On Monday the UN released a report, which calls for a huge increase in direct financial aid to poor countries in order to achieve the Millennium Development Goals (MDGs). The plan, written by the UN’s head of poverty-reduction Jeffrey Sachs, is the latest addition to a range of initiatives and suggestions on how money could be raised to help the world’s poor.
Opinions differ as to how much money is needed to achieve the ambitious set of goals, which include a halving of global poverty by 2015. Whereas the UN report calls for a massive rise to at least $135bn a year starting this year, up from the present $20bn, and rising to $195bn by 2015, the UK Treasury has estimated an additional $50bn a year should be enough.
Several governments are promoting different financing plans, but none of them has received unanimous support. A recent investigation into innovative suggestions for increasing development finance commissioned by the UN, found the following fund raising initiatives. Emerging Markets looks at their pros and cons
The International Finance Facility
The hottest idea is Gordon Brown’s International Finance Facility (IFF). The IFF proposes to raise funds through collecting donor money and then issuing bonds in the international capital markets.
The key benefit of the IFF is that it would raise money upfront in order to speed up the MDGs process and would provide a steady and predictable flow of assistance. However, as donors would have to repay the bonds at some point, the question arises whether this would negatively affect aid flows in the future.
The UK Treasury has already collected the support from several key donors. “As the proposal is finalized, we expect support to increase during the course of 2005. Thirty-nine developing countries - including Brazil, China, India and South Africa - have welcomed the IFF, in addition to support from France, Italy and the Nordic countries,” says a Treasury spokesperson. During the World Economic Forum meeting in Davos, German Chancellor Gerhard Schroder gave his backing to the idea.
Countries worried about their budget and fiscal stability, such as the US and Canada have been more cautious in their approach.
The Chirac-Lula tax
In September, French President Chirac joined Brazilian President Lula in his call for a global tax levied on arms purchases, the revenues of which would be used for poverty alleviation. Lula presented his plan for a global anti-hunger fund financed by a tax on arms exports at the G8 meeting in 2003. A global tax to speed up development is also the favoured option of the French government.
The Landau global tax initiatives
Last September, a work group composed of civil servants, NGOs and private sector leaders, presided over by Jean-Pierre Landau, the French inspector of finances, released a report on a global tax scheme titled “New International Financial Contributions.” President Chirac commissioned the report.
The report put forward five tax proposals: implementing a tax on arms sales (the Chirac-Lula idea); on carbon dioxide emissions; on maritime transport; on financial transactions (the Tobin tax); and on multinational companies’ profits.
Although the economic impact of such taxes, which would be set at minimal rates of one or two basis points, is likely to be very low, its distributional effects are hard to predict. But such taxes could also have secondary, positive effects, such as lowering global volatility or reducing pollution. The report did not give priority to any one proposal because the idea was to create debate.
The biggest obstacle is that none of the proposals presented can be implemented without full international support. A global tax is unlikely to be popular with many national governments. Chirac,himself, in his UN speech endorsing Lula’s proposal made it clear that he would not support a levy on weapons manufacturers but only on arms sales to individuals, as France has a large arms industry.
Special Drawing Rights
Another approach argues that IMF special drawing rights (SDRs) should be revived and increased to fund development. A 2002 UN panel headed by former Mexican president Ernesto Zedillo supported SDRs and George Soros also advocated the idea in his book “George Soros on Globalization”, published in the same year.
SDRs are an IMF specific reserve asset based on a country’s international currency reserves and valued according to the IMF’s own gold reserves. As many developing countries have built up hard currency reserves, the idea arises whether they could use these to draw on additional IMF funds. Rich countries could also draw their share and dedicate them to development.
However, it is not clear how useful drawing SDRs would prove. For instance, there is little consensus over how much money could be raised through SDRs, whether they would amount to anything more than low-interest loans and whether SDRs would be a one-off allocation or would be paid out at regular intervals. The idea, therefore, has received little attention over the past two years.
Global lottery
Other financing strategies that have been established as technically feasible include the creation of a global lottery, which could yield up to $6bn a year, and the issuance of a global premium bond, whose owners participate in regular prize draws instead of interest payments.
Remittances
On the private side, countries could focus on increasing private donations for development or increasing the amount of remittance flows from migrants that work in rich countries and send money home. Annual remittance flows stand at double the value of official development aid and amounted to at least $100bn last year.
The US government is a big fan of remittances and last year it launched a “Remittance Strategy”, aimed at reducing the heavy transaction costs incurred by cross-border financial transfers.
The US government believes remittances are a better way of financing development than aid as the money goes directly to the individual. The thinking is that remittances help promote growth and economic development, whereas aid can lead to a dependency culture.
Bush’s Millennium Challenge Account
Although the US is increasing foreign aid spending, to the point that it now has the fastest growing aid budget of the leading donor nations, it still gives less aid than almost anyone else. While the UN recommends that industrialized nations dedicate 0.7% of their GDP to development aid, the US gives barely 0.2%. Moreover, it imposes stringent conditionality on recipient countries.
An example of this thinking is found in the Bush administration’s Millennium Challenge Account (MCA), which links, in the president’s words “greater contributions from developed nations to greater responsibility from developing nations”. The MCA ranks countries according to the categories of “ruling justly”, “encouraging economic freedom”, and “investing in people” and only distributes aid to those that achieve a certain standard.
Last year, Congress approved $1bn funds for the MCA and for 2005 the requested figure is $2.5bn. By 2006 the government hopes to receive approval for an annual $5bn to be spent.
Conclusion
There is a concern among the development community that with so many proposals too much time is being wasted on reports and committees and not enough on actually providing funds. NGOs argue that governments need to reach a consensus quickly and put the best ideas into action.
“The litmus test is whether governments believe their own rhetoric on aid,’ says Kevin Watkins, director of the UNDP’s Human Development Report.
He reckons the IFF has the greatest potential for gathering international support. “Now is a critical period,” he says. “There is a big campaign building up behind it.”