by Winnie Byanyima
3 June 2015
It would be a mistake to see this year as just being about development. 2015 is a critical year for every person, in every country on this planet. The outcomes of three historical global summits will set the future direction of all government action on global financial flows, sustainable development, and climate change for the next 15 years. The UN’s Financing for Development Conference in Addis Ababa in July will be critical in setting the bar for the success of the UN Summit on the post-2015 development agenda in September, and potentially too for the UN Climate Change Conference in Paris at the end of the year.
Public spending gaps and needs globally are immense. They are more acute in the developing world. Universal health and education are still out of reach in many countries, with some in sub-Saharan Africa still 20 years away from achieving universal primary education. Public financing requirements are set to rise further considering the massive scale up in public finance needed to invest in the future Sustainable Development Goals . But we must not let the volume of the figures overwhelm us into a state of inaction. Sufficient finance is available globally. It just needs to be allocated fairly, alongside systemic international change in policy areas that affect public and private finance, such as taxation, aid and climate change. Yes, the sums are large, but let us remember that financing needs are likely to be on a smaller scale compared to those mobilized to bail out the banks in the face of the recent financial crisis.
In response to this challenge, much energy is going into seeking ‘innovative solutions’ to generate new and additional finance and new approaches to disburse that finance. Governments across the world are increasingly looking at ways of working with the private sector. New multi-stakeholder global funds or task forces are being touted as more effective ways to deliver development. Rather than seeking innovative solutions to old problems, what is needed is a renewed commitment to old solutions. Ambitious commitments on tax-based financing, for example, should be the cornerstone of any financing deal made in Addis Ababa.
Oxford University researchers recently found that tax financing is an efficient way of translating economic growth into health spending. Their research, published in the Lancet, found that tax revenue was a major statistical determinant of progress towards universal health coverage in developing countries. Each $10 per-capita increase in tax revenue was associated with an additional $1 of public health spending per capita. Whereas each $10 increase in GDP per capita was associated with an increase of $0.10.
Equally important to how tax is spent, is how it is collected. Progressive taxation can offset the effect of growing inequality. Taxing companies, particularly successful multinational companies, is one of the most progressive forms of taxation. Developing countries are losing significant tax revenues through corporate tax dodging. Oxfam recently calculated that in 2010 alone, Africa was cheated out of US$11bn through just one of the tricks used by multinational companies to reduce tax bills – trade mispricing. According to UNCTAD, developing countries as a whole lose around US$100bn in tax revenues each year as a result of corporate tax avoidance schemes that route investments through tax havens. Additionally, an estimated US$138bn per year is lost to developing countries because they give away generous tax incentives to multinational companies.
Current efforts to reform international corporate taxation rules, such as the G20/OECD-led Base Erosion Profit Shifting (BEPS) project are too narrow in scope to make tax systems consistent with the public interest of the whole world rather than the public and vested interest of specific countries. Importantly two-thirds of the world’s governments have no formal role in the negotiating process. This is despite new IMF research indicating that developing countries are three times more vulnerable to base erosion and profit shifting activities of multinational companies than OECD countries, losing 0.84% of GDP, compared to 0.23% lost by OECD countries in the short run.
So before we seek ever more complicated solutions to financing development, let’s put effort into cooperating in a truly inclusive process to stem the huge flow of money lost to developing countries through tax dodging.
The time has come for the creation of an intergovernmental tax body that includes all countries as equal members and that has the mandate and resources to reform international corporate taxation to prevent tax evasion and avoidance and harmful tax competition, and to ensure tax cooperation between governments.
To achieve this at the forthcoming Financing for Development Conference would be a sign that we are on our way to making 2015 a historic year.