global ecology inspired by the Earth Summit is the Global Environment Facility (GEF). It has been allocated approximately $2.8 billion over six years for projects that address the global issues of climate change, biodiversity and protection of international waters. Another fund, capitalized at over $225 million, is dedicated to implementing the Montreal Protocol on Ozone Depletion.
The issue of international commitment to these funds is coming to the fore in the latter half of 1997, when the GEF is due to be replenished for three more years.
A recent proposal for a levy on fuel used for international air travel supplements a 1978 proposal by United States economist James Tobin to tax international financial transactions. The hope is that substantial sums could be devoted to the internationally endorsed goal of sustainable development, at the cost of only a few cents on each cross-border financial transaction or only a few dollars added to each passenger's overseas airline trip.
Critics of the international taxes point to practical difficulties in implementing such levies. The main obstacle, however, is likely to be general political opposition to the idea of new taxes, along with reluctance of national governments to cede taxing rights to a supra-national authority.
| $1.2 trillion available through domestic policy reforms
A large part of the extra financial resources needed to take on endemic poverty and environmental degradation can be mobilized through national policy decisions, according to a United Nations report, with contributions from the World Bank, the International Monetary Fund, the Organization for Economic Cooperation and Development, other international agencies and leading universities. The publication, Finance for Sustainable Development: the Road Ahead (UN sales publication number E.97.II.A.5), will be released 23 June, at the UN General Assembly review of follow-up to the 1992 Earth Summit. A chapter by three IMF experts makes an "heroic 'order of magnitude' estimate" and finds that the world's governments have the capacity to generate additional financial resources of $1.2 trillion each year (out of total world GDP of $30 trillion) through domestic reforms. A breakdown of where the money would come from: Additional revenues $300 billion--expanding tax bases and perfecting tax collection Savings on public expenditures $435 billion--elimination or better-targeting of unproductive
and environmentally harmful governmental subsidies Four fifths of this amount would be mobilized in the industrialized countries, and one fifth or more in the developing countries. These estimates, the authors note, do not take into account the substantial additional financial resources which could be generated through macro-economic and structural reforms. |
For further information contact:
Division for Sustainable Development
Department for Policy Coordination and
Sustainable Development
United Nations
New York, NY 10017
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Fax: (212) 963-4260
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or
Development and Human Rights Section
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Fax: (212) 963-1186
Email: vasic@un.org