Global Policy Forum

Financial issues have been at the centre of the North-South debate since the 1960s. During intergovernmental negotiations of recent decades, especially the world conferences from Rio 1992 to Rome 1996, the sharpest controversies between North and South have taken place over "means of implementation" - that is, money to finance the agreed programs of action. The conferences failed to accomplish their goals largely because governments of the North were unwilling to provide the essential financial means.

Financing for development is clearly in a deep crisis - but it is a long-standing crisis. As early as 1969, the Pearson report noted an "atmosphere of decreasing interest for development assistance" in the industrialized countries and "signs of dejection and growing impatience" in the developing countries. The expert commission headed by Lester Pearson concluded that development assistance was in an "acute crisis". They made three recommendations:

• Trade measures in favour of developing countries

• Promotion of foreign direct investment in developing countries

• Increase of official development assistance (ODA) to 0.7 percent of donor country GNP.

Although these remedies were central in the North-South debate of the following decades, they didn't produce any substantial effect - partly because they were not implemented (e.g. the 0.7 target), and partly because they didn't succeed in improving the social and economic situation of the countries (e.g. the system of trade preferences of the European Union for the African, Caribbean and Pacific countries of the ACP Group).

Thirty years after the Pearson Commission published its report "Partners in Development", the global framework for development has changed dramatically. In the 1990s, economic deregulation and the end of the East-West confrontation led to accelerated economic globalization with a rapid increase in transnational flows of goods and capital. While a few economies in the South - mainly in Southeast Asia - profited from this trend (at least until the "Asian crisis" in the end of 1997), a lot of countries did not. Many, especially countries of Sub-Saharan Africa, failed to attract private investment and lost support as ODA declined. As a consequence, the gap between rich and poor deepened dramatically. The ratio between the income of the poorest 20 percent of the world's people and the top 20 percent increased from 1 to 30 in 1960, to 1 to 61 in 1991 and to a startling 1 to 78 in 1994 .

Most governments of the industrialized countries were not willing to counteract this trend by increasing their development assistance to these countries. On the contrary, with the end of East-West competition for spheres of political influence, Northern policy makers lost much of their remaining interest in North-South cooperation. ODA also suffered cuts due to economic and social problems in the OECD countries themselves and the consequent government budget problems. So the GNP donor share of ODA is today farther away from the 0.7 percent target than ever before. The commitments of the world conferences have been ignored.

To minimize their own responsibilities, northern governments increasingly emphasize private investment as the linchpin of development. Further, they call on southern governments to mobilize more domestic resources. And finally, northern governments try to excuse their quantitative failure by emphasizing improved qualitative aspects of development assistance.

Private investment, which has grown so dramatically in recent years, can play a crucial role in the development process and governments can adopt policies to promote investments. However, private investment can only have a positive role if it contributes to environmentally sound and socially just development. This result is unlikely in an unregulated environment, lacking clear multilateral rules. Unregulated private investment tends to serve exclusively the profit interests of the owners (shareholder value). It doesn't automatically promote sustainable development and instead often does more harm than good.

Governments can also do more to mobilize domestic resources. National budgets contain huge potentials for savings and redistribution. Governments can make additional resources available for sustainable development by reforming their tax systems as well as by eliminating harmful subsidies and unproductive expenditures. This is true for all countries in North and South. The countries of the North could set a good example by tackling tax reforms with environmental and social results in mind. These have been long overdue.

Governments can also improve their development assistance qualitatively. This can be done, for example, by shifting resources from prestigious but wasteful infrastructure projects like dams to programs for basic social services (in line with the 20:20 compact of the Copenhagen World Summit for Social Development). But improved quality cannot substitute for more quantity of assistance. The size of global policy challenges requires both more quality and more quantity.

Public development funds will continue to be a major source of financing in the fight against poverty and environmental degradation and to compensate for the negative effects of globalization. As the pace of globalization picks up, we face increasing problems in safeguarding the global commons, preventing global currency crisis, fostering sustainable patterns of consumption and production and preventing intra-state and international conflicts. Challenges of this magnitude require concerted intergovernmental efforts and substantial financial resources. Blind confidence in market forces has led to failure. For sustainable development to succeed, public finance is necessary to sustain social security, public health, education, environmental protection, infrastructure, cultural diversity, economic stability and employment.

This analysis leads to four core questions regarding the future of financing for sustainable development:

1. What measures are needed on the global level to promote public resources of the magnitude required for national development programs in the South and the funding of international institutions?
2. What is the potential of fiscal policy to mobilize or redistribute domestic resources for sustainable development?
3. What kinds of multilateral regulation and standard-setting are necessary to assure that private investment is conducive to the goals of sustainable development?
4. How can the political obstacles to alternative forms of international financing for development be overcome?

This short article cannot give complete answers to these complex questions. It rather seeks to outline the recent trends of financing for development and to formulate a few recommendations for further studies and activities of the United Nations. These comments are proposed in the context of the UN initiative on finance, which is supposed to lead to an International Conference on Financing for Development in the year 2001.

Until 1993, official development assistance (ODA) was the main external source for financing development. Since then, however, its share has declined continuously. In 1996 ODA fell to 58.2 billion dollars . This amount is lower than the sixty billion dollars the countries of the South lose every year from agricultural subsidies and barriers to textile exports in the North . More dramatically, the ODA/GNP ratio reached an all-time low of 0.22 percent in 1997. As in previous years, only four of the 29 OECD member countries - Denmark, Norway, Sweden and the Netherlands - exceeded the UN target of 0.7 percent . In the light of the continued downward trend, some argue that the target is no longer helpful either as a realistic goal or as a political rallying-point.

 

 

Notes:
(a) excluding forgiveness of non-ODA debt for the years 1990-1992
(b) excluding bond lending by banks (item III.3) and guaranteed financial credits (incl. In II)
(c) No reporting has been received from DAC Members on portfolio investment

Source: OECD, 1997 Development Co-operation Report.

The reasons for the unprecedented decline of ODA have been widely discussed and would appear to be rooted in the political and economic shifts of the past decade. OECD Governments would have to shift their political priorities and their development paradigms quite dramatically to reverse this trend. But the political change in the United Kingdom in 1997 has clearly demonstrated that such changes are possible, even while a broad upward trend still seems unlikely.

In contrast to the overall decline of ODA, the total net resource flow to the South grew steadily during the last decade and reached 304 billion dollars in 1996 (see table 1). The main cause for this trend has been the tremendous increase of private capital flows to developing countries. With 234 billion dollars in 1996, private capital flows were more than six times as high as eight years before. But with the rise of private flows, the relative importance of ODA further decreased. The ODA share of the total net resource flows to the South dropped from 49.8 percent in 1988 to 19.2 percent in 1996, while the share of private flows increased in the same period from 38.1 to 77.0 percent. As a consequence, governments and most intergovernmental institutions gradually lost their capacity to influence development processes in the South by financial means (the exceptions being the World Bank and the International Monetary Fund).

The dwindling importance of ODA has also given rise to a more fundamental rethinking of the concept of aid. The notion of "development aid" or "development assistance" was always a misleading euphemism which reduced the cooperation between sovereign states to paternalistic relations between donors and recipients. Northern Governments' gradual loss of influence due to the decline of their financial transfer to the South could lead to a more balanced relationship between North and South on the intergovernmental level. (The fact that at the same time the southern countries' dependence on the international financial markets, banks, pension funds and transnational corporations of the North is growing steadily has to be dealt with separately).

To overcome the old donor-recipient dependence, forms of contractual relations between all countries should be established under the auspices of the United Nations. Required is a new contrat social between North and South which lays down rights and obligations of the states and guarantees a reliable and sufficient resource flow to the South. Some interesting considerations in this direction are contained in a study of Keith Griffin and Terry McKinley . They call for a new global safety net - a progressive income tax on the GNP of rich countries, the proceeds of which would be allocated to the poorer countries. Models for this type of compensation or equalizing adjustment already exist on the national and regional level. In Germany, for example, there is the concept of financial adjustment among the German Laender and in the European Union there is a compensatory structural policy. Moreover, the contractual relationship between the EU and the ACP countries under the Lomé Convention can serve - in spite of its deficiencies - as an indication of the way development cooperation could move in the future. The United Nations should undertake further analyses of the feasibility of such North-South contracts.

As governments have cut their official development assistance, they have also reduced their support for multilateral funding agencies like the United Nations Development Programme (UNDP), and even international financial institutions like the Bretton Woods Institutions. In particular, UNDP was seriously affected by the ODA decrease in recent years. Quite a few governments have cut their voluntary contributions to this agency, including (by 1998) the United States, Germany, France and Japan. In sum, the voluntary contributions fell from 1178 million dollars in 1992 to about 750 million dollars in 1998. "UNDP's current core funding situation has become extremely critical", warned Administrator James Gustave Speth at the Executive Board meeting on June 18, 1998 .

Voluntary funds have also been cut in the case of other UN and regional development agencies, including UNICEF and UNIDO, while budgets based on assessments have been cut back as well in such agencies as the World Health Organization and the International Labour Organization. Remaining funds in the multilateral sphere are more tightly controlled by funder governments, reducing the multilateral nature of the funding process.

The United Nations' core budget - supporting the UN-Secretariat and intergovernmental negotiations - has also suffered severe cuts in recent years, with negative consequences for multilateral development planning and coordination. Cuts in this budget began in 1985, as the United States government refused to pay its regular assessment share. Ten years later, the UN had reached a deep financial crisis and many of its regular activities had come close to paralysis. The UN remains threatened and unless the United States Congress acts to repay the 1.5 billion dollars in current arrears, the world organisation could well collapse, destroying the only global institution capable of creating innovative approaches for development finance.

Under these circumstances, the pledge of US billionaire Ted Turner of 1 billion dollar over ten years in support of UN development and humanitarian programs, announced in October 1997, was warmly welcomed by the Secretary General and other officials as a new source of revenue. And Turner offered to find more rich individuals to help with the funding crisis. But the Turner millions are actually only a very small percentage of the total budget of the UN system (100 million dollars vs. 7-8 billion dollars or about 1.5 percent). Further, they move towards a model of private philanthropy, placing reliance on wealthy individuals for what should properly be a public function and responsibility.

The consequences of decreasing bi- and multilateral ODA in the 1990s are of minor importance compared with the dramatic debt situation of many developing countries. Their foreign indebtedness seriously affects their ability to pursue sustainable development. In theory, foreign loans could be used to finance environmental and social activities in the South. For example, debt might be used to import cutting-edge environmental technology or to finance industries producing solar energy panels or similar environmentally-friendly products. But in practice, the debt process seriously damages sustainable development. Huge debt-financed projects often lead directly to environmental degradation (roads, dams, petroleum prospecting, etc.) and enormous sums (sometimes half or more of a project cost) are siphoned away as corruption into the pockets of politicians and their private sector allies.

Projects aimed at providing public goods such as environmental protection or basic social services like education, public health, clean water and sanitation do not directly produce a surplus for repaying debts and interests. As a consequence, Governments have been often forced to raise new loans just to meet their current obligations. This vicious circle has driven them ever deeper into debt. The situation often has gotten worse as a result of decreased raw material prices, currency devaluation, the costs of environmental and social damage, bad management and corruption. The result has been a deepening debt crisis during the past two decades, which has driven more than half the world's countries to the brink of bankruptcy and forced on them ever-more-draconian austerity policies.

The overall foreign debt of developing countries reached an all-time high in 1997 estimated at 2,171 billion dollars, compared to 603 billions in 1980 and 1,444 billions in 1990 (see Table 2). While the debt situation of the seriously indebted middle income countries (SIMICs) temporarily eased recently, many of the poorer countries, most of which are in Sub-Saharan Africa, have continued to face dramatic problems. But even the emerging market economies of Latin America and South-East Asia face a highly volatile debt situation - as the Mexican crisis in 1994 and the Asian crisis of 1997 and after clearly demonstrate. Since exchange controls have been lifted, short-term investment funds can depart overnight and speculation against local currencies can easily overwhelm the capacity of central banks to defend exchange values. When local currencies lose a quarter or half of their value in a sudden "crisis of confidence," local banks collapse, businesses close and millions of workers are suddenly thrown into unemployment and poverty. As the local economy goes into a tailspin, foreign debts are suddenly far costlier to repay. So even the "miracle" economies enter the company of their poorer cousins, in a kind of debt peonage to the Northern lenders.

In 1997 the total debt-service flow from the developing countries to northern Governments, commercial banks and international institutions amounted to 269.2 billion dollars, more than four times as much as the whole ODA flow to these countries. If these enormous repayments were backed by productive assets, they would pose no problem. But the combination of gross investment errors, waste and corruption has resulted in assets which fall far short of sustaining the debt service. If these were companies, they would long ago have sunk into bankruptcy and the lenders would have lost their capital. But instead, the military and financial might of lender governments protects the dubious original loans, shielding the lenders from risk. So the borrowers must pay, however gruesome the social consequences.

To restore the solvency of the highly indebted countries, the World Bank and IMF imposed Structural Adjustment Programs (SAPs) on most of them which further reduced their capacity to finance social and environmental programs. The Bank and the Fund required neoliberal policy shifts including radical cuts in national budgets that had damaging effects on sustainable development and social justice . But despite the immense adjustment burden which led to environmental degradation and growing social disparities, most countries' debt problems have not been overcome.

Many have proposed forgiveness of these debts as an essential step towards sound development, making available urgently needed financial resources to the poorest countries. But debt forgiveness alone runs the risk of throwing more money into a fatally-flawed process. Would not most of the newly available funds, released from debt service, find their way into the pockets of corrupt officials and their wealthy cronies? How much of the money would be transferred to secret bank accounts in Switzerland, Liechtenstein or the Cayman Islands?

So debt remission is necessary but not enough. There must, at the same time, be a major increase in the accountability of public officials, joined to a judicial process for recovery of stolen or corruptly-obtained funds. Some experts believe that if all these funds were recovered, there would no longer be a debt problem and possibly few debts at all. A former official in Algeria announced in the early 1990's that according to information at his disposal, Algeria's total foreign debt was matched by stolen funds in foreign accounts. Indonesia, the Philippines, Congo (Kinshasha) and Haiti would appear to be just a few of the many similar cases.

International financial institutions and bi-lateral lenders could easily establish rules of accountability insuring honest use of their loan funds. Instead, they have chosen to look the other way, while imposing harsh conditions on the world's poor. The time has come to reverse this cruel double standard and insist on accountability as a primary condition for new lending and (especially) for debt remission.

 

Table 2: Aggregate core debt indicators for all developing countries

 

Billion US-dollars, unless otherwise indicated.
Source: World Bank, Global Development Finance 1998, Analysis and Summary Tables

The World Bank and IMF launched a more traditional debt-forgiveness initiative for the heavily indebted poor countries (HIPC) in fall 1996. This so-called HIPC Initiative aims to remove the "debt overhang" of these countries and to ensure that their debt is reduced to "sustainable levels" . Sustainable debt levels are defined by the World Bank within the range of 200 to 250 percent for the debt-to-export-ratio (on a present value basis) and 20 to 25 percent for the ratio for debt service to exports. Currently 41 countries are on the HIPC list but until 1998 only six (Bolivia, Burkina Faso, Uganda, Guyana, Cí´te d'Ivoire and Mozambique) had been declared eligible for debt relief - after years of severe economic and social reforms. These countries expect to benefit from the HIPC Initiative. As the Ugandan Minister of Planning and Economic Development Richard Kaijuka stated in April 1997: "This debt relief will help us to put more resources into our national Poverty Eradication Plan, especially President Museveni's recent initiative of universal primary education, the provision of basic health care and improved nutrition to our people, and the overall enhancement of rural development."

Many concerned NGOs have welcomed the HIPC Initiative as a first, imperfect step to help the poorest countries exit from the worst burdens of debt. Nevertheless, even setting aside the question of accountability, the Initiative doesn't go nearly far enough. Its criterion for a sustainable debt level is too narrow. Clearly, this restrictive definition is determined by the interests of the creditors, not by the real needs of the debtor countries and their people. Instead of this narrow approach, the debt level of a country should only be regarded as sustainable if the basic needs of the people living in this country are satisfied and debt-service payments don't restrict their ability to meet these basic needs. Comparable rules for private debtors have been for a long time part of national insolvency laws in many developed countries (for instance, debtors have a legal right to pay for their basic needs for shelter and food before they pay their creditors). If such indicators could be developed and applied, the group of countries eligible for debt relief would increase significantly. Simultaneously the amount of debt remission would be much higher than the minuscule 7.4 billion dollars of the current HIPC Initiative out of a debt total of 2,171 billions. The United Nations with its multidisciplinary scope would be the right place to develop the necessary sustainability indicators for debtor countries and to draw the conclusions for further debt remission proposals.

Private capital flows to developing countries have increased dramatically during the past decade and outstripped ODA as major source of external financing. In particular the sharp rise in the amount of foreign direct investment (FDI) and portfolio investment has misled many governments into hoping that private moneys can compensate for the lack of government funding in the environmental and development fields. At the same time, however, the fact that corporate board rooms still continue to focus on short- and medium-term sales and profit results is studiously overlooked. The Secretary-General of the UN stated rightly in a report on the Rio follow up: "Although private capital has the potential to finance sustainable development, so far it has typically avoided projects whose main purpose is to generate environmental and social benefits."

When corporations make decisions, environmental and social concerns play a secondary role at best. Marshall N. Carter, Chairman and Chief Executive Officer of the State Street Corporation, made the priorities very clear in a paper presented to the Second Committee of the UN General Assembly in May 1998: "[...] financial practitioners have a fiduciary responsibility under law," he said, "to maximize return on investment for the funds entrusted to us by our customers." Goal-directed, coordinated action toward sustainable development in the South cannot be expected from private investors of the North. On the contrary, low wage levels, a lack of labor regulations and low environmental standards continue to be the preferred standards in attracting corporate investment.

The advocates of free global markets try to convince critics of just the opposite. "Open markets matter" is the credo of a recent OECD report describing the economic, social and environmental benefits of trade and investment liberalisation. The OECD published this report in April 1998 as a response to the sharp opposition of citizen's groups, NGOs and trade unions against the currently negotiated Multilateral Agreement on Investment (MAI). But even the authors of this report had to confess that "the message that open markets lead to increased welfare in the aggregate is of little consolation to people whose lives may be adversely affected by change [...]" . They notice at least that "there exist rising public concerns in a number of industrialised countries over high and persistent unemployment, widening earnings and income disparities and the accelerating pace of change brought about by globalisation." The conclusion of the OECD: "It's all the more important, therefore, that there be effective policies in place to respond to concerns that the benefits of liberalisation should not be distributed too unevenly." In other words, the worldwide liberalisation of market access and investment conditions alone doesn't lead automatically to an improved quality of life for the majority of the people. On the contrary, many empirical studies demonstrate the detrimental impact of uncontrolled investment activities in countries without adequate environmental and social legislation. The cases of Shell in Nigeria, Mitsubishi in Indonesia or Nike in Vietnam are only a few of the many cases in point .

From a macroeconomic perspective, the effects of short-term portfolio investments in the South may be even worse. It is a fantasy to imagine that the billions of dollars in mutual funds and pension funds worldwide could be mobilized to support sustainable development in the South . For this kind of capital is particularly speculative and volatile by nature and mainly interested in quick appreciation, growing profits and stable investment conditions - legitimate interests from the owners point of view. If there appear even slights signs of crisis in an economy, this capital often "disappears" immediately and thus greatly aggravates the emerging crisis. Whether the capital comes from a trade union pension fund or a fund with only millionaire participants is irrelevant: all tend to head for the door simultaneously. The Mexican "Peso Crisis" of 1994/95 is an excellent example of this tendency. Kavaljit Singh summarizes the lessons learned: "The Mexican case illustrates the dangers of over-reliance on volatile, short-term capital flows to finance unsustainable current account deficits. These private capital flows are no substitute for domestic savings and, at best, can only supplement domestic resources."

But as the investment-saving gap in most countries of the South cannot be filled exclusively by domestic capital in the nearer future, clear rules for international portfolio capital flows have to be established to protect the economies of the South from the adverse effects of these investments - particularly the effects of sudden movement. Chile has established laws that act as a brake on such sudden capital movement by imposing a minimum time frame for investment - regulations of this kind should be adoppted on a global level, with the support of the IMF.

Current attempts to further deregulate and liberalize portfolio investments through a Multilateral Agreement on Investment are moving things in the wrong direction and must be rejected. Similarly, to assure that FDI are conducive to sustainable development, a legal framework has to be established to guarantee binding environmental and social standards worldwide. This framework must also contain compensatory measures for the poorer countries. As long as the world's nations do not accept and implement internationally agreed environmental and social standards, private foreign investment will continue to be a major cause of environmental degradation, exploitation of labor and the crowding out of local industries.

Elements of a legal framework for such standards have long existed - for example in the human rights instruments and the ILO conventions. However, no headway is being made to develop them further or to put them into concrete terms, as in extended producer responsibility in the social and environmental areas. Companies must be held responsible for working conditions in their plants and for the welfare of their employees just as they must be held responsible for the impact their products and production methods have on the environment. Efforts on the part of trade and industry groups to obviate government regulation by assuming voluntary obligations such as the ISO standards - which concomitantly take the wind out of the sails of calls for tougher measures - should not be allowed to obscure the fact that legally binding global regulation is needed.

All these elements of a new global investment regime aimed at the objectives of sustainable development should not be negotiated in the limited and business biased fora of the OECD or the WTO. Instead, the United Nations should take up these questions, possibly by organizing a World Conference on Investment for Sustainable Development with the clear objective of establishing binding environmental and social responsibilities for investors. But it must be emphasized that even the most effective private investment measures cannot substitute for the activities of public institutions. The private sector cannot and should not take over the responsibilities of the state. To fulfill public tasks, be it in the area of peace and security, or in the economic, social or environmental fields, states must be provided with the necessary funding on the national and international level.

Most of the international declarations and programs of action of recent years emphasize the need to mobilize domestic resources for social and environmental purposes. But when faced with calls to increase funding for sustainable development, the governments usually reply that their coffers are empty. A serious analysis of national budgets shows, however, that sufficient money would be available if existing public and private resources were reallocated. The world economy is more productive and prosperous than ever and should easily be able to afford the needed new spending. Both the expenditure and revenue side of government budgets offer many possibilities for reallocation. Controls on corruption also offer huge possibilities for savings.

Looking at the expenditure side, governments could cut very substantially their enormous military budgets. Reflecting the end of the cold war, worldwide military expenditures declined by one third between 1985 and 1995. But huge waste remains. Every year hundreds of billions of dollars are spent on small arms, land mines, weapons of mass destruction, fighter-bombers, tanks, artillery and a world army of more than 23 million soldiers (1995) . So there is a big potential for savings and an urgent need for further reallocation of military budgets towards social needs.

Similarly, government budgets now contain a large number of harmful subsidies which offer substantial opportunities for redistribution. Governments continue to encourage environmentally harmful and socially inequitable production and consumption patterns by granting concealed and open subsidies. These subsidies include export subsidies for agricultural surpluses, state guaranteed export credits (e.g., for the construction of dams or the export of armaments), long-term contracts to purchase products from the armaments industry, and waivers on petroleum tax for certain industries. These types of subsidies not only harm the environment, they also absorb billions of dollars in financial resources which are urgently needed in the social and development fields. According to a study undertaken by the Institute for Research on Public Expenditure, 700 to 900 billion dollars are spent every year worldwide on subsidies in just four economic sectors (water, agriculture, energy and road transportation) - often with a very detrimental environmental impact. The study mentions these cases, among others: "Rice growers in Southeast Asia over-irrigate their fields, because subsidies cover most of the cost. Drivers in southern California continue to funnel onto congested thruways, because subsidies take care of more than half the cost of their daily commute. Uneconomical and highly polluting coal is still mined in Germany as back-door welfare support for the miners." Even if these subsidies were to be only partly dismantled, there still remain hundreds of billions of dollars that can be shifted to sustainable development.

On the revenue side, new resources could be obtained by implementing an ecology-based and more socially responsible and egalitarian tax policy. Such a policy would raise taxes on corporate profits, assets, inheritance and high incomes and eliminate tax loopholes and other forms of tax avoidance. The current tax system in many countries discriminates against "labor" as a production factor while favoring the exploitation of natural resources. Consequently, the tax system must be reorganized on an ecological basis so that the consumption and use of resources are subject to higher taxes. In doing so, care must be taken to ensure that such a reform does not lead to inequitable redistribution. Concrete blueprints for a comprehensive ecological tax reform were drawn up years ago but have yet to be put into effect . These plans involve an energy/CO2 tax and a tax on non-renewable resources . While harmonized taxes on the global level would be the best solution, there remains the possibility of initiatives on a regional and even national level. Countries like Denmark and the Netherlands demonstrate this very clearly and their leadership may inspire wider reforms.

Global instruments for revenue-raising, including various taxes and fees, offer a major new potential source for development finance. Most proposals of this type involve very small taxes or fees on very large global transactions, yielding a large revenue while imposing a relatively light burden on any individual. One of the best-known proposals has been advanced by James Tobin of Yale University, who first proposed in 1972 a tax on currency exchange transactions . Tobin made his proposal in order to reduce speculation in the exchange markets, a goal which is even more important today than when Tobin first proposed it. The revenue-raising potential of the idea is enormous. With an estimated 1.5 trillion dollars in foreign exchange trades every business day in 1998, yearly trading volume is well over 350 trillion dollars. A tax of just one percent would yield 3.5 trillion dollars per year, more than fifty times the total of ODA. Even assuming a major reduction in market volume caused by the tax, the potential yield would remain very substantial.

The Tobin tax has several major advantages in implementation, since the overwhelming majority of foreign exchange transactions are carried out by a small number of money center financial institutions. If their computers could be programmed to deduct the new tax and forward it to a collecting agency, the cost of collection would be virtually zero. And the process of oversight would be fairly simple: a team of a dozen experts, endowed with the proper authority, probably could do the job.

Another major proposal calls for a global environmental tax, such as a tax on carbon emissions or the carbon content of fuels. This tax would be more complicated to administer, since it would have to be levied on tens of thousands of fuel producers. But there is a very compelling case for such a tax as an environmental policy instrument, quite apart from its revenue-raising potential. As a revenue device, like the Tobin tax, it could generate very large sums with a relatively small percentage tax, given the very large volume of carbon-based fuels involved. A higher tax, that would substantially reduce the use of carbon-based fuels, might raise an even larger revenue stream, at least in the short run.

Many other proposals have been made for global revenue-raising, including fees for various uses of the "global commons" - use of the oceans and the atmosphere, parking of satellites in earth orbit, and commercial use of the airwaves. Taxes on international air and sea travel and on internet traffic, fines for environmental pollution like dumping in the oceans, and even an international lottery have been proposed as further approaches to global revenue-raising.

Political leaders, eminent personalities and economic experts have shown considerable enthusiasm for these ideas. Former President Mitterand of France even supported the proposal for a foreign exchange tax of the Tobin type at the UN Social Summit in March, 1995. There have been many major conferences and intergovernmental consultations on the subject. And there are even new grassroots groups in the United States and France lobbying for such policies. But there remain many barriers, including strong opposition from affected business interests (banks are firmly opposed to the Tobin tax, for example, and oil companies to the carbon tax). There is also hesitation on the part of governments to turn even a limited taxing authority over to a multilateral agency, thus ceding an important element of national sovereignty.

Opposition of this kind is strongest in the United States, where the Congress has passed a law forbidding the United Nations from even considering global tax measures. The United Nations has taken this prohibition very seriously and several projects to study the issue have been shelved, while intergovernmental discussions of the subject are now virtually taboo. But the hesitation on the part of governments is short-sighted. They would lose relatively little sovereignty, since state tax authorities would remain in control of the process, as in the EU. Also, the states might retain a substantial proportion of the revenues, easing their own revenue pressures.

Global tax advocates must overcome serious public suspicion that such taxes would be imposed and spent unaccountably. There is a need to insure democratic oversight and control over the tax mechanism and how the resulting revenues will be spent. Some reformers have a technocratic conception of the tax and would prefer a more-or-less automatic flow of funds. But if the tax idea is to succeed, it must have the confidence and support of ordinary citizens. For this, there must be more democratic and more responsible decision-making bodies at the global level.

The first global taxes will probably not be as ambitious as the Tobin or carbon tax proposals, with their billions of dollars of income, for they are vulnerable to opposition from exceptionally powerful vested interests. Instead, more modest proposals are likely to set the early precedents. The EU is moving forward with an air fuels tax, an idea that might possibly be extended to global application. But planning must go forward for the larger taxes and political backing for them must now be assembled. No solution to the crisis of development finance is more promising than this one.

Until the spring of 1997, it seemed likely that a downward spiral of global public institutions, official development assistance and global development policy coordination would continue indefinitely. Then, the Asian crisis suddenly emerged. In June, a major speculative run on the baht dragged the booming economy of Thailand into a sudden slump. In quick succession there followed major currency and economic crises in Malaysia, Indonesia, and South Korea. Japan's once dynamic economy started to weaken dangerously. By late 1997, it had become apparent that the entire world economic system was in danger.

As a result of this dramatic new conjuncture, policy makers began to question the previously unassailable positions of neoliberalism and market "freedom" at all costs. Joseph E. Stiglitz, Senior Vice President and Chief Economist of the World Bank gave a dramatic lecture at the World Institute for Development Economics Research (WIDER) in Helsinki on January 7, 1998 stating bluntly that previous policies had been "misguided." He called for a new policy consensus that would include stronger financial regulation and other measures to restrain unstable markets. The problem, he said, is "not that the government has done too much, but that it has done too little."

Suddenly, with the Bretton Woods Institutions admitting their mistakes, and financial storms breaking across the globe, influential private corporations and governments accepted "new approaches" to global regulation. In this context, governments turned back towards the United Nations, hoping that it could provide a platform for broad intergovernmental negotiations and as such that it could produce a badly-needed new consensus for action. In that spirit, the UN General Assembly on December 18, 1997, passed a resolution calling for study and preparation of a global intergovernmental conference on "Financing for Development" - a conference that would re-consider the entire development finance system. For the first time in nearly two decades, the rich countries seem ready to allow the United Nations to take center stage in the global financial arena.

The "Financing for Development" initiative is not just another North-South skirmish. Rather, it is an authentic, broadly-based initiative that has the support of the Northern countries and of the powerful financial institutions as well. To the astonishment of many observers, a meeting organized by the Economic and Social Council (ECOSOC) at UN headquarters in April 1998 drew the participation of IMF Managing Director Michel Camdessus, as well as a high World Bank official and a number of finance ministers and other key players in the global financial system. As acting ECOSOC President Ambassador Fulci of Italy said, "the Asian crisis has resulted in great attention being given to the sharing of risks and benefits in times of financial turmoil."

That unprecedented April meeting - originally planned to foster greater coordination between the UN and the Bretton Woods institutions - was followed again on July 6, 1998 with yet another high level meeting at the UN, this time with the participation of Camdessus, World Bank President James Wolfensohn, UNCTAD Secretary General Rubens Ricupero, and WTO Deputy Director General Anwarul Hoda. In the meantime, a series of important preparatory "briefings" had been held at UN headquarters to consider various aspects of the crisis and possible international responses to it. Never has there been such widespread agreement that the existing system needs to be re-cast.

Neoliberal dogmas have melted down along with the baht, the ringgit and the won. But what will now be invented to take their place? Clearly, it is not just a matter of going back to the nostrums of Keynes, Harry Dexter White and the other architects of the post-war economic system. Globalization has created a radically different landscape and a need for far stronger and more effective global institutions. Global regulation, global development finance, even global taxation must at last be given serious consideration, in the framework of more accountable and democratic global institutions. These are the major challenges for the UN, governments and civil society in the eve of the 21st century.

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