flying albatross International Conference on Financing for Development, Monterrey, Mexico 18-22 March 2002 United Nations
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Increasing international financial
cooperation for development
through, inter alia, ODA

FfD-Agenda

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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First Working Paper of the Facilitator

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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Draft Outcome Prepared by the Facilitator

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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Revised Draft Outcome Prepared by the Facilitator

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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Draft outcome of the International Conference on Financing for Development
-Monterrey Consensus

 

 

Increasing international financial and technical cooperation for development

39. Official development assistance (ODA) 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 and export capacities are enhanced. ODA can be critical for improving the environment for private sector activity and can thus pave the way for robust growth. ODA is also a crucial instrument for supporting education, health, public infrastructure development, agriculture and rural development, and to enhance food security. For many countries in Africa, least developed countries, small island developing States and landlocked developing countries, ODA is still the largest source of external financing and is critical to the achievement of the development goals and targets of the Millennium Declaration and other internationally agreed development targets.

40. Effective partnerships among donors and recipients are based on the recognition of national leadership and ownership of development plans and, within that framework, sound policies and good governance at all levels are necessary to ensure ODA effectiveness. A major priority is to build those development partnerships, particularly in support of the neediest, and to maximize the poverty reduction impact of ODA. The goals, targets and commitments of the Millennium Declaration and other internationally agreed development targets can help countries to set short-and medium-term national priorities as the foundation for building partnerships for external support. In that context, we underline the importance of the United Nations funds, programmes and specialized agencies, and we will strongly support them.

41. We recognize that a substantial increase in ODA and other resources will be required if developing countries are to achieve the internationally agreed development goals and objectives, including those contained in the Millennium Declaration. To build support for ODA, we will cooperate to further improve policies and development strategies, both nationally and internationally, to enhance aid effectiveness.

42. In that context, we urge developed countries that have not done so to make concrete efforts towards the target of 0.7 per cent of gross national product (GNP) as ODA to developing countries and 0.15 to 0.20 per cent of GNP of developed countries to least developed countries, as reconfirmed at the Third United Nations Conference on Least Developed Countries, and we encourage developing countries to build on progress achieved in ensuring that ODA is used effectively to help achieve development goals and targets. We acknowledge the efforts of all donors, commend those donors whose ODA contributions exceed, reach or are increasing towards the targets, and underline the importance of undertaking to examine the means and time frames for achieving the targets and goals.

43. Recipient and donor countries, as well as international institutions, should strive to make ODA more effective. In particular, there is a need for the multilateral and bilateral financial and development institutions to intensify efforts to:

• Harmonize their operational procedures at the highest standard so as to reduce transaction costs and make ODA disbursement and delivery more flexible,

taking into account national development needs and objectives under the ownership of the recipient country;

• Support and enhance recent efforts and initiatives, such as untying aid, including the implementation of the Organisation for Economic Cooperation and Development/Development Assistance Committee recommendation on untying aid to the least developed countries, as agreed by the Organisation for Economic Cooperation and Development in May 2001. Further efforts should be made to address burdensome restrictions;

• Enhance the absorptive capacity and financial management of the recipient countries to utilize aid in order to promote the use of the most suitable aid delivery instruments that are responsive to the needs of developing countries and to the need for resource predictability, including budget support mechanisms, where appropriate, and in a fully consultative manner;

• Use development frameworks that are owned and driven by developing countries and that embody poverty reduction strategies, including poverty reduction strategy papers, as vehicles for aid delivery, upon request;

• Enhance recipient countries’ input into and ownership of the design, including procurement, of technical assistance programmes; and increase the effective use of local technical assistance resources;

• Promote the use of ODA to leverage additional financing for development, such as foreign investment, trade and domestic resources;

• Strengthen triangular cooperation, including countries with economies in transition, and South-South cooperation, as delivery tools for assistance;

• Improve ODA targeting to the poor, coordination of aid and measurement of results. We invite donors to take steps to apply the above measures in support of all developing countries, including immediately in support of the comprehensive strategy that is embodied in the New Partnership for Africa’s Development and similar efforts in other regions, as well as in support of least developed countries, small island developing States and landlocked developing countries. We acknowledge and appreciate the discussions taking place in other forums on proposals to increase the concessionality of development financing, including greater use of grants.

44. We recognize the value of exploring innovative sources of finance provided that those sources do not unduly burden developing countries. In that regard, we agree to study, in the appropriate forums, the results of the analysis requested from the Secretary-General on possible innovative sources of finance, noting the proposal to use special drawing rights allocations for development purposes. We consider that any assessment of special drawing rights allocations must respect the International Monetary Fund’s Articles of Agreement and the established rules of procedure of the Fund, which requires taking into account the global need for liquidity at the international level.

45. Multilateral and regional development banks continue to play a vital role in serving the development needs of developing countries and countries with economies in transition. They should contribute to providing an adequate supply of finance to countries that are challenged by poverty, follow sound economic policies and may lack adequate access to capital markets. They should also mitigate the impact of excessive volatility of financial markets. Strengthened regional development banks and subregional financial institutions add flexible financial support to national and regional development efforts, enhancing ownership and overall efficiency. They also serve as a vital source of knowledge and expertise on economic growth and development for their developing member countries.

46. We will ensure that the long-term resources at the disposal of the international financial system, including regional and subregional institutions and funds, allow them to adequately support sustained economic and social development, technical assistance for capacity-building, and social and environmental protection schemes.

We will also continue to enhance their overall lending effectiveness through increased country ownership, operations that raise productivity and yield measurable results in reducing poverty, and closer coordination with donors and the private sector.

 

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04 June 2002

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