SOCIAL WATCH INDICATORS - BOOKLET 2001

NORTH-SOUTH CO-OPERATION AT A CROSSROADS:
HIGH-LEVEL EVENT ON FINANCING FOR DEVELOPMENT IN 2002

Jens Martens 1

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:

mobilisation of domestic resources

international resources: foreign investments and other private capital-flows

trade

international development co-operation, including official development assistance (ODA)

debt

coherence and consistency in the international monetary, financial, and trading system as a means of supporting development.

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
jens.martens@weedbonn.org

Notes
1. Jens Martens is a member of the Executive Board of the World Economy, Ecology & Development Association (WEED), Germany. This article is based on his background paper “The Future of Financing for Development” (May 2000) and “Overcoming the Crisis of ODA - the Case for a Global Development Partnership Agreement”, Martens’ statement to the civil society hearings at the United Nations on 7 November 2000.

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.