New Sources of Development Finance

Front matter

NEW SOURCES OF DEVELOPMENT FINANCE

UNU WORLD INSTITUTE FOR DEVELOPMENT ECONOMICS RESEARCH (UNU-WIDER)

was established by the United Nations University as its first

Preface

Two powerful and divergent forces grip the world at present. On the one hand, the effectiveness of international organizations has been called into question. The role and functioning of the UN are debated. Some nations exhibit frustration with multilateral cooperation, resorting to unilateral action. Solutions are sought in regional groupings rather than in worldwide coordination. On the other hand, the recognition is being cemented that a global economy requires global institutions. International organizations are viewed by many as the key to the free movement of goods, services, and capital. We have seen the adoption of ambitious development targets in the form of the Millennium Development Goals (MDGs). Donor countries have pledged increases in official development assistance.

The tension between these two forces pervades discussion of resources for world development. On the one hand, there is talk of ‘donor fatigue’, and official development assistance (ODA) has stood still for many years. The amendment to the IMF’s Articles approved by the board of governors in 1997 allowing a special allocation of Special Drawing Rights (SDRs) remains unratified. Proposals for any form of global taxation meet immediate opposition from powerful elements in the US Congress. On the other hand, there is widespread appreciation of the need for new resource flows to allow the MDGs to be achieved. There are interesting proposals for new sources of revenue such as a global lottery or the International Finance Facility (IFF). Individuals continue to support development charities. US billionaires are personally funding development and world health activities.

The direction taken at this juncture will depend largely on political events and political decisions. But sober economic analysis has an important role to play. This book reports the work of a project on ‘Innovative Sources of Development Finance’ undertaken at the request of the UN. As a result of the Five Year Review of the World Summit for Social Development, the UN General Assembly adopted a resolution calling for ‘a rigorous analysis of the advantages, disadvantages and other implications of proposals for developing new and innovative sources of funding, both public and private, for dedication to social development and poverty eradication programmes’. As the UN Secretary-General observed, there has been a great deal of innovation in private financial markets, but less in the sphere of public finances. The UN Department of Economic and Social Affairs (DESA) in turn requested the World Institute for Development Economics Research of the United Nations University (UNU-WIDER) in Helsinki to commission the study of Innovative Sources.

The execution of this project has involved many people. First, as coordinator of the project, I should like to thank most warmly the other members of the project team, who in addition to the authors of chapters in the book included Ilene Grabel of the University of Denver. They have not only written individual chapters but also vi Preface contributed significantly to the development of the overall analysis. The introductory Chapters 1 and 2, and the concluding Chapter 12, owe a great deal to their ideas, and in a number of places I have used material that they have drafted. The project meeting in May 2003, and extensive e-mail exchange, have helped considerably in trying to achieve a book that, we hope, is both balanced in its views and integrated in its contents.

The work of the project group has benefited much from the comments of external commentators. An earlier version of Chapter 2 was presented at the World Bank ABCDE Meeting in Paris in May 2003, where most helpful comments were made by the discussants, Adrian Wood, chief economist at the Department for International Development, and P.-B. Spahn of the University of Frankfurt, and by conference participants. An overall perspective of the report was presented at an open meeting of the project in Helsinki in September 2003, attended by some 100 people. We are most grateful for their comments to members of the panel: Ahmed Ndyeshobola of the African, Caribbean, and Pacific Group of States, Teresa Ter-Minassian, director of the Fiscal Affairs Department of the IMF and Adrian Wood. Individual chapters were presented at the conference ‘Sharing Global Prosperity’ at UNU-WIDER on 6—7 September 2003. The comments of conference participants were most valuable, as were those of the Oxford University Press referees. There are therefore many people who have contributed. We should, however, single out Anthony Clunies-Ross of the University of Strathclyde, Inge Kaul of UNDP, and Adrian Wood, whose work and comments have had a significant impact on the structure of the report. However, neither they nor any of those thanked should be held in any way responsible for the views expressed.

UN-DESA and UNU-WIDER initiated the project and provided crucial support. We are grateful to Ian Kinniburgh of the Development Policy Analysis Division, UN- DESA, for his active encouragement. At WIDER, Tony Addison has not only managed the project with a disarmingly light touch but also contributed the chapter on the global lottery. Liisa Roponen has been unfailingly helpful and cheerful as project secretary, ensuring that all ran smoothly, and Adam Swallow most efficiently steered the manuscript through the publication process.

UNU-WIDER gratefully acknowledges the support to the project from the United Nations Department of Economic and Social Affairs (UN-DESA). UNU-WIDER also acknowledges the financial contributions to the 2002—2003 research programme by the governments of Denmark (Royal Ministry of Foreign Affairs), Finland (Ministry for Foreign Affairs), Norway (Royal Ministry of Foreign Affairs), Sweden (Swedish International Development Cooperation Agency-Sida), and the United Kingdom (Department for International Development).

Tony Atkinson May 2004

Foreword

Mobilizing additional finance to meet the challenges of the Millennium Development Goals (MDGs) is now an urgent priority. Increased inflows of both private and public money are needed in order for the world’s poorest countries to invest in the basic services and infrastructure necessary to meet the MDG targets for human development, and to improve livelihoods and employment for poor people. Developing countries themselves are mobilizing resources to meet the MDG targets by 2015, but they will fall short of the targets without additional external flows. The consensus adopted by the United Nations International Conference on Financing for Development conference in Monterrey, Mexico, in March 2002 noted the meagre level of official and private capital flows to most developing countries. Official development assistance, although on the rise since Monterrey, still falls far short of the level necessary to meet the MDGs, and private flows to the poorer countries are small: Africa’s share of the flow of global foreign direct investment is only 3 per cent.

As a result of the Five-year Review of the World Summit for Social Development, the United Nations General Assembly in September 2000 called for the mobilization of new and additional resources for social development and for ‘a rigorous analysis of advantages, disadvantages and other implications of proposals for developing new and innovative sources of funding’. The present book contains the results of the study carried out by UNU-WIDER, under the direction of Sir Anthony Atkinson on behalf of the United Nations Department of Economic and Social Affairs.

The book examines a range of innovative sources of finance. The best known of the ideas under consideration is the tax on currency transactions, widely known as the “Tobin tax’. Well known also is the proposal for a carbon tax levied on fuel use. Both of these have many advocates, but they are also controversial. Rigorous economic analysis is therefore necessary. In particular, it is important to separate the argument for these taxes as corrective mechanisms (reducing currency speculation and carbon emissions) from the revenue raising function. The concern in this book is with revenue, which may mean that low rates of taxation may be sufficient to make a major new contribution.

Taxes are only one of the possible new sources. The book examines proposals for a development-focused allocation of Special Drawing Rights (SDRs), and the International Finance Facility (IFF) proposed by the UK’s Chancellor of the Exchequer. The terms of reference of the UNU-WIDER study asked the authors to consider the potential for private funding. The study therefore considers the financing associated with remittances by emigrants, and private philanthropy. It considers the scope for a global lottery or a global premium bond.

The book brings new thinking to bear on these very important global questions. The intellectual perspective that marks the book from others in the field is that the authors bring to bear the tools of modern public economics, more commonly applied viii Foreword to national problems of finance. The book argues that this can provide new insights. We can learn from the analysis of fiscal federalism within nation states. We can learn from the analysis of the ear-marking of taxes and from the literature on political economy.

The findings of this book will be of considerable interest to the development community, including not only national governments, the UN, and bilateral and multilateral agencies but also civil society. The ultimate aim is to help break the present impasse in external finance for developing countries, and we believe that this study will make an important contribution to the debate.

José Antonio Ocampo

Under-Secretary General

Department for Economic & Social Affairs United Nations

Tony Shorrocks

Director

World Institute for Development Economics Research United Nations University

New York and Helsinki, May 2004