The financial needs of developing countries have long outstripped the willingness and ability of donors to provide aid. Addressing this challenge, the “World Economic and Social Survey 2012: In Search of New Development Finance” (WESS 2012), proposes an international tax, combined with other innovative financing mechanisms, to raise more than $400 billion annually for development and global challenges such as fighting climate change.

Launched today, the report reveals that in the midst of difficult financial times, many donor countries have cut back on development assistance. In 2011, for the first time in many years, aid flows declined in real terms.

The survey finds that the financial needs of developing countries have long outstripped the willingness and ability of donors to provide aid. And finding the necessary resources to achieve the Millennium Development Goals and meet other global challenges, such as addressing climate change, will be tough, especially for least developed countries.

The need for additional and more predictable financing has led to a search for new sources – not as a substitute for aid, but as a complement to it. A number of innovative initiatives have been launched during the past decade, mainly to fund global health programmes aimed at providing immunizations, AIDS and tuberculosis treatments to millions of people in the developing world.

The UN survey finds that while these initiatives have successfully used new methods to channel development financing to combat diseases, they have hardly yielded any additional funding on top of traditional development assistance.

“Donor countries have fallen well short of their aid commitments and development assistance declined last year because of budget cuts, increasing the shortfall to $167 billion,” according to the lead author of the survey, Rob Vos, Director of DESA’s Division for Development Policy and Analysis. “Although donors must meet their commitments, it is time to look for other ways to find resources to finance development needs and address growing global challenges, such as combating climate change.”

“We are suggesting various ways to tap resources through international mechanisms, such as coordinated taxes on carbon emissions, air traffic, and financial and currency transactions,” Mr. Vos said. “Such taxes also make economic sense, as they help stimulate green growth and mitigate financial market instability. In short, such new financing mechanisms will help donor countries overcome their record of broken promises to their own benefit the world at large.”

Realizing the potential
The WESS finds the scope for scaling up or replicating existing initiatives is too limited to meet the needs for development financing in the coming decades.  Hence, new sources will need to be tapped. Experts who carried out the survey see potential to raise over $400 billion per year through the following mechanisms:

• a tax on carbon dioxide emissions in developed countries: a tax of $25 per tonne would raise an estimated $250 billion per year, collected by national authorities, but earmarked for international cooperation;
• a tiny currency transaction tax of one half of a “basis point” (0.005 per cent) on all trading in four major currencies (the dollar, euro, yen and pound sterling), which could yield an estimated $40 billion per year for international cooperation;
• earmarking a portion of the proposed European Union financial transaction tax (which is expected to raise up to €55 billion or $71 billion per year) for international cooperation;
• regular allocations of IMF special drawing rights (SDRs) and use of “idle” SDRs could yield about $100 billion per year for the purchase of long-term assets which would then be used as development finance.

The survey says such mechanisms are technically feasible and economically sensible. They could readily provide the means of meeting urgent global development financing needs. Vos said that “realizing the potential of these mechanisms will require international agreement and corresponding political will, both to tap sources as well as to ensure allocation of revenues for development.” 

The survey also suggests other options which could be explored but would require further technical elaboration, such as a billionaire’s tax, which would consist of a small tax of, say, 1 per cent on individual wealth holdings of $1 billion or more with the revenue destined to finance internationally agreed global development purposes.

“The survey provides important suggestions to generate solid financial underpinnings for the actions to be undertaken in follow up to the agreement reached at the recent United Nations Rio+20 Conference to achieve global sustainable development,” according to Sha Zukang, Under-Secretary-General of the UN Department of Economic and Social Affairs.

The survey points out that the design of appropriate governance and allocation mechanisms is crucial for innovative financing to ultimately meet development needs and contribute to financing the post-2015 development agenda. 

The WESS 2012 will also be featured in a panel discussion arranged as one of the side events of the Development Cooperation Forum on 5 July.