This outstanding report could be of historic importance. It is the first comprehensive assessment of the evolution, use of, and potential of ‘innovative development finance’ to provide resources for addressing poverty, climate change and other global public goods. It has the authority of being both rigorously researched and of thoroughly surveying previous national, multilateral and scholarly analyses.
It is timely too for since the financial crisis of 2008-2009 the fiscal squeeze on many donor countries has threatened or caused reductions in ODA. At the same time promises of financial support for climate change mitigation and adaptation have multiplied. These factors have stimulated renewed interest in innovative development finance (IDF) such as financial transaction taxes (FTT) and carbon taxes.
The Report defines IDF as new forms of collective action for financing global social, economic and environmental goals. Innovative finance has two primary aims: first, to strengthen efficient resource allocation through increasing the supply of necessary goods not adequately provided through the private sector or by reducing such market failures as externalities; and second, of redistributing income towards socially preferred ends.
The term innovative development finance was suggested at the preparatory meetings for the 24th Special Session of the General Assembly in 2000 on social development. Canadian delegates proposed that the conference authorise study of the possibility of a Tobin tax, but were opposed by the US, Japan and some European countries. During vigorous negotiation Canada and Norway proposed a compromise: to ‘promote … the mobilization of new and additional resources for social development, inter alia, by … conducting a rigorous analysis of … proposals for developing new and innovative sources of funding, both public and private’, and this was agreed in the Special Session.
The World Institute for Development Economic Research (UNU-WIDER) in Helsinki was commissioned to make the study, and eminent econometrician Sir Anthony Atkinson agreed to lead the research. He edited the resulting book, entitled New Sources of Development Finance, published by OUP in 2005, which set an agenda for consideration.
Modest but significant IDF mechanisms organised during the last decade have accelerated access to new vaccines by strengthening incentives for their commercialisation and substantially increasing funding for immunisation programs; and the Caribbean Catastrophic Risk Insurance Facility is proving an effective risk-pooling mechanism. However their net additional contribution to ODA has been relatively small.
More substantial, assured and predicable sources of revenue are essential – and possibilities such as FTTs, carbon taxes and issues of special drawing rights (SDRs) have been attracting increasing support. These either: capture proceeds from the global use of global resources, such the issuing of SDRs or taxing seabed mining; generate revenue without significantly distorting private behaviour, such as small levies on air travel or currency trading; or generate a ‘double dividend’ by discouraging unwanted behaviour and adding to revenue, such as carbon emission taxes or taxes on short term international financial flows – ‘hot money’ – which cause financial volatility. A Leading Group of countries on Innovative Financing for Development with a French secretariat has been a major forum for discussion of these possibilities.
SDRs were created in 1969 to help assure an adequate supply of international reserve assets, but until the G20 recommended to the IMF that it issue the equivalent of $250 billion in 2009, only two small issues of SDRs had been made. SDRs are attractive to developing countries as they increase capacity to import and there are no conditions on their use. It would be possible for the IMF to start issuing SDRs annually and for their allocation to be changed to favour developing and transitional countries. This would require an amendment to the IMF Articles of Agreement, which must receive 85 per cent of member votes, giving the US an effective veto. However the change would strengthen the international monetary system which all countries support. China is now advocating regular issues of more SDRs.
Widespread introduction of a carbon tax would discourage greenhouse gas emissions and encourage renewable energy production. However there is much debate about what to include in such taxes, whom to tax and how to use the funds. Developed countries have made a commitment to increase support to developing countries for climate change mitigation and adaptation to $100 billion a year by 2020, so a major increase in revenue sources may well be essential. A World Bank, IMF and OECD report estimated that a carbon tax of $25 per ton would raise about $250 billion a year by 2020. The difficulties of achieving global agreement on such a tax are clear, but a more manageable step would be to start with a carbon tax on international air and maritime fuel.
Keynes and later Tobin proposed a currency transaction tax as a disincentive to currency speculation, Tobin suggesting that the tax be internationally coordinated and proceeds passed to multilateral organisations. Currency transaction taxes have recently been used successfully in Brazil, Columbia, South Korea and Thailand to discourage short-term financial inflows and the revenue retained for domestic use.
FTTs have been used in many countries for long periods in both developed and developing countries on, for example, share trading and some banking transactions. Such taxes are progressive because the wealthy and high income earners are more likely to make such transactions. A tax of half of a ‘basis point’, 0.005 per cent of the value of a all trade in the four major vehicle currencies, the dollar, euro, yen and pound sterling, would yield around $40 billion a year. Such a proposal is also equitable because financial sectors are only weakly taxed at present: for example, financial transactions are exempt from VAT in the EU. Support is growing. France put the possibility of FTTs on the G20 agenda in November 2011 and the communiqué for the meeting agreed that ‘over time, new sources of funding need to be found to development needs’ and acknowledged that some countries were considering FTTs for this purpose. In 2011 the European Parliament voted in favour of an FTT and the European Commission issued a concrete proposal for adoption by member states.
The Report correctly notes that a global FTT has not been adopted because of lack of political will. It also implies that the political power of the financial corporations in the City of London and Wall Street is so great that national governments in Britain and the US have felt unable to attempt to constrain them. Yet the global financial crisis allowed British and American voters to glimpse the enormity of the destruction which the unconstrained greed of the bankers can cause. Most voters have not yet understood the enormity of the subsidies with which British and American governments decided to support the banks, in order, they thought, to maintain the viability of their financial systems. The authors of this Report comment that ‘the financial crisis led to mounting public indebtedness in many developed countries, in part owing to the recapitalization of domestic banking systems through Government programmes’. (p6)
Some readers may think it naïve to imagine that democracies are sufficiently open or representative to respond effectively to such gigantic inequities. But it is not just Wall Street occupiers who argued for refusing to allow the banking CEOs to pay themselves packages which Croesus would have envied. Opinion is shifting on executive pay. The links between unconstrained executive greed and bankers’ hollow claims about the adequacy of self-regulation, and the economic security of all have now been vividly demonstrated.
Whether consequential logical policy and regulatory strengthening will occur depends on electoral opinion and so on all of us. At least this Report demonstrates the rationale and viability of introduction of FTTs as one of many means required for constraining unaccountable financial power. It also explains the value of increasing the availability of SDRs as a means of broadening the choice of reserve assets and avoiding deflationary dependence for current account surpluses in vehicle currency countries for growth of financial reserves. Such reforms could have useful roles amongst many others to assist in improving global financial system stability, as well as in mobilising resources for economic development and support for climate change mitigation and adaptation.
An additional potentially powerful means of raising revenue for developed and developing countries alike is clamping down on international tax evasion. Though this is not technically an IDF proposal, the issue of improved international tax cooperation is mentioned in the Report because it requires multilateral cooperation. A necessary condition for effectiveness is countries’ willingness to share more information. This would be assisted by establishment of an international tax organisation.
Rob Vos and his staff and advisors have prepared a comprehensive, technically sophisticated and accessibly written Report. By providing the authoritative, official source of integrated information and analysis which this subject has so far lacked, the authors have strengthened the case for innovative development finance.
The Report is available here.
John Langmore is a Professorial Fellow in the School of Social and Political Sciences at the University of Melbourne. He was previously a member of the Australian House of Representatives and then Director of the Social Policy and Development Division in the UN Department of Economic and Social Affairs in New York.