IV. INNOVATIVE SOURCES OF FINANCE FOR DEVELOPMENT
- Global public goods such as peacekeeping, agricultural research, the prevention of contagious diseases, global financial stability, and biodiversity conservation, are likely to be under-provided by national governments because the benefits of their provision extend across borders. The Zedillo Panel reported an annual shortfall of US$15 billion for the provision of global public goods, in addition to the extra US$50 billion per year needed to meet the MDG targets. Global public goods are non-rival; one person's consumption of the good does not reduce another's ability to enjoy it. They are also non-excludable; one person cannot prevent another's consumption. Such characteristics give rise to free-riding, market failure and under-provision, leading many commentators to conclude that what is needed is a new multilateral mechanism for funding the provision of global public goods.
- The Zedillo report examined a range of proposed mechanisms including a carbon tax, a currency transactions tax, and a new allocation of Special Drawing Rights (SDRs), concluding that "new sources of finance should be considered without prejudice by all parties involved". The more conservative Monterrey Consensus "recognize[s] the value of exploring innovative sources of finance". In the UK, DFID and the Treasury accept the "need to raise a very significant amount of additional finance for development to achieve the Millennium Development Goals" and acknowledge the importance of looking at proposals openly and carefully.
Currency Transactions Taxes
- We examined the proposal to establish a currency transactions tax (CTT) in some detail, seeking in particular to assess its feasibility. More commonly known as the "Tobin Tax", this proposal originated in a suggestion made by Nobel-prize winning economist James Tobin in the early 1970s to impose a small tax, most commonly of between 0.01 and 0.1 percent, on foreign exchange or currency transactions. For Tobin, the purpose of the tax was to reduce short-term capital flows in order to restore the autonomy of national monetary policy. Imposed on currency transactions, the tax would automatically fall most heavily on short term capital flows, discouraging them, but having little impact on long-term investment and trade-related flows.
- For current advocates of the tax such as War on Want and members of the Tobin Tax Network, the tax has two developmental purposes. Firstly, in reducing speculation the tax would give developing countrieswhich are particularly affected by exchange rate fluctuations and financial crises"more room for manoeuvre in terms of their domestic policy" and make them less vulnerable to the fluctuations of currency markets. This would provide developing countries with a more stable environment in which to marshal their resources to meet the MDG targets. Secondly, the tax could provide a major source of revenue which could be earmarked for developmental purposes, including the provision of global public goods. Estimates of possible revenue yields vary depending on the tax rate proposed, the expected impacts on the currency markets, and assumptions about evasion and collection, but tend to range from around US$50 billion to US$300 billion for a 0.1 percent tax.
- There are a variety of objections to CTT proposals. A first set of objections suggests that CTTs are an unnecessary and unhelpful interference in the currency markets, and that exchange rate fluctuations reflect economic fundamentals and the competence of governments in managing their economies. We accept that CTTs and capital controls are no substitute for good governance, but we do not share this view in full; volatile markets may need to be regulated to curb their harmful excesses and to prevent contagion effects. A second set of objections is that whilst CTTs would reduce the liquidity of currency markets, they may actually increase volatility rather than reduce it, and hinder the efficient workings of the markets. This is a highly technical, and also, an empirical matter. We do not pretend to have the technical expertise to assess such objections, or to adjudicate between the different views of experts who do, and as such are not qualified to judge the validity of such a critique. A third set of objections suggests that CTTs would not deter speculation as the tax is too small; a fourth argues that CTTs would cause currency markets to migrate to different tax regimes including offshore tax havens and/or into other products such as derivatives. These are serious objections, to varying degrees.
- We agree that the Tobin Tax as initially proposed would not sufficiently deter speculators at times of exchange rate instability; and that a tax set at a rate which would deter speculators would be likely to lead to market migration. However, these problems might be reduced by more sophisticated variants of the Tobin Tax such as Professor Spahn's proposed two-tier CTT. In this proposal, a low rate tax imposed at all times would generate revenues from the currency markets, and at times of exchange rate instability an additional tax would be triggered which would be at a level high enough to discourage speculation and restore stability.
- But, despite Professor Spahn's assessment that a CTT could be imposed by the EU-plus-Switzerland without pushing the currency markets either offshore or into derivatives trading, we are not convinced that the Spahn proposal addresses adequately the problems of collection and feasibility. It might also accentuate the problems of a two-speed Europe. Such matters are highly technical, and in this we defer to the assessments made by the Zedillo panel and the European Commission's report on Responses to the Challenges of Globalisation. The Zedillo report described the merits of a CTT as "highly controversial" and concluded that "further rigorous study would be needed to resolve the doubts about the feasibility of such a tax". The EU reported that a CTT would "most likely require a multilateral approach". We are aware of the suggestionmade by Rodney Schmidt of the North-South Institute and acknowledged as useful by DFID and HM Treasurythat the tax could be collected through the Continuous Linked Settlement Bank system. Schmidt argues that levying the tax on currencies rather than countries, and collecting it through the settlement system, would reduce the risk of both geographical migration of markets, and migration into derivatives. Nonetheless, in our view it would be very difficult for the UK or the EU to impose the tax unilaterally.
- We recognise that there is considerable support for CTTs both in the UK and in other countries including, in the North, France, Canada and Belgium. We too are sympathetic to the motivations behind CTT proposals. We share with many advocates of CTTs the view that exchange rate volatility contributes to poverty and hinders development, and we too wish to see more financial resources available for development. Many taxestaxes on smoking, motoring, pollutionhave two apparently contradictory purposes. This is not a significant criticism of CTTs, but the question remains as to whether a CTT is the best way, either of reducing speculation or of raising revenue. If we are to be persuaded fully, further investigation into issues of feasibility and practicality will be needed. The Spahn proposalin separating but linking the two aims of generating revenue and reducing speculationis an interesting one, which, in conjunction with technological developments in the banking system, is worthy of further consideration. Nevertheless, in our view it is imperative that generating the political will to finance development remains the central focus, and that the choice of methods by which to collect funds remains a secondary consideration. As Clare Short argued: "You do not have to invent a new tax to find the money, you have to decide whether you should find the money, and then, if new taxes are good for the international system, let us have them. But I think it is slightly dangerous to the development argument if you get boxed into thinking you can only get more money for development if you can find a new tax". The possibility of a currency transactions tax merits further consideration. Detailed feasibility studies and cost benefit analyses are required to look into CTT proposals in greater depth before they can be recommended.
Special Drawing Rights
- Created by the IMF in 1969 as an international reserve asset to supplement Fund members' reserve holdings, SDRs are in themselves neither new nor innovative. The primary motive for creating SDRs was to promote international financial stability by providing a permanent increase in the world stock of reserves and hence preventing general shortages of international liquidity from occurring. There have only ever been two allocations of SDRs. The most recent, in 1981, brought total SDR allocations to about 1.5 percent of global reserves. New allocations can be made. A general allocation, in line with existing IMF quotas, requires the agreement of 85 percent of the IMF's membership in terms of voting power. A special allocation, directed towards developing countries for instance, would require unanimity. In practice, general and special allocations can be vetoed by the USA. A special allocation to new IMF members which were not beneficiaries of earlier general allocations was agreed by the IMF Board in 1997, but is being held up by US opposition, in part because it is feared that discussion of SDRs in Congress might re-open wider issues about the role of the IMF.
- There are a variety of interlinked proposals for using SDRs to finance development. One is that a new allocation of SDRs should be used to fund an emergency financing facility to deal with financial crises. A second is that SDRs should be made available to poorer countries so that they can build up sufficient reserves without having to borrow at market rates. A third proposal, associated particularly with George Soros, is that periodic general allocations of SDRs should be made, and that developed countries should put their allocations into an international development trust fund, which would be used to finance development. ODI estimates that this proposal could raise perhaps US$4 billion per year.
- Whilst not considering any proposal in much depth, both the Zedillo Report and the Monterrey Consensus did consider SDR allocations as a means of financing development. The Zedillo Report described SDRs as a "promising approach to easing financial constraints on developing countries", and drew attention in particular to the possibility that a new SDR allocation might reduce the flow of "reverse aid" which developing countries pay to borrow sufficient reserves to protect themselves from crises. The UK supports a new general allocationthe Fourth amendmenton equity grounds, to boost liquidity and to provide finance for development, but is opposed by, amongst others, the USA, Germany and Canada. HM Treasury reports that the UK is "open to the arguments for another possible general SDR allocation".
- There are a variety of objections to SDR proposals. A first set of objections concern liquidity and inflationary pressures: there is no reliable means of calculating the liquidity requirements of the global economy; no way of assessing whether these needs can be met by the capital markets; and, no way of telling what volume of SDRs would contribute to inflationary pressures. A second objection, although clearly this would be seen as a plus from some viewpoints, is that SDR allocations would reduce the power of the IMF tothrough the attachment of conditions to its lendingencourage developing countries to adopt particular policies. A third objection is that new regular allocations, particularly specific allocations, would contravene the principles and procedures which govern IMF allocations of SDRs.
- We are supportive of the Government's position on SDRs. If the fourth amendment were ratified it would provide a welcome one-off increase in global liquidity, and might provide some resources for development. We encourage the Government to continue to press this case. However, given the strong objections and veto power of the USA, and SDRs' limited realistic potential to raise new resources, SDRs cannot be expected to provide much in the way of financing for development. The EU, in its report, questioned whether it is appropriate to use monetary creationwhich is what an SDR allocation isto finance development. We tend to share these concerns, but consider that there might be a limited role for SDRs, perhaps as part of an International Development Trust Fund.
The International Development Trust Fund
- In a series of speeches and publications made since November 2001, the Chancellor has proposed the establishment of an International Development Trust Fundor perhaps more precisely a financing mechanism or "facility"to generate quickly the step-change in aid flows which is needed if the MDG targets are to be met. The suggestion is that donor countries should commit substantial aid resources to 2015 and beyond, and that these resources should be used as collateral to leverage additional funds through borrowing in international capital markets. This borrowing would be guaranteed by donor governments. In this way, additional flows of US$15-20 billion per year could be leveraged up to US$50 billion per year. The amount of borrowing required to meet a given target would depend on initial donor contributions, interest rates, the total amount of resources disbursed by the fund, and the proportions and terms of any grants and loans made by the fund. The fund could be overseen by a new joint implementation committee of the IMF, World Bank, and perhaps other donors, and the resources distributed through existing institutions.
- Beyond this, we know very little. Indeed, the caution of the Treasury in fleshing out this proposal, indicates to us that the Government is engaged in the delicate business of trying to win international support for this proposal. This does however make any assessment of the proposed Trust Fund rather difficult and perhaps somewhat premature.
- That said, it is our duty to raise some issues which might usefully be addressed. Our main concerns are about how the large debts incurred by guarantor donor countries would eventually be paid off, and about the possible negative impact of such debts on donors' willingness to extend aid beyond 2015. In evidence, the Chancellor wondered aloud as to whether making substantial sums of aid available now might reduce the amount of aid needed after 2015. We, and the Chancellor, may hope that investing substantial amounts of aid now may produce returns in terms of poverty reduction by 2015. We may hope too that as developing countries grow economically and the global market expands, the ability of donor countries to repay their borrowing will grow too. We may also hope that by 2015 tax-payers will appreciate the wisdom of providing increased aid to developing countries. But, it would not be prudent to base our plans entirely on such optimistic hopes. In addition, it remains unclear to us what an international development trust fund could do, which a similarly-funded World Bank could not.
- Like the Chancellor, we are not dismissive of proposals for new and innovative sources of finance for development. Questions remain about some of the proposals, but there is no doubt that there is a funding gap which needs to be filled if the MDG targets are to be met. Innovative proposals may, in time, gather the international support which is needed to make them a success, and they may be a useful supplement to more traditional sources. However, it is crucial that such proposals do not obscure the real issue: there is a funding gap which can only be filled by substantial North-South resource transfers. Such resource transfers will only be possible if sympathetic Northern governments show real political leadership, both in persuading other countries, and in securing domestic public support for the necessary resource transfers. As the Chancellor put it: "each proposal comes back to this essential question, are the individual countries who are the donors prepared to do more, because it requires political will, whichever solution you come to".
77 Financing and providing global public goods: Expectations and Prospects, Institute of Development Studies, for the Swedish Ministry for Foreign Affairs, November 2001. Back
78 Q66 Back
79 Zedillo report, p.6. Back
80 Monterrey Consensus, paragraph 44. See footnote 12 for web-site. Back
81 Ev 82, para 21; and, Tackling poverty: A global new deal-A modern Marshall plan for the developing world, HM Treasury, February 2002. See footnote 13 for web-site. Back
82 The Tobin Tax Network includes 48 organisations including ActionAid, Christian Aid, Friends of the Earth, Oxfam, Save the Children Fund and World Vision from the charity sector; the GMB, TGWU, TUC and UNISON from the trade union sector; and, a range of faith-based organisations. Back
83 Q82 Back
84 Ev 69-corroborated by: Zedillo report; UN Technical note on existing proposals for innovative sources of finance; and, European Commission report on Responses to the challenges of globalisation. See--http://europa.eu.int/comm/economy_finance/publications/globalisation/r2002_185en.pdf Back
85 This two-tier CTT was outlined most recently in a paper produced by Professor Spahn for the Germany Ministry of Development Cooperation. See-http://www.wiwi.uni-frankfurt.de/professoren/spahn/tobintax/Chapter0.pdf Back
86 Zedillo report, p.9-see footnote 6 for web-site. Back
87 Responses to the challenges of globalisation, European Commission, February 2002, p.13. See footnote 84 for web-site. Back
88 Ev 82, para 23 Back
89 Ev 99. See http://www.waronwant.org/tobin/TobinTax1.pdf for Schmidt's proposal. Back
90 Q122 Back
91 Ev 46 Back
92 Zedillo report, p.58. Back
93 Ev 104, para 5 Back
94 Ev 46 Back
95 Responses to the challenges of globalisation, European Commission, February 2002, p.109. See footnote 84 for web-site. Back
96 Q101 Back
97 Ev 101 Back
98 However, see Ev 66 for projections concerning the proposed Trust Fund. Back
99 Q101 Back
100 Ibid. Back