Saturday, November 29, 2014

Innovation in Development Finance

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

ODA declined significantly after the Cold War, dropping to 0.22% of developed countries’ combined GDP in 1997-2001, before rising again after the September 11, 2001, terrorist attacks in the United States and the International Conference on Financing for Development in Monterrey, Mexico, the following year. Then, as developed-country governments imposed strict fiscal austerity in the wake of the global economic crisis, ODA fell again, to 0.31% of GDP in 2010-2011.

But, 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. And, while the Leading Group on Innovative Financing for Development – which includes 63 governments, as well as international organizations and civil-society groups – has contributed to significant progress in the last decade, the definition of innovative development finance remains in dispute. Indeed, critics contend that the international taxes – for example, on carbon emissions – that the Leading 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’s 2012 World Economic and Social Survey 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 (international reserve assets maintained by the International Monetary Fund). The resulting funds, as well as those from existing unused SDRs, 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 project (RED) 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 with the cause. 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 that they are channeled through mechanisms like the International Finance Facility for Immunization, which binds ODA 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 last six years, roughly $6 billion has been allotted to innovative sources of financing, compared to current annual ODA of more than $120 billion – and far less than the almost $20 trillion committed by G-20 countries to economic recovery (including bailouts) since 2008. But some recent proposals promise to raise far more resources for sustainable development.

An internationally coordinated carbon tax could raise $250 billion annually, while a small financial-transaction tax could raise another $40 billion. Likewise, regular SDR emissions to keep pace with the growth of global liquidity could yield roughly $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 continued potential of inclusive multilateralism.

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    1. CommentedGary Tucker

      The most effective way to spur growth in the developing world is through self financed, non governmental, market driven solutions that focus large sums of capital on a very few newly created financial and industrial specific industries.

      For centuries, throughout the world, people living in desert climates have carefully channeled rain water into ever greater channels and catch basins to be used by all. This idea is based upon the same careful channeling of scarce resources into a more effective and productive use of such assets.

      Take the common ordinary mutual fund. Or unit trust as it is known in some areas.

      Create one, that is managed by a management company that is 80% owned by a development foundation and 20% by a private/public engineering and planning company.

      Have this mutual fund have the ability to trade units in the fund for cash, stocks, bonds (both government and corporate) from financial institutions from every developing and then developed country in the world.

      At a large enough size in assets this mutual fund would act as a quasi alternative reserve currency peg. Sort of the savings account to a currency checking account.

      Instead of choosing the dollar or some other currency, financial institutions could instead trade for units in this single large fund. It would only work with one. A group of funds competing for assets would defeat the purpose.

      This would actually be providing a much needed service to developing countries who do not wish to be so heavily reliant upon domestic currencies, US dollars, and other major currencies.

      Next, instead of a Tobin Tax assessed by governments, the fund would pay a 1% management fee to the management company. As the fund would initially, and for some years, be targeted at financial institutions and employing and low trading method (besides currency for redemption's) both the foundation and the planning and engineering company overseeing foundation projects would be well financed.

      A mutual fund of say $10 trillion in currency, bonds, and stocks could well provide up to $50 billion per year in revenue to a foundation.

      The foundation would be focused on three areas.

      Planting of trees and other methods of improving agriculture output worldwide.

      Water projects worldwide.

      Infrastructure projects involving large capital outlays.

      Next, in conjunction with and initially financed by the mutual fund, the concept would be to create 6 regional development companies, publicly traded, covering the entire world.

      The mutual fund, fund management company, foundation and engineering management company, along with the 6 regional development companies are described in greater detail here.

      It is again an idea with no government ownership, focused on sustainable growth worldwide, and provides targeted solutions in tandem with work being done by countless thousands of other institutions worldwide.

      The idea needs dedicated people to see it through to success.

    2. CommentedCarol Maczinsky

      The deal seems that billionaire tax saving schemes are the lesser evil compared to rotten government officials in developing nations. Now, I don't think that's true. The whole decolonialisation movement failed bitterly.