Innovation the key to making development finance successful

By Jomo Kwame Sundaram  / 

Wed, Apr 17, 2013 - Page 9

More than four decades ago, the world’s wealthiest countries pledged that at least 0.7 percent of their GDP would be devoted to official development assistance (ODA). However, fewer than a half-dozen countries have actually met this goal. Development assistance disbursements have not been stable, reliable or reflective of need, and doubts about their effectiveness linger.

The level of ODA declined significantly after the Cold War, dropping to 0.22 percent of developed countries’ combined GDP from 1997 to 2001, before rising again after the Sept. 11, 2001, terrorist attacks in the US and the holding of the International Conference on Financing for Development in Monterrey, Mexico, the following year. Then, as the governments of developedcountry imposed strict fiscal austerity in the wake of the global economic crisis, ODA fell again to 0.31 percent of GDP in 2010 and 2011.

However, since the Monterrey conference, major additional development finance needs have been identified, including aid-for-trade schemes and financing for climate change mitigation and adaptation.

In addtion, while the Leading Group on Innovative Financing for Development — which includes 63 governments, as well as international organizations and civic groups — has contributed to significant progress in the past decade, the definition of innovative development finance remains in dispute. Critics contend that the international taxes on things such as carbon emissions that the group has identified as a potential source of finance infringe on national sovereignty.

Moreover, the sources of finance do not necessarily determine how the funds are allocated, let alone how they are ultimately used. For example, although the so-called Tobin tax — a small levy on financial transactions — was originally intended to fund development assistance, a version of it was recently adopted in Europe in order to supplement national budget revenues.

Of course, such “off-label” uses of innovations in development finance do not discredit them.

The UN World Economic and Social Survey conducted last year on new development finance discusses various existing and proposed innovations in financing, intermediation and disbursement. Aside from allocating and trading greenhouse gas — mainly carbon or “carbon equivalent” — emissions allowances, “solidarity levies” could be imposed on airplane tickets and taxes imposed on aviation or ship fuel.

Another proposal involves creating new international liquidity by issuing special drawing rights, which are the international reserve assets maintained by the IMF. The resulting funds, as well as those from existing unused special drawing rights, would be allocated or re-allocated to development projects and leveraged to augment investment resources.

Yet another scheme would deploy royalties for natural resource extraction from the global commons, such as Antarctica and other areas beyond “exclusive [national] economic zones.”

Some initiatives are already underway. For example, the (RED) project is a corporate campaign that aims to raise money for the Global Fund to Fight AIDS, Tuberculosis and Malaria by donating a portion of proceeds from consumer products branded “red.” While some are critical of the disparity between what these “altruistic” companies spend on advertising and the amount of money that they actually raise, such “cause marketing” could prove to be an effective mechanism for generating additional development finance.

Furthermore, some proposals entail no additional funds. Development finance flows could be restructured so they are channeled through mechanisms like the International Finance Facility for Immunization, which binds official development assistance commitments over a long period and securitizes them in order to generate funds for immediate use.

Similarly, debt-conversion schemes such as Debt2Health and debt-for-nature swaps would allow countries to redirect debt service payments to development projects. Some worthwhile new risk-management proposals include advance commitments for new vaccines, subsidies to drug manufacturers to make their products more affordable and regionally pooled catastrophe insurance.

Over the plast six years, about US$6 billion has been allotted to innovative sources of financing, compared with the current annual official development assistance of more than US$120 billion — and far less than the almost US$20 trillion committed to by G20 countries to economic recovery, including bailouts, since 2008. However, some recent proposals promise to raise far more resources for sustainable development.

An internationally-coordinated carbon tax could raise US$250 billion annually, while a small financial transaction tax could raise another US$40 billion. Likewise, regular special drawing rights emissions to keep pace with the growth of global liquidity could yield approximately US$100 billion annually for international development cooperation. Such emissions would reduce demand for US Treasury bonds and other liquid assets of preferred currencies.

At the same time, if the world’s most powerful countries stopped promoting full capital account liberalization, developing countries would feel less pressure to protect themselves by accumulating foreign exchange reserves. By investing the funds in development projects instead, they could address both savings and foreign exchange constraints.

Finally, innovative strategies are needed to align development finance with national development goals, transforming the multilateral system operationally so that it works more effectively with stakeholders on the ground. One model is the Montreal Protocol on Substances that Deplete the Ozone Layer, which has succeeded spectacularly in reducing levels of chlorofluorocarbons, highlighting the continue d potential of inclusive multilateralism.

Jomo Kwame Sundaram is assistant director-general of the UN Food and Agriculture Organization.

Copyright: Project Syndicate