Failing to finance development?

In this review of the outcome of the Addis Ababa conference, Bhumika Muchhala explains why it constitutes a retrogression from the progress made in financing development in the two earlier UN FfD conferences in Monterrey (2002) and Doha (2008).

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THE Third International Conference on Financing for Development (FfD) in Addis Ababa concluded on 16 July in bad faith as developed countries rejected the formation of a global tax body and dismissed developing countries' compromise proposal to strengthen the existing UN committee of tax experts.

Usually, when large conferences end after conflicts and climax in intergovernmental negotiations, there is a sense of exhilaration. This did not happen in Addis Ababa. Instead, there was deep disappointment among developing countries and many UN staff and outrage among civil society groups which had been following the FfD process over the last year.  But among developed countries, there was relief, at best, or complacency, at worst. As the representative of Japan said in the final plenary, many developed countries including Japan felt relief.

As the civil society coalition on FfD stated in its reaction to the conference outcome document, the Addis Ababa Action Agenda, a fundamental opportunity was lost to tackle structural injustices in the current global economic system and ensure that development finance is people-centred and protects the environment. Not only does the Addis Ababa outcome not rise to the world's multiple crises, including finance, climate and distribution, it lacks the necessary ambition, leadership and actions to be associated with the post-2015 development agenda. Indeed, the outcome is wholly inadequate to support the operational means of implementation (MOI) for the Sustainable Development Goals (SDGs), and exposes an unbridged gap between the rhetoric of aspirations in the post-2015 development agenda and the reality of the void of actions in the Addis Ababa outcome, which does not scale up existing financial resources, let alone commit to new resources.

In light of the Monterrey Consensus and the Doha Declaration - the outcomes from the two previous FfD conferences - the Addis Ababa Action Agenda displays a retrogression from the past, which undermines the FfD mandate to address international systemic issues in macroeconomic, financial, trade, tax and monetary policies.

Failing to finance development?

The hallmark failure of the third FfD conference is the missed opportunity to create an intergovernmental tax body, despite the persistent push into the eleventh hour by a critical mass of developing countries led by India and Brazil. Such a global tax body, which would enable the UN to have a norm-setting role in tax cooperation in an equal capacity to that of the current monopoly of the Organisation for Economic Cooperation and Development (OECD), would have been a meaningful advancement in global economic governance and domestic resource mobilisation.  The intransigence of developed countries against such a key step demonstrated their unwillingness to democratise global economic governance and their disregard for FfD and UN standards of 'good governance at all levels' and 'rule of law'. 

The core argument of developing countries is that given the reality that they are most affected by illicit financial flows, tax evasion and avoidance and transfer mispricing by large corporations, they should have an equal say at the international negotiating table on tax rules. 

Given the glaring absence of new financial commitments, let alone the assurance of new and additional financial resources for climate and biodiversity finance, the majority of funds needed to finance the SDGs will come out of domestic budgets. However, ample research shows how hundreds of billions of dollars are extracted out of the corporate tax purse of developing countries, particularly in the resource-rich African continent. This is due to loopholes and tricks in the international tax architecture that is defined and dominated by the rich-country OECD grouping. A global tax body could have shifted this power imbalance and delivered some fairness to global political economic structures.

The Addis Ababa outcome also legitimises the predominance of private finance through blended finance and public-private partnerships (PPPs). This is problematic precisely because it is unattached to accountability measures or binding commitments based on international human and labour rights and environmental standards. A fast-growing body of evidence substantiates global concern over unconditional support for PPPs and blended financing instruments. Without a parallel recognition of the developmental role of the state and robust safeguards to enable the state to regulate in the public interest, there is a great risk that the private sector undermines rather than supports sustainable development.

The Addis outcome's blind trust in PPPs and blended finance is premised on the notion that such arrangements will lower the risk for private investment. The outcome makes no mention of the critical importance of inclusive and sustainable industrial development for developing countries, for the objectives of supporting economic diversification, adding value to raw materials and ascending the value chain, improving economic productivity and developing modern and appropriate technologies. Civil society had hoped that being in Addis Ababa, governments would remind themselves of the African Union's Agenda 2063 based on shared prosperity through social and economic transformation.

Similarly, there is no critical assessment of trade regimes. Instead of safeguarding policy space, the Addis outcome fails to critically assess international trade policy in order to provide alternative paths to commodity dependence, eliminate or at least review investor-state dispute settlement clauses in free trade agreements, and undertake human rights impact and sustainability assessments of such agreements to ensure their alignment with the national and extraterritorial obligations of governments.

Furthermore, the additional steps in Addis Ababa to address gender equality and women's empowerment seem to speak more to 'gender equality as smart economics' than to women's and girls' entitlement to human rights, and show a strong tendency towards the  instrumentalisation of women by stating that women's empowerment is vital to enhance economic growth and productivity.

Regression in systemic issues

The core competencies of FfD are comprised of international systemic issues such as capital flows, external debt, trade, financialisation and the monetary system. The ability of the UN to address systemic issues is routinely challenged by developed countries which argue that these issues are outside the UN's domain. Power and control over systemic issues and reforms are thus kept exclusively in the rich countries' domain of the Bretton Woods Institutions [the International Monetary Fund (IMF) and World Bank], the G7 and the G20.

However, not only does the UN have a longstanding history in substantively analysing and proposing reforms on systemic issues, it is also the only universal forum where all countries, from the smallest island nation to the poorest landlocked country, have a voice and a vote in the General Assembly. The UN is also the only forum that connects systemic issues to the global partnership for development that recognises North-South cooperation at its centre, based on historical responsibility and variances in levels of development and capacity, as well as the global rules and drivers that determine national policy space for development.

With regard to such systemic reforms, the Addis Ababa outcome explicitly ignores a landmark initiative in the UN itself to establish an international statutory legal framework for debt restructuring (see the article 'UN adopts sovereign debt restructuring principles' in this issue). Instead, it reaffirms the dominance of creditor-dominated mechanisms, such as the Paris Club, whose inequitable governance was criticised in the Doha Declaration of 2008. The outcome also welcomes existing OECD and IMF initiatives which do not address the scale of debt problems afflicting many developing countries today, such as Jamaica, which, according to its finance minister's intervention in Addis Ababa, won't be able to finance its SDGs until its external debt can achieve sustainability in 2025. Clearly, servicing creditors is seen as having priority over development goals. Reversing this order by incorporating national development financing needs into debt sustainability analyses was not addressed by the Addis Ababa outcome.

In spite of the global recognition that capital controls are crucial to developing countries' ability to protect themselves from financial crises, the outcome document demotes the use of 'capital flow management measures' as a last resort 'after necessary macroeconomic policy adjustment'. This is a regression from the Monterrey Consensus of 2002, which recognised that 'measures that mitigate the impact of excessive volatility of short-term capital flows are important and must be considered'.

Similarly, the Addis outcome removes a clause on special drawing rights allocations for development which existed in previous iterations of the outcome document. Again, this is a step backwards from Monterrey, which addressed SDR allocations in two clauses.

Despite these critical retro-gressions, there are two beacons of light in the Addis outcome: the establishment of a Technology Facilitation Mechanism (TFM) in the UN that supports SDG achievement, and an institutionalised follow-up mechanism for FfD that will involve up to five days of review every year to generate 'agreed conclusions and recommendations'. However, this follow-up forum has to be shared with the review of MOI for the post-2015 development agenda, going against developing countries' call for the FfD follow-up to be distinct and independent from that for the post-2015 development agenda in order to maintain focus on FfD as a separate and longstanding agenda. 

While the TFM has positive potential, especially if it addresses intellectual property rights and endogenous technological development in poor countries, it is at the same time not tantamount to the financing items that comprise the development agenda. As such, the TFM helps obscure the paucity of political ambition on the FfD agenda.

A crisis of multilateralism

Perhaps the most sordid mark of a process that occurred in bad faith is the fact that negotiations never transpired in Addis Ababa. There was no official plenary, no proposals articulated and no document projected onto a screen to amend.  Instead, what took place over four days in Addis Ababa was a behind-the-scenes pressure campaign exerted by the most powerful countries on developing countries. One developing-country delegate revealed that the pressure included bullying and blackmailing to silence many developing countries who can't afford to be politically defiant. Another delegate disclosed that he had never before experienced such an absence of transparency in discussions. Some observers commented that the atmosphere in Addis Ababa was akin to a 'Green Room' style of discussions, where private discussions take place in small groups without any semblance of openness or transparency. [The term 'Green Room' was first used for meetings of selected member states in trade negotiations at the General Agreement on Tariffs and Trade (GATT) forum and later the World Trade Organisation.]

These underhanded tactics were exacerbated by the asymmetrical influence of member states over the Co-Facilitators, with developing countries often left wondering how a proposal that was not discussed in plenary found its way into a draft version of the outcome document. In the 25 June draft of the outcome document, new text appeared that said, 'We affirm that the present Accord is not intended to create rights and obligations under international law.' This text, introduced by a developed country, clearly sought to negate any concrete impact of an FfD outcome on both normative and legal levels. In the days and weeks preceding Addis Ababa, the G77 group of 134 developing countries managed to remove this damaging text from the outcome document while clarifying a set of key issues for the group.

These included the upgrading of the UN tax committee into an intergovernmental tax body; an adequate follow-up mechanism for reviewing the implementation of FfD outcomes starting from the 2002 Monterrey conference; the Rio principle of 'common but differentiated responsibilities' (CBDR); and the link between FfD and the post-2015 development agenda through the role of MOI.

A central strategy of developed countries was the effective distortion of developing-country narratives and priorities, or the creation of new narratives to undermine the longstanding arguments of developing countries. Throughout the negotiations at UN headquarters in New York in the run-up to the Addis Ababa conference, the European Union created a narrative based on the phrase 'the world has changed'. This narrative postulated that developing countries' emphasis on international public finance and red line on CBDR did not reflect the fact that the world has changed since Monterrey in 2002. Much of the FfD text, the EU said, was still premised on an outdated North-South construct which did not reflect the complexity of today's world. Germany reinforced the EU's position, adding that the G77's positions did not consider the reality that emerging economies are now capable of taking on some of the financing burdens for development. As such, Germany clarified that the SDGs could not just be funded by developed countries.

India provided a succinct response to this challenge thrown by the EU to middle-income countries, particularly the emerging market economies such as China, Brazil and India, to provide financial resources alongside developed countries. India pointed out that the 30 richest countries of the world account for only 17% of the global population but over 60% of global GDP, more than 50% of global electricity consumption and nearly 40% of global carbon emissions. The UN's Inequality Matters - World Social Situation 2013 report said that in 2010, high-income countries generated 55% of global income, while low-income countries created just above 1% of global income even though they contained 72% of the global population. India clarified that despite the relatively faster rates of growth in developing countries, international inequality has not fallen. The above UN report shows that, excluding one large developing country (China), the Gini coefficient of international inequality was higher in 2010 than in 1980. India concluded that these figures attest to the fact of the North-South gap, saying that member states will be doing themselves a disservice if reality is misrepresented.

Alongside the creation of new narratives, the long-existing UN discourse on 'South-South cooperation' was sought to be distorted into a mechanism through which developed countries downplay their commitments and shift some of them onto developing countries. Developing countries responded with the argument that South-South and triangular cooperation, while increasingly important in the reform of the architecture of international relations, should not substitute for or downplay the importance of historical responsibilities and agreed commitments of North-South development cooperation. 

This crisis of multilateralism exhibited by the recent FfD process does not bode well for the two crucial conferences yet to take place this year, the post-2015 development summit in September and the climate change (COP 21) conference in December.

Implications for post-2015 and climate change

The ways in which key words such as 'transformative,' 'ambitious', 'rule of law' and 'enabling environment' were used, or misused, by developed-country negotiators in the FfD negotiations have made their developing-country counterparts wary of the gap between actual meaning and rhetorical application. The term 'enabling environment', for example, is used by developing countries to refer to an enabling environment for development. This involves development-oriented reforms in the international financial and trade archi-tectures, such as addressing unfair agricultural subsidies in developed countries or pro-cyclical macroeconomic conditions attached to financial loans. However, developed countries also use the term 'enabling environment' with equivalent vigour, except that they are referring to an enabling environment for private investment, such as favourable tax policies and labour market deregulation.

The experience in the FfD negotiations suggests that when these terms are tossed about in the post-2015 and COP 21 negotiations, they will be associated with limiting the policy space of developing countries. For the most part, this limitation is linked to facilitating private sector activity through so-called multi-stakeholder or public-private partnerships that involve shared financing between multiple entities even as most decision-making remains in the seat of the private sector. Meanwhile, an implicit ebbing, if not reneging, takes place on the public and international financing obligations of developed countries. Consequently, financing and decision-making are transferred to institutions where developing countries have to compete with representatives of the private sector and private foundations for voice and representation.

As the post-2015 development agenda negotiations leading up to the September summit conclude, the effects of the FfD experience remain to be witnessed. There are some indications that developing countries will unite with renewed strength and determination to bring multilateralism back. However, there are other signs that the retrogression in commitments and actions induced by Addis Ababa will bring the post-2015 outcome down to its lowly level of ambition. What is increasingly clear is the stark fact that the geopolitical battle in the UN has not abated. If anything, it has become even more pronounced, imbued with a rather perverse irony as the international community embarks on its most ambitious development paradigm over the next 15 years. 

Bhumika Muchhala is a researcher with the Third World Network in the area of finance and development.

*Third World Resurgence No. 300, August 2015, pp 8-11