Select Committee on International Development Memoranda



Joint memorandum submitted by the Department for International Development and Her Majesty's Treasury

 

HOW SUCCESSFUL HAS THE UN FINANCING FOR DEVELOPMENT SUMMIT BEEN, AND WHAT CAN WE LEARN FROM THE PROCESSES LEADING UP TO THE SUMMIT?

  1.  The UN Conference on Financing for Development was a major success and potentially represents a turning point in the global fight against world poverty. The key reasons for the success were:

    (a)  Monterrey became the first UN Conference to achieve concrete and specific increases in ODA. The EU and US announcements on aid levels will lead to additional aid flows of $12 billion a year from 2006 and potentially cumulatively $30 billion before then;

    (b)  The Monterrey Consensus document—which sets out a balanced agenda of partnership and mutual accountability—was formally adopted by UN members; particularly welcome are the commitments to good governance and the rule of law;

    (c)  The international commitment to the Millennium Development Goals (MDGs) was strengthened; and the significant participation of the IMF and the World Bank meant that this was a good example of the UN and the Bretton Woods institutions collaborating effectively towards shared objectives;

    (d)  There was high level government attendance from developing countries and developed countries, including key members of the US administration, and there was a good atmosphere for debate;

    (e)  The business sector and Non-Governmental Organisation (NGO) sector participated fully.

  2.  The objective of the Financing for Development Process and the final Conference in Monterrey was to analyse how domestic and international finance could be mobilised more effectively for development, so ensuring greater progress towards the achievement of the MDGs. The key areas considered were domestic resources, international private resources, trade, overseas development assistance, debt relief and the international financial architecture. UK objectives were to:

    —  Focus FfD on poverty elimination;

    —  Promote developing country actions to create an enabling environment for poverty reduction;

    —  Press for significant increases in aid to achieve the Millennium Development Goals;

    —  Press for measures to increase aid effectiveness, including harmonisation of donor practices and procedures, untying, greater use of budget support and the targeting of aid by policy and poverty criteria;

    —  Strengthen the voice of developing countries in the international financial architecture.

  These objectives were broadly met, through the long negotiations on the Monterrey text that took place in the Preparatory Committee Meetings in New York, and UK government interventions in the EU, which secured the agreement to increase aid volumes.

  3.  The Financing for Development outcome was shaped through four UN Preparatory Committees, which moved from consideration of inputs—such as the Zedillo Report—to negotiation of the outcome document. The UK is represented in UN negotiations by the EU Presidency. Therefore there were a series of EU co-ordination meetings to establish the EU line. The UK was influential in shaping the EU strategy. DFID produced a UK strategy paper at a very early stage in the process.

  4.  The UK was able to co-ordinate effectively across government departments, benefiting significantly from the close working relationship between the Chancellor and the International Development Secretary. A Whitehall official steering group was established to develop and agree UK policy, with representation from all Departments with an interest in FfD (DFID, HMT, FCO, DEFRA, DTI, IR, ECGD and DWP). Meetings were held regularly, and proved an effective mechanism for developing policy and identifying areas where Whitehall discussion was required. There were frequent meetings between DFID, HMT and FCO officials: the close involvement of HMT throughout the process helped the UK to establish an influential position within the EU. Ultimately it was the close working relationship between DFID and HMT with the support of FCO which enabled the UK to gain agreement on the proposal to raise EU aid volumes; first with the Secretary of State for International Development's work with others at the Development Council to set up the process that led to a commitment to increased quantity and quality of aid at Monterrey; second with the Chancellor's interventions at ECOFIN on 5 March; and third with FCO support at the following General Affairs Council, leaving the final decision to be made by Heads at the Barcelona Council.

  5.  The FfD outcomes document—the Monterrey Consensus—was negotiated in advance of the Conference, and signed by those who attended. We consider it to be a good document. It clearly sets out the partnership between developed and developing countries to achieve the MDGs, with developing countries committing to good governance and to creating an enabling environment, and developed nations agreeing to support these efforts better through actions on trade, debt relief, ODA and reform of the international financial architecture. The Monterrey Consensus meets many of the UK's objectives, though we would have preferred stronger commitments in some areas; for example on aid effectiveness. The Secretary of State pushed very hard on this issue, with support from the Chancellor of the Exchequer, and the issue was taken up by the DFID negotiating team in New York. However, resistance from other countries meant that we were unable to make as much progress as we would have wished.

  6.  The Monterrey Consensus provides a good basis for further action in a variety of fora. For example, trade will be tackled within the Doha Development Agenda; debt relief within HIPC; aid effectiveness within OECD DAC; and reforms to the international financial architecture within the World Bank and IMF. The NEPAD process is a specific example of a mechanism through which developing countries can make concrete their commitment to good governance and poverty reduction.

  7.  Most of the concrete business of the Monterrey Conference was achieved before it started. This enabled world leaders to attend the final summit in the knowledge that a successful document was already on the table. This helped contribute positively to the atmosphere for debate. During the preparatory process, one of the key debates concerned the overall effectiveness of ODA, and the case for increases in its volume. The Treasury and DFID produced a joint paper setting out "The Case for Aid" which the UK delegation launched with a press conference. The paper was well-received and circulated widely at Monterrey.

  8.  The centrepiece of the EU package of commitments for Monterrey is an undertaking to raise the EU average ODA/ GNI ratio from 0.33 per cent to 0.39 per cent by 2006—which will equate to an extra $7 billion dollars p.a. Other elements are to take concrete steps to harmonise procedures by 2004; to discuss the scope for further aid untying; to increase levels of trade related technical assistance; to work on identifying global public goods; to consider the case for innovative sources of financing; to press for a stronger voice for developing countries in international economic decision-making; and to work to ensure debt sustainability.

  9.  The agreement to increase aid volume was based on a UK proposal—initially proposed by the Chancellor at a meeting of Economic and Finance Ministers, and taken forward by the Spanish Presidency. The UK will press for EU discussions following Monterrey to encourage the specific national commitments required to ensure that the 0.39 per cent average is reached. The US also made a commitment to increase its level of ODA, in advance of the Monterrey conference. The commitment amounts to an increase in aid of $10 billion over three years ($1.3 billion in 2004, $3.7 billion in 2005 and $5 billion in 2006). The US also committed to maintaining this increased level of aid in cash terms from 2006 onwards. Together, the EU and US statements provided an important new element in the overall package of proposals, and helped to ensure the success of the conference.

  10.  In summary, the Monterrey Consensus document represents an important step forward in international consensus on how to mobilise finance to achieve the MDGs. It contains important recognition by developing countries of their responsibilities for setting an enabling policy environment; and it contains commitments by donors to make stronger efforts to assist them. The EU and US ODA commitments represent a historic reversal in the 20-year decline in ODA levels. Monterrey was the first UN Conference to achieve commitments to concrete and specific increases in ODA.

  11.  It is now a matter of taking forward the agenda from Monterrey, at the UN and the Bretton Woods institutions, through the G7 Meetings in Halifax and G8 in Kananaskis, at the World Summit on Sustainable Development in Johannesburg and the Commonwealth Finance Ministers' Meeting in London. We will seek to ensure that no developing country genuinely committed to good governance, economic reform and poverty reduction, will be denied the chance to achieve the Millennium Development Goals through lack of finance.

WHAT PROGRESS IS BEING MADE BY THE UK AND OTHER GOVERNMENTS IN MOVING TOWARDS MEETING THE TARGET OF PROVIDING 0.7 PER CENT OF GROSS NATIONAL INCOME IN OFFICIAL DEVELOPMENT ASSISTANCE?

  12.  The UK is determined to be at the forefront in the fight against global poverty. We are committed to the target of raising ODA to 0.7 per cent of national income. We will contribute positively to raising the EU average by significantly raising the amount of our ODA, and by raising its share in national income, in our next spending round covering the years up to 2005-06. We will also work to ensure aid effectiveness both in the UK and in the EU.

  13.  The UN target of providing 0.7 per cent of Gross National Income (GNI) as Official Development Assistance (ODA) was endorsed by the 1970 UN General Assembly. Figures for Official Development Assistance are compiled by the OECD Development Assistance Committee (DAC) by calendar year on the basis of reporting from member countries. During the 1980s and early 1990s the UK's ODA/GNI ratio declined from 0.51 per cent in 1979. In 1997, the Government White Paper "Eliminating World Poverty: A Challenge for the 21st Century", committed the Government to reversing this decline. It also confirmed the Government's commitment to the 0.7 per cent target. Figure 1 shows the ODA/GNI ratio since 1997, including the provisional figure for 2001.

Figure 1: ODA/GNI figures for 1997 to 2001. (From Statistics on International Development 1996-97—2000-01 except 2001 figure)

Year

ODA/GNI ratio

1997

0.26  

1998

0.27  

1999

0.241

2000

0.32  

2001 (provisional)

0.32  

   

 

  14.  The White Paper on "Eliminating World Poverty: Making Globalisation Work for the Poor", published in 2000, committed the Government to ensuring that the ODA/GNI ratio reached 0.33 per cent by 2003-04 and to making further progress towards the 0.7 per cent UN target. The Government is committed to significantly raising the amount of our development assistance, and its share in national income, in the current spending round. The outcome of this spending round will be announced later this year and will cover the years up to 2005-06.

  15.  During the 1980s and early 1990s the average ODA/GNI ratio for DAC donors fell steadily. Figure 2 shows the average ODA/GNI ratio from 1976 to 2000. Since 1997 there has been some sign that the decline in ODA has reversed or at least halted. In 2000, a fall in ODA volume of 0.4 per cent over the previous year combined with economic growth averaging 3.7 per cent across DAC members pushed the DAC average ODA/GNI ratio down from 0.24 per cent to 0.22 per cent.

  16.  The ODA/GNI ratios of individual DAC members in 2000 are shown in figure 3 along with weighted averages for all DAC members and for European Union countries. Data for ODA/GNI ratio and ODA volume of DAC donors from 1996 to 2000 are shown in figure 4. In 2000, Luxembourg joined Denmark, Netherlands, Sweden and Norway as countries which meet the UN 0.7 per cent target.

  17.  A number of countries have made commitments to increase either their ODA volume or their ODA/GNI ratio. Most of these were made during the run up to the Financing for Development conference. The Swiss Government have committed to reaching an ODA/GNI ratio of 0.4 per cent by 2010. The Norwegians have committed to reach 1.00 per cent by 2005. The following EU countries have made individual public commitments to increase their ODA/GNI ratios:

Belgium:

0.7 per cent by 2010

Finland:

0.4 per cent by 2007

France:

committed to keeping its ODA/GNI ratio above EU average

Greece:

0.33 per cent by 2006

Ireland:

0.45 per cent by 2002 and 0.7 per cent by 2007

Italy:

0.25 per cent by 2006

Luxembourg:

1.00 per cent by 2005

Portugal:

0.36 per cent by 2006

Sweden:

1.00 per cent by 2006


 

 

  18.  The Japanese government has not made any commitments to increase or maintain either its ODA/GNI ratio or its ODA volume. The outlook on ODA in the 2001 DAC Development Co-operation Report states that: "In the largest donor, Japan, ODA is expected to fall as a result of overall efforts to reduce the budget deficit". However, the Japanese government has given assurances that aid to Africa will be protected. Denmark has also announced that it will reduce from 1.00 per cent to 0.7 per cent.

Figure 4: ODA/GNI ratio and ODA volume for DAC donors from 1996 to 2000

   

per cent GNI

   

$ Million

 
 

1996

1997

1998

1999

2000

1996

1997

1998

1999

2000

Australia

0.27

0.27

0.27

0.26

0.27

1 074

1 061

960

982

987

Austria

0.24

0.26

0.22

0.26

0.23

557

527

456

527

423

Belgium

0.34

0.31

0.35

0.30

0.36

913

764

883

760

820

Canada

0.32

0.34

0.30

0.28

0.25

1,795

2,045

1,707

1,706

1,744

Denmark

1.04

0.97

0.99

1.01

1.06

1,772

1,637

1,704

1,733

1,664

Finland

0.34

0.33

0.32

0.33

0.31

408

379

396

416

371

France

0.48

0.45

0.40

0.39

0.32

7,451

6,307

5,742

5,639

4,105

Germany

0.32

0.28

0.26

0.26

0.27

7,601

5,857

5,581

5,515

5,030

Greece

0.15

0.14

0.15

0.15

0.20

184

173

179

194

226

Ireland

0.31

0.31

0.30

0.31

0.30

179

187

199

245

235

Italy

0.20

0.11

0.20

0.15

0.13

2,416

1,266

2,278

1,806

1,376

Japan

0.20

0.21

0.27

0.34

0.28

9,439

9,358

10,640

15,323

13,508

Luxembourg

0.44

0.55

0.65

0.66

0.71

82

95

112

119

127

Netherlands

0.81

0.81

0.80

0.79

0.84

3,246

2,947

3,042

3,134

3,135

New Zealand

0.21

0.26

0.27

0.27

0.25

122

154

130

134

113

Norway

0.84

0.85

0.90

0.90

0.80

1,311

1,306

1,321

1,370

1,264

Portugal

0.21

0.25

0.24

0.26

0.26

218

250

259

276

271

Spain

0.22

0.24

0.24

0.23

0.22

1,251

1,234

1,376

1,363

1,195

Sweden

0.84

0.79

0.72

0.70

0.80

1,999

1,731

1,573

1,630

1,799

Switzerland

0.34

0.34

0.32

0.35

0.34

1 026

911

898

984

890

United Kingdom

0.27

0.26

0.27

0.24

0.32

3,199

3,433

3,864

3,426

4 501

United States

0.12

0.09

0.10

0.10

0.10

9,377

6,878

8,786

9,145

9,955

TOTAL DAC

0.25

0.22

0.23

0.24

0.22

55,622

48,497

52,084

56,428

53,737

EU Members

0.37

0.33

0.33

0.32

0.32

31,476

26,785

27,641

26,784

25,277

                     

  19.  The pledges for increased and more effective aid from donors are very welcome, and we will continue to press for them to be sustained and for further progress. The report prepared for Financing for Development by Ernesto Zedillo concludes that if we are to succeed in achieving the Millennium Development Goals—that include halving the proportion of those living on less than a dollar a day, reducing child mortality by two-thirds and building a better future for children all over the world by ensuring that every child has the chance to start and complete a primary education—there will be required each year until 2015 an extra $50 billion a year in aid. It requires unprecedented action by the developed world. In his speeches in New York and Washington in November and December last year, the Chancellor indicated how this might be achieved. He proposed that we could move faster to increase flows to the poorest countries by leveraging more money from the private sector. If a broad package could generate additional resources—for say 30 years or more—then this could be leveraged up by borrowing from the markets provided this was supported by appropriate guarantees/security. He suggested that in this way the international community could meet the challenge of providing the additional $50 billion a year that is required.

  20.  Existing levels of ODA could have much more impact if they were spent more effectively. The World Bank's recent report "Measuring IDA's effectiveness" estimated that IDA is 50 per cent more efficient in the task of poverty reduction than the typical bilateral aid programme, because it is targeted on countries with large numbers of poor people and with sound policies. If all aid was targeted in the same way, this could have an equivalent impact to an increase of up to 23 billion dollars in aid volume. The World Bank has estimated that untied aid is up to 25 per cent more effective in achieving poverty reduction than tied aid. If all aid was untied, this could have an equivalent impact to an increase of up to 5 billion dollars in aid volume.

HOW DESIRABLE AND REALISTIC ARE PROPOSALS FOR "NOVEL FORMS" OF FINANCING DEVELOPMENT, INCLUDING CURRENCY TRANSACTIONS TAXES?

  21.  We recognise that we need to raise a very significant amount of additional finance for development to achieve the Millennium Development Goals. Therefore we believe that it is important that the international community looks openly and carefully at all proposals that might deliver such finance.

International Currency Tax (Tobin Tax)

  22.  The proponents of the Tobin tax argue that it would promote financial stability by discouraging short-term speculative capital flows, while at the same time generating potentially large revenues—perhaps as much as 14 billion per year at a tax rate of 0.01 per cent on the value of the transaction. There are however potential difficulties with the introduction of a Tobin tax. There are doubts over the extent—if any—to which it may help prevent financial crises, and concerns that—by reducing market liquidity and preventing economic adjustment—it may actually make matters worse.

  23.  There is also considerable uncertainty over the ease with which such a tax could be collected. There are concerns over the scope for evasion, even if agreement on the imposition of the tax was reached between the G7 states. However, recent developments in technology, including the increasingly integrated foreign exchange settlements system, have allayed some of these concerns. It remains the case, however, that there is little support amongst national governments for the introduction of such a tax, which will require near-universal support in order for it to be implemented effectively.

SDR Allocations

  24.  The SDR is an international reserve asset used to supplement members' existing reserve assets. The UK supports the implementation of the proposed Fourth Amendment to the IMF Articles, which would allocate SDRs on a one-off basis, to allow all members to participate in the SDR system on an equitable basis. The proposal requires an 85 per cent majority of the IMF voting power to complete ratification, which in turn requires a positive vote by the US Congress.

WHAT ARE THE PROSPECTS OF DEVELOPING COUNTRIES DOMESTICALLY GENERATING SUFFICIENT FINANCE FOR DEVELOPMENT? TO WHAT EXTENT WOULD THESE PROSPECTS BE INCREASED BY COUNTRIES PRACTISING GOOD GOVERNANCE AND PROMOTING THE RULE OF LAW?

  25.  It is only likely to be possible for developing countries to generate domestically a small share of the additional $50 billion of funds required to meet the MDGs. The World Bank estimate that if poorly performing countries raised their savings rates and efficiency of investment to the average levels achieved in countries with good policies, then this would reduce their funding requirements by some $7 billion (from $22 billion to $15 billion).

  26.  Globalisation is changing the context in which governments interact with private investors. Although foreign private investment in developing countries has risen significantly over the last couple of decades or so, much of this investment is concentrated in a small number of large countries. Many of the poorest countries including those in Sub Saharan Africa have not succeeded in attracting significant amounts of foreign or local private savings and investment sufficient to sustain high rates of economic growth.

  27.  DFID has identified seven key capabilities required for modern effective states and the achievement of poverty reduction. One of these is to "provide macroeconomic stability and to facilitate investment and trade". Governments have a critical role to play in creating the right enabling environment to promote both local and foreign private sector investment.

  28.  Certain core functions of the state that affect the business climate include operating predictably with a transparent framework of laws and rules; maintaining a sound, non-distortionary policy environment, including macro-economic stability; and guaranteeing effective basic social services and infrastructure. Business surveys undertaken to identify the constraints to private sector investment have shown that where the Government lacks credibility in its core functions, private investment, both local and foreign, lags behind that of other countries.

  29.  These surveys indicate that these conditions have often not been provided in poorer countries in the past. In particular, where crime is rife, or where there are unpredictable changes in laws and policies, insecurity of property, unreliable judiciary or unstable governments, and where businessmen are required to conduct regular and protracted negotiations with public officials to run their businesses, this provides a major disincentive to the private sector to invest. Business surveys show that corruption is a major deterrent to private investment. Surveys also highlight that overly complex or inappropriate systems of regulations, high taxes, poor public infrastructure and misguided public investment policies are also a significant deterrent to private savings and investment.

  30.  Different factors may bear on domestic and foreign investment in different country contexts, such as middle income countries, poor countries and countries in conflict. More needs to be done by donors and others to understand the political constraints to reforms to promote local and foreign investment. Building up the key public institutions to support market based development and creating a stable, predictable, sound policy environment is crucial. Governments and donors can learn lessons from what has worked and what has failed.

  31.  Governments need to embark on a clear comprehensive agenda to build up the capability of the State to improve the enabling environment for private sector investment. This includes:

    —  Making Government itself bound by effective rules and restraints and subject to more transparent and accountable checks and balances to include: rooting out corruption, cutting back on the discretionary power of public officials, making public spending and investment policies more effective, and making Governments more open and responsive to the needs of the private sector.

    —  Implementing and enforcing a sound legal framework which provides adequate protection and support to the private sector including the ability to enforce contracts, resist arbitrary seizure of assets and to seek redress against unlawful practices.

    —  Reforming State Owned Enterprises particularly those that supply key goods and services to the private sector critical for its success such as power, transport, and other supporting infrastructure.

    —  Creating the right regulatory environment for the private sector which strikes a balance between creating competitive incentives for private investment and the need to spread the benefits of growth equitably.

    —  Investing in people through effective education, training and health programmes to enhance the productivity of the local labour force.

  32.  Developing country governments are likely to require a significant amount of support from donors and others to successfully implement policies and programmes to improve the enabling environment for private investment.

Department for International Development and HM Treasury

April 2002

 

 

 


 
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