Select Committee on International Development Minutes of Evidence

Memorandum submitted by the Overseas Development Institute


  This "pack" of papers for the IDC contains a series of memoranda written by ODI staff in their personal capacities. Some were written before Monterrey and some afterwards. Some (items 4-10) are already in the public domain, [1]the rest are not. We also attach, as an appendix, a note summarising the outcomes of Monterrey and reactions to it, prepared initially for internal use.

  The Monterrey Consensus document covered a range of issues, but the debate has focused on aid quantity, quality and architecture, as well as alternative financing mechanisms. This is appropriate, since other issues (notably the setting of global goals, trade, domestic resource mobilisation, and some aspects of foreign direct investment) have been or are adequately covered elsewhere (eg in the WTO). The ODI contributions are mostly concerned with aid issues, with one additional contribution (by te Velde) on foreign direct investment for poverty reduction.

  As far as aid is concerned, Monterrey made some progress on aid volume, but left some big questions to be resolved, all with direct implications for UK and EU policy. It would be especially helpful for the IDC to focus on these (ODI memoranda in brackets):

  1.  Does aid work? More specifically, is aid effective only where policy is right (Morrissey, Macrae)? If so, what are the implications for selectivity (Morrissey)? And are there also implications for the choice of aid instruments in different kinds of country (Foster and Leavy)?

  2.  What proportion of aid should be devoted to meeting Millennium Development Goals in particular poor countries (Naschold), and what proportion to providing global or international public goods (te Velde)?

  3.  Is there real mileage in any of the proposals for alternative means of funding aid, eg by taxation of currency transactions (Roberts)?


  4.  What steps can be taken immediately to strengthen the "architecture" of aid, including use of grants rather than loans, the democratisation of the Bretton Woods Institutions, support for the UN, and formalising notions of "partnership" in bilateral aid (Maxwell, Macrae)?



  In terms of content a very significant feature of the Monterrey Consensus is that there has been international agreement in a United Nations forum on a comprehensive development financing agenda representing what can be termed the "post-Washington consensus". The Consensus reflects the mainstream of donor thinking on how to make development policy and development assistance effective in reducing poverty and achieving the Millennium Development Goals.

  The main points in the Consensus to underline in this connection are:

    —  the crucial role of the private sector as the engine of sustained growth;

    —  the importance of trade in economic growth and poverty reduction, and thus of upholding and further developing the multilateral trade system;

    —  the complementary role of government, often in partnership with the private sector, with the support of donors, in guiding the growth process towards pro-poor outcomes and in building essential public services;

    —  the importance at the national level of good governance, including civil peace, democracy, the rule of law, upholding human rights, listening to the poor and financial accountability and transparency;

    —  the importance internationally of implementing the multilateral commitment to achieving the Millennium Development Goals, not only globally but also regionally;

    —  the need for this purpose to increase the volume of ODA in order to finance necessary improvements in the extent and quality of pro-poor public services in poor developing countries, and to increase the supply of global public goods;

    —  the need to complete recent improvements in the architecture of national and international reforms for preventing and coping with financial crises with better cooperative arrangements for the orderly restructuring of debt owed to international bondholders;

    —  the desirability and importance of closer working relationships between, and high level policy co-ordination between, the UN, the Bretton Woods institutions and the World Trade Organisation.

  The reiteration in the Consensus of these already familiar propositions may seem unadventurous. It may be disappointing to those who entertained hopes of radical new visions and commitments. However, beneath a bland exterior the Consensus has brought real progress in several respects, and indeed may in future be seen as marking a turning point. Its true importance lies not only in the (necessarily compromise) language it adopts, but also and above all in the political processes and commitments that occurred in preparing for, and in the margins of, the Monterrey summit.


  A now obvious but important point about the long process of preparing for Monterrey is that a consensus was achieved. At the outset this was far from a foregone conclusion. There could, until the end, have been an unresolved confrontation between exaggerated expectations of developing countries for higher resource flows, more debt relief, a preponderant role for themselves in the international financial architecture and the construction of new institutions of world economic governance with authority over macroeconomic policy and international investment on the one hand, and defensive and negative attitudes on the part of developed countries on all these issues on the other.

  The fact that Monterrey gave rise to a coherent Consensus rather than an unsatisfactory declaration produced in confrontational drafting sessions arose from two significant departures from earlier UN conferences on development policy. The first of these is the growing willingness, since the Rio conference on sustainable development of 1992, on the part of all parties, to achieve constructive outcomes to UN development conferences. Most recently UNCTAD X in 2000 and the UNCTAD conference on least developed countries in Brussels in 2001 were characterised by a desire by developed and developing countries to reach pragmatic and realistic conclusions. The adoption of the Millennium Development Goals by a UN General Assembly Special Session in 2000 was another powerful expression of common purpose and goal. Financing for Development benefited from this background of growing harmony and pragmatism.

  Another equally important ingredient of success was the deliberate decision of the governments of certain developed country governments—in particular the UK, the Netherlands, Norway etc, and the European Commission—to strive to make FfD a success. They wanted to impress the developing countries with their genuine desire to accelerate development and to make it work for the achievement of the MDGs, though without abandoning the major planks of the "post-Washington consensus" which they regard as important to their own interests and to the stability and openness of the world economy. These countries came to the conference prepared with initiatives designed to inspire confidence and to yield tangible results.

  The initiatives taken by these Northern authorities were on aid and trade. The pre-Monterrey process also gave helpful if modest impetus to initiatives afoot among the multilateral institutions and those involved in the international financial architecture.

Aid volume

  New commitments on aid are the most dramatic by-product of the FfD preparatory process. The run-up to Monterrey gave rise to the well publicised commitments by the EC to increase its collective development assistance disbursements by $7 billion per annum by 2006, and (at the last minute) by the US to increase its aid by $5 billion pa also by 2006. These two commitments alone will increase total ODA by about 23 per cent above recent levels.

  These commitments will reverse the real terms decline in ODA that occurred in the 1990s, but will be far from sufficient to finance the expansion of pro-poor public services recognised as necessary—by the World Bank, the Zedillo Panel, the Sachs task force on health—for achieving the MDGs. Hence the new willingness of a number of developed country governments to countenance some novel proposals for mobilising additional ODA—including the use of SDRs, a carbon tax, a Tobin tax and Gordon Brown's debt-based initiative.

  These novel sources of development finance are currently under review simultaneously in the UN under a mandate given to the Secretary General and in the European Commission. When the reviews are complete there will be some international pressure on donors to agree to start implementing whatever proposals seem most feasible and practical.

  Higher future levels of ODA will bring inevitable problems of poor countries' capacity effectively to absorb and utilise additional resources for poverty reduction. The commitments by developed countries in the Consensus to reinforce their assistance for capacity building are therefore very important. However, capacity building is easier said than done, particularly in countries with weak governance whose commitment to poverty reduction is ambiguous.

  As commitments to higher ODA flows are implemented the questions about whether donors should be selective in the countries to which they provide aid, how to create the conditions of aid effectiveness in poorly performing countries, and how to avoid unsustainable aid dependence will be posed with even greater acuity than now.

Aid quality

  A second expected achievement of preparing for Monterrey has been a more explicit open commitment by donors than heretofore to improving the quality of their aid through untying and the closer harmonisation of procedures. The commitment is not total. The US and Japan are not yet convinced either to untie completely or to adopt procedures for appraisal, disbursement, accounting and monitoring common to all donors.

  However, in the absence of collective donor action, the European Commission is suggesting an initiative by EU member states to untie procurement to suppliers in other donor countries that untie and to suppliers in developing countries. Meanwhile, the OECD's Development Assistance Committee's Task Force on Donor Practices is developing norms of good practice for reducing the "transaction costs" of aid for developing countries.

  The prospects are therefore quite favourable for modest improvements in aid quality in the near term, and probably for further piecemeal improvements thereafter.


  Monterrey came in the wake of the successful Doha WTO Ministerial, and added modestly to the chances of success of the Doha round of multilateral trade negotiations. It did this firstly by reiterating the collective belief of the parties—including those not yet members of the WTO—in the principles of multilateralism in trade, and secondly by further clarifying developed countries' commitment to make the trade system and the trade negotiations benefit developing countries.

  Prominent among developed countries' commitments are those to provide more and more effective trade related assistance—so that developing countries realise the potential advantages for them of being in the global economy and of their membership of the WTO—and to support new trade agreements with more imaginative facilities for their implementation by developing countries than those reached in the Uruguay Round.

  The Consensus also recommends that other developed countries follow the lead of the EU in amending their trade preferences for developing countries by removing duties and quota restrictions from all imports from the least developed countries, except arms. This concession will give countries which have hitherto been among the least successful in developing their exports an additional opportunity to catch up with more successful developing countries by making production for export more profitable.

Multilateral co-operation

  A notable feature of pre-Monterrey preparations was the significant investment by the Bretton Woods Institutions in supporting the Financing for Development process. The BWIs delegated senior staff to take part in the preparations and in the analytical work undertaken by the secretariat. This represented a change from earlier occasions when the BWIs downplayed the importance of UN initiatives in setting the development agenda—and when the UN held the BWIs at arm's length. Rivalry, mutual suspicion and resentment in the UN at the greater financial resources for analysis and delivery available to the BWIs characterised relations.

  As a by-product of this now closer collaboration has been agreement on a division of labour between the UN and the BWIs on the monitoring of the progress towards the MDGs and of the Poverty Reduction Strategy process on which most IDA countries are now embarked. This had previously been a bone of contention, with both sets of institutions committed to promoting poverty reduction and to achieving international development targets, but doing so with inadequate coordination at the policy and operational levels. Under the arrangements now reached the UN Statistical Office will take the lead in monitoring and analysing progress towards the MDGs and their associated targets and indicators, while the BWIs will continue to play an acknowledged and pivotal role in helping to make countries' Poverty Reduction Strategies operational. In this it will be supported by UN Development Assistance Frameworks orchestrated by the UNDP.


  A final significant conclusion at Monterrey is the agreement to follow up Consensus commitments and policies, and to fix the modalities of a follow-up conference no later than 2005. The UN's poverty monitoring will be enlarged in scope to encompass progress with the processes and actions to which the Consensus refers.

  UN monitoring of development policies and of development assistance actions is not in itself new. The World Bank and the OECD also monitor and report on the evolution of development assistance. However, the process initiated in Monterrey will add an extra dimension of mutual surveillance and accountability to the work of the UN, and one which will probably be taken more seriously by developed countries in view of the seriousness of the commitments they entered into at the Conference. Donor countries will now have to render account for their performance in development assistance not only to members of their own club, but also to a wider forum of developing countries.


  The Zedillo Panel report commissioned by the UN Secretary General to recommend strategies for mobilising resources needed to achieve the Millennium Development Goals identified and discussed three possible novel sources of development finance:

    —  a currency transaction tax (Tobin Tax);

    —  a tax on carbon emissions; and

    —  the creation of new SDRs.

  In the European Commission the Director General of DG DEV, Koos Richelle, in a paper drafted in preparation for Monterrey, suggested for examination the following additional mechanisms:

    —  an international air transport tax;

    —  a tax on arms exports;

    —  mobilisation of incremental revenues from enhanced international cooperation (a) to suppress tax evasion and avoidance and (b) to combat illegality and corruption.

  The Chancellor of the Exchequer, Gordon Brown, has proposed yet another mechanism for doubling ODA flows in the form of an International Development Trust Fund financed by large scale market borrowing guaranteed by donor governments.

  This note looks briefly at the pros and cons of these ideas from the points of view of their practicability, their political realism and their possible yield in additional ODA.

Currency transaction tax

  The currency tax would take the form of a very small levy (eg between 0.01 per cent and 0.1 per cent) on the value of all foreign exchange transactions. It was originally proposed in 1972 by James Tobin as a means of curbing currency "speculation" which he feared would destabilise the world economy. It was later suggested—for example by Mahbub ul Haq when he directed the drafting of the UNDP Human Development Report—that the proceeds of the tax might be used for development finance.

  The Zedillo Panel report, in its discussion of the tax, recalls the scepticism with which it has been treated by commentators. On the technical level it has been felt to be too complex to implement, and too easy to evade—by taking transactions off-shore or by using derivatives. There are also doubts about whether its effects on foreign exchange markets would be beneficial.

  These doubts are only partly justified. Advocates for the tax point out that central banks are counterparties to most foreign exchange transactions involving major financial institutions, and that these institutions themselves are counterparties in minor transactions. It would therefore be possible in principle to levy a tax on wholesale transactions between institutions and central banks, and that this would be hard to evade so long as there is cooperation to collect it among central banks. Avoidance, however, would be easy if central banks in some jurisdictions refuse to cooperate.

  If there is no large scale avoidance the tax would be a very buoyant source of revenue as the volume of foreign exchange transactions continues to grow apace. [2]However, the tax is likely to distort and impair to some extent the working of foreign exchange markets. It would be shifted onto primary buyers and sellers of foreign exchange who would experience a wider spread between buying and selling rates. There is no good case for saying that increasing the cost of foreign exchange transactions will be a force for stability in markets.

  The currency markets of the world are dominated by a few major currencies—dollar, euro, yen, sterling—between which there are no serious problems of day-to-day instability caused by pure speculation. Major and sustained movements in exchange rates occur because of changes in perceived market fundamentals. Players who need to protect themselves against currency movements can find an array of hedging instruments (futures, options, swaps etc) with which to do so. There is thus no current macroeconomic or transactional need for a currency transaction tax to stabilise the market in major currencies.

  In fact the tax could lead to greater instability and less efficiency of exchange rates as a signalling mechanism. It would discourage arbitrage, which is a force for stability and market efficiency. The tax would also tend to discourage the trend towards gross, real time, wholesale settlements which are considered as more efficient and less risky in currency markets, and encourage a return to settlements on a riskier net basis which would attract less tax.

  The tax would be ineffectual in preventing financial crises such as the Asian crisis featuring large scale and rapid loss of investor confidence, often engendered by unsustainable exchange rate or other economic policies. The small cost of the tax would be as nothing compared with the potentially large gains from short selling or capital flight.

  In political terms the currency transactions tax is probably now a more realistic proposition than would have been the case a few years ago. The parliaments of France and Belgium have passed resolutions in favour of it. The German minister of cooperation has expressed public interest in it. The British government has said that it is keeping an open mind on this—and on other ideas for increasing aid flows. However, as the City of London is a major centre for foreign exchange transactions and derivatives there would be opposition from the UK financial sector to a proposal that would increase its costs and probably diminish its turnover. The US is understood to be adamantly opposed to the tax.

  Given the ease of avoiding the tax unless all jurisdictions agree to apply it uniformly and simultaneously, and given its inappropriateness in present circumstances as an instrument of market regulation, the chances of early agreement on its introduction cannot be rated highly.

Carbon emissions tax

  A tax on CO2 emissions (and other greenhouse gases) is in principle desirable because it corrects a market failure, namely the absence of a market price to pay for polluting the global commons through activity that increases atmospheric CO2. The Zedillo Panel commended the carbon tax in these terms.

  The tax is practical to collect. Most countries already levy some form of excise or proportional tax on hydrocarbon fuels. It would not be technically difficult to broaden the coverage and to increase the rate of these taxes and for developed countries to devote the proceeds thereof to development finance. The majority of countries in the world are signatories of the Kyoto Protocol on climate change, and most developed countries are committed to reducing their emissions to 1990 levels by 2010. One of the instruments they are using to achieve this objective is taxation. The UK has introduced a climate change levy—though in its present form this is designed to be revenue neutral, and is abated for industries that are energy-intensive and which introduce new, energy-efficient, technologies.

  However, the tax would only be a buoyant source of revenue if it is also applied to developing countries. Economic growth in mature industrialised or post-industrial countries is decreasingly energy-intensive. Commitments under the Kyoto Protocol, if fully implemented, will ensure that energy consumption will stagnate or fall in these countries as their living standards rise. In the developing countries, on the other hand, growth remains energy intensive, and there is no Kyoto commitment to restrain greenhouse gas emissions.

  This then points to significant sources of doubt about the political feasibility of a carbon tax as a source of aid financing:

    —  The developed countries with Kyoto commitments have already taken tax and non-tax measures to implement their commitments, or are contemplating so doing. They may well be reluctant to tax themselves further, if they believe they are on track to meet the Kyoto objective. New devices such as carbon trading, now experimentally introduced in the UK, will redistribute income between firms but will not be revenue generating. [3]

    —  The US, which has refused to undertake Kyoto commitments, and whose greenhouse gas emissions continue to grow, is only ready, politically, to apply mild restraints on the growth of energy consumption of a non-revenue-raising variety (such as the trading of pollution permits).

    —  It is against the spirit of the exercise to ask developing countries—which are exempt from Kyoto commitments—to pay an international carbon tax to finance their development.

  Burden sharing presents other political difficulties also. Fuel taxes are at present applied very unevenly as between different fuels because governments are seeking simultaneously to achieve a variety of different and sometimes contradictory objectives. Governments want to keep some fuel prices low for distributional reasons. Other fuels are effectively untaxed for reasons of competitiveness or because of the ease of evasion. For example, taxes on fuels used for heating or cooking, for electricity generation, or in agriculture, are often, as in the UK, much lower than those applied to fuels used in motor vehicles. Hydrocarbon fuels used by airlines are not taxed at all.

  Motor fuels are taxed heavily in many countries because of the ease of collection and because vehicle use causes atmospheric pollution and congestion.

  An international carbon tax would almost certainly have to be levied at a specific rate related to the amount of carbon emitted by its use. Any other basis would be regarded as unfair, and would prevent agreement. However, the application of a specific carbon tax would upset the political consensus underlying the current uneven pattern of fuel taxation. The prices to consumers of untaxed or lightly taxed fuels would increase the most in percentage terms.

  To conclude, a carbon tax, though prima facie desirable, would probably not be a buoyant source of additional ODA, and would present great burden sharing difficulties in its application, both internationally and nationally.

Creation of SDRs

  George Soros has proposed that there should be periodic new general allocations of SDRs—which would be allocated to all IMF members pro-rata to their quotas, and that developed country beneficiaries should devote their shares of new SDRs to trust funds which would finance development. Under the present distribution of IMF quotas some 60 per cent of any new general allocation could thus be converted into additional ODA.

  The Soros proposal is technically and economically feasible, so long as the magnitude of new SDR allocations is kept proportionate to the growth of international demand for liquidity.

  On the technical side there may be difficulties with domestic accounting rules. Beneficiary countries have to start paying interest to the IMF (at a current rate of 2.3 per cent) as soon as they use their SDRs in payment. Donor countries which convert their SDRs into ODA would thus, under IMF rules, pay interest on them to the Fund in perpetuity. Some governments may thus choose to account for SDRs converted into ODA as additional government borrowing. The UK government would treat it as additional public sector borrowing.

  Governments which place limits on their borrowing for reasons of macroeconomic management may thus feel unable to authorise additional expenditure on ODA financed by SDRs. It could on the other hand be argued that this "borrowing" from the IMF to finance expenditure in developing countries has no domestic macroeconomic effect, and that the transaction should not therefore count against public sector net borrowing.

  On the international economic side it has to be remembered, as noted by the Zedillo Panel, that the prime purpose of SDR allocations is to prevent general shortages of international liquidity from developing. The fear of possible liquidity shortages inhibiting the expansion of international trade and payments that gave rise to general allocations, felt in the 1970s, diminished greatly in the 1980s with the development of international capital markets and of international trade financing. No general allocations have therefore taken place since 1981. International payments and creditworthiness difficulties affecting individual IMF member countries are dealt with by conventional IMF conditional lending and debt restructuring.

  A special allocation of SDR21 billion (which was not pro-rata to quota and thus required an amendment to the IMF's Articles) to compensate new Fund members which were not beneficiaries of earlier general allocations was agreed by the Fund Board in September 1997. Its effect would be to double the cumulative allocation of SDRs. Though some 110 Fund members with 72 per cent of the votes in the Board have ratified the special allocation this falls short of the prescribed 85 per cent level of approval. Ratification by the US Congress is still awaited.

  The US's reluctance to assent to the first allocation of new SDRs for over twenty years does not bode well for its agreement to subsequent new general allocations needed to fuel the Soros mechanism for creating additional ODA.

  Even if US objections could be overcome new SDR allocations could not be expanded or repeated ad infinitum because the ultimate effect would be to increase world inflation. Unfortunately, there is no fully reliable means of calculating the general liquidity requirements of the global economy, nor for assessing whether these are adequately met by markets, nor for saying at what point new SDR allocations would contribute dangerously to inflationary pressures. [4]The potential contribution of the Soros mechanism to development finance is thus hard to pin down.

  As a rule of thumb, however, and abstracting from major political objections, one might be able to look forward to allocations every 4-5 years or so of the same real magnitude as the (still unratified) SDR 21 billion special allocation proposed in 1996. Of this SDR 13 billion ($16 billion) might be convertible into ODA, making only a small (7-10 per cent) increase in ODA flows. Even if this were doubled it would contribute less than the combined EU and US pledges announced at Monterrey.

  It would be unrealistic, for reasons of international financial stability, to expect the SDR instrument alone to double the net flow of ODA to developing countries.

International air transport tax

  An international air transport tax for development, additional to existing airport passenger departure taxes, would be very easy to levy. This is because there are well established mechanisms at airports for collecting this tax and there are good statistics on passenger, freight and aircraft movements. Airport departure taxes have limited distortionary effect on passengers' choice of mode of transport, and thus have limited efficiency cost.

  However, the feasible yield of an international air transport tax would probably not be very high. There are some 600-700 million passenger departures each year, worldwide, for international destinations. Existing airport departure taxes are commonly in the range $20-30. It would probably be difficult to reach international consensus to a supplement for development of more than $10 per passenger. So, a tax for development levied on passengers would at present yield no more than about $6-7 billion per annum.

  It would not be practical to exempt passengers from developing countries from paying the tax on grounds of nationality. Developing country citizens travelling abroad would thus also have to pay the tax.

  It would also in principle be possible to impose a levy for development on top of the aircraft landing charges that airlines pay to airport operators. This levy would have to be a percentage of landing charges in force—not a flat fee—because charges vary greatly by type of aircraft and airport location. This opens the possibility of collusion between airports and aircraft operators to evade the charge.

Tax on arms exports

  Statistical information on arms exports is poor. Some arms exporters do not record their sales at all or make them unrecognisable in their trade statistics. Much equipment of military application can be used for civilian as well as military purposes. Military exports are also often offset by countervailing purchases of supplies by the importing country. Sophisticated weapons are also commonly developed jointly by companies located in several countries, giving rise to trade in sub-assemblies.

  For these various reasons which obscure the record of arms sales it would be extremely difficult to establish a fair and unambiguous base for a levy on arms exports. Considerations of confidentiality and state security, as well as of product description and purpose, would make an international tax difficult if not impossible to police.

  The tax on arms exports must therefore be considered among the least practical of suggestions for mobilising additional ODA.

Co-operation to suppress tax evasion

  It is hard to see why co-operation to suppress tax evasion and corruption should be considered as a novel source of international development finance. Co-operation between tax authorities and police authorities already exists.

  The OECD has been bringing pressure to bear on tax havens to improve their disclosure and reporting requirements, and to share information with tax authorities in other jurisdictions about transactions taking place in their territories. These initiatives, by discouraging capital flight, may in due course enlarge the base of taxable incomes in developing countries and thus help to mobilise additional domestic resources to finance development expenditure. However, the aggregate effect and its distribution between different countries are extremely hard to estimate.

International Development Trust Fund

  In December 2001 the Chancellor of the Exchequer, Gordon Brown, proposed the creation of an International Development Trust Fund which would contribute an additional $50 billion pa of ODA, on top of the current level of flows, in the years up to 2015 (when most of the MDGs are supposed to be attained). The Fund would be overseen by a joint implementing committee of the Bretton Woods Institutions, and would be used primarily to supplement the resources provided by IDA and the IBRD, though with a strong focus on meeting the financing needs of the least developed and low income countries.

  The Trust Fund would be financed by:

    —  additional governmental ODA of about $13.5 billion pa at today's prices—to be mobilised by dint of asking DAC donors whose ODA/GNI ratios are less that 0.4 per cent to raise their aid to this level;

    —  guaranteed market borrowing to finance the bulk of the intended additional disbursements of ODA.

  Borrowing would have to take place on a very large scale—at its peak approaching $60 billion per annum—in order to pay interest on previous borrowing and to meet the disbursement needs of the Fund. The Fund would accumulate a stock of debt amounting at its maximum to over $800 billion—which exceeds the size of the World Bank's balance sheet. The Fund's income from lending would be very low because most lending would be on interest-free IDA terms. Its debt to the markets would therefore initially have to be rolled over and thereafter to be paid down in instalments by its guarantor donor governments. The debt would not be fully expunged before around 2030.

  The merits of this proposal are that it would generate, within 2-3 years, a very steep increase in ODA flows, and that there would be an institutional framework for allocating the additional aid and managing disbursements. The disadvantages of the scheme as proposed are that it would raise the level of aid disbursements only temporarily, and that aid flows would fall after 2015—when there would still be widespread poverty in the world, even if the MDGs are attained. Furthermore, future generations of taxpayers would be expected to service and pay off the accumulated debt, in addition to continuing to aid the still numerous poor developing countries.


  This brief survey of proposals for innovative sources of development finance leads to the following outline conclusions:

    —  None of the proposed mechanisms is fully satisfactory. Some (eg the air transport tax, SDR creation) would be easy to manage but unlikely to yield substantial additional resources. Others having greater yield potential seem likely to run into major practical difficulties, including problems in achieving consensus on application (carbon tax and arms tax). The International Development Trust Fund is most promising in terms of early disbursements, but is only temporary and leaves an uncomfortable legacy of debt.

    —  The best way of approaching a sustainable doubling of ODA is to combine different mechanisms—eg higher conventional ODA (along lines announced at Monterrey, or better), supplemented by a tax on air transport, modest periodic creation of additional SDRs and a modestly dimensioned debt-financed fund to bridge the gap until other mechanisms become fully effective.

    —  There are political objections in some quarters to all novel proposals. These will have to be confronted, and objections to the most promising proposals overcome, when the UNSG and the EC have concluded their on-going studies on these proposals. However, there is no obvious international forum for reaching a comprehensive set of decisions on innovative sources of finance. It is too long to wait until the Financing for Development review conference to be convened after 2005.

    —  In parallel with preparing a balanced and feasible set of decisions on innovative sources serious consideration should also be devoted to modalities for allocating and administering substantially expanded aid flows. This will involve estimation of financing needs, relative returns and absorptive capacity constraints both in poor developing countries and in the multilateral and international institutions responsible for producing core global public goods.

1   Not printed. Back

2   Foreign exchange transactions are now running at a rate of $300,000 billion pa, double the level of 1990. A tax at the rate of 0.01 per cent would thus yield $30 billion pa. Back

3   The UK offers fiscal inducements to firms to encourage them to accept "caps" on their carbon emissions and then to participate in the market for traded permits. Back

4   The allocation of SDR 21 billion adds less than 1.5 per cent to total world foreign exchange holdings and is not believed to have any measurable effect on price levels. Back

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