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Financing for Development: Time for the UN to Take Centre Stage Again

Added 23 Jan 2018

This article was originally published in Triple Crisis.

Little progress has been made since the last conference of the United Nations Financing for Development (FfD) process, held in Addis Ababa in July 2015, which agreed the Addis Ababa Agenda for Action (AAAA) – the framework for how the world would finance the Sustainable Development Goals (SDGs). Since Addis, however, there has been little headway and last year’s UN FfD Forum was disappointing, with few concrete outcomes achieved. As the FfD Forum outcome document highlighted, that current policies are not delivering the economic step-change needed to achieve the SDGs.

Given the slow rate of reform since Addis, it is clear that global leaders need to work towards a major new set of concrete actions on financing for development. The European Network on Debt and Development (Eurodad) recently launched a short paper setting out three key tests that this year’s UN FfD Forum should pass if it is to be regarded a success:

 

Test 1: Include all countries in global efforts to crack down on tax dodging to fill the public financing gap.

Every year, significant tax revenues are lost due to the use of offshore financial centres, intra-company operations within multinational corporations, and financial secrecy to transfer financial resources out of developing countries. A recent study estimated that governments worldwide lose US$500 billion annually due to corporate tax avoidance. For example, according to the study Pakistan loses the equivalent of 40 percent of the country’s overall tax revenue to corporate tax avoidance.

Instead of a global negotiating forum to deliver strong and truly global solutions for this problem, developing countries are encouraged to join the OECD’s Inclusive Framework. Membership requires developing countries to pay a membership fee to the OECD and commit to implementing the standard on Base Erosion and Profit Shifting (BEPS). This BEPS package, which runs to nearly 2,000 pages, was negotiated through a process where more than 100 developing countries were excluded from participating. Its content is both inadequate and, in some cases, highly problematic.

This year governments should agree to set up a global intergovernmental tax commission, under the auspices of the UN, to ensure that all countries have a say, with the mandate and resources to combat international tax dodging, which drains the vital public financing needed to achieve the SDGs.

Test 2: Ensure full transparency on efforts to fill financing gaps to avoid promoting the wrong solutions. 

International public financial flows that could help fill the public financing gap have been lower than stated, less than promised, and proven volatile and subject to changing priorities in developed countries. This is largely due to developed countries’ failures to meet the UN target of 0.7 percent of GDP to be given as Overseas Development Assistance (ODA, or ‘aid’). In 2016, members of the OECD Development Assistance Committee (DAC) reached less than half of this figure.

ODA is also seriously undermined by the continued practice of many countries of ‘tying’ ODA – using ODA to support firms from the donor country. This not only subverts the sustainable development focus of ODA, it also increases the costs of projects by 15–30 percent.

Meanwhile, international private capital has been flowing out of developing countries, in net terms, since 2015. Successful developing countries have directed domestic investment into productive sectors, while carefully managing international private finance: their ability to do this now is significantly curtailed by the international trading system and by international rules.

Rather than supporting policy space for developing countries to manage private finance, many international institutions – particularly the World Bank Group (WBG) – have been promoting greater involvement of private finance in delivering public services through public private partnerships (PPPs). However, all too often PPPs prove to have significant hidden fiscal costs, frequently for the simple reason that most public services, including much infrastructure, cannot be delivered on a for-profit basis. To prevent bad decisions arising from the hidden debts of PPPs, a key first step would be for governments to agree at the FfD Forum to abide by the Open Contracting Global Principles, and the proactive disclosure of documents and information related to public contracting.

Test 3: Show commitment to ending destructive crises by supporting a debt workout mechanism.

Debilitating sovereign debt crises continue to be a major feature of the international system, and debt risks have been rising in developing countries. A new wave of sovereign debt crises may soon be on our hands: a recent study found that 116 developing countries breach one, several, or all major debt sustainability indicator thresholds. Despite the fact that since the 1950s there have been more than 600 cases where unsustainable sovereign debt has had to be restructured, there is still no bankruptcy regime or ‘debt workout mechanism’ for governments that face unsustainable debt levels.

The next step for the UN is to create a Debt Workout Institution (DWI), independent of creditors and debtors, to facilitate debt restructuring processes. Such work must be guided by good practice in insolvency procedures, the sovereigns’ obligations to comply with international human rights law, and by the internationally agreed 2030 development agenda and its financing needs.

Finally, this year, UN governments should agree to an FfD heads of state summit for 2020, to recognise that, given the slow rate of reform since Addis, far more needs to be done. Global leaders should work towards ensuring the implementation of previous commitments, as well as agree a major new set of ambitious actions on financing for development. Without this renewed impetus, it remains unlikely that the SDGs can be achieved.