RECOMMENDATIONS  

June 22, 2001

This report was commissioned by the Secretary-General of the United Nations. The members of the Panel do not each subscribe to every detail in the text but they endorse the report as a whole. The Panel wishes to thank John Williamson, who served with excellence as Project Director, as well as Vijaya Ramachandran and Javier Guzman.  

| The challenge of poverty | Mobilizing resources for development |
| Policies in developing countries | Private capital flows | Trade |
| International development cooperation | More development aid needed |
| Systemic issues | Conclusion |

 …the central challenge we face today is to ensure that globalization becomes a positive force for all the world’s people, instead of leaving billions of them behind in squalor. Inclusive globalization must be built on the great enabling force of the market, but market forces alone will not achieve it. It requires a broader effort to create a shared future, based upon our common humanity in all its diversity.[1]

The world has seen faster human and economic development during the past half century than during any previous comparable period in history. Almost everywhere, literacy rates are up, infant mortality is down, and people are living longer lives.

Much as there is to celebrate, there is more to deplore. Almost half of the world’s people are still living in abject poverty. One-sixth of the world’s population, or 1.2 billion people, live on less than one dollar a day. In the low-income countries, with their 2.5 billion people, more than 100 babies out of every 1,000 die, compared to just six per 1,000 in the high-income countries. And in low-income countries, four out of ten people still cannot read or write. World income distribution is becoming more unequal. Nowadays, 80 percent of the global population lives on less than 20 percent of the global income.

The most painful international story of the past three decades has been the impoverishment of countries that are home to half a billion people, most of them in Sub-Saharan Africa. Nowhere is a global commitment to poverty reduction needed more than in this region. Sub-Saharan Africa has the largest proportion of people living on less than one dollar a day, and indeed, its people are almost as poor as they were 20 years ago.

The challenge of poverty

The successful development stories of our era are essentially the result of globalization, powered both by the explicit political decisions of nation states and by unprecedented technological progress. The market economy and globalization at large present tremendous opportunities. But too many people in too many countries lack the freedom to take advantage of these opportunities, and they are consequently left on the sidelines of the globalization process. People lack freedom when they lack food, education, training, health, basic human and political rights, security, elementary infrastructure, and employment opportunities. Provide people with these elements—through economic growth and through social policies that equalize opportunities among individuals, communities, and nations—and you will see them empowered to take up new opportunities and improve their lives.

Sadly, however, increasing polarization between the haves and have-nots has become a feature of our world.

Reversing this shameful trend is the preeminent moral and humanitarian challenge of our age. For people in the rich world, elementary self-interest is also at stake. In the global village, someone else’s poverty very soon becomes one’s own problem: of lack of markets for one’s products, illegal immigration, pollution, contagious disease, insecurity, fanaticism, terrorism.

The international community has begun to acknowledge and confront the challenge of poverty. The United Nations has held a series of conferences over the past decade to address the critical problems facing humanity. These culminated in the Millennium Summit of September 2000, which brought together the largest-ever number of heads of state and government. The Millennium Declaration produced by the conference committed all governments to work to free the world of extreme poverty and, to that end, to achieve precise International Development Goals by the year 2015. The goals are to: halve the proportion of people with income of less than one dollar a day; halve the proportion of people suffering from hunger; halve the proportion of people without safe drinking water; ensure equal access to all levels of education for girls and boys; provide universal primary education; to reduce maternal mortality by three fourths and mortality among children under five by two-thirds; begin to reverse the spread of HIV/AIDS, malaria, and other major diseases; and to improve the lives of 100 million slum dwellers.

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.

Private capital flows

            The bulk of savings will come from domestic resources, but foreign capital can provide a valuable supplement to finance investment and growth. Again the primary responsibility to tap the vast pool of funds available in the forms of foreign direct investment, portfolio investment, and bank loans, lies with developing countries themselves.

Actions by developing countries

            Foreign direct investors, just like domestic investors, want assurance of political stability, knowledge that the rule of law prevails—so that there will be long-term stability of rules and procedures—and freedom from corruption. In addition, foreign investors expect a commitment to be treated no less favorably than domestic investors, as well as provisions for free transfer of capital, profits, and dividends, guarantees against expropriation of their assets, and binding arbitration of disputes. It is in host countries’ interest to provide these conditions.

            Foreign investors should not be exempted from domestic laws governing corporate and individual behavior, however; nor should the authority of domestic courts, tribunals, and regulatory authorities over foreign investors and their enterprises be curtailed. By the same token, we advise against the use of costly and discretionary investment incentives and eroding labor and environmental standards in a “race to the bottom”.

            To attract other forms of foreign capital besides direct investment, progressively more developing countries have been liberalizing their capital accounts in recent years. The long-term trend still ought to be to further liberalize capital flows, but the experience of financial crises has shown that countries should only introduce liberalization measures in appropriate circumstances: that is, when they have sound macroeconomic fundamentals, a healthy domestic financial system, and an effective system of prudential supervision. In very special circumstances, temporary taxes may need to be imposed on capital inflows, to moderate the destabilizing effects of volatile capital movements.

Actions by industrial countries

            Industrial countries have an important role in facilitating private capital flows into developing countries. In cooperation with pertinent multilateral public institutions and private organizations—such as chambers of commerce and industry—these countries should enhance the flows of information on investment opportunities in developing countries, insurance schemes, and market access provisions.

            The industrial countries should also consider more systematic discipline of their own competitive tax concessions, which sometimes unfairly and artificially erode developing countries’ relative attractiveness to foreign investment.

            In the discussions on a new international financial architecture, an important outstanding issue concerns how to prevent private lenders from calling in their capital if confidence erodes. For this purpose, bonds should have collective action clauses that permit a qualified majority of bondholders to approve changes in their payments clauses. Major industrial countries should join Canada and the UK in introducing such clauses into the bonds they issue, to ease the way for the adoption of these clauses in bonds issued by emerging markets.

            Industrial countries still impose some important impediments to foreign investment by some categories of investors among their nationals; it is important that they remove artificial constraints that prevent investments into emerging markets.

Actions by international community

            In countries that have not had time to build up a credible track record, many potentially viable infrastructure investment projects do not get financed by the private sector because their returns are subject to government and regulatory risk. The multilateral development banks should be enabled to increase their role in helping their client countries attract FDI, through cofinancing and by providing guarantees.

            New proposals for determining banks’ minimum capital requirements are under discussion in the Basel Committee on Banking Supervision. Care is needed to make sure the new rules do not make international bank loans prohibitively expensive to most developing countries.

Trade

            For developing countries to achieve sustained growth, their efforts to set their fundamentals in order must be complemented with a favorable international environment. The large industrial countries, with their large economies and their dominance in world markets, have a critical responsibility to pursue macroeconomic policies that lead to adequate international growth with low inflation. And of at least equal importance is their duty to open their markets to developing countries.

            Thanks to eight rounds of multilateral negotiations, much has been done in half a century to dismantle tariff and non-tariff barriers to trade. But by far the main beneficiaries of trade liberalization have been the industrial countries. Developing countries’ products continue to face significant impediments in rich country markets. Basic products in which developing countries are highly competitive are precisely the ones that carry the highest protection in the most advanced countries. These include not only agricultural products, which still face pernicious protection, but also many industrial products subject to tariff and non-tariff barriers. For their own economic interest, industrial countries should open their markets more decisively to developing countries.

“Development Round” of negotiations needed

            Wealthy nations’ protectionism imposes an enormous human and economic cost on the developing world. But it also imposes high costs on their own populations, either through higher consumer prices or through the fiscal burden brought about by subsidies.

            On balance, all countries would gain from dismantling the remaining trade protection in rich countries. While some panel members feel it is crucial that developed countries first rebuild confidence in the WTO by delivering on both the spirit as well as the letter of previous agreements, the Panel as a whole strongly endorses the launch of a new round of trade liberalization at the next WTO ministerial meeting, to be held in Qatar next November.

            A new round can only succeed if it focuses mainly on the trade needs of developing countries. The Uruguay Round reached a satisfactory conclusion only because developing countries were flexible. The Seattle WTO ministerial meeting failed to launch a new round, not because of the protests in the streets, but because the major trading powers lacked the political will to accommodate the interests of developing countries. Developing countries should not be expected once again to bear the burden for improving the multilateral trading system. In order for developing countries to have confidence in a new round, rich countries must deliver on commitments made in the past, such as accelerating the agricultural trade negotiations and phasing out quotas on textiles and clothing.

            For the sake of the poor people of less advanced countries but also for the self-interest of rich countries, the new round should be truly a “development round” for developing countries. To achieve this objective, the new negotiations must tackle the following essential issues:

§ The implementation of the Uruguay Round. This issue concerns not only full compliance with the commitments that industrial countries made under the Uruguay Round but also a responsible review—open and generous but consistent with free trade principles—of some regulations that developing countries have found either extremely hard to implement or outright counterproductive. Chief among these are standards (technical barriers to trade), anti-dumping, trade-related intellectual property rights (TRIPS), trade-related investment measures (TRIMS), subsidies, customs valuation, and phase-in periods for developing countries. §Liberalization in agriculture. Here, it is vital for developing countries to discuss and get from industrial countries a significant improvement in market access, an elimination of export subsidies, and a tightening of support to domestic producers.

§ The total elimination of remaining trade barriers in manufacturing. Existing barriers in this sector are mostly at the expense of developing countries. An obvious, but sadly not unique, example of this injustice is protection on textiles and clothing.

Some panel members believe that the welfare gains to all countries could be even greater if the new round also liberalizes trade in services.

Measures for least developed countries

            For the poorest countries, better market opportunities need to be supplemented by specific assistance programs. These countries need assistance to build up their capacity for trade negotiations and to help them diversify their exports. We strongly recommend generous financing of the “Integrated Framework” set up for that purpose by a number of multilateral institutions. Additional international efforts for such capacity building would be most welcome, as would be any rational effort to limit the havoc that can be wrought by weak primary commodity prices. The Panel recommends the restoration and improvement of the IMF’s Compensatory Financing Facility and the establishment of a multilateral Commodity Risk Management Scheme for less developed countries.

International Development Cooperation

§ Helping to initiate development in countries and sectors that do not attract much private investment, and that cannot afford to borrow extensively from commercial sources. This is the traditional role of official development assistance and of lending by the multilateral development banks.

§ Coping with humanitarian crises.

§ Providing or preserving the supply of global public goods. Goods that fall into this category include peacekeeping; prevention of contagious diseases; research into tropical medicines, vaccines, and agricultural crops; the prevention of CFC emissions; limitation of carbon emissions; and preservation of biodiversity. No individual country has an incentive to pay for these goods and thus collective action is needed if they are to be supplied in sufficient quantity.

§ Confronting and accelerating recovery from financial crises.

The world has a crucial interest in seeing these four roles funded on an adequate scale.

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.

Further debt relief for highly indebted poor countries

            The campaign spearheaded by Jubilee 2000 resulted in a welcome reduction in the debt burden on heavily indebted poor countries. The official estimate is that under the HIPC Initiative the highly indebted poor countries will pay $1.1 billion per year less in debt service than they would otherwise have paid, and $2.4 billion per year less than they would have owed. The scheme is welcome despite the fact that the actual delivery of substantial debt reduction has taken a very long time and that it has not been fully financed by additional ODA, as many had originally hoped. Some donors are simply reassigning part of their traditional aid resources to finance commitments to the enhanced HIPC initiative.

While the enhanced HIPC scheme is clearly providing increased resources for poverty reduction, in most cases it has not gone far enough to make these countries’ debt sustainable. Certainly the principle that debt obligations should be repaid is central to the functioning of credit markets; debt relief programs are an exception for extraordinary circumstances. Yet the situation of several countries is still desperate. A further effort is needed to reduce debt in HIPC to sustainable levels and thus help to improve those countries’ ability to attract private finance.

In the view of some Panel members, a further debt relief agreement would be an excellent step. Others believe it would perhaps be worth serious consideration. Most important, all agree that a further debt relief agreement would only be worthwhile if it is based on a firm commitment from donors to provide strictly additional resources for its proper financing. If a re-enhanced HIPC scheme is not financed by increased ODA, then its main effect would be to redistribute aid among poor countries—an outcome that must certainly be avoided. All Panel members also believe that any debt relief scheme should be designed so as to reduce, not increase, moral hazard; that is, it should not weaken borrowers’ responsibility for their own actions.

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.

Systemic issues

            Many of the issues at the heart of development financing have to do with global economic governance. Economic and social policies are subjects not only of national but also of global governance. The dramatic events of the first half of the twentieth century taught nation states that global interdependence without global rules and institutions is in nobody’s long-term interest. The painfully acquired awareness of the need for a global rules-based framework is what led to the building of the existing multilateral system. Despite its shortcomings, this system has made powerful contributions to the unprecedented progress and stability that much of humankind has enjoyed since the end of the second world war.

            It is clear, however, that the challenges of globalization today cannot be adequately handled by a system that was largely designed for the world of 50 years ago. Changes in international economic governance have not kept pace with the growth of international interdependence:

§ As economic interdependence increases, its potential benefits increase, but so do the speed and strength of the effects that a disturbance anywhere can have on the rest of the global economy. Despite recent worthy efforts, the world has no fully satisfactory mechanism to anticipate and counter global economic shocks.

§ The integration of markets—either through explicit decisions of nation states or simply by virtue of technological progress and economic specialization—is not occurring as harmoniously as it could and should. This leads to mounting frictions and, in several actual and potential market participants, to a sense of unfairness and frustration.

§ Sovereign states have proliferated and a good number of fast-moving developing countries have increased their shares in world production and trade. Yet global economic decision making has become increasingly concentrated in a few countries. Tensions have worsened as a result. For a range of common problems, the world has no formal institutional mechanism to insure that voices representing all relevant parts are heard in the discussion.

§ The international community has no commonly agreed instrument or procedure for deciding who does what. The result is several vacuums in global governance. For some global public goods, practically no agency has effective authority and existing agencies struggle to respond to problems for which they are ill-equipped or lack a precise mandate—as for example when the WTO is asked to enact and enforce labor standards.

§ Some forums that attempt to address systematically a variety of global economic issues are too restrictive in their membership—like the Group of Seven plus Russia. Others—like the Group of Twenty or the committees of finance ministers and central bankers convened periodically by the IMF and the World Bank—lack the adequate political level to make authoritative decisions.

            These gaps in global governance have a host of adverse consequences for the resolution of many of the issues that this Panel was asked to address. The Commission on Global Governance[2] warned lucidly about the “global governance deficit” six years ago—and since then the trends that make it urgent to confront the deficit have continued to assert themselves very strongly.

Global Council and Globalization Summit

            We thus endorse the Commission’s proposal to create a global council at the highest political level to provide leadership on issues of global governance. The proposed council would be more broadly based than the G7 or the Bretton Woods institutions. It would not have legal binding authority but through its political leadership it would provide a long-term strategic policy framework to promote development, to secure consistency in the policy goals of the major international organizations, and to promote consensus building among governments on possible solutions for issues of global economic and social governance.

            As much as we perceive the need for the proposed council, we acknowledge the enormous political difficulty of launching it. To pave the way, we support a Globalization Summit.[3] The Summit would convene a group of heads of state, large enough to be representative but small enough to be efficient, to address the key governance challenges of globalization through a structured but informal discussion. Very importantly, through the influence of its political leadership, the Summit could speed up some ongoing processes of reform and launch new ones that are urgently needed to help give effect to the promises of globalization.

            The Globalization Summit should take as a very important input the conclusions of the Financing for Development Conference. We recommend that first the Conference and then the Summit should consider the following systemic issues that affect financing for development:

Support for multilateralism

            The Conference and the Summit should endorse the multilateral approach to handling the common problems of humanity. Without the United Nations System ours would be a much worse world and, as has been wisely said, its main institutions would have to be invented anew. First and foremost, the United Nations Organization must receive the appreciation and support it deserves for its many accomplishments and its still enormous untapped potential. The UN must be reinvigorated politically and economically. And so must the Bretton Woods and some other institutions of the UN system.

Faster reform of the international financial architecture

            Financial crises in several countries in recent years have given rise to a number of initiatives aimed at reforming the international financial system. Some useful initial progress has been made, but now that the sense of urgency has subsided, the implementation of the main points of the agenda has proceeded too slowly. Much remains to be done to strengthen financial systems, to promote adherence to international standards of good practice, and to promote fair burden sharing by inducing better involvement of the private sector in preventing and resolving crises.

            In the International Monetary Fund, the shift to crisis prevention, including the timely detection of external vulnerability, is yet to be completed. Another important pending issue is the streamlining of the Fund’s conditionality. The Fund frequently imposes too many conditions and unrealistic demands on borrowing countries, exceeding its core mandate and taking insufficient account of domestic authorities’ willingness and capacity to execute its demands. Without impairing the Fund’s ability to comply with its core mandate, borrowing countries should be given the opportunity to choose their own path to reform.

            The World Bank should also accelerate its refocusing, to support client countries’ longer- and medium-term structural and social reforms, particularly those useful for preventing crises and fostering economic and social recovery from financial crisis, including the construction of social safety nets.

            Efforts to correct anomalies in the governance of both institutions should continue.

Reinforcement of the WTO

            The World Trade Organization, the first new global institution of the post cold-war era, is the centerpiece of the multilateral trading system. It is a unique institution, to the extent that it not only works through the acceptance and observance of its rules by all its members, but also provides a multilateral dispute settlement system and procedures to enforce the commonly agreed rules. The WTO system based on rules and disciplines is of critical importance to developing countries, which have much less capacity than the industrial countries to influence trading conditions, unilaterally or bilaterally. The WTO provides developing countries with an enforceable framework to ensure their rights are respected.

            Yet the WTO is under enormous stress. Both developing and industrial countries claim to have quarrels with the institution—not to mention activists of all persuasions who would like to see the WTO serve their specific social and political agendas.

            Despite its youth, the WTO is in urgent need of reform and support in certain critical aspects. The necessary changes are unlikely to be achieved from within. What may be needed is a bigger political impulse, stemming from the construction of global economic governance. In that endeavor, at least the following aspects of the WTO should be addressed:

§ its decision-making system, which many developing countries perceive, with reason, as selective and exclusionary;

§ its capacity to provide technical assistance to developing countries, so they can participate more effectively in multilateral trade negotiations, trade opportunities, and the dispute settlement mechanism;

§ attached to the latter, the WTO’s evident underfunding and understaffing.

Institutional response to environmental and labor issues

            Various international organizations have been under huge, and frequently conflicting, pressures to address legitimate environmental and labor issues that are raised by civil society interests. With its capacity to impose sanctions, the WTO has been the most attractive target for such pressures. To a large extent, this situation reflects the lack of global instruments capable of responding adequately to the labor and environmental concerns that are raised.

            To deflect pressures from the WTO and provide a more adequate forum for the development and enforcement of labor and environmental standards, serious consideration should be given to:

§ strengthening the International Labor Organization by providing it with instruments to enforce its standards; and

§ consolidating the sundry organizations with responsibility for environmental issues into a single Global Environment Organization.

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 for 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 Financing for Development Conference 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. Skeptics 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 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 skeptics 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 (SDR) created by the 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 buildup 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, the IMF ought to resume SDR allocations.

The role of an international tax organization

            Most countries’ tax systems evolved at a time when trade and capital movements were heavily restricted, so that enterprises operated largely within the borders of their home country and most individuals earned their incomes from activities in their home country.

            Matters are much more complex in today’s global village. We thus propose that the Financing for Development Conference and the Globalization Summit consider the potential benefits of an International Tax Organization (ITO)[4], to:

§ At the least, compile statistics, identify trends and problems, present reports, provide technical assistance, and develop international norms for tax policy and administration.

§ Maintain surveillance of tax developments in the same way that the IMF maintains surveillance of macroeconomic policies.

§ Take a lead role in restraining tax competition designed to attract multinationals with excessive and unwise incentives. 

§ Slightly more ambitiously, develop procedures for arbitration when frictions develop between countries on tax questions.

§ Sponsor a mechanism for multilateral sharing of tax information, like that already in place within the OECD, so as to curb the scope for evasion of taxes on investment income earned abroad.

§ Perhaps most ambitious of all, an international tax organization might in due course seek to develop and secure international agreement on a formula for the unitary taxation of multinationals.

            If an ITO succeeded in curbing tax evasion and tax competition, there would be two beneficial consequences. One would be an increase in the proportion of a given volume of taxes paid by (a) dishonest taxpayers and (b) mobile factors of production (such as capital). Most people would consider this an unambiguous gain. The second consequence would be an increase in tax revenue at given tax rates.

            An ITO would also be of great importance to develop and implement innovative sources of finance if they were agreed upon by the international community.

Migration policies

            Immigration policies must protect individual nations’ economic and social interests. But it is time for governments, without risking the national interests they must promote, to start working together to develop forms of international cooperation to optimize collectively the benefits of the movement of labor across national borders. The time may be ripe to start seeking an international agreement on “the movement of natural persons”.

Conclusion

            Poverty and underdevelopment pose severe threats to stability and peace in the world.

By taking action to make markets function better—through more open international trade, more investment flowing across countries, more knowledge diffused internationally among communities and individuals—and thus creating more wealth, shared opportunities, and common interests, the nations of the world can do much to defeat the evils of poverty and conflict during this new century. More open trade, in particular, is a vital necessity.

Markets have important limitations, however, even when they function well. Sound government policies, public funds and political solutions will continue to be needed. Huge needs for public funding are unmet at present. Meeting the International Development Goals alone would require almost double the current ODA total of more than  $50 billion per year. We urge the Financing for Development Conference, which is planned for March 2002, to obtain a commitment by the industrial countries to implement the aid target of 0.7 percent of GNP. To achieve this will require a massive campaign to influence public opinion in the donor countries.

Not only for official development assistance but also for humanitarian aid and for global public goods, the system needs more funds than are being provided by traditional sources. We see a genuine need to establish, by international consensus, stable and contractual new sources of multilateral finance. And, to administer these resources effectively, we see a genuine need to fill gaps in global governance. Today’s challenges cannot be adequately handled by an international system that was largely designed for the world of fifty years ago.

We thus endorse the proposal that was made—as much as six years ago—by the Commission on Global Governance, to create a global Council at the highest political level. The Council’s role would be to provide a long-term strategic policy framework to promote development, to secure consistency in the policy goals of the major international organizations, and to promote consensus building among governments on possible solutions for issues of global economic and social governance.

To pave the way, we support a Globalization Summit. The agenda for first the Financing for Development Conference and then the Summit should include the systemic issues we have raised and the possibilities we have outlined for new sources of finance.

            With the rapid advance of global interdependence, problems of poverty and underdevelopment have become global problems for which the world must exercise global responsibility. We have outlined an ambitious agenda to raise the financial resources needed. Undertaking this agenda will require public education and political courage. But the effort is more than warranted by the scale of the development challenges throughout the world. We believe that, if only out of self-interest, all parties involved should consider this agenda without prejudice.