Memorandum submitted by the Overseas Development
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, 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
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
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)?
2. HOW SUCCESSFUL
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
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
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
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 governmentsin particular the UK, the Netherlands,
Norway etc, and the European Commissionto 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
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 necessaryby the World Bank, the Zedillo Panel,
the Sachs task force on healthfor achieving the MDGs. Hence
the new willingness of a number of developed country governments
to countenance some novel proposals for mobilising additional
ODAincluding 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.
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
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 partiesincluding
those not yet members of the WTOin 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 assistanceso
that developing countries realise the potential advantages for
them of being in the global economy and of their membership of
the WTOand 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.
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 agendaand
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
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.
3. REALISM AND
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
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
an international air transport tax;
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
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 suggestedfor example by Mahbub
ul Haq when he directed the drafting of the UNDP Human Development
Reportthat the proceeds of the tax might be used for development
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 evadeby taking
transactions off-shore or by using derivatives. There are also
doubts about whether its effects on foreign exchange markets would
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
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. 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 currenciesdollar, euro, yen, sterlingbetween
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 thisand 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
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 levythough in its
present form this is designed to be revenue neutral, and is abated
for industries that are energy-intensive and which introduce new,
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
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. 
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 countrieswhich are exempt from Kyoto
commitmentsto pay an international carbon tax to finance
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
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 SDRswhich 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
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. 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
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
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 forcenot a flat feebecause
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
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 pricesto 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 scaleat its peak approaching $60 billion per annumin
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 billionwhich 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 2015when 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
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 mechanismseg 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
1 Not printed. Back
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
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
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