Mobilizing Domestic Financial
Resources
for Development
United Nations, A/ AC. 257/ L. 2, June 2000
"Mobilizing domestic financial resources for development
1. Enabling domestic environments: governance issues; sound
macroeconomic policies, including fiscal and private savings policies; special needs of
Africa, the least developed countries, small island developing States, landlocked and
transit developing countries and other developing countries as well as countries with
economies in transition with special difficulties in attracting financing for development.
2. Strengthening public finances: development and enforcement of
effective and equitable tax systems; enhanced allocation of public expenditures for
infrastructure and social development; capacity-building and technical assistance.
3. Strengthening the domestic financial sector: institutional
issues; supervision; harmonization of codes and standards; innovative instruments; access
to microcredit; capacity-building and technical assistance."
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United Nations, A/AC.254/24, March 2001
"Heading I: Mobilizing
domestic financial resources for development
Each country has primary responsibility for its economic
development. The mobilization of domestic resources is the foundation for self-sustaining
development. An enabling domestic environment is vital not only in mobilizing domestic
resources, but also in attracting and effectively using international investment and
assistance.
National efforts to mobilize domestic financial resources should
consolidate enabling domestic environments geared to promote growth with equity, through
good governance, effective domestic institutions, rule of law, and sound macroeconomic,
structural and social development policies that are gender and environment sensitive.
Based on common international understandings that respect
diversity and specific country circumstances, these national efforts should be supported
by an enabling international environment, including good international financial and trade
governance and adequate external resources mobilization.
In the pursuit of good governance at the national and
international levels, an immediate priority is to fight corruption:
How to enhance international cooperation to fight corruption,
eliminate money laundering and illegal transactions and repatriate illegally transferred
funds? How could an international legal instrument against corruption under the aegis of
the United Nations be effective to fight corruption?
Public finance is not only central to domestic resource
mobilization, but also an area where action by governments can lead to early and effective
results:
How can multilateral and bilateral development agencies support
national efforts to formulate medium-term fiscal frameworks that promote financial
stability while providing a measure of predictability for public spending programmes?
How can international cooperation support national efforts to put
in place an efficient and equitable tax system?
How can the international community support national efforts to
tap civil society and private sector resources to contribute to the provision of
infrastructure and social services, so that public resources can be concentrated in other
areas where there can be no substitute for government activity?
Fostering a dynamic private sector is another crucial part of an
enabling environment:
How best to foster private sector development, particularly the
development of a functioning financial sector to encourage private savings and productive
investments?
An important challenge is to widen access to sources of finance
so that all segments of the population can participate in development. Finance for SMEs
and microcredit, both at urban and rural areas, can play a key role in this regard
considering its critical impact on employment and income distribution:
How can the international community support national efforts to
foster the development of more inclusive financial services and ensure access by all,
notably women and the poor? How to capitalize on the recent innovations in financial
instrumentality to develop microfinance and other financial products for small borrowers?
Within the context of the UN's partnerships with business, is it possible to deepen
financial innovation to better serve the financial needs of the poor? How to benefit from
the experience of postal savings?
A basic priority is to put on track a comprehensive
capacity-building and technical assistance effort to support generating an increasing
stream of domestic financial resources and efficiently channeling them to development
goals.
How best to strengthen technical assistance efforts for national
capacity-building in the critical areas of public finance and the financial-sector
development, including capacity-building for enhanced participation in the formulation and
implementation of codes and standards as well as for financial sector reforms needed to
facilitate investment flows?"
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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
"The high-level event should underline that
national macroeconomic policies should aim at a medium-term framework that balances the
key objectives of sustained economic growth, employment growth and poverty reduction,
taking into account the need to ensure low inflation and that fiscal and current account
balances are sustainable. In determining the macroeconomic policy package, national
economic authorities should pay special attention to the time horizon of implementation
and to consistency among the various objectives and instruments.(...)
The international community should agree that
special care be taken with respect to the opening of the capital account in developing
countries and countries with economies in transition, recognizing the need for national
policy autonomy, which in some circumstances may call for countries to apply disincentives
or controls on short-term capital in times of surges in capital flows. However, capital
controls cannot be used as a substitute for sound and appropriate macroeconomic
policies.(...)
The international community should create and
promote an international economic environment supportive of sound macroeconomic policy and
domestic resource mobilization in developing countries and countries with economies in
transition. The large industrial countries should endeavour to formulate and implement
policies that are supportive of robust international global growth and consistent with a
stable international economic environment, making special efforts to minimize abrupt
shifts in interest rates, in the supply of capital in international financial markets and
in the exchange rates of reserve currencies(...)
While traditional macroeconomic instruments remain
crucial, Member States should agree that supplemental instruments need to be developed to
deal with the fluctuations in fiscal balances and foreign-exchange reserves and the
greater risk of instability that have been accentuated by the increasing speed of
globalization. These instruments could include fiscal stabilization funds, which
neutralize fortuitous increases in revenues or foreign-exchange earnings, for use later,
and more stringent supervision and regulation of the international exposure of the
industrial and financial sector.(...)
Developing and transition economy countries should
give high priority to strengthening macroeconomic institutions, especially central banks
and finance ministries, and to enhancing or creating supervisory bodies. This will involve
capacity-building - e.g., through training programmes for public officials - and requires
enhanced technical cooperation, particularly for the least developed countries. Emphasis
in all countries should be placed on strengthening institutional arrangements that bring
the main elements of macroeconomic policy into the public domain so that the full
consequences of those policies, including their social dimensions, can be discussed in a
way that helps achieve a balance between economic and social priorities and enhances the
acceptance - and facilitates the implementation - of the chosen macroeconomic
policies.(...)
Member States should accelerate implementation of
their commitment, reiterated at the twenty-fourth special session of the General Assembly,
to effective, participatory, transparent and accountable governance and institutions
responsive to the people and their needs, and to intensify reforms geared to strengthening
legal and regulatory frameworks, social, economic and institutional infrastructure, equal
access to and control over resources for women and men, the enforcement of contracts and
domestic laws regarding private property, and financial sector reform.(...)
Member States should strengthen measures to fight
corruption at the national and international levels, including through enhanced
international cooperation. In this regard, they should call for expeditious completion of
preparatory work for the elaboration of an international legal instrument against
corruption under the aegis of the United Nations - independent of the United Nations
convention against transnational organized crime - and for the convening of a conference
for the negotiation of the corresponding legal instrument by the earliest possible
date.(...)
The international community should support on a
long-term basis the national efforts of developing countries, particularly the countries
of Africa, the least developed countries, small island developing States and landlocked
and transit developing countries, as well as countries with economies in transition, to
develop effective governance systems, in particular by providing increased resources for
technical assistance for institution building.(...)
Countries should consider the formulation of a
medium-term fiscal framework to provide a measure of predictability for public spending
programmes and to set out clear goals for the mobilization of tax and non-tax revenues and
the profile of public assets and liabilities, including contingent liabilities.
International institutions should be ready to assist countries in developing such a
framework, and all donor partners should take it into account in providing assistance to
those countries.(...)
Countries should strive to develop progressive
taxation systems and should endeavour to ensure that the process of adopting taxes is
equitable and participatory through, inter alia, the following policies and measures:
- Taking measures to ensure that the incidence of taxation falls
justly on different income classes and different categories of income, such as wages,
profits and rents;
- Extending the tax base to cover incomes from activities that
are not currently taxed;
- Expanding indirect taxes and making them more equitable by
targeting the growing modern service sector and socially and environmentally undesirable
activities.(...)
All countries should strive to simplify tax laws, to improve the
efficiency and effectiveness of tax administration and to enhance enforcement through the
strengthening of institutional, technical and technological capacities, including the
development of a transparent, accountable and corruption-free system. Developed countries
and international institutions should provide increasing support, especially in terms of
resources for technical assistance in capacity-building, to developing and transition
economy countries undertaking these changes.(...)
Developing countries and countries with economies in transition
should undertake appropriate administrative and legislative measures to combat tax evasion
and prevent tax avoidance. International institutions should provide assistance for this
purpose, particularly to facilitate south-south cooperation.Developing countries and
countries with economies in transition should undertake appropriate administrative and
legislative measures to combat tax evasion and prevent tax avoidance. International
institutions should provide assistance for this purpose, particularly to facilitate
South-South cooperation.(...)
National, regional and local authorities should establish
transparent budget procedures and facilitate the participation of civil society in the
review of public expenditures with a view to enhancing the efficient and equitable
provision of health, education, social security and infrastructure services, and safety
nets. Such transparent procedures and review should also help Governments to protect
essential maintenance and developmental expenditures in times of adjustment, to enhance
the cost-effectiveness of public programmes and correct those that are mistargeted, and to
evaluate their impact on the poor, particularly women, and on the environment.(...)
National authorities, supported by the international community, should explore
possibilities for tapping civil society and private-sector resources, both managerial and
financial, to contribute to the provision of infrastructure and social services in a way
that promotes service quality, expands access to the poorest, in particular to women, and
at the same time maximizes the levels of public resources allocated to the provision of
other non-commercial services, including safety nets, that are required to establish more
just and equitable societies.(...)
All countries should support the development of well functioning
financial markets by:
- Establishing a transparent and efficient overall legal
framework and administration, complemented by effective regulatory and supervisory
institutions in order to, inter alia, reduce excessive risk-taking and "moral
hazard";
- Building an effective insolvency regime that properly and
equitably balances the rights and obligations of debtors and creditors;
- Fostering good corporate governance, accounting, and auditing
practices in private and public entities;
- Fostering a competitive environment to facilitate efficiency
and innovation in financial services, including the consideration, where appropriate, of
in-country operation of foreign financial institutions.(...)
All countries should aim to develop a diverse financial system,
consistent with legal and cultural traditions and the capacity for adequate regulation,
that responds to the multifaceted needs for financial services, in particular to promote
household savings and facilitate long-term investment. Such a system includes markets for
public and private bonds and equities; such institutions as pension funds, life-insurance
companies, mutual funds, postal savings and mortgage providers; and development banks and
non-bank financial institutions. Groups of countries with small economies and lack of
financial depth should consider modalities to foster regional markets for financial
services.(...)
All countries should facilitate access to finance by small and
medium-sized enterprises through the provision of credit - particularly microcredit - and
appropriate guarantee schemes, as well as through the introduction of segments of stock
markets which are adapted to the needs of small and medium-sized enterprises and where
more flexible rules apply. The emphasis should be on transparency of enterprises, on
innovative, market-based financing mechanisms and on modalities appropriate to small
enterprises, such as venture capital, leasing companies and insurance products.(...)
Countries should develop a rural credit plan that provides
farmers, fisher folk and other small rural producers with equitable access to long- and
short-term credit, crop (weather) insurance and other financial services. The development
of a legal framework and promotional measures that facilitate credit cooperatives can play
an important role in this regard.(...)
All countries should facilitate access to financial services for
the poor and vulnerable by fostering a wide range of financial intermediaries which target
small savers and small borrowers, microenterprises, including microfinance institutions,
cooperatives, credit unions and postal savings. To this end, countries should strive to
remove institutional and regulatory obstacles, such as restrictions on cost recovery, lack
of secure transaction laws and weak property registries. Countries should also seek to
improve women’s access to mainstream sources of financing, including by strengthening
their rights to pledge collateral. Governments and donors should provide resources and
explore venues to reach people living in poverty, including through international
public-private partnership funds to encourage research and applications on innovative
financial tools.(...)
Countries should further assess the underpinnings of well
functioning financial markets - which should also help to reduce the vulnerability of the
international and domestic financial systems to crisis and contagion - through
self-assessments or externally assisted assessments, as embodied, for example, in the
multi-agency "financial sector assessment programmes" and "reports on the
observance of standards and codes". In many countries, such guidelines can be of
great assistance in determining the priorities of financial reforms and the appropriate
sequencing of reform and economic liberalization measures.(...)
Bilateral and multilateral financing and development agencies and
institutions should be urged to continue to support, on a long-term basis and with
increased resources for technical assistance, the national efforts of developing countries
and countries with economies in transition in capacity-building for their efforts related
to strengthening the financial sector.(...)
National authorities should support a comprehensive approach
towards the development of sustainable social protection systems by designing such systems
in a manner that facilitates risk management at the individual and family levels,
particularly for women; increasing the allocation of national resources for social
protection; supporting, to the extent possible, the principle of universal coverage;
evaluating systems both in terms of their effectiveness as support mechanisms and also of
their impact on productivity, job creation and competitiveness; developing institutional
mechanisms for improved coherence in social protection expenditures at the national and
local levels; developing modalities and mobilizing resources to extend social protection
to those working in the informal economy and those performing unpaid work - who are
disproportionately likely to be women; and having social safety nets in place to extend
special protection for the poor and vulnerable in times of economic crisis.(...)
National authorities should explore the development of pension
funds, where appropriate to domestic circumstances, as a mechanism to improve income
security and as an integral part of a national pension system. The design of the specific
programme should aim to ensure its sustainability and attain its primary objective of the
reliable provision of income, while giving appropriate consideration to fostering its
potential impact on savings mobilization and the development of the financial sector
through effective, transparent and adaptable regulation and accountable administration.
The sharing of experience in this area should be supported by technical assistance
resources from the international community."
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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
"Mobilization of domestic resources for development
There was broad agreement among participants on almost all the
issues raised.4/ The starting point is that each country has primary responsibility for
its economic development. Some of the principles emphasized in the discussion were
ownership, participation, transparency, accountability and access. For a supportive and
conducive environment, the following were highlighted:
Interlinkages of domestic resource mobilization with an enabling
environment, both domestic and international, including trade, finance, commodity prices
and official development assistance and capacity building; The role of the private sector
in domestic resource mobilization; The role of civil society organizations in providing
financial services to low-income groups and the poor.
The discussion helped to sharpen the focus on the issues and
highlighted promising areas of agreement.
Towards policy priorities
Critical issues in the mobilization of domestic resources were
identified: good governance, a sound macroeconomic framework, formulation of a medium-term
fiscal framework, development of an efficient and equitable tax system, development of a
well-functioning financial system, financial innovations to widen access of finance and
involvement of civil society and the private sector in the provision of infrastructure,
social services and ensuring access to financing for those groups usually excluded from
the formal financial sector.
Developing a focused and effective capacity building and
technical assistance effort to support the critical areas in the mobilization of domestic
resources, drawing on opportunities for cooperation among all countries, from the North
and the South, within and across regional groupings of countries. In this regard, there
were certain additional considerations:
The importance to their effectiveness of prioritization and
ownership of programmes by developing countries in consultation with bilateral and
multilateral donors, an example of which is the initiative of the Economic Commission for
Africa, "A Compact for Africa’s Recovery."5/ Drawing on lessons learned
from existing programmes, including provision by the UN of replicable models of programmes
and work of other international and bilateral organizations.
Determining the international support needed for special groups
of developing countries in their efforts to mobilize domestic resources for development.
Implications for this issue of the outcome of the forthcoming UN Conference on least
developed countries in Brussels, 14-20 May 2001, can be an input to the International
Conference.
Developing the complementary role that the private sector and
civil society can play with the public sector and in the provision of infrastructure and
social services, as well as in developing financial innovations to widen access to
financing for all segments of society. Additional considerations in this regard included:
Exploring how public resources can be used to leverage private
resources. Drawing on lessons learned from various groups, e.g. work on microfinance by
the 27 agencies that constitute the Consultative Group to Assist the Poorest (CGAP).
Possible private sector involvement in a roundtable on the issue of innovations in
financing as a side event at the International Conference.
Enhancing national and international efforts to combat corruption
of all origins, and organize international cooperation in this area under the auspices of
the United Nations, taking into account national experiences and ongoing international and
regional efforts to avoid duplication.
Coordination of the various existing mechanisms for international
support to developing countries in their formulation and implementation of strategies for
domestic resource mobilization to attain their development goals (including, national
development plans and strategies, Poverty Reduction Strategy Papers, Comprehensive
Development Frameworks, United Nations Development Assistance Frameworks, and Common
Country Assessments)."
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High-Level
Panel on
Financing for Development -
Recommendations & Technical Report
United Nations, A/55/1000, 26 June 2001
" Recommendations:
Mobilizing resources for development
Unlike many previous undertakings, the Millennium Declaration
also highlighted the task of mobilizing the financial resources needed—to achieve the
International Development Goals and, more generally, to finance the development process of
developing countries. The upcoming Conference on Financing for Development, to be held in
March 2002, will be a key event in agreeing a strategy for better resource mobilization.
Financing for development provides the mandate entrusted to this
Panel by the UN Secretary-General. Drawing on our collective practical experience, our
task was to recommend steps that can be taken to augment the flow of resources to the
developing world. In what follows, and in the accompanying technical report, we look at
ways to ensure that developing countries receive the financial resources they need. What
policies must they adopt? What kind of help from the industrialized world will be most
useful to them? Does the world have the right international institutions? And if so, how
to ensure they play their proper role?
Policies in developing countries
The primary responsibility for achieving growth and equitable
development lies with the developing countries themselves. This responsibility includes
creating the conditions that make it possible to secure the needed financial resources for
investment. It is the actions of domestic policymakers that largely determine the state of
governance, macroeconomic and microeconomic policies, the public finances, the condition
of the financial system, and other basic elements of a country’s economic
environment.
We emphasize here that achieving such a positive environment is
not simply a matter of political will. Though beyond the purview of this Panel, capacity
building and institutional development are an absolutely essential complement to finance
in the effort to improve living standards among the poor. Many developing countries,
usually the poorest ones, still lack institutions capable of implementing the necessary
actions, and will need to focus major national efforts on capacity building. In this task,
more and better assistance from the international community is needed; indeed, experience
shows that imposing tough policy conditionality on poor countries without assisting them
to build their domestic capacity is a recipe for frustration and unsatisfactory results.
Governance
First and foremost, a country needs to have good governance that
commands the consent of the governed, and effective and impartial rule of
law—including relentless combat of corruption, competent and socially legitimate
protection of property rights, and well designed, well enforced regulations (appropriate
to the specific country’s stage of development) to protect workers’ rights and
the environment.
Macroeconomic policy
The generation of domestic resources to save and invest
productively is the essential foundation of sustained development. A very low domestic
savings rate is one of the main structural weaknesses to be overcome in most developing
countries. But there will not be enough domestic savings, nor enough high quality national
investment, without macroeconomic discipline. Economic policy must be designed to make
inflation and the current account balance consistent with sustained growth. For countries
with high inflation, this implies that monetary policy should aim to reduce inflation over
time, and once it has reached a low level, to hold it there. Monetary policy also needs to
be consistent with the chosen exchange rate regime, which must give reasonable assurance
that the country will avoid an unsustainably large current account deficit.
Fiscal policy and social spending
Fiscal discipline, too, is required at all times, so as to keep
deficit financing small enough to avoid causing inflation, to avoid excessive accumulation
of public debt, and to ensure that government borrowing does not crowd out the private
sector from domestic credit markets. Almost everywhere the most potent way to empower the
poor to integrate themselves into the market economy, and hence to contribute to and
benefit from growth, is to make public investments in broadly accessible education,
health, and nutrition, in other basic social programs, and in the rural sector, where
large proportions of the poor typically live. These programs need to have the first call
on government resources—they should not be treated as marginal programs whose budgets
can be slashed when times are difficult.
Financing an adequate level of social public expenditure while
limiting budget deficits calls for substantial tax revenues. Most countries of the
developing world must undertake significant tax reforms if they are to raise the
additional revenue that they need. These reforms should generally aim to broaden the tax
base and to encourage domestic savings. In designing tax reforms, care is needed to
protect the consumption levels of the poor.
Financial system
A diverse, well-functioning, competitive financial system is
crucially important both for mobilizing savings and for investing them productively. Every
country needs a financial system that promotes savings and provides credit efficiently to
small, medium, and large firms as well as to micro-enterprises—including those owned
by the poor and by women. Again, in most developing countries, such a system is missing.
Its development requires a modern framework that progressively incorporates accepted
international standards for capitalization, accounting, auditing, regulation, and
supervision, as well as arrangements for corporate governance and bankruptcy that are
adapted to the local culture while meeting global standards. Building financial systems
that will meet these specifications is difficult. The international community needs to
help developing countries in this task.
Pension reform
A country’s pension system has a dual role: as a social
safety net for the elderly and as a source of savings that can be used for productive
investment. How the government approaches the provision of old age security can have a
significant impact on the national savings rate. The type of pension scheme with the
greatest impact on savings is probably a defined-contribution scheme in which participants
accumulate rights to the assets that they contribute, and thus regard their capitalized
contributions as a part of their personal wealth. To have the greatest social impact, a
defined contribution scheme should be complemented by a tax-financed scheme, to provide
for a minimum pension that has a progressive redistributional impact and safeguards the
poor. The feasibility of this approach is likely to vary among countries, however,
depending in part on the solvency of the existing system and in part on the weight the
society places on social cohesion.
Technical Report
1- Domestic Resource Mobilisation
The main responsibility for securing growth and equity, and hence
for achieving rapid poverty reduction and human development as called for by the
International Development Goals, lies with countries’ policymakers. It is their
actions that primarily determine the state of governance, the choice of macroeconomic and
microeconomic policies, the health of public finances, the parameters of the financial
system, and other fundamental elements of the economic environment. There cannot be growth
without investment of sufficient amount and quality. The domestic economy is virtually
always the dominant source of savings for investment, and the domestic policy environment
is a decisive determinant of the desire to invest. Furthermore, the equally crucial
question of the efficiency with which resources are invested is determined overwhelmingly
by national decisions and the domestic policy environment. That is why it is right to
start a discussion of how to provide the financial resources to achieve the 2015 targets
by looking at domestic policy issues in developing countries.
Perhaps the most basic of those issues concerns governance,
including the rule of law. Countries need to be able to govern themselves efficiently and
fairly, and in a way that commands the consent of the governed, if they are to have a
chance at development. The cancer of corruption should be vigorously combated as an
impediment to growth and an offence against the poor.
Experience has also made it abundantly clear that one cannot
expect savers to keep their savings within the country, or investors to risk their wealth
in socially productive investments there, in the absence of macroeconomic discipline.
Inflation and the current account deficit need to be consistent with sustained growth.
This implies a monetary policy that aims to reduce high inflation over time, and to keep
low inflation low. Monetary policy also needs to be consistent with the chosen exchange
rate regime, which must give reasonable assurance that unsustainably large current account
deficits will be avoided. And one certainly cannot have macroeconomic discipline without
fiscal discipline.
As Amartya Sen argues[6] , a market economy provides both a means
for enlarging personal freedom and the most effective known way of furthering economic
growth. But a market economy requires a secure institutional infrastructure in order to
function effectively. This involves adherence to the rule of law, administered impartially
by the courts; a coherent system of corporate, contract, and bankruptcy law; legally
established property rights that recognise socially acceptable traditional practices and
therefore command social legitimacy; and well-designed regulations appropriate to a
country’s stage of development. This includes regulations that promote worker and
product safety, set environmental standards, and, in the event of monopoly, establish
reasonable prices.
What markets do not automatically provide, however, is a fair
chance for everyone to participate in them and exploit their potential to the full. To
give the disadvantaged a chance, action may be needed to secure legal recognition of
traditional property rights,[7] gender equity, and, in some countries, land reform. But
just about everywhere, the most potent instrument for empowering the poor—including
women--to integrate themselves into the market economy is public spending on education,
health, nutrition, the rural sector, and other basic social programmes. It is these that
enable the poor to contribute to—and thus benefit from—economic growth. These
programmes, plus infrastructure investment, need to be the first call on government
resources—not the marginal spending that is slashed when times are difficult.
Financing an adequate level of public expenditure, including a
social safety net, while limiting budget deficits implies raising substantial revenue from
taxation. Tax revenue (supplemented in lower-income countries by foreign aid) needs to be
sufficient to permit spending to be financed without either imposing the inflation tax,
which falls disproportionately on the poor, or curtailing investment by the private
sector. Many developing countries will have to undertake tax reform in order to raise tax
revenue to the levels required. A value added tax has been found useful in many countries,
because it spreads the burden of taxation over a broad tax base, although care may be
needed to prevent an unfair share of the burden falling on the poor.
Experience has shown that even the most admirable tax structure
on paper is of little value if it is administered incompetently or corruptly. This points
both to the need to simplify the tax system wherever possible and to the importance of
building a transparent, accountable, and corruption-free tax administration. Section 5 of
this Report urges that the international community create an International Tax
Organisation that would help countries achieve these objectives, as well as reduce the
scope for tax avoidance and evasion on income sources that have a transnational element.
That would broaden the tax base and thus permit lower marginal tax rates, helping to limit
disincentive effects while making taxation more progressive.
The financial system has been called the brain and nervous system
of an economy. It provides opportunities for households to save, determines how savings
are channelled to productive enterprises, and monitors the use made by enterprises of
those savings. A diverse, well-functioning, competitive financial system is thus of
crucial importance both in mobilising savings and in securing their productive investment.
A truly diverse financial system is one that provides credit to microenterprises as well
as larger firms; that encompasses a vigorous capital market as well as widely accessible
banks; that allows firms to raise both equity and debt finance; that offers a range of
institutional savings mechanisms; and that provides both credit and savings opportunities
to women, the informal sector, and the poor. A well-functioning system needs to be based
on a modern legal framework incorporating international accounting and auditing standards,
as well as corporate governance and bankruptcy arrangements that are adapted to the local
culture but meet global standards. Banks must be competitive, efficient, properly
capitalised, and well regulated and supervised. Countries must aspire to reach the
standards and abide by the codes on financial regulation that various international fora
have developed. Of course, building institutions that will meet these specifications is
difficult and will take time; it will also require assistance by the international
community.
Public policy can have an important impact on the level of saving
through arrangements made for the provision of pensions. Many developing countries still
lack a reasonably comprehensive system for roviding adequate income to their retirees.
This may not be a priority issue in the very poorest countries, where retirees are not the
only group in society whose incomes are typically lacking. But it is fast becoming a
serious social issue even in countries with quite low incomes, as the extended family
system erodes and life expectancy increases. Moreover, it is a problem whose solution can
have a significant impact on the mobilisation of savings.
If a pension system is to add to national saving, it must be a
funded rather than a pay-as-you-go system, and the transition to the funded system must
not be financed by borrowing. (A funded system is one in which contributions of
today’s workers are set aside for their own retirement; in a pay-as-you-go system
those contributions are transferred to today’s retirees.) The result will be a higher
national saving rate, as the present generation of workers is obliged to save to build up
the assets that will pay their future pensions, while still paying taxes to fund the
pensions of those already retired when the scheme is introduced. A defined-contribution
scheme, in which a participant accumulates rights to the assets that he or she
contributes, is probably the most efficient way of raising saving, since people regard
their capitalised contributions as a part of their personal wealth. Such a scheme can be
organised and managed by the state itself, or the task can be turned over to private
pension funds regulated by the state, with mandatory contributions. A programme of either
type should be complemented by a tax-financed scheme with a progressive redistributional
impact so as to ensure a minimum pension. The importance of a funded, defined-contribution
element and a tax-financed element assuring a minimum pension is likely to vary from one
country to another, depending in part on the solvency of the existing system and in part
on the weight the society places on social cohesion.
Admittedly, the agenda just laid out is an ambitious one,
particularly for low-income countries that have been ravaged by war or civil conflict. It
is not intended to imply that all countries should adopt the same set of policies:
differing circumstances will certainly require different policies. The intent has been to
identify those propositions that are widely valid, and to make the point that neither
economic nor human development is likely to get very far, whatever the international
environment, in countries that fail to address this agenda. If the world is to achieve the
2015 International Development Goals, the first indispensable step is for all developing
countries to make sure their fundamentals are being addressed along the lines sketched out
here. But doing this is not simply a matter of political will. Many developing countries
lack institutions capable of implementing much of this agenda. These countries will need
to focus major national efforts on capacity building: developing a competent and
corruption-free public service, nurturing a strong civic society and a vibrant and
independent press, and promoting a strong indigenous private sector. Technical assistance
as currently organised is not providing the help that it ought to be doing. The
international community needs to think hard about how it can best assist developing
countries build the robust, sustainable, strategic and innovative institutions capable of
responding with flexibility to a fast changing domestic and external environment that will
be needed to achieve the International Development Goals."
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United Nations, 09/17/01
" Mobilizing domestic financial resources for development
7. Domestic resources provide the foundation for self-sustaining
development. In our common pursuit of growth and equity, 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. This enabling domestic
environment is vital not only in mobilizing domestic resources, but also in attracting and
effectively using international investment and assistance.
8. To this end, we shall:
Strengthen our efforts to consolidate good governance and the
rule of law, including by intensifying our combat of corruption and by enhancing policy
and regulatory frameworks that foster a dynamic and well-functioning business sector while
promoting equitable income distribution, empowering women and protecting workers’
rights and the environment. Pursue sound macroeconomic policies geared to the sustainable
achievement of high rates of economic growth and employment, price stability, and balanced
external accounts. Promote fiscal discipline, medium-term fiscal frameworks, equitable and
efficient tax systems, and prudent public sector debt management, Ensure sustainable
investments in education, health, nutrition, and social security programs, which take
special care of children and are gender sensitive and fully inclusive of the rural sector
and all disadvantaged communities. Strengthen the domestic financial sector. In this
regard, we attach priority to the following:
1.Progressive implementation of multilaterally agreed financial
standards, duly adapted to the local institutional traditions and stage of development;
2.Development of capital markets and financial instruments to
promote savings and provide long-term credit efficiently to all;
3.Microcredit and credit for small and medium-size enterprises,
including support of efforts to bring the informal sector into the formal economy;
4.Financial instruments that reduce the transfer costs of migrant
workers’ remittances and encourage their investment in projects of high development
impact; 5.Pension schemes that maximize their dual role as a social protection for the
elderly and as a source of savings.
9. To provide the necessary support to these efforts, we shall
search collectively for ways to:
Promote policy dialogue and coordination among peers at the
sub-regional and regional levels on macroeconomic and development policies. Strengthen
technical assistance for capacity building, including in the areas of public finance and
administration, gender budget analysis, financial sector development, and debt management,
as well as in information and telecommunications infrastructure and management. Address
the special needs of vulnerable and marginalized countries and social groups, particularly
countries in Africa, the least developed countries, small island developing states (SIDs),
and landlocked and transit developing countries.
10. We shall also negotiate expeditiously, under the aegis of the
United Nations, a comprehensive Convention against Corruption, including cooperation to
eliminate money laundering and illegal transactions as well as to repatriate illegally
transferred funds."
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United Nations,12/06/01
"II. LEADING ACTIONS
Mobilizing domestic financial resources for development
7. In our common pursuit of growth, poverty eradication, and
sustainable development, a critical challenge is to ensure the necessary internal
conditions for mobilizing enough domestic savings to sustain adequate levels of investment
in productive and human capacity. A crucial task is to enhance the appropriateness,
coherence, and consistency of macroeconomic and structural policies. An enabling domestic
environment is vital for mobilizing domestic resources, reducing capital flight, and
attracting and making good use of international investment and assistance.
8. Improved domestic governance. Good governance is essential for
sustainable development. Sound national policies and solid institutions are the basis for
sustained economic growth, employment creation, and poverty reduction. Freedom, peace and
security, respect for human rights and the rule of law, market-oriented policies, and an
overall commitment to just societies, are also preconditions.
9. We will consolidate appropriate policy and regulatory
frameworks to encourage private and local initiative and foster a dynamic and
well-functioning business sector, while improving income distribution, empowering women,
and protecting labor rights and the environment. We recognize that the specific mix
between market-oriented policies and state intervention will vary from country to country,
according to specific circumstances.
10. Fighting corruption is a priority. Taking into account
existing instruments, we will negotiate a United Nations comprehensive convention against
corruption, including stronger cooperation to eliminate money laundering, terror
financing, and other illegal activities—as well as to repatriate transferred funds of
illicit origin.
11. Sound macroeconomic policies. We recognize the need to pursue
sound macroeconomic policies geared to high rates of economic growth, full employment,
poverty eradication, price stability, and sustainable fiscal and external balances.
Governments should attach priority to avoiding inflationary distortions and abrupt
economic fluctuations that negatively affect income distribution and resource allocation.
Along with prudent fiscal and monetary policies, an appropriate exchange rate regime is
required.
12. Securing fiscal sustainability. An effective, efficient, and
accountable system for mobilizing public resources and managing their use by governments
is essential. We recognize the need to secure fiscal sustainability through medium-term
fiscal frameworks, based upon equitable and efficient tax systems and improvements in
public spending that do not crowd out productive private investment but rather support it.
We also recognize the potential of international tax cooperation to enhance the scope of
national fiscal efforts.
13. Social security and safety nets. Investments in basic
economic infrastructure and social services including education, health, nutrition, and
social security programs—which take special care of children and are gender sensitive
and fully inclusive of the rural sector and all disadvantaged communities—are vital
to enabling people to better adapt to and benefit from changing economic conditions and
opportunities and to contribute to economic activity. Recent economic crises have also
stressed the importance of effective social safety nets.
14. Financial sector strengthening. We recognize the need to
strengthen the domestic financial sector, encouraging the orderly development of capital
markets through institutional arrangements that channel savings and foster productive
investments, including equity markets.
15. This requires a strong central bank and a solid system of
financial intermediation, supported by a transparent regulatory framework and effective
supervision mechanisms. It also requires the progressive, voluntary implementation of
internationally agreed financial standards.
16. Microfinance and credit for small and medium-size
enterprises, including in the rural sector, as well as savings institutions such as postal
savings, are important to enhance the social impact of the financial sector. Well managed
development banks can be an effective instrument to guarantee access to finance to these
enterprises, as well as an adequate supply of long-term credit and the promotion of
financial innovations aimed at deepening domestic financial development. We must aim to
develop pension schemes that maximize their dual role as social protection and as a source
of savings. It is also important to reduce the transfer costs of migrant workers’
remittances and explore modalities to encourage their investment in projects of high
development impact. Wherever feasible, the informal sector must be incorporated into the
formal economy.
17. Capacity building. We commit ourselves to strengthening
technical assistance to reinforce national efforts in capacity building in areas such as:
public finance and public administration, gender budget analysis, financial regulation and
supervision, early warning and crisis prevention, and debt management. In the process, we
shall particularly address the special needs of Africa, the least developed countries,
small island developing countries, and landlocked developing countries."
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