2001
North-South Co-Operation at a Crossroads: High-Level Event on Financing for Development In 2002
Jens Martens
WEED
In
March 2002, for the first time in its history, the United Nations will hold a
global conference on Financing for Development. Themes will range from the
future role of public and private capital-flows to institutional reforms in the
international financial system. The United Nations will thus be moving into
terrain previously dominated by the Bretton Woods Institutions (World Bank and
International Monetary Fund) and the World Trade Organisation (WTO). The
following six topic-areas have emerged as preliminary items for the conference
agenda:
The
event and the process leading to it could be of high political relevance. For
the first time, hard economic and financial questions will be at the centre of a
UN conference. With last year’s financial crisis and the growing legitimacy
deficit of the neo-liberal paradigm as background, the conference offers an
opportunity to discuss central aspects of North-South co-operation and the
re-regulation of the global financial system in the only intergovernmental forum
with universal membership and broad civil society participation.
It
is not clear whether this conference will offer a way out of the impasse that
North-South negotiations reached almost automatically in past years whenever
they took up questions of financing. If the governments settle for business
as usual, the conference is
doomed to failure from the start. However, if governments –particularly those
of the rich Northern countries– agree on concrete institutional reforms in the
international financial system and a significant increase of resources for the
fight against poverty and the promotion of sustainable development, then the
conference could become a success.
Development
financing in crisis
Issues
of development financing have formed the central plank of the North-South debate
since the 1960s. Development financing is an important yardstick of development
policy, for unlike the rhetoric of development strategies and international
action programmes, the provision of financial resources unambiguously reflects
the political priorities of governments and parliaments. This applies equally to
domestic budget allocations and international financial transfers.
If
the level of official development assistance (ODA) is taken as an indicator,
then development policy is in danger. While the need for resources, for example
to combat poverty, for humanitarian aid and for global environmental protection
is globally rising, official funding for these purposes has been falling for
years, with no upturn in the trend in sight. It is no exaggeration to say that
financing for development is in serious crisis. ODA contributions by all OECD
countries fell from a high of USD59.6 billion in 1994 to an estimated USD56.0
billion in 1999, and ODA’s share of GNP fell accordingly from 0.30% to 0.24%.2
Since private net capital flows rose significantly in the same period, ODA’s
share of overall resource flows from North to South fell from over 40% in the
early 1990s to about 20% at the end of the decade. This trend also marks a
remarkable shift in importance from official to private capital flows.
The
financial crises of recent years in South-East Asia, Russia and Latin America
have further exacerbated the situation. The burgeoning Asian economies have now
become the very victims of globalisation. National income in Indonesia,
Malaysia, the Philippines and Thailand dropped as a result of the crisis.
Unemployment and poverty have increased, and other social indicators have
likewise declined. Calls for improved capital controls and the
“re-regulation” of the financial markets have been growing ever more
insistent since then.
The
political reactions to these crises and to the persistent lack of development
resources have been completely inadequate. Now, instead of continuing their
half-hearted attempts to muddle through, governments should use the Financing
for Development (FfD) event to subject all aspects of development financing to a
thoroughgoing review. The following considerations and proposals should be
explored during the FfD process. This list does not cover the whole spectrum of
issues, but highlights a few fundamental aspects of future North-South
relations.
A
Global Development Partnership Agreement
The
notion of ‘development aid’ was always a misleading euphemism, which reduced
the co-operation between sovereign states to charitable or even paternalistic
relations between donors and recipients. The Financing for Development event
could pave the way toward a more balanced relationship between North and South
on the intergovernmental level. To overcome at least partly the traditional
dependency relationship between ‘donors’ and ‘recipients’, new forms of
contractual relations between all countries should be established under the
auspices of the United Nations. What is required is a new «contrat
social», a new
social contract between North and South that lays down the rights and
obligations of states and guarantees a reliable and sufficient flow of resources
to the poorer countries.
This
objective could be met by a Global
Development Partnership Agreement,
based on existing legal documents such as the International Covenant on
Economic, Social and Cultural Rights. The contractual relationship between the
European Union (EU) and the Africa, the Caribbean and the Pacific countries
(ACP) under the new Cotonou Agreement could indicate –despite some
shortcomings– the direction North-South co-operation could take in the future.
The proposal for a binding
Anti-Poverty-Convention, discussed in Geneva at the Special Session of the
UN General Assembly on Social Development (Copenhagen + 5) in June 2000, follows
the same reasoning. The basic idea is to link internationally agreed development
targets to binding commitments by the rich countries to provide the necessary
resources to reach these targets.
A
reliable resource transfer from rich to poor countries
Increased
reliability of official resource pledges would ease long-term development
planning in the countries of the South. A new binding development agreement
should contain as a core element new modalities to guarantee a predictable and
sufficient transfer of resources at a level to be determined with reference to
clearly defined development indicators. This new mechanism could replace –in
part– the current system of discretionary spending. Keith Griffin and Terry
McKinley outline some thought-provoking considerations on this idea in a study
published by UNDP’s Office of Development Studies (ODS). Both authors 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 in
line with a fixed formula. Their appeal is unambiguous:
“In
creating a new framework for development co-operation, the objective should be
to abandon the present system, where aid contributions are voluntary, the aid
burden is distributed randomly and inequitably, and the aid flows are
unpredictable because they are subject to annual appropriations by national
parliaments. The world should move instead to a system where contributions to
the aid effort are obligatory, the burden is distributed progressively, and the
annual flows are predictable. The idea of a progressive international income tax
to finance foreign aid is not new, and if development aid is to have a future
and be more than marginal in size, the idea should be taken seriously.”
3
At
first glance this proposal may seem utopian. But there are already precedents of
such institutionalised solidarity on national and regional levels. In Germany,
for instance, under the concept of financial adjustment among the federal states
–the so-called “state financing offset”– billions of dollars are
transferred from the economically stronger to the weaker regions each year. The
EU, to name another example, has the instrument of Structural Funds to support
the poorer regions and weaker economic sectors within the Union. By these means,
from 2000 to 2006, an estimated EUR195 billion (about USD24 billion per year)
will flow from the richer to the poorer sectors and regions of the EU.
A
need-based target for ODA
In
addition to the proposed qualitative changes in North-South relations, there is
also the need to rethink the quantitative target of ODA. So far, the GNP of the
‘donor countries’ has served as the assessment criterion for the level of
official development assistance. Since the adoption of the “Strategy for the
Second Development Decade” by the UN General Assembly in 1970, the 0.7% target
for the ODA/GNP ratio has been at the centre of development negotiations. It is
still an important political criterion, as it highlights the (widening) gap
between donor commitments and the resources they actually provide –in other
words, the gap between the rhetoric and the reality of aid. Nevertheless, there
is no conclusive justification for setting exactly 0.7% as the reference value
or using GNP as the only basis for assessment. Questioning the 0.7%-target may
be tantamount to breaking a taboo, but it is time to rethink this issue.
The
0.7% target reflects the supply side of ODA, but we should equally think about
other indicators focusing on the demand side. The scale of ODA should depend
upon the real needs of the recipient countries. Quantifying these needs is
undoubtedly complicated, although for certain specific areas such as world-wide
provision of basic social services, estimated costs already exist.
4 This new
need-oriented assessment of North-South transfers, however, must not be regarded
as an attempt to justify a further decline of ODA flows. On the contrary, the
financing volume may be substantially higher than specified under the current
0.7% target.
No
development “on credit”
Excessive
foreign indebtedness continues to be a serious obstacle to development for many
countries in the South. Instead of being spent for education, healthcare and
social services, state income is used to service debts to public and private
creditors in the North. Capital recovery from the South in the form of debt
service payments stood at USD349.4 billion in 1999, a new all-time high. This
was more than five times the total ODA in that year.5
A
large of current development assistance is provided in form of concessional
loans. Even under favourable conditions (for instance low interest rates and
long grace periods) this “aid” has to be paid back sooner or later. This
amounts to “solidarity on credit”. Any increase in this kind of development
assistance automatically leads to an increase in the foreign debt of the
recipient countries. Especially with regard to activities and programmes that
deliver neither sufficient yield nor enough foreign currency, this raises the
general question of whether ODA should, in the future, be made available in the
form of repayable loans at all. This is particularly true for basic social
services but also for environmental measures, capacity building, and support for
non-export-oriented agricultural production.
In
all these cases, loan-based development assistance exacerbates the debt
situation of the recipient countries and, in the long run, will increase the
transfer of resources from poor to rich countries. Therefore, official resources
should increasingly be made available in the form of non-repayable grants.
However, this argument should not be used as a pretext for further reductions in
bilateral and multilateral transfers to the South and lead to increased recourse
to private donors. For it was precisely short-term loans from foreign commercial
banks and growing indebtedness via foreign bonds in the second half of the 1990s
that aggravated the debt crises in Asia and Latin America.
In
order to avoid such crisis situations in the future and to achieve a lasting
solution to the debt crisis, the following demands should be supported:
-
the
comprehensive transformation of loan-financed development co-operation into
grant financing, to prevent a new crisis of indebtedness after debt
reduction;
-
a
quantitative extension of debt cancellation measures, including complete
waiving of the debt for the highly indebted poor countries (HIPCs).
Furthermore, creditors must acknowledge that narrowing the debt debate to
the 41 HIPCs has contributed to the problem, not the solution, of the
international debt crisis. Therefore, substantive steps toward the
cancellation of bilateral and multilateral debts of all Non-HIPCs are
necessary;
-
the
introduction of additional social, economic and ecological indicators as
criteria for debt sustainability;
-
the
increased liability of private investors in the event of a financial crisis
(‘bail in’) in order to avoid the socialisation of private losses in the
future;
-
the
development of an international insolvency law, including a fair and
transparent process of arbitration;
-
institutional
reforms in the donor dominated international debt regime (the Paris Club,
etc.) to increase transparency for the public and to guarantee equal
participation of debtor countries.
New
instruments for financing global public goods
A
portion of official development resources is used, not for specific national
development requirements of countries of the South, but for financing global
public goods such as protection of the ozone layer, warding off global financial
crises, and promotion of international security. For this reason, it has been
suggested that in addition to the traditional forms of ODA, which should be
renamed as ODA (C = country), a new budget item called ODA (G = global) should
be introduced for the financing of global public goods.6
The (additional) resources for ODA (G) could be raised through new global
financing mechanisms. Among the most important proposals currently under
discussion are:
-
a
tax on international currency transactions (CTT, e.g.,
the so-called Tobin tax);
-
taxes
and charges for the use of global public goods, such as an international sea
transport tax for the use of the world’s seas and a kerosene tax in
aviation;
-
an
international CO2/energy tax.
All
these proposals have a normative as well as a money-raising function. The Tobin
tax is supposed to curb the volume of speculative currency transactions and
thereby increase stability on the financial markets. International transport
taxes should reduce traffic and its environmentally damaging effects by better
reflecting the ecological costs of shipping and aviation in the prices. An
international energy tax should cut the use of fossil fuels and thus the
emission of gases that adversely affect the climate.
The
amount of potential revenue from international taxes is hard to estimate, for if
the normative objectives of the various taxes are successful, then tax revenues
will diminish. The greatest financing potential probably lies in the tax on
currency transactions. Rough estimates assume that even with an extremely low
tax rate (between 0.01% and 0.25%), annual world-wide revenues of USD50–450
billion could be achieved.
Though
technically feasible, the various proposals for such taxes have failed to find
political acceptance. The USA, in particular, has vehemently attacked any form
of internationally agreed taxation, and in recent years has even succeeded in
blocking discussion about it at the UN level. Groups and NGOs in many countries
have recognised this key obstacle and are trying, via campaigns, to increase the
political acceptance of international taxes.
To
encourage the debate at the intergovernmental level, NGOs suggested at the
“Copenhagen + 5” Special Session of the UN General Assembly that as a first
step, a feasibility study on a CTT should be commissioned at UN level. This
demand remains highly relevant in the FfD process.
Reform
of the international financial system
The
debate on financing for development should not concentrate only on the
mobilisation of additional resources. The central question in recent times is:
“Which international institutions should be making decisions about appropriate
financing instruments, quantity and quality of the financial flows, and policy
framework conditions?” On the one hand, we already have a tightly woven
network of international bodies and organisations handling finance and
development issues. On the other hand, the international financial system lacks
accountable, transparent, democratically controlled decision-making bodies.
In
order to overcome the deficiencies in the international financial system and the
structural causes of the recent crises, there is a pressing need for greater
transparency in financial transactions and better bank supervision at the
national level, but these are not the only conditions needed. Other important
elements in the reform discussion would be the following:
-
stronger
democratic control of the international financial institutions and their
consistent transparency vis-à-vis
civil society organisations;
-
equal
representation of all countries in the decision-making bodies of the
international financial institutions;
-
transfer
of decision-making power over economic and finance policies away from closed
clubs with a limited membership (G-7, Paris Club) toward bodies with
universal membership and egalitarian decision-making procedures. In a
genuinely multilateral and participatory system of global development
finance, the United Nations (and not the World Bank or the Development
Assistance Committee of the OECD) have to be the main body for
decision-making and policy co-ordination;
-
and
-equally important- the ultimate rejection by the international economic and
financial institutions of the neoliberal model of the “Washington
consensus” and the consistent shift of their policy toward the primacy of
sustainable, i.e.,
environmentally sound and socially just development.
In
their Millennium Declaration, the Heads of State and Government reaffirmed that solidarity
has to be one of the fundamental values that are essential for international
relations in the twenty-first century. They stated:
“Global
challenges must be managed in a way that distributes the costs and burdens
fairly in accordance with basic principles of equity and social justice. Those
who suffer or who benefit least deserve help from those who benefit most.”
7
If
this important commitment is to be more than pure lip service, it has to be
translated into concrete political action. The Financing for Development
Conference offers the historic opportunity to meet this challenge by moving
beyond the “agreed language” of the past and taking credible steps toward a
new North-South solidarity.
NGOs
can contribute to the dynamic of the negotiating process – as they did in the
world conferences of the 1990s. The outcome of the conference will also depend
upon their actions and the pressure that they exercise on their governments.
Experience from Social Watch, the Multilateral Agreement on Investment (MAI)
Campaign, the international ATTAC (Association pour une Taxation des
Transactions Financières pour l’Aide aux Citoyens) movement, the protests at
the WTO ministerial meeting in Seattle, and also the world-wide resonance of the
Jubilee 2000 Campaign, shows the potential in many countries to increase
pressure on governments for political reform. The Financing for Development
process could evolve into a new common strategic field of action for these
movements.
WEED
Notes
2.
OECD/DAC: 1999 Development
Co-operation Report, Paris 2000; and OECD/DAC: Press
Statement by the DAC Chairman, 12 May 2000.
3. Keith Griffin/Terry McKinley: New
Approaches to Development Co-operation. New York: UNDP 1996 (ODS Discussion
Paper Series No. 7), p. 16.
4. See for example: UNICEF et al.: Implementing
the 20/20 Initiative. Achieving universal access to basic social services.
New York, September 1998. This study estimates the additional minimum costs to
achieve universal access to health, water and sanitation, and primary education
to be USD70-80 billion per year.
5.
Cf. World Bank, Global Development
Finance 2000, Country and summary data, p. 32.
6. Cf. Inge Kaul/Isabelle Grunberg/Marc A. Stern. Global
Public Goods. International Co-operation in the 21st
Century. Oxford/New York 1999, p. 495.
7. UN Doc. A/RES/55/2, para. 6.
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