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New Sources of Development Finance$

A. B. Atkinson

Print publication date: 2004

Print ISBN-13: 9780199278558

Published to Oxford Scholarship Online: January 2005

DOI: 10.1093/0199278555.001.0001

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The Way Forward

The Way Forward

Chapter:
(p.238) 12 The Way Forward
Source:
New Sources of Development Finance
Author(s):
Anthony B. Atkinson
Publisher:
Oxford University Press
DOI:10.1093/0199278555.003.0012

Abstract and Keywords

The key points to emerge from the book are drawn together and summarised in a table that presents the main conclusions reached in regard to the seven proposals for new sources of development finance that have been examined. For each proposal, the table provides a brief description, outlines potential to fund development, any double dividend and cost resulting, disadvantages, and main obstacles. The way forward for development funding is then briefly considered.

Keywords:   development finance, development funding, sources of funding

The aim of this project has been to advance thinking about new sources of finance for development. This final chapter draws together the main conclusions and considers how we can move forward towards concrete action.

12.1 THE CHALLENGE

Our starting point has been the widely recognized need for additional development funding if the Millennium Development Goals (MDGs) are to be achieved by 2015. All figures are estimates, and involve matters of judgement, but there is broad agreement about the magnitude. It seems reasonable to take a figure of additional US$50 billion, about the present total of official development assistance (ODA), as being required annually to achieve the international development goals. This means that we have either to double existing official development assistance or to find alternative sources of comparable magnitude or to abandon the MDGs. Here, we do not accept the third answer. The choice in raising additional funds is, therefore, between ODA and alternative sources—or a balance of the two.

This sharp presentation of the problem serves to focus our treatment of new and alternative sources of funding. First, we are primarily concerned with the contribution of these sources to the finance of development. Many of the proposals have multiple objectives. The creation of Special Drawing Rights (SDRs) was first proposed to ease problems of international liquidity, but here (Chapter 5) we are concerned with their potential role for development purposes. The Tobin tax was first proposed as a means of coping with financial volatility. Here (Chapter 4) we are primarily concerned with its potential as a generator of revenue to be used to finance development. Remittances from emigrants are used for many purposes, notably the financing of consumption by their families who have stayed. This consumption is important, but our concern here (Chapter 9) is with the contribution of remittances to funding investment for the future.

Our focus means secondly that we are principally concerned with comparing different ways of funding the MDGs. If a particular proposal is found to have shortcomings, this is not the end of the matter. We have to ask—what is the alternative? In the course of the book, we have made use of the insights of public economics, applied at a global plane. One of these insights is that one needs to specify the comparison. If the (p.239) proposal were not to be adopted, what would come in its place? Here, in considering proposals for new sources, we ask how they would differ from an increase in ODA. How would their economic and social impact differ from that of an ODA increase? Or, more cynically, how far are different proposals simply different ways of dressing up an increased transfer from rich to poor countries?

In comparison with ODA, the closest are the proposal for the International Finance Facility (IFF) (Chapter 6), involving a forward commitment by donors of development funding, and for a development-focused allocation of SDRs (Chapter 5), which again involves the sovereign actions of governments. The other proposals are distinctly different, involving either global taxation or a global lottery or increased private transfers.

12.1.1 What's New?

Some of the proposals discussed in the book have been the subject of a large literature: the Tobin tax, for example. There have been a number of valuable overviews of the field, to which we have referred in Chapter 1. But our book is not without novelty. Even in the case of the Tobin tax, the fact that we are concentrating primarily on its revenue potential gives a different emphasis to Chapter 4, reflected in its title. In other cases, the field is less well tilled. In the case of the IFF, Chapter 6 provides, to our knowledge, the first external analysis of this proposal. There is relatively little economic literature on private donations for international development and the reasons why people give for one cause rather than another (Chapter 7). By applying approaches from public economics, we can derive new insights. This applies to the lessons from fiscal federalism (Chapter 11) that can be applied to multi-level policymaking with global concerns and national governments. It applies to the equivalence of taxes and the auctioning of quotas (Chapter 3).

The book contains some new ideas. Attention has been paid recently to the global lottery, but the authors of Chapter 8 have come up with a totally new mechanism—the global premium bond. The analysis of fiscal architecture in Chapters 2 and 11 has suggested the novel idea that national and individual taxbases can be divorced. By applying a method of subsidiarity, the national liability can be determined according to one formula, but national governments can choose to raise the revenue by other means. There is the application of the ideas of stochastic dominance to competition between the prize structures of different lotteries (Chapter 8).

12.2 CONCLUSIONS: NEW SOURCES OF FINANCE

Table 12.1 summarizes the main conclusions with regard to the seven proposals for new sources of development finance considered here. In each case, there is a brief description, and a summary of the potential contribution to the funding of development. The first conclusion is that the two global taxes considered could yield revenue of the magnitude required (tax on carbon use) or at least half of the requirement (CTT at a wholesale rate of 2 basis points). Moreover, the tax rates required for this purpose are an order of magnitude smaller than the tax rates proposed by those advocating these (p.240) (p.241) (p.242) taxes on allocational grounds. The Tobin taxes proposed to ‘put sand in the wheels of international finance’ have been of the order of 10 or 20 basis points—ten times that considered here. The energy tax considered in Chapter 3 has a rate per metric ton of a tenth or a twentieth of those typically considered in the literature on global warming. The taxes are not, therefore, guaranteed to have the major behavioural impact, discouraging pollution and speculation, which has been sought. This conclusion has both negative and positive aspects. On the minus side, it means that the double dividend—of revenue plus improved functioning of the economy—may fall short on the second dimension. But it is revenue that is our concern here. The second aspect is positive, which is that the much more modest tax rates envisaged here are more acceptable and less likely to have disruptive economic consequences.

Table 12.1 New sources of development funding: summary of conclusions

Source

Brief description

Potential to fund development?

Double dividend and cost?

Disadvantages

Main obstacles

Global environmental taxes

Tax on goods generating environmental externalities, with specific reference to a tax on use of hydrocarbon fuels according to their carbon content

Tax on high-income countries alone could raise revenue of US$50 billion. Tax rates required are order of magnitude smaller than those considered in proposals to halt global warming

Environmental gain as well as revenue. Tax borne according to final energy use

Distributional effect on households within high-income countries needs to be offset. Administrative cost of operating global tax

Requires general agreement of high-income countries. Account has to be taken of existing national taxes

Currency transactions tax (Tobin tax)

Tax on foreign currency transactions, covering a range of transactions (spot, forward, future, swaps and other derivatives)

Tax could generate US$15–28 billion for global public use. Tax rate considerably smaller than those considered in proposals to reduce exchange rate volatility

Reduces foreign exchange speculation. Tax passed on to final users

Final distributional effect and impact on real transactions hard to predict. Administrative cost of operating global tax

Requires general agreement

Creation of new Special Drawing Rights (SDRs)

Creation of SDRs for development purposes, with donor countries making their SDR allocation available to fund development

Allocation of US$25–30 billion could make significant contribution, but depends on frequency

Could have positive effect on the global macroeconomy

Impact on world economy not clear

Has to be ratified by 100 members with 85% of voting power

International Finance Facility (IFF)

Long-term, but conditional, funding guaranteed to the poorest countries by the donor countries. Long-term pledges of a flow of annual payments to the IFF would leverage additional money from the international capital markets

If introduced as planned could achieve flow of US$50 billion for 2010–15, building up from 2006 and falling to zero by 2020. Provides predictable and stable flows with agreed disbursement mechanism

Could have positive effect on the global macroeconomy

Cost of negotiation and administration of new organization. Difficult to ensure additionality. Administrative cost of establishing new institution. Problem of what happens after 2020

Requires sufficient donor countries to sign up, and to continue to make commitments. Involvement of all rich countries not required. Requires agreement on conditions to be attached to outflows

Increased private donations for development

Charitable donations by private individuals and firms. Measures to encourage private funding of development: tax incentives, global funds, corporate giving, and the Internet

Present flows marginal but important for psychological reasons. No sign of crowding out. Total charitable giving sizeable and potential for development to attract larger share

Giving benefits both donors and recipients

To the extent that total giving increased, through shifting consumer preferences, no direct cost; to extent that achieved at expense of other recipients, there is opportunity cost

Primarily individual action, but national governments can stimulate by income tax deduction. Link with use of funds important

Increased remittances from emigrants

Logistics (reducing cost of remittances), financial institutions (encouraging repatriation) and legal (regularising the status of migrants)

Remittances are a large, growing and relatively stable flow of funds. They can contribute to infrastructure projects. A reduction in transfer costs could significantly increase remittances

Transfer benefits both donors and recipients

Link to development uncertain

May run into money laundering and counter-terrorism legislation

Global lottery

Global lottery operated through national state-operated and state-licensed lotteries, with proceeds shared between national participants and an independent foundation established in conjunction with UN

Difficult to estimate but could reach US$6 billion a year

Ethical issues. Distributional burden borne by lower income groups, including low-income countries

Competition with national lotteries

Global premium bond

Global premium bond, parallel to national bonds with lottery prizes in place of interest; capital value preserved

Provides loan finance, volume hard to estimate

Crowding out of other government debt. Administrative cost

Competition with other borrowing

The second conclusion is that there are alternatives to global taxation. The IFF proposed by the UK government could, if it attracts sufficient support from other major donors, yield flows over the crucial period up to 2015 of the magnitude required. It is, of course, open to question how far this differs at heart from a commitment to expand ODA. The creation of SDRs for development purposes has been envisaged as raising some US$25–30 billion. This means that it could contribute a significant part of the total, but would need to be combined with other measures, particularly if such allocations were only to be made less frequently than annually. One such additional source is the global lottery, which is potentially the source of significant revenues, if agreement can be reached with national lotteries. A global premium bond could provide a flow of loan funding that would not be otherwise be available. Supporting roles could be played by increased remittances from emigrants, and, on a more modest scale, increased private donations.

In each case, however, we have to consider the extent of additionality. The third conclusion is that there is a distinct risk of crowding-out. A country signing up to the IFF may implicitly offset this commitment against its regular ODA. The same may apply to countries that transfer any new SDR allocation. Agreement to the introduction of a global tax may mean that governments feel less pressure to increase their ODA, or that firms are less likely to contribute to charitable funding of development. Measures to stimulate private donations may adversely affect other forms of giving. Issuing a global premium bond may crowd out other borrowing for development purposes, although this is less likely if it is targeted at the individual investor.

The next column in Table 12.1 summarizes the contribution to generating a double dividend. In other words, how far do the proposals have other advantages apart from the revenue raised? As already noted, the proposed tax rates are much lower than those advocated for other purposes, but both energy use and currency transactions taxes have potential to act as corrective taxes. There is an allocational benefit rather than a deadweight loss. In the same way, tax incentives to private donations and remittances by emigrants may act to encourage an activity that is undersupplied, a gift benefiting the recipient as well as the sender. The fourth conclusion is that there are possible double dividends, but they are a by-product but not the primary rationale of the proposals. The double dividend argument should not be over-sold.

(p.243) The existence of a double dividend does not mean that there is no cost. With an ordinary tax, the burden of a tax generating $x billion can be said to consist of two parts: the $x billion that taxpayers hand over, and the additional deadweight cost (excess burden) due to the distortion of economic decisions. Where there is a double dividend, the second element becomes a benefit: decisions are improved by the corrective tax. But revenue is still raised. There are good reasons to expect that the taxes will be passed on to final users. This applies to energy taxes, where we have to follow through the full input-output implications. People tend to think immediately of the impact of a carbon tax on the fuel and transport costs of households, but energy costs enter also as inputs in other sectors. The operating costs of the financial sector, for example, will be increased, so that part may appear as higher prices for apparently unrelated products. In the case of the Tobin tax, we can regard it as an excise tax on all purchases according to their foreign exchange content. One disadvantage of the tax is that the final incidence is not easily determined. Part of the burden may well fall on developing countries: for instance, if the tax reduces the effective flow of remittances from emigrants. The other measures, too, may have costs. The increase in ODA that is effectively envisaged under the IFF has to be financed, and the future commitments may affect the budgetary position of donor countries. Tax relief for remittances by emigrants has a cost to the host countries. The fifth conclusion is that it is illusory to suppose that simply adopting an alternative funding route avoids all cost.

In considering both double dividends and cost burdens, one important consideration is the impact on the macroeconomy. It is the specific purpose of some measures, such as the creation of SDRs, to stimulate the world economy. Given that there is significant unemployment, and under-use of productive capacity, it may be possible to generate new resources at little or no real cost. Donor countries may, via the IFF, be able to engage in borrowing in a way that acts as a macroeconomic stimulus. In the opposite direction, a significant increase in funding for development may run into the absorption, or transfer, problems considered in Chapters 2 and 6. We have not attempted here to assess these macroeconomic arguments, but they are potentially important. A sixth conclusion is that the policy towards funding the MDGs has to be seen in conjunction with stimulating the global economy and with an eye to the absorption issue.

The fourth column in Table 12.1 identifies the main disadvantages of the different proposals. One common element is, seventh conclusion, the fact that we have only limited understanding of the economic impact of the different proposals, which is, of course, highly relevant to judging their final cost, as noted above. The final incidence of a global tax, such as the carbon tax, depends on the responses of firms and households that determine the ultimate general equilibrium. We can only guess that the impact of a currency transactions tax will be larger in countries more engaged in international trade. Views about the macroeconomic impact of SDR creation depend on how one believes that the world economy operates. We know relatively little about the impact of remittances from migrant workers. We know little about what influences the destination of private giving.

In considering the disadvantages, we need to bear in mind that we are comparing alternative ways of increasing development funding. Take, for example, the argument (p.244) that the burden of a global lottery falls on low-income groups (discussed in Chapters 2 and 8). If the choice is a global lottery or nothing, then it seems likely that the recipients of the benefits from global lottery funding have lower incomes than the poor in rich countries who play the lottery. If, however, the alternative is increased ODA financed by higher income taxation, then the distributional argument does not favour the lottery.

The final column in Table 12.1 lists the main obstacles to the proposals. This naturally leads one to ask how they can be overcome. This is in part a question of design. How can they be made more compelling? In this book, we have identified a number of routes by which the design can be refined. In the case of the global lottery, the prize structure can be constructed in a way that helps differentiate the product from that of national lotteries and to avoid the possibly negative effects of astronomical prizes. We have described ways of increasing the efficiency of the market for remittances.

Overcoming the obstacles is in part a matter for political action. In the next section, we consider the possible role of different actors.

12.3 THE WAY FORWARD

How can we achieve the target level of an annual increase of US$50 billion in resources for development? The first point to be made is that the increase could quite realistically be achieved via ODA. Viewed in relation to previous aid achievements and aspirations, the US$50 billion increase seems quite feasible. If donors were to raise their ODA to 0.5 per cent of GNP, then the US$50 billion additional ODA would have been realized. Nor is an increase of ODA by existing donors the only route by which ODA could be increased. The world distribution of income is changing. The growth of middle-income countries means that they can be expected to come into the equation.

The funding of the MDGs could be achieved solely by increasing ODA. At the same time, it would require a step change from the present, going considerably beyond what has so far been promised. This is not going to be achieved overnight. The widening of the circle of aid donors is equally going to take time. Time is, however, of the essence. For this reason alone, it may be necessary to consider new sources. It may indeed be that consideration of negative aspects of alternatives may lead donor countries to be more willing to make the step change in ODA. In this book, we have considered seven such sources. While a carbon tax on its own might be sufficient to raise the required funds, this is not true of the other proposals and it is likely that any programme will consist of a package of measures. Such a package could be constructed by the UN and other international agencies, which would monitor its introduction. The enactment of the package would, however, involve a large cast of actors. Indeed, it is important from the standpoint of democratic accountability that there should be the widest possible engagement.

To begin with, there is an essential role for the individual citizen. Individuals can contribute significantly both by their private support and by their influence on governments. Individuals make generous donations to charity, but relatively little goes to (p.245) development purposes. We have seen how there is considerable scope for the globalization of charitable giving. Increased support for development charities serves both the direct purpose of helping poor countries and the indirect purpose of demonstrating to governments of rich countries the concerns of their voters.

National governments are indeed the key actors. First, they have considerable independent impact. Acting alone, the government of a rich country can take steps to increase the flows of finance for development. A single country could, for example, allow income tax deductions for taxpayers making contributions to hometown associations (Chapter 9) that are funding community projects in the home country. A single country could launch a premium bond dedicated to development funding. A single country could decide to allocate to development purposes part of the proceeds from its national lottery. A single country could match out of public funds the amounts donated by its citizens to development charities.

Matching also applies at the national level, and governments may be more willing to provide funding where other countries are also participating. The logic of the International Finance Facility is that a number of countries join together in making the commitment. This brings us to the class of proposals where common action is required but it is sufficient for a significant subset of countries to agree. This includes the IFF and the global lottery. Finally, there are those proposals where the involvement of all donor countries is effectively necessary. This includes the creation of new SDRs and (probably) the carbon tax.

Our focus has been on the role of high-income countries, but, as stressed at the outset, we do not believe that this is the only important aspect. Within the context of the proposals considered here, there is much that developing countries can do to facilitate their effective enactment and to take forward the necessary dialogue. (p.246)