Global Policy Forum

Can the Financing Gap Be Closed?


By Jullyette Ukabiala

Africa Recovery
December, 2001
As aid from rich countries slides further, a UN independent panel on development financing recently proposed new ways of raising more funds to rescue millions of people from poverty -- most of them in sub-Saharan Africa. In 1999, donor countries gave just $12 bn to the region as official development assistance (ODA), $6 bn less than they gave in 1995. Such aid, even at its peak, fell far short of the continent's needs.

The panel, chaired by former Mexican President Ernesto Zedillo, was set up by UN Secretary-General Kofi Annan to identify innovative methods for raising the estimated $50 bn needed yearly to implement the UN's commitments to poverty reduction and sustainable growth in developing countries. Its recommendations will be considered by the UN conference on financing for development, to be held in Monterrey, Mexico, in March 2002.

Among the proposals are taxes on the consumption of fossil fuels and on international currency transactions. The panel urges new ways to boost aid and investment flows to poor countries, and to assist countries raise funds from within their own economies through better political and economic management, including by improving their ability to collect domestic taxes. Such efforts would be supported by the establishment of an international tax organization and the holding of a summit that would address problems arising from globalization, the panel stated.

Members agreed that reversing the widening and "shameful" gap between rich and poor countries "is the pre-eminent moral and humanitarian challenge of our age." And sub-Saharan Africa, they noted, should be a priority. "Nowhere is a global commitment to poverty reduction needed more than in this region. Sub-Saharan Africa has the largest proportion of people living on less than one dollar a day, and indeed, its people are almost as poor as they were 20 years ago."

A currency tax

Combating poverty, the panel argued, requires the provision of vital services which strengthen social and political stability, such as peacekeeping, healthcare facilities and programmes for environmental protection -- described collectively as "global public goods." To secure the enormous amount of money needed yearly for that, it said a global system of taxation is necessary, either through a currency transaction tax or a tax on the consumption of fossil fuels.

A currency transaction tax, also known as a "Tobin tax" -- named after Yale University economist James Tobin, who first proposed it -- would have individual countries collect a "small tax" of between 0.1 and 0.5 per cent on all foreign exchange transactions in their national currencies anywhere in the world. With the total value of such transactions currently put at $1,600 bn a day, up to $400 bn yearly would be raised at a minimum tax rate of 0.1 per cent. Each country would keep part of the revenue collected and release the remainder to international agencies funding global public goods.

The panel noted that such a tax could have a side benefit of helping to curb potentially damaging speculative buying and selling of currencies -- aimed at making profit later when prices change. Such "gambling" was in part blamed for the devastating capital outflows that plunged Southeast Asian countries into economic crisis in 1997-98.

The Tobin tax has been criticized on the grounds that it could be evaded, might not actually yield the expected benefits and could unwittingly hurt global economic growth by discouraging financial transactions of all kinds. However, several major industrial nations have voiced support for the tax, which is also backed by a growing coalition of non-governmental organizations (NGOs). The panel decided that "further rigorous technical study is needed" before any conclusions could be reached on its feasibility. Ms. Robin Round, policy analyst for the Halifax Initiative -- one of the NGOs promoting the tax -- told Africa Recovery that the call for further study "gives us an important opening to educate more people about the promises of a Tobin tax and to keep pushing for the consensus necessary to adopt it."

Taxing fuel consumption

The Zedillo panel also proposed a tax on the consumption of fossil fuels. Support for such a "carbon tax" has been growing since the 1992 UN Earth Summit focused international attention on the damage to the environment caused by excessive use of fossil fuels worldwide. The release of greenhouse gases, mainly carbon dioxide from fossil fuels, contributes to global warming and climate change.

The main energy sources that would be affected by a carbon tax include coal, petroleum, kerosene and natural gas. The tax would be reflected in an increase in their price, at a level based on the capacity of each type of fuel to emit carbon dioxide. The higher the carbon content, the higher the minimum tax rate. The tax would likely be collected by fuel vendors. Implementation would not be difficult since many countries already impose taxes on fossil fuels. An additional carbon tax, the panel hoped, should encourage consumers to shift to lower or non carbon-emitting sources of energy, such as hydro-power, solar energy and wind power.

The panel gave no estimates of how much a carbon tax could generate. Industrial countries would agree to release their carbon tax revenue to international organizations funding global public goods. Developing countries would invest their proceeds in their own economies, enabling them to increase public spending.

African states, like most other countries, are heavily dependent on fossil fuels for transport and industrial activities in both urban and rural areas. A carbon tax, which would make fuel more expensive for many families, would therefore also reduce the amount of money available for food and other basic necessities. Public demonstrations in countries like Nigeria and Zimbabwe following fuel price increases also indicate that a carbon tax could aggravate social discontent and political instability.

Would such a tax be good or bad for poor African countries? Good, says Ms. Emira Woods, programme manager for development policy issues at InterAction, a US-based coalition of over 165 NGOs, many of which are involved in development and humanitarian activities in Africa. Besides helping to clean up the environment, it would provide them with more development funding, she notes. Similarly, the deputy director of the regional bureau for Africa of the UN Development Programme (UNDP), Mr. Jacques Loup, told Africa Recovery that a carbon tax in rich countries would help "boost the international resource base for aid to Africa." However, Mr. Geoffrey Mwau, an economic and social policy adviser at the UN Economic Commission for Africa (ECA), cautions that the benefits would be lost if the tax collected from rich countries is treated as a "substitute" for ODA.

An international tax organization

With increasing cross-border movement of goods, services and capital in the world today, states are less able to collect taxes from multinational corporations, the panel observed, bringing substantial losses in potential revenue. Pointing out that taxes have become a potential source of conflicts among states, it noted that "the taxes that one country can impose are often constrained by the tax rates of others." The lack of precise and established regulations for taxing the income of multinational corporations makes it difficult to determine which country is entitled to which tax. All that exists are "complex and in some respects arbitrary conventions," the panel said.

Several international and governmental organizations already deal with international tax issues, including a UN group of experts on international cooperation in tax matters. The panel said a new international tax organization should be created to assume all functions performed by existing institutions. It would serve as a global intergovernmental forum for international cooperation on all tax issues. It would also help resolve conflicts between countries and help them to increase tax revenue by fostering information exchanges and measures that could reduce tax evasion on investment and personal income earned at home and abroad. Funds raised could be used to increase spending on public services.

The capacity of many African states to generate income on their own is often hindered by inefficient tax collection. Mr. Loup of UNDP believes the proposed international tax organization could help African governments reform their tax policies, but it should not interfere with their authority to design their own tax systems. The real problem with the tax policies of African states has more to do with corruption, Mr. Mwau of ECA believes. Most Africans are poor and the small number of the rich from whom substantial taxes could be collected "are able to avoid taxes through corruption." For as long as that remains the case, he argues, tax reforms alone would not help Africa.

Globalizing decision-making

Existing international bodies, "largely designed for the world of fifty years ago," are no longer equipped to address problems arising from the growing interdependence of nations, the panel stated. There are no satisfactory means of dealing with global economic "shocks" and no effective way to ensure that all voices are heard. "Global economic decision-making has become increasingly concentrated in a few countries."

The panel called for the creation of a global council to lead the international community "at the highest level" in managing today's global issues. The council would be more broadly based than the Group of Seven industrialized countries or international financial institutions such as the World Bank and International Monetary Fund. Its decisions would not be legally binding, but it should have the political clout to promote development, encourage major international economic organizations to improve their policies and build consensus for resolving global economic and social problems. The panel recommended that the UN convene after next year's Mexico conference, a "globalization summit" of heads of state to decide on the shape and status of such a global council.

African leaders and advocacy groups have been complaining about the continent's increasing marginalization and impoverishment as a result of globalization and are not sure how the proposed global council and summit could benefit them. They "would be worthwhile," Mr. Loup said, so long as they devote adequate attention to issues that seriously affect Africa -- crippling debt, aid flows, information and communication technology, market access and the environment. Mr. Lamin Manneh, UNDP's strategic and regional programme adviser for Africa, said more needs to be known about how a global council would help resolve "the problems we face today." A special forum or channel, he argued, should be created to enable African countries to express their concerns forcefully within the new institutions. The "big problem" is that the council would not have binding legal authority, says Ms. Woods, who nevertheless remains optimistic about the potential benefits of a global council to African states.

The ECA's Mr. Mwau notes that "attempts to deal with global issues through the existing mechanisms have failed not just because the institutional arrangements for dealing with them are inadequate, but more fundamentally because there is no political will." The creation of a new global council by itself would not help unless the international community commits to enforcing the council's decisions. African states, he argues, would benefit only if they are not excluded from making those decisions.



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