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									Innovative Sources of Finance after Paris   FES Briefing Paper May 2006       Page 1

                 Innovative Sources of Finance after the Paris

                       The concept is gaining currency but major challenges

                                              FRANK SCHROEDER
                                                FES NEW YORK
Innovative Sources of Finance after Paris   FES Briefing Paper May 2006                                    Page 2

Introduction                                                  marks an opportunity to bring development fi-
                                                              nance back to center stage.
It is a paradox that new perspectives on eco-
nomic development and poverty reduction ap-                   The endeavor of the governments of Brazil,
pear at first sight as nothing more than the same             France, and Chile, that was later endorsed by
old wine in new bottles. New terminology in re-               Spain, Germany and Algeria has established a
cent proposals for innovative sources of financ-              technical group to contribute to multilateral ef-
ing for development may conceal the fact that                 forts for new financing mechanisms for devel-
what is being described is not genuinely new.                 opment and has brought new governments on
However, the unprecedented political attention                board. After Chile and France enacted legislation
devoted to the concept should not be underes-                 for the implementation of a small air-ticket tax
timated. Rarely has there been such intensive fo-             for development a recent conference in Paris re-
cus in the international community on a broad                 sulted in 11 additional countries joining in this
development agenda. The magnitude of new ef-                  commitment. Moreover, this conference, in
forts and initiatives underway for the revitaliza-            which ninety countries and 60 non-
tion of international development finance indi-               governmental organizations were in attendance,
cates that governments have become much                       established a “pilot group for solidarity contribu-
more serious than in the past several decades.                tions for development”, with the membership of
                                                              a total of 38 nations. The Paris conference sym-
After many years of aid fatigue and the lack of
                                                              bolically marked the shift from theory on new
political will to give concrete consideration to
                                                              additional sources for development into practice
the resource requirements for the attainment of
                                                              and has offered a window of opportunity to es-
the Millennium Development Goals (MDGs), the
                                                              tablish additional mechanisms in the future.
International UN conference on Financing for
Development (FfD) in Monterrey, Mexico in 2002                This paper provides an analysis of the different
marked a turning point as governments explicitly              proposals for new sources of development fi-
recognized the need for additional financial re-              nance. In doing so, the following questions will
sources in the conference outcome document. In                be addressed: Why are alternatives or additional
the afterglow of Monterrey the shared political               sources being sought to Official Development
leadership of the Presidents of Brazil, France and            Assistance? What are the criteria for making ef-
Chile in 2004 to launch the initiative “Action                fective use of additional financial flows to devel-
against Hunger and Poverty” and to promote                    oping countries and how will they affect the ab-
the concept of “New Innovative Sources of De-                 sorptive capacity in recipient nations? How can
velopment Finance” was an important political                 this new-found development momentum be sus-
step for the implementation of the Monterrey                  tained and what will be the overall role that new
commitments. While the quest of this initiative               sources of development finance play for the at-
for additional resources for the achievement of               tainment of the Millennium Development Goals
the MDGs may have so far only created a small                 and economic growth? Finally, the basis of po-
number of new proposals and commitments for                   litical support for the different proposed mecha-
financing instruments, the heightened political               nisms will be examined and it will be discussed
awareness it has produced, including renewed                  to what extent they could be implemented in
interest in previously proposed mechanisms,                   the short and longer term.

1. Breakthrough in Paris conference and                       eral development objectives for many years were
the rationale for innovative sources of                       a manifestation of a “one size fits all” approach.
finance                                                       Despite the unprecedented attention in the in-
                                                              ternational debate devoted to the concept of the
1.1 Paris meeting gives boost to multilateral                 Millennium Development Goals (MDGs), it
development cooperation                                       should be noted, that the first seven MDGs, for
                                                              which developing nations have assumed respon-
While there is widespread recognition that the
                                                              sibility, do neither comprise an explicit set of pol-
process of globalization has not only generated
                                                              icy options, nor do they pay adequate attention
wealth, but also a growing divide between the
                                                              to developing countries’ different stages of eco-
developed and some developing nations, the in-
                                                              nomic development. A notable shortcoming is
ternational community has yet to establish a
                                                              reflected in goal eight of the MDGs, which de-
consensus formula for new financing schemes to
                                                              fines global targets for developed countries in
assist the poorest and most vulnerable countries
                                                              the area of ODA, trade and debt relief. It is not
of the Global South. With regard to the over-
                                                              time bound and suffers from the fact that its
arching objective of reducing poverty, multilat-
Innovative Sources of Finance after Paris       FES Briefing Paper May 2006                                   Page 3

relevance has been contested by some donor na-                    ple that the revenues raised by the new solidarity
tions over the past several years.                                tax will be dedicated to the ongoing fight
                                                                  against pandemics such as HIV/AIDS, Tuberculo-
Against this background, the presidents of Brazil,
                                                                  sis and Malaria in the poorest countries and be
France, and Chile courageously launched the ini-
                                                                  paid into a new global health fund. The fact that
tiative “Action against Hunger and Poverty” in
                                                                  the Paris conference established a “pilot group
2004, which laid the groundwork for a break-
                                                                  for solidarity contributions for development”,
through in the Paris conference on innovative
                                                                  with the membership of a total of 38 nations
ways to fund development in February of 2006
                                                                  gives hope for further new financing mecha-
and established new standards for international
                                                                  nisms to be implemented in the future.
development cooperation. Instead of getting
caught up in the controversy on traditional in-                   1.2 Why ODA flows will fall short to achieve
struments of external finance such as ODA or In-                  the MDGs
ternational Trade, the initiative has chosen a very
                                                                  A closer look at the current levels of Official De-
flexible approach, focuses exclusively on gener-
                                                                  velopment Assistance (ODA) reveals why the
ating new additional sources and aims to im-
                                                                  mobilization of additional sources of finance is
plement financing mechanisms that would not
                                                                  crucial to win the battle against poverty and dis-
require consensus of all multilateral actors. The
                                                                  eases in the Global South. It was widely ac-
Paris conference that was attended by ninety
                                                                  cepted by governments in the FFD conference in
countries and 60 non-governmental organiza-
                                                                  Monterrey that the challenge posed by the Mil-
tions set the ball rolling for a tax on airline travel
                                                                  lennium Development Goals (MDGs) and the po-
to be implemented by 13 countries from the
                                                                  litical agreement to their fulfillment by the target
North and the South in the nearer future. This
                                                                  date of 2015 would require an additional annual
latest development is not only significant, be-
                                                                  contribution of the order of $50 billion in pre-
cause it marks a roadmap for future global taxa-
                                                                  sent prices as Official Development Assistance
tion schemes, it is also remarkable that the proc-
                                                                  (ODA). At first sight it might appear impressive
ess towards this new compact on development
                                                                  that in comparison to the ODA level of $ 67 bil-
finance was never endangered by interference of
                                                                  lion in 2002, the Development Assistance Com-
some influential global players that are opposed
                                                                  mittee (DAC) of the Organization for Economic
to new mechanisms to fund development. In or-
                                                                  Cooperation and Development (OECD) recently
der to avoid distortions in the airline sector, the
                                                                  reported that development aid from the world’s
technical group of “Action against Hunger and
                                                                  richest countries exceeded $100bn for the first
Poverty” has carefully chosen a tax on air- tickets                              1
                                                                  time in 2005. But the current increase in aid is
to be implemented by national and not global
                                                                  exaggerated not only because recent increases in
authorities at a very small rate. After France and
                                                                  ODA have taken the form of international secu-

 Table 1: The French and Chilean air-ticket tax               (Source: Own estimates)
                       French ticket tax                  Chilean ticket tax
 Domestic               1 Economy class                   N/A
                         10 Business/ First Class
                       (incl. flights within the EU)
 International          4 Economy class                   $4 for each ticket issued
                        40 Business/ First Class
                                                          50% contribution to Global Health Fund
 Utilization of        100% contribution to Global        50% contribution for the promotion of domestic
 Revenues              Health Fund                        tourism

Chile set the precedent (see table 1) and enacted                 rity and emergency distress relief (such as in the
legislative measures for the implementation of                    case of the Asian Tsunami) and not the form of
the air-ticket tax, another 11 countries declared                 new cash resources. Moreover, donor countries
in the Paris conference to follow suit. The deci-                 have booked their debt relief for Iraq and Nigeria
sion was clearly encouraged by the fact that the                  (approx. 20 Billion US$) as aid increase for 2005.
proposed air-ticket tax has no negative impact                    In other words, increases in ODA levels since
on national fiscal budgets as it will be exclusively
financed by passengers. Members of the new                        1
                                                                      See OECD International Development Statistics
“coalition of the willing” have agreed in princi-                     (2006)
Innovative Sources of Finance after Paris    FES Briefing Paper May 2006                                    Page 4

2002 have been rather modest and still fall short              the current aid architecture and to pioneer a
in reaching the estimated annual amount                        more effective model of international coopera-
deemed necessary to achieve the Millennium                     tion. However, the current proposal by the
Development Goals (MDGs). In order to meet                     French government to channel the revenues of
the needs of the poorer countries it should be                 the air-ticket tax into a global health fund in or-
noted further that aid flows have to become                    der to finance a “drug purchasing facility” may
more stable and predictable. History has shown                 bear the risk to over-emphasize one type of in-
that pledges for more ODA bear uncertainties,                  tervention at the expense of others. The asser-
due to the performance of the national econo-                  tion that the provision of cheaper drugs that
mies and unexpected budget constraints in do-                  such a facility might provide to fight pandemics
nor countries. Therefore, it can be said that the              such as HIV/AIDS, Malaria and Tuberculosis
annual framework that generally governs the                    could easily win in competition with other inter-
budgets of developed countries cannot guaran-                  ventions does not recognize the desirability of
tee predictable and stable sources of ODA. In                  developing countries setting their own priorities.
other words, additional and stable sources of fi-              While a top-down globalism may play a neces-
nance are needed to finance long-term pro-                     sary role in initially moving the public-health
grams in the area of health, education and infra-              community forward it may create a conflict be-
structure in the poorest countries.                            tween the priorities of the founders of global ini-
                                                               tiatives and the countries they purport to assist.
1.3 Aid effectiveness and absorptive                           Besides the negative macroeconomic effects that
capacity in recipient countries                                a massive disposal of most likely in developed
                                                               countries manufactured drugs would create in
Despite the euphoria in international campaigns
                                                               the developing world, it could also undermine
that are lobbying for poverty eradication it
                                                               the common knowledge of economic theory
should not be ignored that a drastic increase in
                                                               that more capacity and better programs matter
funding for the poorest countries may also be
                               2                               for development. In a recent report, the Harvard
associated with certain risks. While the refer-
                                                               based Global Equity Initiative showed that
ence to the lack of absorptive capacity in devel-
                                                               strategies to mobilize, retain and train health
oping countries is sometimes exaggerated and
                                                               workers and the creation of a steadily built pri-
serves as an ideological vehicle to justify stingi-
                                                               mary health care system is one of the most es-
ness in international development cooperation,
                                                               sential elements for the successful fight against
the shortcomings of current donor interventions                             5
                                                               pandemics. Thus, a substantial boost for aid-
with respect to aid effectiveness should serve as
                                                               financed investment in infrastructure and train-
an opportunity to identify better entry points
                                                               ing could contribute to increased sustainability
and help to avoid potential problems and fail-
                    3                                          of long-term development efforts. It should not
ures in the future.
                                                               come as a surprise that the sudden focus on
The key objective of channeling resources into                 global health policies is a result of the influential
the poorest developing nations is to promote                   Sachs Report 6, however, this should not lead to
economic growth in the long-term and to lift                   the conclusion that the primary focus of devel-
people out of poverty. This should lead to the                 opment policy should now be on “quick fixes”.
conclusion that policies matter for aid effective-             Short-term gains, no matter how much they
ness. Moreover, it is widely acknowledged that                 lend themselves to public relations sound bites,
the current practices and behavior of donor a-                 or fit into donor funding cycles, do not necessar-
gencies are an important source of absorptive                  ily achieve their stated humanitarian objectives. 7
capacity constraints in recipient countries, as too
many small and dispersed projects exist and do-
nor organizations impose heavy transaction costs
on scarce government capacity.
Against this background, the unique composi-
tion of the alliance of countries in support of an
air-ticket tax from developing and developed
countries would have the opportunity to reshape

    A good summary of potential risks attached to a
    significant increase in ODA and proposals how to
    mitigate them can be found in Hofmann/ Zattler
    See Overseas Development Institute Briefing Paper
    (05/ 2005)                                                     Global Equity Initiative (2004)
4                                                              6
    Overseas Development Institute Briefing Paper (05/             See UN Development Project (2005)
    2005), p. 2                                                    Muraskin (2004), p.9
Innovative Sources of Finance after Paris     FES Briefing Paper May 2006                                     Page 5

     Table 2: Potential revenue generated by innovative sources of finance
                                                          Implementation                 Potential Revenue
     Short-term mechanisms
     Air- ticket tax                                      2006                             400 Million (p.a.) 8
     Int. Finance Facility (IFF)                          2006 (issuance of bonds)       $ 4 Billion
     Remittances                                          N/A                            N/A
     Potential mechanisms in the longer run
     Special Drawing Rights(SDRs)                                                        $ 18 Billion 9
     Tackling Tax Evasion                                                                $ 50 Billion (p.a.) 10
     Currency Transaction Tax                                                            $ 16-60 Billion (p.a.) 11
     Carbon Tax                                                                          $ 60- 130 Billion (p.a.) 12
     Tax on Arms Exports                                                                 $ 5 Billion (p.a.) 13
Therefore, civil society advocates and develop-                 these studies have shown that while some of the
ment practitioners should make a strong case in                 proposals might have the political feasibility to
their lobbying efforts for a focus on human and                 be implemented in the short- term, others are
capital investment needs in developing countries                still facing strong resentments in the interna-
whenever the improvement of public health is                    tional community and may have only a chance
subject to political debate. The strengthening of               to materialize in the long run.
public services to achieve this goal could be es-
                                                                However, the proposals that have been subject
sential in particular in the poorest countries,
                                                                to discussion differ quite substantially in terms of
such as Sub-Saharan Africa, where strategies for
                                                                the magnitude of potential revenue (see table 2)
an increased role of the private sector did not
             14                                                 and their potential impact on the Millennium
                                                                Development Goals.
2. The political feasibility of additional
                                                                2.1 Air-ticket tax
finance mechanisms in the short-term
                                                                As outlined in the previous chapter the decision
There are several studies that were undertaken
                                                                by 13 countries to introduce a tax on commer-
to prove the technical feasibility of new innova-
                                                                cial air- tickets has been hailed as a first step to-
tive financing mechanisms. The two most com-
                                                                wards future global taxation schemes. Taxing air
prehensive and prominent publications in this
                                                                transport is a sensible measure because gases
area were written by the World Institute for De-
                                                                emitted by aircraft play a major role in global
velopment Economics Research (WIDER) of the                                 17
                                                                warming. The group of countries that have
United Nations University 15 and the Working
                                                                agreed to implement a tax on air travel by the
Group on New International Contributions to Fi-
                                                                end of this year are: France, Chile, Brazil, the U-
nance Development 16 commissioned by the
                                                                nited Kingdom, Congo, Cote d'Ivoire, Cyprus,
French President Jacques Chirac. The subsequent
                                                                Jordan, Luxembourg, Madagascar, Mauritius,
political debate and deliberations in the interna-
                                                                Nicaragua, and Norway. While the mix of devel-
tional community after the release of
                                                                oped and developing countries symbolizes a
                                                                genuine North-South partnership, the lack of
                                                                commitment on the side of other industrial
                                                                countries that operate major travel hubs in the
      Own estimate                                              world economy will have a strong impact on the
      Based on the proposal by George Soros, which will         potential revenue the pilot project will be able to
      be explained in Section 3.1                               raise. According to first estimates France will
      Based on estimates of Report of the Working
      Group on New International Contributions to Fi-
                                                                generate up to 200 million Euros. All other
      nance Development (2004)                                  countries of the initiative as a group will ap-
      See World and Economic Survey (2004), p. 137              proximately raise the same amount. The differ-
      Estimated at 5 US cents per gallon of gasoline            ence in revenue can be explained by the fact
      (lower figure without developing nations)                 that the developing nations will only impose
      Based on a very high tax rate of 25%                      taxes on international travel and contribute
      Overseas Development Institute Briefing Paper
                                                                some of the revenue for domestic purposes such
      (05/2005), p.4
      Atkins A.B.(2005)
16                                                              17
      Working Group on New International Contribu-                   See World Economic and Social Survey (2005), p.
      tions to Finance Development (2004)                            135
Innovative Sources of Finance after Paris   FES Briefing Paper May 2006                                   Page 6

as the promotion of tourism. The United King-                 While the advantage of the IFF would be that aid
dom which already raises 1.8 billion dollars a                budgets will be ramped up immediately after its
year for the taxation of commercial flights has               implementation by avoiding short-term political
committed to allocate a percentage of this reve-              constraints that may prevent larger aid alloca-
nue to the initiative.                                        tions, the IFF does not necessarily create any
                                                              new resources. In fact, given that interest needs
France’s leadership in providing the lion’s share
                                                              to be paid for the bonds issued, the net effect
of resources to this initiative and in mobilizing
                                                              on aid flows is actually negative. It may even be
the support of other countries by hosting the
                                                              questionable if the up-front spending mecha-
Paris conference in February 2006 was an impor-
                                                              nism of the IFF would be suitable to tackle the
tant step to get the ball for additional resources
                                                              needs for the improved provision of health or
for the achievement of the MDGs rolling. How-
                                                              social services in the poorest countries, since this
ever, in order to achieve significant progress in
                                                              would require longer- term financing require-
the area of Global Health, support by other ma-
                                                              ments and investments. Since the disbursements
jor industrial countries would be necessary,
                                                              of the IFF would dry up after 2015 and even
which could, according to estimates of the
                                                              erode future aid at a later stage, the mechanism
European Commission, lead to the magnitude of
                                                              should be scrutinized with caution.
10 billion dollars a year.
                                                              While the British government only obtained sup-
2.2 The International Finance Facility (IFF)                  port by some donor countries for its proposed
                                                              mechanism, a pilot IFF for Immunization (IFFIm)
The initial proposal for an International Finance
                                                              on a smaller scale of $ 4 billion over ten years
Facility brought forward by the United Kingdom
                                                              was launched in September 2005 with contribu-
envisioned that donor countries would “front-
                                                              tions from France, Italy, Spain, Sweden, Norway
load” the additional-aid pledges they have made
                                                              and the UK. Brazil announced after the recent
since the 2002 Monterrey conference for
                                                              Paris conference that it will also contribute $ 20
roughly 30 years into the future. The instrument
                                                              Million over a period of 20 years to the IFFIm.
of an IFF would be executed through a bond
                                                              The new funds of the pilot IFF will support the
mechanism on financial markets, to finance out-
                                                              work of the GAVI Alliance, a leading global
lays of roughly $50 billion a year directed at the
                                                              health partnership that includes UNICEF, the
MDGs until the year 2015. The British proposal
                                                              World Health Organization, the World Bank, the
assumed that an initial amount of $16 billion a
                                                              Bill & Melinda Gates Foundation, and represen-
year would start the mechanism. They proposed
                                                              tatives of the vaccine industry in both industrial-
that donors should increase the annual amounts
                                                              ized and developing countries.
that they have initially pledged by 4% a year in
real terms, with an initial promise to continue               At the current stage, the IFFIm has a greater
this for 15 years, and the prospect of rolling 15-            magnitude in mobilizing funds for development
year commitments roughly every three years                    as the tax on air travel, even though it will be
thereafter to eventually cover the 30-year period             only replenished from annual budgets of Official
(see Figure 1).                                               Development Assistance. Therefore, it would be

 Figure 1: The IFF Mechanism (Source HM Treasury, UK)
Innovative Sources of Finance after Paris        FES Briefing Paper May 2006                                    Page 7

crucial that long-term support for the initiative                  nancial institutions such as savings banks would
will be achieved in order to insure additionality.                 become accessible to the poor. A broader eco-
The participation of Brazil might be a first step                  nomic transformation of remittances may also
into this direction. Nevertheless, it would be cru-                require governments to provide additional finan-
cial to scrutinize the approach of the IFFIm with                  cial instruments, such as loans backed on remit-
respect to the aspect of long-term sustainability.                 tances, in order to overcome capital and liquidity
If the program will not be able to create new in-                  constraints that are critical for small enterprise
frastructure in the area of health in the poorest                  development.
countries over a long-term period its impact will
be minimal.                                                        3. Major sources of development
                                                                   finance in the longer run
2.3 Remittances
                                                                   3.1 The allocation of Special Drawing Rights
Remittances are emerging as an important
source of external development finance. Conser-
vative estimates indicate that remittance flows                    The Special Drawing Right (SDR), created by the
have surpassed the astounding figure of $ 100                      International Monetary Fund in 1969, was de-
billion a year and have become for many devel-                     signed as an international reserve asset to sup-
oping countries a much more important source                       plement Fund members' reserve holdings. While
of finance than official aid. However, it should                   the major industrialized countries haven’t bor-
be noted that the bulk of international remit-                     rowed from the IMF for over 25 years and take
tances do not accrue to the poorest nations as                     the position that the development of interna-
they are benefiting mainly middle-income coun-                     tional capital markets have eclipsed the role of
tries. While it is important to emphasize that re-                 SDRs, many developing and transition countries,
mittances hardly qualify as innovative sources of                  that make up the majority of the Fund's mem-
finance for development, initiatives to facilitate                 bership, either face high costs in acquiring and
the transfer of remittances (reduction of transac-                 holding reserves from borrowed sources or are
tion costs) and the diffusion of these flows to-                   excluded from private capital markets altogether.
wards a more productive and growth enhancing                       Against this background the philanthropist
use have been a major undertaking by the inter-                    George Soros has made in the FFD conference in
national community in recent years. In response                    Monterrey the proposal for recycling the SDRs
to the increasing debate about remittances,                        allocated to the industrialized countries in the
some development experts have argued that as                       IMF. Provided the developing countries that take
with the euphoria with private capital flows in                    or spend these assets recompense the original
the mid-1990s, the attractiveness of remittances                   recipients for the interest that the latter will still
is in part a reaction to previous failed develop-                  have to pay, the SDRs can be passed on without
ment mantras.                                                      loss to those original recipients. In other words,
                                                                   the developing countries that subsequently re-
The recent increase in research on the develop-
                                                                   ceive these assets will in effect be receiving
ment impact of remittances and the promotion
                                                                   termless loans at low market interest rates to fi-
by donor countries to facilitate such financial
                                                                   nance development purposes. Soros’ approach
flows may also be explained by the fact that
                                                                   relates to a special issue of SDRs that has already
unlike foreign aid, remittance flows do not put
                                                                   been authorized by the IMF in 1997 and was
any burden on taxpayers in rich countries. While
                                                                   approved by 72% of its membership; and would
it would be inappropriate to dismiss the devel-
                                                                   only require the approval of the US Congress to
opment impact of remittances, the benefits of
                                                                   attain the 85% supermajority that is necessary
these financial flows do not offset the adverse
                                                                   to make the issue effective. From the special is-
effects of the brain drain in developing countries.
19                                                                 sue which amounts to about $27 billion, he pro-
   Furthermore, it should be pointed out that the
                                                                   posed that about $18 billion of additional fi-
industrial countries have different political op-
                                                                   nance would be donated to a dedicated trust
tions to contribute to an increase in the volume
                                                                   fund for development purposes. While a consen-
of remittances worldwide by improving working
                                                                   sus for such a mechanism has yet to be achieved,
conditions and the legal status of immigrants.
                                                                   the proposal would have the advantage that the
On the recipient side the evidence regarding the                   benefits to many developing countries would be
direct impact of remittances on economic devel-                    tangible and cumulative, and could be imple-
opment and growth is limited. While the bulk of                    mented almost immediately.
remittances is spent on consumption, wider mul-
tiplier effects could only be achieved if local fi-

     Kapur, D. (2003), p. 10
     Lowell, Findlay and Stewart (2004), p. 24
Innovative Sources of Finance after Paris   FES Briefing Paper May 2006                                       Page 8

3.2 International tax cooperation to fight                    comings of a currency-transaction tax (CTT) and
tax evasion                                                   to what extent it might be able to tame volatility
                                                              in international financial markets, consensus has
Tax evasion and loopholes in the international
                                                              emerged on one point, namely that such an in-
tax system have become defining features of
                                                              strument would have the potential to raise a
global financial markets in recent years 20. While
                                                              substantive amount of global revenues for de-
most of these undeclared funds originate from
                                                              velopment. Estimated revenues could range be-
developed countries, a significant portion also
                                                              tween $16- 60 billion 22, depending on the actual
comes from developing countries, and deprives
                                                              basis points that would be imposed on currency
them of funds needed for development. Accord-
                                                              transactions and how much developed countries
ing to the Landau report the loss in tax revenues
                                                              with major financial centers would utilize for
generated by evasion in developing countries
                                                              domestic purposes. Nevertheless, the CTT would
may be equivalent to the sums needed to
                                                              have to be imposed at a very low rate (1-2 basis
achieve the Millennium Development Goals. 21 It
                                                              points) and to be applied consistently and uni-
seems therefore pointless to think about poverty
                                                              versally. This would require that the authorities
reduction, if at the same time little is being done
                                                              that are responsible for the four to six main ve-
to help to rebuild developing countries’ taxation
                                                              hicle-currencies in the world economy had the
capabilities, both of their own residents and on
                                                              will to cooperate actively with each other and a
foreign-owned capital. The share of activities
                                                              few others would stand by ready to take part, if
pertaining to tax evasion in financial markets by
                                                              necessary. In such a scenario, free-riding would
trans-national corporations (TNCs), which are
                                                              be virtually excluded, but conversely any one of
prepared to make use of loopholes in the inter-
                                                              the parties could bring the scheme to an end.
national economy, moreover, imparts an unfair
                                                              Against the background that there is such severe
competitive advantage over domestic competi-
                                                              opposition against the CTT in financial circles
tors and small and medium size enterprises that
                                                              and that the instrument has received strong re-
do not have the global reach of the TNCs. Con-
                                                              sentment in the US Congress and Senate it is at
trary to tax competition, governments agree, in
                                                              this point hardly feasible politically.
principle, on the need to fight tax evasion. What
would be needed in this context is a universal                Tax on Arms Exports/ Carbon Tax
withholding tax on non-residents’ portfolio in-
                                                              A tax on arms exports would rely, to a consider-
come. At a high enough rate the withholding
                                                              able extent, on governments’ taxing themselves.
tax would remove the evasion motive for “capi-
                                                              If the burden fell on the buyers, its proportional
tal flight” from developing countries. In the area
                                                              impact might well be highest on the poorest
of tax competition it would be necessary to end
                                                              countries. Revenue at any rate of tax would fluc-
all tax preferences to producers on account of
                                                              tuate greatly. Under the assumption that the tax
foreign ownership of headquarters or produc-
                                                              was imposed for example at the quite high rate
tion. But plugging these loopholes that are be-
                                                              of 25% and there had been no impact of the tax
ing exploited by TNCs would be a difficult task
                                                              on sales of weapons, estimated revenue would
to achieve. Due to the resistance by developed
                                                              only be as low as $5 billion.
countries, a tax oriented body such as the new
UN committee of tax experts might be able to                  A carbon tax would have to be imposed on top
achieve consensus between the different parties.              of several pre-existing taxes and subsidies on
                                                              various fuels. If the agreement was simply that
3.3 Other Global Taxation Mechanisms                          the equivalent of a carbon tax at a uniform rate
                                                              should be delivered for international use by each
The breakthrough for the implementation of a
                                                              country, it is not clear that this would be any
tax on air travel was already perceived as a first
                                                              more acceptable than a schedule of budgetary
step towards additional future global taxation
                                                              contributions. Across countries it would be far
schemes. However, other taxation mechanisms
                                                              less fair: indeed across some pairs of countries it
that have been subject to international debate
                                                              would be highly regressive since a number of
are more complex in their composition and may
                                                              poorer countries have a far higher carbon use
only be feasible if introduced in an internation-
                                                              per unit income than most of the rich. However,
ally coordinated manner with clear agreement
                                                              the distribution would be made fairer if the
over the use of the tax revenue.
                                                              global ‘tax’ would only be imposed on the richer
Currency Transaction Tax (CTT)                                nations. A small tax of the equivalent of 5 US
                                                              cents per US gallon of gasoline worldwide could
After many years of heated debate in the inter-
                                                              raise about $60 billion for global purposes and
national community about the merits and short-
                                                              would be barely noticeable for consumers. How-
20                                                            ever, public opposition in times of high oil prices
     See Schapiro/ Schroeder (2003)
     Report of the Working Group on New International
     Contributions to Finance Development (2004)                   World and Economic Survey (2004), p. 137
Innovative Sources of Finance after Paris   FES Briefing Paper May 2006                                   Page 9

would make a campaign for such a tax very dif-                ment of Brazil to contribute to the IFF points al-
ficult politically.                                           ready in this direction.
                                                              •    More pressure on major donor countries
4. Concluding remarks and the way
forward                                                       The media attention and public awareness on
                                                              innovative financing mechanisms after the Paris
The unique alliance between governments from
                                                              conference has increased the pressure on major
the North and the South in launching the initia-
                                                              donor countries such as Germany, Japan but
tive “Action against Hunger and Poverty” has
                                                              also the U.S., since they have so far not made
heightened political awareness around the idea
                                                              use of any of the new instruments.
of innovative financing mechanisms for devel-
opment. The concept has not only become an                    •    Scrutiny of the expenditure side
issue on the agenda of all major international fo-
                                                              While the current euphoria to raise more funds
rums, moreover, with the implementation of a
                                                              for the achievement of the MDGs leads to a
pilot IFF on immunization and the breakthrough
                                                              strong emphasis on the revenue side, questions
of a ticket-tax in the recent Paris conference, the
                                                              of governance of the new funds and ownership,
proposals have moved from theory into practice.
                                                              as well as aid effectiveness might become more
While the new political momentum on innova-
                                                              important in the future. This could lead to a
tive sources of finance will give hope that other
                                                              move to more aid-financed investments in long-
countries might join the initiative, the revenues
                                                              term development efforts.
raised at this point are modest in comparison to
the sums said to be necessary to meet the Mil-                •    Future of other global taxation schemes
lennium Development Goals.
                                                              Reasons for the political support for an air-ticket
The new window of opportunity for innovative                  tax is its virtue of simplicity, its very small rate
ways to fund development could lead to the fol-               and its ability to be implemented by national and
lowing scenarios:                                             not global authorities. The fact that other global
                                                              taxes are much more complex in their composi-
•    Synergy of IFF and air-ticket tax
                                                              tion and require strong international coordina-
There is no reason why the IFF and the air-ticket             tion makes them politically less feasible. More-
tax need to compete with each other. One pos-                 over, since governments agree at least in princi-
sibility being canvassed by Gordon Brown and                  ple, on the need to fight tax evasion, future
President Chirac is that smaller revenues from                North-South cooperation may lead to progress in
the air-ticket tax could be used to leverage larger           this area.
amounts through bond flotation under the IFF.
The agreement between the two political leaders
prior to the Paris conference and the commit-
Innovative Sources of Finance after Paris           FES Briefing Paper May 2006                                                Page 10

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