Funding the fight against global poverty

Development Centre

Taxes, philanthropy and financial markets could all become new sources of funding to help finance development and meet the Millennium Development Goals. But donors should be aware of their pitfalls too.

On 20 September, several world leaders met in New York in response to an invitation from President Lula of Brazil to discuss possible new ways of financing the fight against world hunger. The meeting was part of the drive to meet the so-called Millennium Development Goals adopted just four years earlier, but which are now in danger of being missed.

Not that anyone has ever objected to the goals; on the contrary, experts, aid activists and the general public alike, as well as political leaders the world over, hailed them as a breakthrough, with clear targets for fighting poverty, hunger, disease, illiteracy, environmental degradation and discrimination against women. But how time flies.

Can we make up ground and meet the agreed deadline of 2015? Yes, though as those at the New York meeting would agree, more funding may be needed. How much is not clear, yet many say as much as $50 billion per year, which is roughly the total of aid spent by rich-country donors now.

Sure enough, recent pledges by donor countries, in Monterrey and elsewhere, have improved prospects for higher aid flows, but still leave the annual target to achieve the MDGs underfinanced by some $25 billion. The simplest solution is to raise aid further. However, budgets are tightening, which means new sources of development finance must be found if governments are to be sure of keeping their pledge to the world’s poor.

What are the options? Broadly, there are three: global taxes; private-sector contributions; and financial engineering.

Take global taxes first of all. These have widespread public support, notably among civil society groups, in part because they seek to finance a global public “good” (development) by imposing a tax on a global “bad”, such as speculative international finance, pollution or the arms trade. Any new tax would, of course, have to be easy to collect and hard to evade, but if it generates spin-off benefits other than revenues, such as a cleaner environment, then a tax would not only be worth it, proponents say, but may even be a better way to finance development than traditional aid.

Already today, “green” taxes yield on average 2.5% of GDP in OECD countries. However, a global environmental tax seems too distant a prospect to help us fund the MDGs in time. Nor are rich countries showing much sign of eagerness to pencil in proceeds from their new carbonrelated tax for aid purposes.

Another possibility is to tax currency transactions. Such a tax was originally proposed in 1927 by James Tobin, a Nobel Prize winning economist. Although Mr Tobin’s idea was to combat exchange-rate volatility, the tax now appeals to NGOs and some governments as a way to generate funds for development. After all, even a very small rate on such a large tax base as the foreign exchange market would yield large returns; indeed, a rate of just 0.01% applied on a global scale would generate an estimated $17-19 billion in revenue.

There are downsides though. First, the tax would have to cover multiple transactions, including hedging activities. Each transaction would be taxed, but the overall size of the tax base of daily foreign exchange transactions would shrink. In any case, the tax base for global financial capital may simply be too mobile to be relied on for financing the MDGs.

As for taxing arms dealing, even if the legal and documented trade in arms (worth around $50 billion per year) was unaffected by taxation, a 5% tax would not yield more than $2.5 billion annually. Also, the tax could backfire, so to speak, since higher taxation could stimulate more illicit arms dealing.

If a tax alone might not help meet the MDGs, what about encouraging more private funding? The United Nations Children’s Fund (UNICEF) coversaround a third of its income from NGO and private-sector contributions, according to its 2003 annual report. Programmes like the Global Fund to Fight AIDS, the Vaccine Fund and the Global Environment Facility are administered and financed by coalitions of governments, international organisations, private enterprise and civil society. The trouble is, though they might serve to finance specific urgent problems, they may lead to a less coherent response to global development by duplicating existing structures and substituting official aid, and so not actually adding much extra. Private sector contributions would probably not be enough to make up the financing shortfall of the millennium goals, and even if a huge pool of donors were built up via firms and charities, it would take years to make an impression.

Financial engineering, which is what the UK government’s International Finance Facility (IFF) idea effectively is, would stand a better chance of providing the additional funds needed to reach the development goals. The finance facility would be built on a series of pledges by donors (each lasting 15 years). On the back of these pledges (its assets) the IFF would issue bonds in its own name (its own liabilities). The UK plan could be improved, though: real liquid public assets would bolster the credibility of the facility, and lower prospective spreads on the bonds it would issue, making them less risky. The demand for these bonds issues might also be enhanced if they were in the form of a lottery ticket, perhaps modelled on low-risk schemes currently in operation in Ireland and the UK.

The main advantage of the finance facility is that it could boost aid to as much as $100 billion per year during the crucial 2010-2015 period. And it emphasises grant finance rather than loans to the recipient countries, so relieving some pressure on poor country governments. Also, because donor co-ordination would take place through existing aid delivery channels, poor countries would not have to face myriad donors and regulations.

Global taxes, private charities and financial markets all have their advantages, so rather than choosing a single one, governments will probably want to pursue a combination of innovative funding approaches. This could well bring the Millennium Development Goals within reach, since more choice should stimulate the supply of more reliable funding.

©OECD Observer No 244, September 2004

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