NGLS Roundup 78, August 2001

FFD PANEL CALLS FOR BETTER ECONOMIC GOVERNANCE

Better governance of the global economic system, significantly higher levels of aid and freer markets would go a long way toward achieving the international development goals defined at the global conferences and summits of the 1990s, and supported by Heads of State and Government at the UN Millennium Summit (see NGLS Roundup 62), according to the High-Level Panel on Financing for Development (see Go Between 86 and NGLS Roundup 71).

At the launch of the Panel's Report at UN headquarters on 28 June 2001, Ernesto Zedillo, Panel Chair and former President of Mexico, stressed that greater political support and public awareness would be crucial for improving financing for development. He said increased financial commitments were critical for debt relief, humanitarian efforts, and the effective functioning of international institutions like the UN. “The public has little awareness of how meagre foreign aid giving is,” he said. He called for civil society and organizations with global reach to educate the public on the effectiveness of development assistance and reverse the misperception that donor countries give away too much money.

According to the World Bank's World Development Report 2000/2001, while donor countries' economies have grown since 1992, their levels of official development assistance (ODA) have dropped. In 1999 total ODA stood at approximately US$56 billion or half what the Panel says is necessary to achieve development goals by 2015. Mr. Zedillo raised the possibility of such initiatives as a carbon tax and a tax on currency transactions to generate resources for international cooperation. “An ambitious agenda is necessary to raise needed revenue,” Mr. Zedillo said. “If only out of self-interest, all countries should consider the report without prejudice.”

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Principal recommendations contained in the report include:

--launching a global campaign for the Millennium Goals;

--convening a UN Global Economic Governance Summit with the possibility of establishing an Economic Security Council;

--initiating a Development Round of multilateral trade negotiations at the Qatar WTO Ministerial;

--establishing a multilateral Commodity Risk Management Scheme for less developed countries;

--shifting aid voluntarily to a “common pool;”

--exploring the desirability of securing an adequate tax source to finance the supply of global public goods (GPGs);

--studying further the feasibility and convenience of a Tobin-style tax;

--considering a tax on carbon emissions to reduce greenhouse gases and raise revenue;

--consolidating environmental institutions into a Global Environment Organization;

--strengthening the International Labour Organization (ILO) and its ability to enforce labour standards; and

--creating an International Tax Organization (ITO).

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BACKGROUND

In December 2000, UN Secretary-General Kofi Annan appointed Ernesto Zedillo to head a High-Level Panel that would advise him on measures he could recommend to fulfil the financing needs of the world's developing countries.

Mr. Annan gave the Panel the task of identifying achievable actions that could be carried out by governments, business, civil society and international institutions in the areas of trade, aid, debt relief, investment, domestic resource mobilization and global decision making on financial matters, and to identify new ways to mobilize funds for development.

Serving on the High-Level Panel were Abdulatif Al-Hammad, Director-General, Arab Fund for Economic and Social Development, Kuwait; David Bryer, Former Director, Oxfam, United Kingdom; Mary Chinery-Hess, Former Deputy Director-General of the International Labour Office (ILO), Ghana; Jacques Delors, former Finance Minister of France and President of the European Commission; Rebeca  Grynspan, former Vice-President, Costa Rica; Alexander Livshitz, Chairman, Russian Credit Bank; Abdul Majid Osman, former Finance Minister of Mozambique; Robert Rubin, former Secretary of the Treasury, United States; Manmohan Singh, former Minister of Finance, India; and Masayoshi Son, President and CEO of the Japan Softbank Corporation.

TRADE

The Report of the Panel strongly believes a new trade round could be biased in favour of developing countries and that would remedy some of the imbalances that currently favour industrial countries. The Report says that all countries would gain from dismantling the remaining trade protection in rich countries. “While some Panel members feel it is crucial that developed countries first rebuild confidence in the World Trade Organization (WTO) by delivering on both the spirit and the letter of previous agreements, the Panel as a whole strongly endorses the launching of a new round of trade liberalization at the next WTO ministerial meeting, to be held in Qatar in November 2001.” The Report qualifies this recommendation by saying the round could only succeed if it focuses mainly on the trade needs of developing countries by accelerating agricultural trade negotiations and phasing out quotas on textiles and clothing. On the contentious issue of liberalizing the trade in services, only some members of the Panel believed this would contribute to the welfare gains for developing countries. Unlike some countries in favour of a new round, the Panel opposes the inclusion of labour and environmental standards in trade discussions and prefers to see appropriate international institutions, such as a strengthened ILO and a proposed Global Environment Organization take up these concerns.

The Report of the Panel suggests three essential issues that must be tackled by the new trade negotiations if it is to be a “development round”:

--the implementation of the Uruguay Round and the full compliance by industrial countries of commitments made, and an open review of some regulations, including anti-dumping, trade-related intellectual property rights (TRIPs), and trade-related investment measures (TRIMs), which developing countries have found either extremely hard to implement or outright counterproductive;

--the liberalization of the agricultural sector, which should translate into significant improvement in market access for developing countries, and the elimination of export subsidies and a tightening of support to domestic producers; and

--the total elimination of remaining trade barriers in manufacturing, particularly on textiles and clothing.

The Report also suggests legitimizing limited, time-bound protection of certain industries of countries in the early stages of industrialization. This would allow countries to actively nurture the development of an industrial sector rather than merely provide protection to import substitution programmes. Such measures would help developing country governments to resist excessive demands from their domestic lobbies and from multinationals considering local investment. The Report also suggests that a new round should consider liberalizing migration, negotiating a related international agreement on the “movement of natural persons” and the rules governing short-term overseas employment. “The time has come,” says the Report, “to consider the possible benefits of migration in generating remittances to developing countries.”

The Report of the Panel recognizes that least developed countries (LDCs) in particular could benefit from better market opportunities but require additional support to enhance their capacity for trade negotiations and to diversify their exports. The Report recommends re-establishing and improving the International Monetary Fund (IMF) Compensatory Financing Facility and creating a multilateral Commodity Risk Management Scheme to limit the economic damage resulting from weak and fluctuating primary commodity prices. This initiative would allow poor farmers and other producers in developing countries to buy insurance on the prices of specific principal commodities exported by developing countries. The scheme would be operated by an international organization, and while the scheme would not attempt to stabilize market prices, it would ensure a minimum price for the individual producer.

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“…both organizations [World Bank and IMF] function because of the willingness of the industrial countries to commit substantial financial resources to them. It is a fact of life that creditors expect to control organizations in which they place money.”

—Report of the High-Level Panel

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REFORM OF WTO

While recognizing the need for a “development round” of trade talks, the Report also highlights the current weaknesses of the WTO and the urgent need for reform and support in certain critical aspects. The Report says that problems arise from the relatively weak position of developing countries in the institution and the under-funding of the institution itself.

The Report notes that because of the nature of the Uruguay Round accords, many countries found that, after the Round, they had accepted a series of obligations that had been developed without their participation, and which they would have great difficulty implementing. In order to remedy this situation, the Report suggests the creation of a small but representative steering group, which would be responsible for negotiating consensus on future trade accords. The actual decision-making system would be more balanced and allow smaller countries to play a greater role. However, the Report recognizes that such changes would not come from within but would require a larger political impulse “stemming from the construction of global economic governance.” This is in keeping with the Report's assertion regarding change at the World Bank and IMF, of which it says, “both organizations function because of the willingness of the industrial countries to commit substantial financial resources to them. It is a fact of life that creditors expect to control organizations in which they place money.” In the case of the WTO, most income is derived from Member States' contributions, established according to a formula based on the countries' share of international trade. WTO figures indicate that in 2001 the Group of Seven Industrial Countries (G-7) contributed approximately 50% of the WTO’s budget.

According to the Report, under-funding and under-staffing of WTO is the main reason the organization has not been able to provide technical assistance to developing countries to help improve their effectiveness in multilateral trade negotiations, trade opportunities and the dispute settlement mechanisms. It says that the 2000 budget of the WTO was less than 15% of that of the IMF.

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“Many of the issues at the heart of development financing have to do with global economic governance.”

—Report of the High-Level Panel

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GLOBAL ECONOMIC GOVERNANCE

Some of the more far-reaching proposals made by the Report concern global governance, including the convening of a one-time Globalization Summit by the UN; a possible Economic Security Council; the creation of an International Tax Organization; a new Global Environment Organization; and a strengthened ILO. According to the Report, “Many of the issues at the heart of development financing have to do with global economic governance.” It suggests reform of the current system, which was designed over 50 years ago and is not keeping up with the growth of international interdependence. The Report says that examples of this include the lack of a mechanism to anticipate and counter global economic shocks; friction and frustration caused by the integration of markets; increasing concentration of economic decision making in the hands of a few countries; no commonly agreed instrument or procedure for deciding which organization does what; and restrictive membership fora, which can lack adequate political decision-making authority.

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“The other major lacuna in existing international economic arrangements is the absence of any apex organization with political legitimacy.”

—Report of the High-Level Panel

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In light of the deficient arrangements on global governance, the Report of the Panel suggests the United Nations convene a “Globalization Summit” to speed up some ongoing processes of reform and launch new ones that are urgently needed to help fulfill the promises of globalization. Such a meeting would bring together a group of Heads of State, large enough to be representative but small enough to be efficient. Its task would be to take up issues such as reform of the international financial architecture, desirability of global taxation, and creation of a global council at the highest political level to provide leadership on issues of global governance.

The Report endorses the 1995 recommendation of the Commission on Global Governance for the creation of such a council because of the “absence of any apex organization with political legitimacy.” One suggestion by the Report is the creation of an Economic Security Council, which would take up global economic problems and the linkages between economic, social, and environment issues in the same way the UN Security Council focuses on peace and security. The Council would provide a strategic framework for policy made in international organizations and ensure consistency across their policy goals, and promote intergovernmental dialogue on the evolution of the global economic system.

The Report also says that there is a need to establish an organization to fill the vacuum in the area of international taxation. An International Tax Organization (ITO) could deal with issues raised by transboundary income-generating activities of both individuals and corporations. The Report says that in today's economy of financial mobility and flexibility, countries are increasingly competing not by tariff policy or devaluing their currencies, but by offering low tax rates and other incentives, in what has been called a “race to the bottom” or “tax degradation.”

The areas to be explored by an ITO include:

--developing and securing international agreement on a formula for the unitary taxation of multinationals;

--sponsoring a mechanism for multilateral sharing of tax information to curb the scope for evasion of taxes on investment income earned abroad;

--developing procedures for arbitration when frictions develop between countries on tax questions;

--restraining tax competition designed to attract multinationals;

--negotiating with tax havens to persuade them to desist from harmful tax competition; and

--engaging in surveillance of tax developments.

The Report recognizes that this would be an ambitious mandate, and suggests that at the very least an ITO could compile statistics, identify trends and problems, present reports, offer technical assistance and provide a forum for the exchange of ideas and the development of norms for tax policy and administration.

The Report recommends changes to existing institutions as well. For example, the voting structure within both the IMF and World Bank has been criticized for placing decision-making power squarely in the hands of industrial countries and the United States in particular. The Report recognizes the difficulty in balancing the need of smaller and poorer countries to have a voice in these institutions against the need for financial security of the institutions gained through primary donors wielding greater influence. Nonetheless, this reality should not preclude continuing attempts to correct anomalies in their governance, according to the Report.

The Bretton Woods Institutions (BWIs) have also been the target of criticism for the conditionality attached to lending, the imposition of a one-size-fits-all approach to development and the insensitivity to political realities, says the Report. They have also been criticized for lending only where the policy environment is favourable and undermining efforts to give countries greater ownership over their development strategies. To address the situation, the Report suggests the BWIs maintain a dialogue with the United Nations to ensure that countries other than those favoured by the World Bank and IMF for their policy environments can still benefit from lending.

OFFICIAL DEVELOPMENT ASSISTANCE

The Report of the High-Level Panel acknowledges that while trade, foreign direct investment (FDI), and debt relief are all factors in contributing to development, ODA continues to play a key role for those countries that do not attract significant capital inflows or cannot afford to borrow extensively from commercial sources. In 1999 however, ODA levels stood at an average of only 0.24% of the GNPs of the 22 members of the Organisation for Economic Co-operation and Development’s (OECD) Development Assistance Committee (DAC), way below the internationally-agreed target of 0.7%. The Report says that with this level of ODA, the international community could fail to meet the 2015 development targets as a result of an annual shortage of US$50 billion.

The Report says that to counteract resistance in some donor countries to raising ODA levels, the public in these countries should be made aware of the Millennium Goals to be reached by 2015, such as achieving primary education for all children, and reducing by half the number of people who do not have access to safe drinking water. A global campaign on such goals could help rekindle political momentum behind aid programmes, says the Report.

However, it is unclear how the public in donor countries would react to such a message, given the extensive campaigning by Jubilee debt networks worldwide, which demonstrated that debt servicing by poor countries often exceeds aid received many times over. Therefore the call for increased aid would have to be seen as an addition to debt cancellation initiatives. The Report recognizes the impact of NGOs working on debt and says, “Such a campaign [on the Millennium Goals] would need to combine the enthusiasm that the debt campaigners brought to bear in their successful campaign with the professional expertise of the key international agencies and the financial support of private foundations.”

The Report emphasizes not only the need to change ODA levels, but to change how ODA is used in order for it to yield greater value for money spent. The problem has to be addressed by donor countries, which have not always used aid to reduce poverty but instead to further foreign policy objectives or promote their own exports. In addition to these problems, the Report identifies other factors that limit the effectiveness of aid including conditionality tied to governance, procurement, anti-corruption, economic policy, the environment, social spending, gender equality, human rights and child labour. Other hindrances are related to administrative costs and a lack of donor coordination, according to the Report.

As a potential remedy to this multi-layered problem, the Report of the Panel recommends the “common pool” approach to ODA. This would involve a potential aid recipient drawing up its development strategy, programmes and projects primarily in consultation with its own population but also in a dialogue with donors. The strategy would then be presented to donors who, if they agree with the plans, would place unrestricted financing into a common pool of development assistance. The logic behind such an approach is to allow policy makers to economize on time spent negotiating conditions, to eliminate the tying of aid to goods and services provided by donor countries, and to reduce some of the policies of conditionality, while at the same time making aid recipients aware of the consequences of pursuing policies judged unwise by the donor community. The Report acknowledges that this new approach could upset the donor community and some recipient countries, but suggests that in order to put relations between donors and recipients on a new footing and engender ownership by developing countries, the latter have to be given greater responsibility and the room to make mistakes.

DEBT

Since campaigns brought the issue of debt into the centre of the international policy arena, all donor countries and international financial institutions have come to recognize the need for debt relief. However, the greatest battles have been waged over how much, how fast, and how deep. The Report recognizes the importance of debt relief initiatives because developing countries are servicing debt at the expense of social spending, and their ability to access new credit is eroding. While the Report makes few suggestions on debt relief, it does say that more effort is needed to reduce the debt of highly indebted poor countries (HIPCs) to sustainable levels. Report members were divided over calling for a further debt relief agreement (HIPC-3) or merely considering one. Nonetheless, all cautioned against two scenarios: first, developing countries ending up paying for debt relief of HIPCs as a result of multilateral development banks (MDBs) raising their interest rates to compensate for using reserves to cancel debts; and second, concessional term debts owed to the World Bank’s International Development Association (IDA) financed by cutting future IDA lending, which could result in penalizing non-HIPC low-income countries.

The Report's principal message on debt is that any relief initiatives have to be financed by additional ODA. If not, the net effect will be the redistribution of aid amongst countries and possibly reduced ODA for less-indebted but still poor countries.

CAPITAL FLOWS

Foreign capital is vital for developing countries, says the Report of the Panel, but only as a supplement to domestic resources. It believes that such investment will only be forthcoming if developing countries nurture an attractive investment climate built on improved accounting and auditing standards and enhanced transparency, corporate governance, and impartiality of their administration.

The FDI-led approach to development has been criticized because of the relative weakness of developing countries in the face of foreign capital and their tendency to “bend over backwards” to attract such flows. The Report cautions against such a model and suggests instead that foreign investors should not be exempted from domestic laws governing corporate and individual behaviour; that the authority of domestic courts, tribunals and regulatory authorities over foreign investors and their enterprises should not be curtailed; and that developing countries should not use costly and discretionary investment incentives, nor weaken labour and environmental standards to attract foreign capital in a “race to the bottom.”

However, the Report does suggest that countries should continue to liberalize their capital accounts in an effort to attract foreign capital other than FDI. This should only be carried out under appropriate circumstances–when a country has sound macro-economic fundamentals, a healthy domestic financial system and an effective system of prudential supervision. The Report recognizes the potential destabilizing effects of capital movements and suggests that under special circumstances, temporary capital inflow taxes could be imposed in order to limit volatility.

NEW AND INNOVATIVE SOURCES OF FUNDING

The current debate over how to pay and who should pay for global public goods such as peacekeeping, the preservation of biodiversity, and research into tropical medicines has encouraged the examination of new and innovative sources of financing. The Report recommends the International Conference on Financing for Development (to be held from 18-22 March 2002 in Mexico) explore whether or not an adequate international tax source could be beneficial in this regard. The two sources examined in the Report are a tax on currency transactions (CTT) and a tax on the consumption of fossil fuels (carbon tax).

At the early stages of the preparation of the High-Level Panel Report, some NGOs were concerned that the Report would either ignore the CTT or dismiss it without undertaking an examination of its possibilities or feasibility. However, the Report does consider its potential as a deterrent to short-term speculation and as a source of revenue. According to the Report, some questions remain unanswered: would the foreign exchange market (central banks in particular) merely reconfigure its role in these activities to avoid the tax? Would speculators move their activities from the foreign exchange market to derivative instruments? Would the hoped-for curb in speculation be so high as to subvert the revenue-raising potential of the tax? The Panel’s Report expresses some doubts on the CTT, but does not dismiss its possibilities out of hand; it recommends that further rigourous study is needed before any definitive conclusion can be reached.

Another proposal of the Report to generate a global public good as well as raise revenue for development is a tax on carbon emissions. The Report suggests that this would control global warming through taxing the consumption of fossil fuels, at rates for each type of fuel that reflect its contribution to global carbon emissions. The tax would create economic incentives and guide production away from more expensive and harmful carbon-based fuels. The Report envisages that industrial countries would have to agree to impose at least a minimum tax rate and transfer their receipts to international organizations responsible for financing the provision of global public goods. Developing countries, on the other hand, would be allowed to “recycle” their tax receipts into their own economies for development purposes.

WHAT WILL HAPPEN TO THE REPORT?

The Report of the High-Level Panel will be the contribution of the Secretary-General to the resumed Third Session of the Preparatory Committee scheduled for 15-19 October 2001 in New York. This meeting will have as its other significant input the “concise first draft” of the outcome document by the FFD Facilitator, Mauricio Escanero (Mexico), which should be prepared by mid-September 2001 and be available on the FFD website (www.un.org/esa/ffd).

CONTACT

The full Panel report (A/55/1000), press materials and the webcast of Mr. Zedillo's 28 June press conference can be found on the United Nations website (www.un.org/reports/financing). If you would like to obtain a hard copy of the report in any official UN languages, contact NGLS in New York (Room DC1-1106, UN, New York NY 10017, United States, Tel. +1-212 963 3125, Fax +1-212 963 8712 )

This edition of NGLS Roundup was prepared by the United Nations Non-Governmental Liaison Service (NGLS). The NGLS Roundup is produced for NGOs and others interested in the institutions, policies and activities of the UN system and is not an official record.