By Francine Mestrum
Development and development cooperation cannot be seen as success stories. In the ‘third world’ the past half century can be divided in two sub-periods. From 1960 to 1985, growth and social indicators improved rapidly; from 1986 to 2000 growth stalled and social indicators improved much more slowly. The only explanation for this reversal is the introduction of neoliberal policies, imposed as ‘Washington Consensus’ in all countries needing funds from the IMF and the World Bank.
A new global context
To-day, the situation is changing again. New power relations are emerging, old hegemonies are threatened, peoples revolt against their marginalization and new emerging economies try to influence world history. Will the old Europe which is now led by the European Union be able to maintain its power and its moral authority? This is far from sure, particularly because third world countries have learned that universalism is a very beautiful discourse, but that European countries never applied it in other continents. Human rights and democracy are only promoted when they favor existing geopolitical power relations. Politically, the European Union is very weak and unable to put into practice the values it preaches. Economically, the United States are very weak but militarily they still play a very important role. New powers such as China and India work from a different philosophical background. China is investing in Africa in mining industries and in infrastructure, without thorny conditionalities. More and more, led by China and Brazil, a South-South cooperation is emerging. Having a choice for the very first time since more than a century, African countries are aware of their strategic role and make their voices heard.
In the past fifty years, the concept of ‘development’ has constantly changed its meaning. Of course ‘development’ is possible, if only the existing geopolitical and economic power relations were different. Today, development assistance is nothing more than a drop in the ocean and fails to reach its formal objectives. In fact, relations between North and South are more and more concerned with military cooperation and with security. Capital continues to flow from South to North, whereas in the North good intentioned people are turning to charity in order to help the poor in the South. All too often one forgets that poverty is in the very first place an income deficit, in the same way as ‘development’ needs an important capital input. Right now, this money is not available.
The financial and economic crisis of the past years has strengthened the role of the IMF and the World Bank. At the start of the third millennium, many poor countries had important monetary reserves and started to pay back their remaining debts. This meant a serious cut in the revenues of the Bretton Woods institutions who, for the very first time, had to reform and to retrench. However, the crisis allowed the IMF to resume its intervention policies, even in the European Union. A couple of neoliberal dogma’s were abandoned, but the neoliberal doctrine did survive, in spite of all its failures. A solution for the undemocratic composition of the IMF and the World Bank has not been found yet.
To-day, the power of private financial institutions, banks and hedge funds has become very clear. Only a handful of countries can pretend to have real sovereignty. Most have to follow the rules of the IMF and the World Bank, in order to avoid speculative attacks from the financial markets. The member-states of the G20 certainly have the power to regulate the financial sector, but they don’t do it. It shows their lack of accountability and of political cohesion. The world governance they reject is now in the hands of undemocratic multilateral institutions and transnational corporations, banks and other financial market players.
Even in the delicate dossier of climate change, a same kind of lack of responsibility can be seen. By refusing to take far-reaching measures to curb climate change, rich countries condemn poor countries to more catastrophes, floods and droughts. The life of millions of people is threatened. Climate change will surely lead to more conflicts.
In Africa, people are aware of these risks. People know that the Millennium Development Goals are not relevant compared to reverse capital flows and the threats of climate change. The Swiss author and politician Jean Ziegler speaks in this context of Africans ‘hating the west’ because of the false promises, the repeated lies, the enduring exploitation[1]. Certainly, these are not general feelings, but they do play a role in social movements and progressive parties. More and more, western NGOs and aid organizations are rejected by governments and by people. It is only in Western Europe that many seem to ignore how Africans look at them.
In Latin America, the situation is different. Social movements are very dynamic and participate actively in working out policy proposals. In Venezuela, Bolivia and Ecuador – three oil exporting countries – a new ‘socialism of the 21st century is begin put into place. Whether it will succeed depends on the political relations in the rest of the subcontinent. The June 2009 coup in Honduras, a small and very poor country, has shown the limits of what the West can accept. The victory of a rightwing candidate in the Chilean elections changed the balance of power relations, whereas in Brazil, the leftwing candidate prevailed, thanks to the support of former president Lula. Some Latinamerican countries now have a Banco del Sur, a development bank of their own, and they have an alternative trade agreement with ALBA (Bolivarian Alliance for the Peoples of America), based on mutual solidarity. It allows them to develop new policies, in a modest but decisive way.
In Asia, the emerging economies of China and India are the most important new factor. They are relatively both poor countries with a revenue per capita in 2009 of 3650 $ and 1180 $ respectively. But they are home to one third of the world population and have an enormous potential for growth. China has a tremendous amount of reserves in Dollars, which has created a mutual dependency between China and the US. But just like in Latin America, the Asians are working to prepare an alternative financial and monetary system in order to lower their dependency from the West. The Chang Mai Initiative was born after the crisis in 1997 and allows 13 countries, including China, to build common exchange reserves. Trade relations are being developed and imperceptibly a regional trading block is in the making.
Once again, Africa is lagging behind, though peoples in Northern Africa are now reacting and fighting for social justice, development and democracy. In South Africa, the ANC is still in power but black power can also be neoliberal power. Everywhere in Africa, the Chinese – investors and workers – are arriving, while more and more middle class people try to migrate to Europe, looking for a better future. Everywhere there is a new willingness to take one’s future in one’s own hands and to work for better regional development. There are still too many regimes who ‘do well’, which means that their leaders and their followers benefit from the commodity’s trade and the development assistance. Without any pressure from their populations, they are not inclined to change spontaneously.
Towards a new development paradigm
This situation shows a double paradox.
On the one hand, the current economic system and the power relations make development, in the sense of economic modernization, diversification and collective emancipation impossible. The African economies are answering to the needs of Northern countries and more and more to those of China. Simultaneously, peoples want more prosperity and social justice. Development is necessary, even if it never can be an imitation of the industrial North.
On the other hand, rich countries are not inclined to give more money to what they begin to see as a bottomless pit. But solidarity is needed in a world in which inequalities are growing, particularly if we speak about sustainability. Populations in the North are willing to show this solidarity but start to have doubts on structural solutions.
It means that we will need another paradigm, for development as well as for cooperation. It is unacceptable to have rich countries and their institutions decide on what Africa needs and wants.
Asian and Latinamerican countries are beginning to show that all regions and all countries have to build their own alternatives, have to make their own choices. Whether this can happen without conflicts will depend on the willingness to intervene from the EU or the US. A successful development program will always be endogenous, even if regional cooperation will be necessary, particularly in the case of Africa and its fragmented reality. South-South cooperation can also be very useful, though it is clear that China and Brazil are not disinterested. Mutuality and solidarity are major principles to make this cooperation a success.
It means that African countries will have to re-conquer their independence, away from ‘development models’, from so-called assistance, from debt servicing, from domination by the World Bank and the IMF, from trade agreements with the EU. This is the most important task for the ex-colonies, fifty years after their political independence. They need their own policy space. The concept of ‘sovereignty’ will have to be re-thought, because globalization has totally eroded it. For certain purposes, such as monetary cooperation, climate agreements or to help distressed people, this sovereignty can be pooled. But at any rate, development plans will have to be established in an as democratic and sovereign way as possible, without foreign intervention. The UN has published excellent directives for national development plans with alternative macro-economic, trade and social policies[2].
Northern countries are not that generous anymore with development assistance and their austerity programs following the financial crisis will not help to rise their budgets for development cooperation. This is not a positive perspective for poor countries. Of course, development cooperation has always been criticized, with good arguments, but these last years, the criticism is becoming particularly harsh. However, market solutions, as proposed by Dambisa Moyo or William Easterly[3], are not acceptable, precisely because the policies of the past two or three decades have shown their shortcomings. Markets are not able to launch and sustain a development process. Development still is a difficult and slow process that carefully needs to be directed and adjusted.
What, then, is the responsibility of the North?
The first responsibility will be to seek a new development paradigm for itself. The current growth model has shown its ecological limits. A carbon-poor economy will mean a dramatic shift in production and consumption patterns. Furthermore, the financial crisis of 2008 was evidence of the wrong direction our economy has taken. Rising unemployment, growing inequalities, poverty, stress at the work-place, financial volatility and the enormous concentration of wealth are evidence of a diminishing group of people for whom the neoliberal capitalism has positive results. In that respect, the borders between North and South are blurred. Only the small elites of poor countries and the somewhat larger elites from rich countries are the beneficiaries of this system. The list of the thousand richest people in the world – dollar billionaires – has to be looked at against the background of half of the world population living under the poverty line of 2,5 $ a day.
The second responsibility of rich countries is therefore to fight the rising inequality in the world. There are good and objective, ethical and economic reasons to do this, more than there are for fighting poverty. Inequality threatens political stability, encourages migration and erodes citizenship. It is not enough to fight poverty, since poverty can only be reduced if there is a fair distribution of incomes. Poverty is not the problem of poor people but of the whole of society and thus also of the international community. The problem of poverty cannot be solved if you only work with poor people, one simply has to avoid poverty and this supposes to reduce inequality.
North and South have comparable problems but their starting blocks are different. They both have to design a development paradigm, but Africa has to start from beneath the zero line, with a majorty of very poor people and an enormous potential of natural resources and human capital. Rich countries have human capital, a majority of (still) prosperous people and little natural resources. Even the poor have been led to an over-consumptive track.
What does solidarity mean then? It is giving and taking, for all partners. It is not a donor and a beneficiary, but a relationship of equivalence in which all parties decide to work together because all have to win. This means there is no place for charity and patronizing.
This kind of solidarity can be justified on the basis of a common interest. Members of the same club have to respect the same rules. Members of the international community want to defend the stability of their community, want to avoid distortion of competition due to low wages or child labor, want political equality and thus economic and social equality. These are the principles used by the ILO in its proposal for a ‘social protection floor’, a minimal universal social protection for all, and they can be applied to all global public goods, from water to biodiversity and health care.
This reasoning does not exclude a moral responsibility. The United Nations has adopted a Universal Declaration on Human Rights as well as a Declaration on the right to development. This Universal Declaration was translated into legally binding International Covenants. Article 11 of the Covenant on economic, social and cultural rights stipulates that all people have a right to an adequate standard of living, and the member states recognize the importance of international cooperation in order to put this right into practice. Poverty is the consequence of the denial of this right.
Globalization has shown its limits. Large transnational corporations have gained enormous power, protected by the IMF, the World Bank and the WTO, and have made this globalization into a caricature of itself. They did not build one world but their world. In another type of globalization, regional entities will be able to cooperate. A regional ‘de-linking’ can have more ecological and economic advantages than the current system of a borderless world that only leaves some crumbs for the poorest. Furthermore, it is obvious that in a democratic world governance system – as this is being discussed for many years – Africa, Asia and Latin America will need to have a voice. It is the only way to make globalization coterminous with development, the building of one world with one common humanity and free movement of people instead of free movement of goods, services and capital.
Concretely, this means that African countries will have to design their development plans in full ownership. With these plans, they can work towards regional, South-South or North-South cooperation. This policy autonomy is crucial in order to start a real development process.
Cooperation and solidarity
Many proposals have been made to find new funds for development. After a long and interesting series of UN world conferences in the 1990s, third world countries wondered how the different action plans were ever to be realized without fresh money. In 2002 a UN Conference was organized on the ‘Financing of Development’. It adopted the ‘Consensus of Monterrey’[4] with six major points that are somewhat contradictory:
Point one is mobilizing domestic financial resources for development. It can be done with taxes, import and export tariffs, royalties, etc., as well as by fighting corruption.
Point two is mobilizing international resources, with foreign investments and other private capital flows. But it is easy to see how this can be incompatible with point 1. Where countries have introduced a fair tax system, foreign investors no longer want to come. They usually ask exemptions for taxes, social and ecological rules.
A third point is international trade, but again, this does not necessarily lead to more resources. It can only help countries which already are strong players on the world markets.
Point four is international financial and technical cooperation for development and this is being worked at with the ‘Declaration of Paris ‘ of the OECD-DAC member-states.[5] It is a difficult and very slow process to make development assistance more ‘effective’. In its WESS 2010 report, the UN wonders if a more radical shift towards full adherence is not needed.[6]
Point five is the external debt issue, for which much more can be done to cancel the debt and to prohibit vulture funds.
Point six covers the systemic issues for enhancing the coherence and consistency of the international monetary, financial and trading system in support of development. This requires in the first place to review the six points of the consensus and we must hope that this does include the fight against tax evasion and tax havens, though again, this will not encourage investors.
The Conference on ‘Financing for Development’ is important because of another point. Paragraph 44 of the Monterrey Consensus mentions ‘the value of exploring innovative sources of finance, provided that these sources do not unduly burden developing countries. In this regard, we agree to study […] innovative sources of finance, noting the proposal to use SDR allocations for development purposes. Paragraph 51 of the Doha Declaration notes that participants ‘recognize the considerable progress made since the Monterrey Consensus in voluntary innovative sources of finance and innovative programmes linked to them […] We encourage the scaling up and the implementation, where appropriate, of innovative sources of finance initiatives’. The search for thess ‘innovative resources’ will open new avenues for global taxes.
If these proposals are being made, it clearly is because development assistance is becoming very controversial. Promises are not being kept, definitions are changed and opened up, sustainability and security are absorbing more and more money, its effectiveness is questioned.
Yash Tandon, former director of the South Center, wants to stop the dependency on aid.[7] He sees five different categories of aid and gives them a color. Red aid is ideological aid en should stop immediately. Orange aid is not real aid but helps to promote trade. Yellow aid is military and political and there is no reason to not see it as ‘development aid’, because now it totally escapes the accountability mechanisms. Blue-green aid is, according to Tandon, meant for global public goods and can therefore not be seen as ‘aid’ since it also benefits those who give. Only purple aid is acceptable since it is based on solidarity and is meant to liberate oneself from the United States and the Bretton Woods institutions. What Tandon shows is that the current aid system is totally inadequate and should not be called ‘aid’. Global public goods surely can be financed, on the basis of solidarity, in the same way as the purple aid. But how can we make this solidarity concrete?
This discussion concerns rich as well as poor countries. There are some preliminary points to consider.
The first thing to do is to conceptually clarify the debate.We often use the same words but with different meanings. Development is something very different from poverty reduction. Development is a political, economic and social project of change and emancipation – the empowerment of peoples and countries so that they can become self-sufficient. How they want to do this is up for themselves to decide. This does not mean that all countries have to strive for some kind of autarky, on the contrary. It does mean that they will have to decide on what they want to produce themselves, what they want to import and to export, regionally and globally. Poverty reduction, as all should have learnt in the meantime, is not possible without development. Poverty reduction can only be the result of a successful economic and social development process. The other way round can never work.
Secondly, rich and poor countries need to be fully aware of our common interest in adopting another approach. This is not an easy task. Discourses on social justice are being used, but practices do not follow. Migration is said to undermine the Northern welfare states. This is certainly untrue, but it is interesting to refer to the principles of this welfare states in which social and economic policies reinforce each other. Nowhere else in the world is inequality so limited. Not migration, but neoliberal ideology is threatening this system, although it is based on excellent principles which could help us to reduce poverty and inequality in the world, two important global public goods.
Universal social protection and global public goods
The first principle is the recognition, end of the 19th century, of the fact that risks are collective and not purely individual. This leads to an insurance system in which all pay and all benefit. The current globalization allows for this principle to be adopted in third world countries. Their populations live in a world community and live with the consequences of what happens in the rest of the world. No country or population can be seen in an isolated way. We therefore should think of an insurance system to avoid that poor countries have to bear the consequences of what happens in the rest of the world without them having any responsibility for it.
A second principle is the fact that political rights are undermined by huge economic inequality. This principle is equally valid for international relations. Poor countries often ‘sell’ their vote in international organizations in order to receive some kind of compensation or benefit. The recognition of this unsustainable inequality is crucial in order for poor countries to recover their independence and sovereignty.
The third principle is the anonymous solidarity in Western European welfare states. To speak with Durkheim, this is the mechanic solidarity which accompanies the division of labor. Working people pay their contributions but do not know who receives ‘their’ money. They do know they have exactly the same rights and when needed, the common fund will pay for their hospital, child, or pension. Working people pay for pensioners. Childless families pay for the children of others. Healthy people pay for the sick. It is not true that these solidarity mechanisms are financially unsustainable. All depends on the revenues of the system and the expenditures and contributions of the working population.
These three principles of welfare state solidarity can be applied to the relations between poor and rich countries. Poor countries have no individual responsibility for the consequences of globalization or of natural catastrophes. Global economic policies should be matched with global social policies, political rights need social and economic rights, solidarity should be anonymous. In this way, a universal social protection becomes possible.
Inside countries, a similar system can be developed, in conformity with the development plans. It certainly should not be the case of substituting a national program for global protection. What it does come down to is to have solidarity mechanisms at global, regional, national and local levels, and to have these mechanisms positively interact with each other. The legal framework always should be the Universal Declaration on Human Rights. This can possibly be complemented with collective rights and, as some are asking for today, the rights of nature.
This all means that we have to fundamentally re-think the fragmented and patronizing system of current development cooperation. It is not based on solidarity and is not based on cooperation. It is fragmented and inspired by small and large interests of donors. It hinders the emergence of democratic regimes in beneficiary countries. NGOs are not able to promote structural changes. Governments of poor countries are accountable to their donors, more than to their own population. Corruption is enhanced and the sovereignty of countries is undermined.
The necessary reforms cannot mean that all is left to the market. Markets are places with power relations, with weak and strong partners, a game that poor countries never can win. Markets do not allow poor countries making national development plans. Markets do play a role, in every economic system, but they cannot be responsible for regulating the economy of for organizing society.
Finding resources for global public goods
Domestic taxes are very low in poor countries. Currently, the average ‘tax take’ in high-income countries is around 37 % of GDP, whereas for low-income countries, it is only 14 %.[8] Due to the importance of the informal sector, it is not that easy to raise tax incomes, though many solutions are possible, such as incentives in order to formalize or country-by-country reporting by multinational corporations in order to break the culture of secrecy. High poverty rates also diminish the potential for domestic income taxes. Ecological taxes can be a solution, and are certainly better than a regressive VAT which hurts the poor proportionally more than the rich.
Tax holidays in special export zones are not necessarily beneficial to poor countries, whereas in many cases the royalties on extractive activities can be reassessed. The main point is that there is now a lack of transparency with high suspicions of fraud.[9]
Corruption is a very serious concern, touching both the domestic and the international resources. Initiatives like the Publish-What-You-Pay campaign has been supported by the G8 and around 30 countries are willing to participate. They will be asked, as well as all corporations involved, to make public, on a voluntary basis, the money they have received or have paid. International investments are more than welcome, though they are very volatile and highly dependent on the domestic tax and regulation environment. The lack of transparency in the extractive industries cannot be sustained.[10]
International trade can be an engine for growth, though the costs it involves are often ignored. According to a Dutch scientific report[11], the average poor country has to spend around 150 million $ just in order to comply with the WTO rules in matters of custom administration, fytosanitary rules, intellectual property rights, and so on. The liberalization of trade also involves a sharp reduction in public revenues from tariffs which is not always compensated. The Economic Partnership Agreements the European Union is offering to African countries can cost around 1,9 billion Dollars[12]. Compensating measures include ‘Aid for Trade’ and VAT, though according to the IMF this is far from being sufficient[13]. Christian Aid estimates that African countries have lost around 272 billion Dollars due to free trade in the past 20 years[14]. More research is needed in order to make international trade mutually beneficial.
As for debt relief, the data are mixed. The HIPC-initiative (‘Highly Indebted Poor Countries)has helped many countries to reduce the external debt burden, though it has to be reminded that if 40 billion $ of debt have been cancelled in 41 poor countries, of which 33 are African, several countries are not eligible, such as Kenya and RDC[15]. Moreover, much of the debt can be considered to be odious debt, particularly for the RDC and loans given to former President Mobutu. If some of the debt titles have been de-valued, vulture funds are now ready to cash in for the full amount. The external debt remains a serious problem of capital outflows for many poor countries.
Royalties are the amounts paid by companies for mining activities. They are usually very low because of the investment risks, and in many African countries they hardly reach 3 %. Nevertheless, higher benefits for national governments are possible, as has been proved by the Bolivian and Ecuadorean governments who re-negotiated contracts with mining and oil companies.
Strict rules for the repatriation of profits are also a potential resource for national governments. In the past, international rules asked for part of the profits of transnational corporations to be re-invested in the host countries, or they limited the repatriation to a percentage of the initial investment. These rules have disappeared but could be re-introduced.
Important progress can be made with the ‘systemic issues’ and the reform of the international financial architecture. Two points can be mentioned here, on the one hand international reserves and on the other hand capital flight and tax havens.
The Dollar reserves of poor countries – without China - amounted to 4.900 billion $ in 2007[16]. This may have helped them to cope with the financial crisis of 2008-2009, but it certainly is expensive. According to Eurodad, the interest rate on these amounts - invested in US Treasury Bills -may have cost poor countries around 300 billion $.
The second point concerns capital flight, trade mispricing and tax evasion. GFI (Global Financial Integrity) estimates the illicit financial flows for all developing countries in 2002-2006 at between 612 to 716 billion US$. For Africa, the amount is estimated at 854 billion $ for the period 1970 to 2008[17]. However, this is only the result of one form of trade mispricing. With estimates for mispricing in the trade of services and for smuggling, the authors think it is not unreasonable to estimate the amount at 1,8 trillion US$. Illicit capital flows concern illegally earned, transferred or utilized money. It is a two-way street with responsibilities for poor as well as for rich countries. Most if not all of the money – and invoices – go indeed to tax havens or secrecy jurisdictions and these are very detrimental to domestic tax systems and public finances[18].
In the fight against capital flight and tax havens, poor countries depend on the willingness of the rich to change anything. But they can support initiatives aiming at more transparency, such as the ‘country-by-country’ reporting system which is proposed for transnational corporations. If companies work internationally, they should be obliged to publish detailed balance sheets per country in which they work, so that it can be seen where profits are made and where taxes are (not) paid.
The current economic and financial crisis has accelerated the discussions on all these points, as well as the debates on the effectiveness of aid. Member-States of OECD’s DAC have put into place a ‘Declaration of Paris’ in order to improve the assistance[19].
This very short overview can help to understand that a very important amount of financial resources can be found through a serious effort to reform the existing aid architecture, to restructure the international financial sector and to organize and strengthen the domestic capacities for tax purposes.
The important point to stress is that tax policies are crucial for the sovereignty of nations. By asking people and business to pay taxes, these people and business can stress accountability and a correct fiscal policy. Taxes have a direct influence on the relationships between state and society and are crucial for democracy. This is precisely what is lacking in development cooperation, since governments are only accountable to their donors.
Business has also a big interest in a well functioning society with good infrastructure and people who work with pleasure. Only those who focus on the very short term can think otherwise. Even the wealthy have an interest in a politically stable environment for their business, without serious conflicts. Unfortunately, today, it is a very small minority of ‘globalized non-citizens’ – the superrich, who can pay for their personal security who have enough power to try and influence global decision-making -. All others need stability and should be ready to pay taxes in order to have it. The measures mentioned above can yield a lot more money than what is coming now from development cooperation. Furthermore, these revenues are predictable and stable.
Innovative sources of financing
The call for ‘innovative sources of finance’ has already been mentioned. The Monterrey Consensus and the Doha Declaration have led to numerous proposals for global taxes.
Solidarity is not the only reason for it. Globalization means we are now interdependent, the world has become like a village. Capital flows only need a second to travel around the world. Our food is coming from around the world. The internet allows for friendships to develop from North to South, East to West. Yet, there is no global governance, there is no possibility to formalize the power which is now in the hands of the IMF, the World Bank and the WTO. The United Nations only has marginal power. The G8 and G20 are informal gatherings. The ‘third world’, meaning the majority of the world population, hardly has any voice or power.
The need for some kind of global governance is closely linked to the need for global taxes. Many economic activities take place at the global level but are not covered by any national government. There are hardly any globally enforceable rules. This is particularly clear in the financial sector which uses tax havens. Moreover, transnational companies can also organize in such a way that they totally – and legally - evade taxes.
Today, there are more global needs requiring collective action. The environment is the best example, but even collective security will require to look beyond national borders. Stability, social and economic rights as well as gender equality are also global public goods. The point urgently has to be put on the international agenda.
Finally, there is the philosophical consideration on what ‘one world community’ might mean. Globalization can mean that all people are responsible for each other, in the same way as happens in a national community. Since internal and external policies are interacting, we should also reflect on global solidarity beyond poverty reduction and charity. Furthermore, respecting human rights also implies an international responsibility, as mentioned in article 2, § 1 of the International Covenant on economic, Social and Cultural Rights. Different procedures and mechanisms are possible, but a global redistribution of incomes certainly is feasible. We can think then on a global welfare state, not in order to replace the national systems, but in order to complement them in conformity with the global economy. Global taxes can be part of this new type of solidarity and redistribution.
Three different types of ‘innovative resources’ can be mentioned here.
a) Special Drawing Rights (SDRs)
The SDR (Special Drawing Rights) is an international reserve asset, created by the IMF in 1969 in order to supplement its member countries’ official reserves. Its value is based on four key international currencies, which today are the US Dollar, the Euro, the Japanese Yen and the UK Pound Sterling. SDRs can be exchanged for freely usable currencies. The SDR is neither a currency, nor a claim on the IMF. It is a potential claim and it serves as the unit of account of the IMF and some other international organizations. The IMF may allocate SDRs to members in proportion to their IMF quotas. A general allocation was approved in August 2009 for an amount of 161,2 billion. In 2009, a special allocation which was already decided on in 1997 finally was ratified by enough member-states and allowed for a cumulative rise by 21,5 billion. It means that the SDRs now amount to 204 billion, or around 308 billion US$[20]. It has to be noted however that the huge majority of these SDRs are in the hands of the rich countries which have the largest quotas. They are perfectly free however to relinquish their rights to poor countries in order to be used for development purposes.
b) Public/Private capital flows
After the G8 summit in Gleneagles in 2005, an ‘International Finance Facility for Immunization’ (IFFI) was created, a system working on the basis of ‘frontloading’ of development assistance which is borrowed in advance in order to buy vaccines. Bonds are issued in order to collect the necessary money. The loans are reimbursed through the annual budgets of development assistance. In this way, long term donor government pledges are transformed into immediately available cash resources. This money goes to the ‘Global Alliance for Vaccines and Immunization’(GAVI).[21]
Next to IFFI, an Advanced Market Commitment has been created which allows for donors to commit money to guarantee the price of vaccines once they have been developed. This mechanism is thus creating the potential for a viable future market, which is especially important for poor countries with health risks that are not covered by normal activities of the pharmaceutical industry, or when vaccines are too expensive.[22]
The Global Fund is a public/private partnership created in 2002 in order to fight AIDS, tuberculosis and malaria. Is has become the dominant financier in this field and is also funded with private money, such as the Bill & Melinda Gates Foundation or RED. RED is an initiative taken by some private global philanthropists. It collects money from business by taking up to 50 % of gross profits from sales of their products.[23]
Socially Responsible Investments is a French initiative in partnership with a French bank. Business partners can invest in projects of the French Development Assistance Agency.
Most of these initiatives are concerned with global health, a sector which easily attracts private funds from major philanthropic foundations.
c) International taxes
Many other proposals for innovative resources for development have been made. After the Monterrey Consensus, an official French Commission – Commission Landau – examined different international tax proposals and concluded that most of them were perfectly feasible[24]. It discussed a currency transaction tax, a windfall profit tax for multinational corporations, taxes on the trade in weapons and even a global lottery. The UN, the IMF, the OECD and the EU, academia and global civil society also started to examine the question[25]. After the Monterrey Conference, the UN has put into place a ‘High Level Dialogue on Financing for Development’, though it is only concerned with the Millennium Development Goals.
Three types of international taxes have to be looked at today.
- Ecological taxes
While many types of ecological taxes are possible at the national level, discussions on global taxes mainly concern two different types in order to achieve a significant reduction of the emission of greenhouse gases.
On the one hand, countries, like those of the European Union who work with a ‘cap and trade’ system and an Emission Trading Scheme, based on allowances which can be bought and sold, can possibly tax these allowances. The EU-ETS system will be changed in 2013 in order to progressively evolve towards an auctioning system. The possibility of taxing the allowances is not excluded.
On the other hand, there is a possibility of directly taxing the emissions in order to curb them. This system has the advantage of being less burdensome with less transaction costs. According to UNDP a similar tax of 20 $ per ton of CO2 in OECD countries would yield up to 265 billion $ a year[26].
However, it seems obvious that these revenues would also be used in the very first instance to finance the ecological costs linked to preserving the planet. According to the Copenhagen Accord of December 2009, developed countries committed themselves to raise additional funding of up to 30 billion $ a year for the period 2010-2012, and to mobilize jointly 100 billion $ a year by 2020 for mitigation efforts.[27] This money would thus not be available for other development efforts.
- Proposals of the ‘Leading Group’ and the IMF
In 2006, France, Chile, Brazil and Spain took the initiative to create a ‘Leading Group on solidarity levies to fund development’. This group now counts 63 members and changed its name into ‘Leading Group on Innovative Financing for development’. Some countries, like France and Brazil, introduced a ticket tax, this is a small levy on international airline tickets to be paid on all tickets for flights leaving from their airports. The money – around 220 million Euros a year - goes to Unitaid in order to fight Aids, malaria and tuberculosis. Unitaid is a public/private initiative founded by France, Brazil, Chile, Norway and the UK in order to support the existing efforts to achieve the MDGs, more particularly the health related goals. It is funded for up to 70 % through this tax.[28]
This ‘Leading Group’ also created a task force to study an ‘International Financial Transaction Tax for Development’. The group looked at different possibilities for solidarity levies from the viewpoint of sufficiency, market impact, feasibility, sustainability and suitability. It looked at five options, a Financial Activities Tax (FAT), VAT on financial services, an FTT, a national CTT and a global CTT. It finally opted for a global collection mechanism of CTT and rejected the FTT on grounds of the ‘geographical asymmetry’ in the revenue collection. Financial transactions are not purely international and a tax would draw on financial activity on the national level significantly. At a rate of 0,005 %, the proposed CTT would yield between 26,0 and 34,3 billion US$.[29]
The IMF was asked by the G20 in April 2009 to study the concrete possibility of taxing the financial sector, though this had nothing to do with development but with the burdens associated with government intervention to repair the banking system. From this point of view, the IMF rejects the FTT, since it is not focused on the core sources of financial instability. Interesting though is the fact that the IMF stresses that the FTT should not be dismissed on grounds of administrative practicality. Most of the G20 countries, already tax financial transactions, and the UK Stamp Duty even amounts to 0, 5 %. For the purpose of its mandate, the IMF chooses a ‘Financial Stability Contribution’ or a kind of bank tax, a levy to provision for the net fiscal cost of direct support to the financial sector, and a FAT, Financial Activity Tax, which can be compared to a kind of VAT on bank transactions. This, according to the IMF, could mitigate excessive risk-taking.[30]
- Financial Transaction Tax
The idea of a Financial Transaction Tax (FTT) is based on the old idea of the Currency Transaction Tax (CTT), an idea launched by Nobel Prize Winner James Tobin in the 1970s, in order to throw ‘sand in the wheels’ of the financial system which began to grow very fast. The CTT is a small tax on currency transactions and was meant to curb financial speculation and short term capital movements. These transactions are indeed very numerous, they involve huge amounts and yield excessively high profits. The citizen’s movement Attac (Association for the Taxation of Financial Transactions and Aid to Citizens) campaigned for several years to introduce such a tax, but only Belgium adopted a piece of legislation, mentioning though it will only come into force when other EU countries adopt a similar law.
Discussions took a new turn with the current financial and economic crisis. The objectives are very broad ranging, but it is interesting to note that the idea of global taxes has ceased to be considered as being utopian. Today, there is a real possibility of introducing them, though how and what is still very unsure. But the point is on the international agenda, even at the IMF and the G20. The objectives of the current proposals are somewhat divergent though. Some proponents want to impose the financial sector to reimburse part of the rescue money public authorities paid in 2008, others just want to use the yield to absorb the public sovereign debts and still others want to use it to for the insufficient EU budget. At the IMF, some want to use the money to strengthen the reserve systems in order to cope with possible future crises. Development is not the only objective anymore.
Even in the US Congress and several think tanks have started their research. The federal US government is against any form of international taxation, though Wall Street remains immensely unpopular in the US. Canada remains opposed, though Brazil, South Africa and Japan remain open. In Europe there is a clear commitment from the French and the German governments to pursue the goal of a FTT within the G20. The British government however seems to prefer a FAT tax. The European Parliament organized a hearing and voted on several resolutions asking for a ‘financial transaction tax’. It also adopted a report on international taxes.[31] It is unlikely that any developing nation will oppose a tax levied in the rich world on rich world transactions to help raise funds for climate change and development.[32]
A financial Transaction tax goes beyond the original proposal on a Currency Transaction Tax. It is not only meant to tax currency speculation but all transactions of financial assets such as equity, bonds, treasury bills and so on, and even derivatives and OTCs. The objective is to curb short term speculation and to stabilize financial markets. At the same time, such a tax can raise important revenues, even at the national level[33]. The volume of financial transactions in the global economy in the past decade amounted to 73,5 times the nominal world GDP[34].
Re-define[35], an NGO created by former trader Sony Kapoor, stresses that soon there will be a clearing house for all financial transactions, so there is no problem of possible tax avoidance. He also stresses that normal consumers, pension funds and deposit banks would not be victims of such a tax, since the burden falls mainly on investment banks and hedge funds, the so called ‘high frequency traders’. Pension funds and insurance firms are ‘buy-and-hold’ investors who turn their portfolio around less than once a year. Sony Kapoor also stresses the possibility of different rates for regulated banks, private capital, non financial corporations and for different transactions, in function of their harmfulness or risk-factor. This multi-tiered tax regime is also present in TUAC proposals[36]. Kapoor estimates the possible yield at something between 300 and 600 billion US$ a year.
The Global Progressive Forum made a proposal together with the Foundation for European Progressive Studies. They also propose to tax all kinds of transactions, including OTCs, at 0,05 % and estimate the yield at 515,4 billion $ at the global level and at 195,7 billion $ at the European level.
ENOFAD, the NGO-European Network on Finance and Development, proposes to leave out the OTC transactions, but proposes a tax of 0,1 % which would yield 734,8 US$ at the global level, and 321,3 billion at the European level.
The proposal of the European Parliament, adopted on March 8th[37], points to the double dividend of such a tax: it is able to curb speculation and it can improve market efficiency. This proposal estimates that with a low rate of 0,01 % and 0,05 %, there is only a very small risk of major shifts in activity toward other low taxed jurisdictions. Moreover, if there is a flow to other jurisdictions, there are no detrimental effects if these flows only concern speculation which is harmful for the economy. The European Parliament wants to tax all spot and derivatives transactions as well as OTCs. According to the report, such a tax could yield 200 billion $ at the EU level and around 650 billion $ dollars if it is introduced at the global level.
How should this money be used?
Just imagine that poor countries succeed in reforming their tax and trade systems and that they can put into place a development plan which can be financed with the revenues of global taxes!
The major question which then rises is obviously about the management and the use of this money. The risk of fragmentation is real, as well as a power struggle between financial institutions to get hold of the money. The major concern is transparency and accountability.
The UN put into place in 2005 a ‘World Solidarity Fund’, though it has never been operationalized. Whether it is this Fund, or another ad hoc fund is in fact irrelevant, as long as it is allowed to work independently and is fully accountable to rich as to poor countries. It could collect and manage the tax money and possibly add to this 0,5 % of national development budgets. This is less than the promised 0,7 %, but could be a good start for a real development fund which could easily collect between 500 and 750 billion $.
How to use the money? Certainly not in the way development funds are being spent today. For infrastructure or economic reconversion, countries can have access to the financial markets. But for global public goods, which are underprovided, such as education, health care, gender equality, water and sanitation or housing, these global funds should be available, possibly with a co-financing from the countries themselves.
Countries can use these funds according to a drawing right which can be calculated taking into account national income, population, human development indicator, poverty and inequality rates. In this way, countries know what their rights are and this allows for better planning.
Necessarily, there will be conditions. Poor countries can be asked to establish national development plans, though neither the UN nor the rich countries can tell them what they should look like. They can be assessed however in order to check their feasibility and their creditworthiness. Funds will be made available only with the achievement of the first results.
Practically, such a mechanism can be inspired by what the Global Fund against HIV/Aids is doing already. It examines all proposals with a panel of experts and projects are adopted by the board. This board has delegates from rich as well as from poor countries and from civil society. Projects can start being implemented after their adoption, though there will be a follow up by an independent monitoring system in the country itself. Locally, there will also be delegates of rich and of poor countries, as well as civil society, financial institutions and local communities. It is a way to avoid fraud and corruption.
One might wonder what national development agencies in rich countries will have to do? There certainly is enough work advising and monitoring the global development fund. As for the NGOs, they can work on awareness campaigns in the North, do research, work on alliances between social movements and lobby national governments and international organizations.
Conclusions
It has to be stressed that the idea of global taxes is far from new. It was mentioned by Nobel Prize winner and development expert Jan Tinbergen in the 1970s. What he had in mind was a kind of World Treasury and taxes on the extraction industry. Global taxes were also mentioned in the first report of the ‘Brandt’ Commission on development and cooperation in 1980[38]. Today, taxes on financial transactions already exist in around 40 countries, including the New York Stock Exchange and the City of London. They consist of very different types with different rates in countries like China, Brazil, Japan, Argentina, India, Peru, Chile, Colombia, etc. What all these cases show however is that the lower the rate and the simpler the design, the more revenue is collected[39]. There is no reason why a global FTT would have to be rejected a priori.[40]
The advantages of a global FTT are obvious.
First and foremost, if the idea of globalization is to be understood as progressing towards ‘one common world’ of states and people, instilling some solidarity into the global system is only a confirmation of our common destiny. It is concrete evidence of our universal human rights for which international cooperation is needed, as is confirmed by article 2, paragraph 1 of the International Covenant on Economic, Social and Cultural Rights. A global redistribution of incomes is only one possibility for achieving this goal. Furthermore, taxes have always been at the heart of any democracy and all ideas of accountability. To-day, globalization is not perceived as being transparent and democratic. The political dimension is scattered over many global institutions. Solidarity and redistribution can help to strengthen this political dimension as well as the belief in our common future.
Secondly, the growth of the global economy has not been matched until now with effective means to levy global taxes in order to pay for global public goods. On the contrary, globalization has led to new inequalities, new risks and new wealth, whereas global public goods remain under-provided for. According to the Leading Group, this leads to a solidarity dilemma which could undermine globalization itself. Current inequality levels are unsustainable and the huge and growing gap will have to be bridged in order to maintain stability.[41]
Thirdly, global taxes and redistribution can help to strengthen national governments who can develop their policy autonomy and become less dependent on volatile aid. With national development plans, as asked for by the UN, governments will be accountable to their citizens as well as to the global fund where the resources will be collected. A predictable flow of resources can help developmental states to plan and justify their policies.
Fourthly, the fast growing financial sector has globalized rapidly since it is particularly apt to ignore borders, but it remains largely untaxed. Even if a small levy will probably curb its growth, it can also curb short term financial speculation which is often harmful to the economy and in doing so it can reduce volatility and contribute to financial stability.
Fifthly, as becomes clear in all studies on an FTT, this is a high revenue tax and even at a minimal rate of 0,01 %, it is the only tax which is able to bridge the funding gap, estimated by the Leading Group at 324-326 US$ a year from 2012 to 2017. The FTT is the only mechanism able to provide these funds.
Sixthly, as stressed by the IMF, an FTT is technically feasible, especially when there is a central clearing system which allows for taxing automatically and immediately. The avoidance problem is totally discarded is if the FII can be introduced at the global level. If not, it remains to be seen whether a low rate of 0,01 % will really lead to delocalization. It will lead to a reduction of activities, which, according to Schulmeister can be up to 65 %[42]. Divergence on this rate, as well as the possible ‘cannibalizing’ of existing tax revenue explain the different estimates of the expected yields.
Finally, the real problem concerns the political feasibility of a global tax. Not only does it require a global agreement, but it also implies some kind of global governance and management. This will probably be the most difficult problem to solve.
A global financial transaction tax is perfectly feasible if there is a political will to introduce it. However, it should also be clear the global taxes are not sufficient to solve all remaining political, economic and financial problems. In order to achieve the expected results, an FTT will only work in a clever combination of measures, including domestic taxes, macroeconomic stability and a restructuring of the financial architecture, discarding tax havens and thus capital flight.
Today, development and development assistance are becoming controversial, in the North as well as in the South. More and more, aid is perceived as money from the poor in rich countries going to the rich in poor countries. The aid system is very fragmented, highly volatile and more predictable aid flows would be more than welcome. A global system of redistribution can bring transparent and equitable solidarity into the system, helping to improve social spending and introducing a universal social protection in the framework of global public goods. This implies a broad development strategy and a broad vision on the financing for development.
This article is based on chapter 7 of my Dutch book: ’Ontwikkeling en Solidariteit’( Development and Solidarity), published by EPO, 2010.
[1] Ziegler, J., La Haine de l’Occident, Paris, Albin Michel, 2008.
2006, http://esa.un.org/techcoop/policyNotes.asp.
[3] Easterly, W., The White Man’s Burden. Why the West’s Efforts to aid the rest have done so much ill and so little good, New York, The Penguin Press, 2006; Moyo, D., Dead Aid. Why Aid is not working and how there is another way for Africa, London, The Penguin Group, 2009.
[4] United Nations, Monterrey Consensus, International Conference on the Financing of Development, Monterrey, 18-22 March 2002, Doc. A/CONF.198/11; As for the follow-up conference in 2008: United Nations, Report of the Follow-Up International Conference on the Financing of Development to review the Implementation of the Monterrey Consensus, Doha, Qatar, 29 Nov-2 Dec 2008, Doc. A/CONF.212/L.1/Rev.1, 2008.
http://www.oecd.org/dataoecd/11/41/34428351.pdf
[6] United Nations, Retooling Global Development, World Economic and Social Survey, New York, United Nations, p. xv.
[7] Tandon, Y., En finir avec la dependence de l’aide, Genève, Cetim, 2009.
[8] Fjeldstad, O.-H. & Moore, M., ‘Tax Reform and State-Building in a Globalised World’ in Bräutigam, D. et al., Taxation and State-Building in Developing Countries, Cambridge, Cambridge University Press, 2008, p. 242.
[9] Tax Justice Network – Africa, Tax Us If You Can. Why Africa Should Stand Up for Tax Justice, January 2011.
[10] Tax Justice Network, Breaking the Curse: How Transparent taxation and Fair Taxes can Turn Africa’s Mineral Wealth into Development, www.taxjusticenetwork.org.
[11] Lieshout, P., Went, R. & Kremer, M., Less Pretention, More Ambition. Development Policy in Times of Globalization, Scientific Council for Government Policy, Amsterdam, Amsterdam University Press, 2010.
[12] Tandon, Y., 2009, op.cit., p. 79.
[13] Christian Aid, The shirts of their Backs. How Tax Policies fleece the poor, September 2005; United Nations, see note 2.
[14] Christian Aid, quoted in Keune, L., ‘Development Cooperation: A Hindrance for Self-Sustainable Development’, Tailoring Biotechnologies, Vol. 1, issue 2, winter 2005-2006.
[15] Tax Justice Network, 2011, op. cit., p. 12.
[16] Eurodad, The costs of reserves: developing countries pay the price of global financial instability, January 2010; Lieshout, P. et al., p.156 in full Dutch version; IMF, The IMF and Aid to Subsaharan Africa, Evaluation report IEO, Washington, IMF, 2007.
[17] Global Financial Integrity, Illicit Financial Flows from Developing Countries: 2002-2006, Washington, s.d.; Global Financial Integrity, Illicit Financial Flows from Africa: Hidden, Resource for Development, Washington, s.d.
[18] Tax Havens and Development, Report from the (Norwegian) Commission on Capital Flight from Developing Countries, 2009.
[19] See note 5.
http://www.imf.org/external/no/exr/fgacts/sdr.htm
[21] United Nations, Innovative Financing for Development, The I-8 Group Leading Innovative Financing for Equity (LIFE), New York, 2009.
[22] United Nations, 2009, op. cit.
[23] www.Theglobalfund.org
[24] Les nouvelles contributions financières internationales, Rapport officiel du Groupe de Travail présidé par J.-P. Landau, La Documentation Française, 2004.
[25] At the level of the UN, innovative sources of financing and global taxes are mentioned, e.g. in Keeping the Promise: united to achieve the Millennium Development Goals, General Assembly Doc. A/65/L.1 of 17 September 2010 (§ 78i), or in the Report of the Commission of Experts of the President of the UN General Assembly on the Reform of the International Monetary and Financial System, 21 September 2009 (chapter 5, § 91 and 95).
[26] UNDP, Human Development Report 2007/2008. Fighting Climate Change, New York, Palgrave Macmillan, 2007, p. 126.
[27] United Nations, UNFCCC, Copenhagen Accord, Doc. FCCC/CP/2009/L.7, 18 December 2009.
[28] www.unitaid.eu
[29] Leading Group, Globalizing Solidarity: The Case for Financial Levies, Report 2010 of the Committee of Experts to the Taskforce on International Financial Taxes and Development.
[30] IMF, A Fair and Substantial Contribution by the Financial Sector, Final Report to the G20, June 2010.
[31] European Parliament, Innovative financing at a global and European level, Resolution 2010/2105 (INI) 8 March 2011.
[32] Wahl, P., Robin Hood Tax Political Update, www.globalsocialjustice.eu, January 2011.
[33] For the US, see Baker, D. et al., The Potential Revenue from Financial Transaction Taxes, CEPR, Issue Brief, December 2009.
[34] Schulmeister, S., A General Financial YTransaction Tax: A Short Cut of the Pros, the Cons and a Proposal, WIFO, Working Papers, 344/2009.
[35] Re-define, Financial Transaction Taxes: Tools for Progressive Taxation and Improving Market Behaviour, February 2010.
[36] TUAC, OECD, The parameters of a Financial Transaction Tax and the OECD Global Public Good Resource Gap, 2010-2020, 15 february 2010.
[37] See note 31.
[38] Mentioned in Nauwelaerts, P., ‘Economie, vrede en ontwikkeling’, in Wereldbeeld. Tijdschrift voor de Verenigde Naties, jg. 33, nr 151, 2009/4, p. 39; Brandt, W., Nord-Sud. Un programme de survie, Rapport de la Commission indépendante sur les problèmes de développement, Paris, Gallimard, 1980.
[39] Health Poverty Action et al., Raising Revenue. A review of Financial TransactionTaxes throughout the world, September 2010.
[40] For an overview of also technical arguments, see Baker, D., Responses to Criticismls of Taxes on Financial Speculation, CEPR, January 2010.
[41] See Kohonen, M. & Mestrum, F., Tax Justice. Putting Global Inequality on the Agenda, London, Pluto Press, 2008.
[42] Schulmeister, S., 2009, op. cit.
