Global Policy Forum

Summary

At first glance it may appear that, by aiming to fund the extra $50 billion required to pay for the Millennium Development Goals (MDGs), the IFF is in direct competition with the Tobin Tax and in some way undermines and weakens the case for it. Closer analysis reveals the opposite is true: they are, in fact, extremely complementary, with the Tobin Tax compensating for various shortfalls in the IFF.

HM Treasury's candid acknowledgement of the serious funding gap that needs to be filled to meet the MDGs by 2015, the urgency of its efforts to make progress, and the boldness of the IFF proposal to secure such volumes of funding, are a refreshing and brave departure from the languid pace that has beset development finance in the past. Efforts to solicit support for the IFF from OECD countries has created a climate in which the wealthiest countries are obliged to concentrate on how to pay for the MDGs. HM Treasury's work in building this climate is propitious, not just to the pursuit of the IFF, but to many prospective ways of financing international development – including the Tobin Tax.

It is clear, however, that setting the bar to entry of the IFF as low as possible to maximise donor participation will only serve to perpetuate the present culture of aid. Whilst the UK has set an example by untying aid, donors that do not follow this course may use IFF disbursements to further domestic trade and industry agendas or foreign policy objectives.

It is because we are aware of these shortcomings that we can be both supportive of the IFF (whilst voicing certain criticisms) and absolutely clear of the pressing need for a substantial income stream, such as the Tobin Tax, to operate alongside the IFF, if a meaningful assault on the MDGs is to be mounted.

The target of realising the MDGs by 2015 is positive since it gives us a date on which to focus our efforts. On the other hand, it is an arbitrary date after which it would be irresponsible to suddenly cut aid flows. Having the Tobin Tax (or its like) in place will, therefore, provide a complementary financing mechanism to work alongside the IFF until 2015, which can shoulder the aid burden when the IFF moves into its pay-back phase after 2015.

This paper recommends that the Tobin Tax Network support the IFF whilst emphasising:

• the need for grants not loans
• concern over conditions of entry for participating countries
• the critical importance of donor coordination to maximise the achievement of the MDGs across countries and goals

Background

At the 2002 G8 summit in Kananaskis, Canada, a significant pledge for global development was made in the text of the Action Plan for Africa: "No country genuinely committed to poverty reduction, good governance and economic reform will be denied the chance to achieve the Millennium Development Goals through lack of finance."

It is clear that the MDGs cannot be achieved with present levels of funding: an estimated $50 billion more is needed each year. In recent papers on the IFF the Treasury stated that: "Without urgent action, we will fail to meet the MDGs by 2015." It also stated that "proposals for new and innovative ways to meet this funding gap include global taxes, special drawing rights and the Tobin Tax. The UK approaches further evaluation of all these options with an open mind."

However, HM Treasury's preferred option to finance the implementation of the MDGs is the IFF, which aims to raise an extra $50 billion each year up until 2015.

The Treasury's vigorous efforts to secure the IFF were rewarded at the 2003 G8 Summit in Evian when the concluding statement explicitly requested finance ministers "to report back to us in September [2003] on financing instruments, including the proposal for a new International Finance Facility".

The IFF mechanism

By issuing 'long term bonds' on the international capital markets, the IFF will be able to borrow funds backed by guarantees of donor countries against their long-term national aid commitments. This will significantly increase aid flows between now and 2015, and create a binding commitment from donors to provide additional resources towards meeting the MDGs. This 'front-loading' of aid in the short term reflects both a commitment to, and a method of, achieving the substantial increases in resources required to meet the MDGs. The initiative is a marked shift from the unpredictable process of increasing aid budgets, which are contingent on domestic priorities. Recipient countries will be reassured that aid flows will be stable and predictable until 2015. However, donor countries will then repay the borrowed money out of their aid budgets, which may lead to a significant fall in aid levels after 2015.

The funds raised will be issued in the form of grants and/or concessional loans, and be conditional on recipient countries "following good governance and implementing sound policies". The IFF is intended to build on existing agreements between developed and developing countries, with each country:

• pursuing sound, transparent and corruption-free policies
• committing to the Doha development agenda – a sequenced opening up of markets to global trade
• establishing the conditions required to raise private investment levels
• improving aid effectiveness by agreeing on clear plans for building education, health and economic capacity, with higher levels of development assistance

The funds will be distributed through existing bilateral and multilateral mechanisms, and would reflect donors' preferred recipient countries and delivery channels.

Advantages of the IFF

The IFF has the advantage of being founded on long-term commitments which will improve the predictability of aid flows, and aims to supply aid in sufficient volume and at the most critical time to meet the MDGs by 2015. This concentration of aid over the next 10-12 years would constitute an unparalleled investment in development with benefits that will accrue over time as infrastructure is put into place in the poorest countries.

Concerns over the IFF's effectiveness in meeting the MDGs

1) Grants or loans

A major concern is whether IFF aid flows will take the form of grants or loans. If the IFF delivers funds in the form of loans, there is a risk of increasing the debt burden of developing countries after 2015. This is especially concerning in the case of low income countries, particularly those that are or have been highly-indebted poor countries. Since this could be extremely counterproductive, it is desirable that all IFF aid be delivered in the form of grants in the same way as Tobin Tax funding is envisaged to operate. However, for reasons of maximising donor participation, prescriptive ground rules such as 100% grants and all aid being untied are not requirements of the IFF proposal.

2) Conditions of entry

A basic condition of the IFF is that no country in arrears with the IMF can receive funding. The reasons for arrears by some of these countries may be bad governance. However, should people living in so-called 'bad policy' countries be deprived of aid and effectively discriminated against because of the nature of their governments? It is arguable that people living in these circumstances are often most in need of aid.

This paper contends that IFF funds should be diverted on the basis of need, and the likelihood that such aid would contribute to meeting the MDGs. In order to address delivery of aid in the case of  'bad policy' governments, we propose a parallel condition that allows the IFF to specifically fund development work through local civil society groups instead of government.

The IFF proposal suggests that countries will be selected as aid recipients based on factors such as their willingness to open up their markets to investment and global trade. However, economists disagree about the extent to which trade liberalisation increases growth and reduces poverty. It is likely that efforts to build up productive capacity before liberalisation will be key. Many analysts consider the one-size-fits-all approach to be flawed, and that rapid and insensitive liberalisation has led to large numbers of people becoming more vulnerable and prone to poverty. Making IFF money contingent on opening markets means that it will be harder to put those complementary policies in place first, and may preclude the participation of some countries who are in urgent need of aid.

There is a certain lack of clarity surrounding eligibility for IFF funding among the world's poorest countries, which may suffer from poor governance, corruption and conflict. It seems that these countries, which have the most vulnerable populations, will be the most likely candidates for exclusion. However, this is a problem related not only to the IFF, but to all concessional flows, including World Bank loans, aid and debt relief.

Funding from Tobin Tax revenues is likely to be negotiated within the UN with input from industrialised countries, so conditions of disbursement of funds to 'bad policy' countries may be similar. However, it seems clear that, since the IFF and the Tobin Tax will in many instances have differing criteria, some countries and programmes excluded from IFF funding would be eligible for financing by the Tobin Tax.

It is because some countries and programmes will be excluded from IFF funding by certain conditions of entry, and because IFF donors are likely to continue with the present culture of aid, funding countries through conditional aid arrangements, that there is a compelling case for another funding stream such as the Tobin Tax to complement the IFF. Indeed, with the exclusion of some countries and programmes in this way, it is hard to conceive of how the MDGs can be met, if an alternative, powerful, source of development finance, such as the Tobin Tax, does not exist.

3) Post 2015

After 2015 there will clearly still be a need for aid. Since, by the logic of the IFF scheme, aid flows are likely to fall after 2015, it is necessary that alternative funding channels are on stream in parallel with the IFF.

The Goldman Sachs Report on the IFF states that after 2015: "there is no upfront commitment to participate in subsequent programmes". As the IFF's bond repayment phase begins, recipient countries could be starved of further aid. The Tobin Tax, by contrast, would provide funds indefinitely (as long as currency markets operate).

Due to the short-term nature of the IFF, it is important that the Treasury takes responsibility for what will happen after 2015. Securing a powerful income stream, such as the Tobin Tax, alongside the IFF is therefore necessary in order to sustain the impetus of the quantity of development work the IFF aspires to create.

4) The need for financial stability to prevent the MDGs being undermined

If the MDGs are to be met, there is a need to address the way the world economy operates, to protect vulnerable countries and safeguard aid flows. What would be the point of the IFF raising huge sums if economies of recipient countries are prone to speculative attack, such as devastated the 'Asian Tigers' in the late 1990s? Without frameworks in place to minimise financial shocks, most of the benefits of aid can be wiped out in a short period of time.

The circuit-breaker component of the two-tier Tobin Tax would contribute significantly to financial stability by deterring, indeed making unprofitable, the most damaging practice of collective actions by powerful financial actors to drain the foreign exchange reserves of poor countries.

5) Is $50 billion extra per year up to 2015 enough?

The World Bank is currently preparing a paper for its annual meetings that aims to set out more detailed assessments of the costs of delivering the MDGs. The paper is likely to call for at least a doubling of current aid levels. Many Tobin Tax Network members feel that even this will be insufficient*. Far more realistic calculations of the actual costs – goal by goal and country by country – are still required.

Since the possibility exists that $50 billion extra per year will not be sufficient, it would be expedient that other sources of development finance, such as the Tobin Tax, be seriously considered as accompanying income streams.

6) Dangers of the lack of donor coordination and the perpetuation of the current aid culture

To deliver such a complex set of development objectives such as the MDGs by 2015 will require a high degree of coordination between donor countries. The Treasury insists that the IFF is merely a funding mechanism and makes no claims to disbursement responsibilities. As yet there seems no plan for IFF donors to operate in a joined-up way.

However, without coordination, delivery of the MDGs is bound to be a hit-and-miss process. Donors are likely to provide funding on the basis of preference rather than need. There is also a clear risk that aid would flow to countries most likely to succeed in achieving the MDGs, whilst other, more needy cases are neglected. Unless this is addressed it is likely to result in considerably unbalanced outcomes, leaving large swathes of the poorest populations no better off.

Yet perhaps the greatest danger of relying solely on the IFF is that, with no intention of altering the present aid culture, ineffective and inefficient aid practice could simply be multiplied by the considerable increase of funds and will not result in the achievement of the MDGs as planned.

By contrast, work with the NGO community to create the criteria for disbursement of Tobin Tax funds specifically addresses these problems and looks to learn how to maximise aid efficiency from past experience and best expertise. Tobin Tax funding, in contrast with the IFF, is intended to be disbursed through an international body with a global, rather than a national perspective, and the overarching purpose of eliminating poverty and meeting basic human needs.

Concerns over the political will of prospective donors to participate

The biggest hurdle the Treasury faces in the realisation of the IFF is securing the involvement of those countries that can afford to be donors. Furthermore, there is an urgent time consideration: the IFF needs to be operational as soon as possible, because every day delayed is a day lost in the timeline towards 2015.

Of the G8 countries, France is the only one to have displayed definite support for the IFF to date. Germany faces serious economic difficulties and is hostile to the idea of increasing its borrowing commitments. For various reasons Japan, Canada, Italy and the US are not yet prepared to sign up. Clearly, the US is pivotal in this situation, because many countries would follow their lead, yet they seem reluctant to acknowledge the entire concept of the MDGs.

Many northern European countries have reached 0.7% of GNP for international development aid, as well as pursuing debt relief, and appear reluctant to commit any more funds through joining the IFF to cover what they see as the G8's failure to provide adequate aid in the past.

However, there is some room for optimism, since the concluding statement from the Evian G8 summit explicitly requests finance ministers to report on the IFF proposal at the next IMF/World Bank meetings in September 2003.

Conclusion

It seems clear that conditions of entry may exclude some countries from the IFF. It also seems clear that a number of important donor countries may not sign up to the IFF, affecting the volume of revenue that it will actually raise. The Tobin Tax is therefore as timely as ever because:

• it could fund areas that the IFF ultimately would not
• the IFF may not raise the entire $50 billion as planned
• it is vital that development financing of this magnitude does not cease after 2015

It is important that the Tobin Tax Network support HM Treasury in its efforts to secure the IFF. However, it is equally important that this support is met with the acknowledgement that alone the IFF is unlikely to achieve the MDGs and that another powerful income stream such as the Tobin Tax is a necessary, rather than an optional, accompanying initiative. The Tobin Tax Network strongly contends, therefore, that the Tobin Tax and the IFF are complementary sources of substantial finance for the achievement of the Millennium Development Goals.