Third World Economics No. 512 (1-15 January 2012)

Aid debate in UN dialogue on financing for development

A UN meeting in December discussed ways to raise resources for funding economic advancement in developing countries, including through aid, trade and debt relief. Bhumika Muchhala reports.

NEW YORK: On 7-8 December, the United Nations General Assembly held the fifth High-Level Dialogue on Financing for Development (FfD) at UN headquarters here, where developing countries urged fulfilment of development aid commitments and global development cooperation, while developed countries highlighted the role of domestic resource mobilization and of new donors such as big developing countries.

The UN member states shared a sentiment of “getting back to the basics of development”, and reaffirmed mutual responsibilities and obligations of their governments to fulfil commitments on development financing agreed to in the Monterrey Consensus (the outcome of the 2002 International Conference on FfD in Monterrey, Mexico, widely hailed by many delegates as the preeminent reference point for international development cooperation) and its follow-up, the Doha Declaration of 2008.

 However, there were also underlying differences. Many developing countries, such as Bangladesh and Guinea, highlighted the failure of developed countries to meet their official development assistance (ODA) commitments, while also falling short in ensuring more democracy and inclusivity in global financial governance. While reaffirming its intent to meet its aid commitments in 2015, the European Union bluntly stated that “aid is never enough” and that developing countries “cannot depend on ODA” and should rely on state budgets. The EU, the United States and other developed countries also called on “big developing countries” to provide aid.

In contrast, Bangladeshi parliamentarian Fazle Hossain Badshah said it was high time donors sat down with developing countries and agreed on mechanisms to fulfil their ODA commitments.  He said that rather than directing “sarcasm” at poorer countries, the international community should ensure their full participation in global decision-making processes, with least developed countries given special consideration.

Argentina, on behalf of the developing-country Group of 77 and China, warned that the globalization process has curtailed national ownership, sovereignty and mobility.  The 2010 Summit on the Millennium Development Goals (MDGs) and the Istanbul Programme of Action for the Least Developed Countries (LDCs) both reaffirmed that ODA commitments need to be ramped up by 2015, which necessitates a firm commitment to allocate 0.7% of gross national product (GNP) towards international cooperation. 

The G77 and China also stressed the importance of holding discussions on sovereign debt restructuring that takes into regard revisions to the debt sustainability framework.  The role of credit rating agencies in sovereign debt ratings is crucial to examine.

Market access continues to be a major obstacle for LDCs in trade, and “trade financing, special and differential treatment, the use of barriers and standards, are just a few topics in a very long list.” All countries must resist protectionist measures. The G77 and China reiterated the central role played by the UN as a focal point in creating sustainable development, and reaffirmed coordination with the Bretton Woods institutions [viz., the International Monetary Fund (IMF) and the World Bank] in order to address the persistent gaps and failures in the international financial architecture.

The Africa Group, represented by Tanzania, aligned themselves with the G77 and China statement and emphasized that trade, remittances and aid are severely impacted by the ongoing recession and crisis of 2008-09. The MDGs are not on target. “Africa has upheld growth, in part due to the commodity price spike. However, it must be emphasized that most of the gains in African development are due to South-South cooperation.” 

The crisis is not a legitimate reason for developed countries to not live up to their commitments on aid and innovative financing flows.  Some African countries do benefit from debt relief, and this needs to be deepened and accelerated. Many nations desire to trade themselves out of poverty, but the global trade regime remains problematic. African nations, which account for a mere 3.1% of aggregate global trade flows, remain deeply marginalized in world trade.  The Doha Round of trade talks has been stuck since 2008, focusing on procedural rather than substantive issues. The Monterrey Consensus was about a turning point, a global compact for shared commitments, but developed countries have yet to live up to the original goals.

The Least Developed Countries Group, represented by Nepal, also aligned themselves with the statement of the G77 and China. Despite the Monterrey Consensus, LDCs account for only 0.33% of global trade, with only half their exports enjoying duty-free, quota-free market access.  As such, LDCs are calling for the implementation of the WTO Hong Kong Ministerial Conference’s declaration on duty-free, quota-free provisions, a prevention of the dilution of multilateralism in the Doha Round, and for greater product coverage and simplified rules of origin.  The LDCs reminded the audience that two-thirds of aid for trade reached only 10 LDC states. Trade-related technical assistance and capacity-building is urgently needed in line with the Istanbul Programme of Action.

The “huge gap” between ODA commitments and delivery is reflected in the fact that 13 recipient countries faced aid contractions and LDCs retain a high debt burden, despite the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief initiatives.  Debt servicing takes up large chunks of LDC resources. Full cancellation of their debts and HIPC renewal would help improve debt sustainability.

Developed countries need to incentivize their domestic companies to invest in diversified and productive sectors to enhance the development impact of foreign direct investment (FDI), which remains low and concentrated in extractive industries.  Both remittances and innovative sources of financing could have positive impacts as well; however, substantive and comprehensive reform of the international financial system and architecture is needed to improve LDC voices in decision-making and norm-setting in the Bretton Woods institutions.  As such, LDCs should be recognized as a special category based on the UN vulnerability index.

The Group of 15 Developing Countries for South-South and North-South Cooperation and Consultation, represented by Sri Lanka, stated that transparent restructuring of the international financial architecture is a clear need. This includes even-handed IMF surveillance of major financial centres and markets, enhanced IMF voting power through a new quota system that recognizes the importance of developing countries in the world economy, and a more democratic and innovative framework within the Bretton Woods institutions.

While LDCs are facing a severe tightening of international financial resources, debt relief and moratorium programmes should not be accompanied by disproportionate conditionality.

The Group of  15 stressed the importance  of  holding a review conference in 2013 on the Monterrey Consensus. “Current difficulties coupled with austerity measures and retrenchment policies in developed countries are a threat to development. We urge all developed countries to meet the promised commitments  made  in international agreements,” they stated.

South-South cooperation is emerging as an important instrument of development cooperation, and the Group of 15 functions as a viable forum to promote South-South cooperation. Sri Lanka is committed to pursuing South-South, North-South and triangular cooperation.

Realizing the Monterrey Consensus

China said the “wonderful blueprint” envisaged by the Monterrey Consensus had yet to be translated into reality, therefore the international community should focus its efforts in four key areas. Firstly, concerted efforts must be made to create strong, balanced global economic growth to promote development, particularly as the world economy faces severe risks and the market is marked by volatility.  Countries should strengthen macroeconomic policy coordination. 

Developed countries in particular should adopt responsible fiscal and monetary policies, properly address their respective debt problems, ensure safe and stable market investments and refrain from trade protectionism. Developing countries should promote growth by mobilizing domestic resources for their own development. 

Secondly, developed countries should not use the financial crisis as an excuse to shirk their development assistance responsibilities.  International financial institutions should bolster efforts to mobilize financing for development.

Thirdly, countries should reject trade and investment protectionism and vigorously push the Doha Round negotiations forward in order to create an equitable, rational and non-discriminatory global trade system.  China called for more rational, transparent pricing and regulation mechanisms for bulk commodities, and for greater supervision of and an end to speculation in order to guarantee global energy and food security.

Fourthly, China asserted the need to clarify the relationship between innovative financing and ODA, and for simpler application procedures for such financing. For China, development is a top priority, and initiatives to spur development in developing countries are pursued through South-South cooperation. For example, to help African countries cope with the serious drought and food crisis in 2011, China donated 533.2 million RMB (about $84 million) in emergency food aid to affected countries. At the recently held G20 Summit in Cannes, China’s President announced zero-tariff treatment to 97% of exports from LDCs that had diplomatic relations with China.

The Association of South-East Asian Nations (ASEAN), represented by Indonesia, aligned with the G77 and China, and said development is a primary responsibility of each nation. However, an enabling international environment is critical, and that is particularly true for ASEAN, where international trade is an important financial source and where accumulation and mobilization of domestic resources to finance development remains limited.

While it was initially thought that the world could emerge stronger from the 2008-09 crisis, it is now clear that the same systemic problems of the global economy remain unresolved and the world faces the threat of yet another global crisis due to the financial turmoil in the eurozone.  A lot of hope is pinned on international cooperation for development and, therefore, it is imperative to go back and honour the spirit and principles of the Monterrey Consensus. As such, Indonesia underlined concrete steps to strengthen the six pillars of the Monterrey Consensus. These include: (i) international financial and economic regulation, monitoring and supervision; (ii) financial governance reform; (iii) ODA commitments, which need to be fulfilled; and (iv) a strengthened international trade regime.

The Caribbean Community (CARICOM), represented by Jamaica, underlined the need to engage in frank discussions on development cooperation, and the strong links between development financing commitments by traditional donors and MDG Goal 8, the global partnership for development. A key development challenge for CARICOM states is their burdensome debt-to-GDP ratio, which for many of them stands at over 100%.  It is imperative, CARICOM stressed, that developing countries adopt new and innovative approaches.  As such, while South-South and triangular cooperation are important, they are a complement to, and not a substitute for, traditional ODA.

Minister for International Cooperation of Guinea, Koutoub M. Sano, said that insufficient and unpredictable ODA, combined with other negative impacts of the series of global crises on LDCs (48% of which are in Africa), mean that the continent might not achieve the MDGs by 2015. It is crucial, therefore, to identify regular and sustainable sources of financing for the continent. In that context, he drew the Assembly’s attention to three of his government’s proposals aimed at increasing financing to Africa: (i) holding a conference on development financing; (ii) increasing South-South and triangular cooperation; and (iii) adopting an Africa-wide declaration on transparency in financial governance.

Egypt said that the current discussion in the UN was the main forum in which to revive development financing commitments, particularly in view of the huge financial and economic challenges facing the global economy.  The crisis challenge represents a real test of the solidity of the international community’s commitment to the cause of strengthening the global partnership for development and to support developing-country needs, which is necessary for MDG achievement by 2015.

Egypt has suffered the burden of mitigating the repercussions of the world financial and economic crisis, as well as the food and energy crisis, which resulted in huge challenges, as Egypt is among the net food-importing developing countries.  Despite the current decline in economic activity, Egypt believes that the current steps in the transition towards democracy and strengthening transparency and good governance will greatly improve the domestic economic and investment climate. 

For its part, Egypt will continue to participate actively in all international efforts and initiatives aimed at strengthening the international development agenda, including the Rio+20 summit in June 2012, and the follow-up to the UN Conference on the World Financial and Economic Crisis and Its Impact on Development.

Capturing the mood of many speakers, Chile’s representative said that what had been a “transcendental agreement” in Monterrey, a “commitment to a true partnership to urgently address development, trade and debt issues”, has languished, as very little action had been taken to promote equitable growth and create sustainable conditions, both environmentally and economically.

After 10 years, no dynamic really exists for shared work on development financing between the UN and other international groupings, such as the G20. “We need to get back to basics,” he declared, urging decisive action to close such fundamental gaps and deficiencies in the system of global governance.  In that regard, General Assembly resolution 65/94, on the role of the UN in global governance, could provide a roadmap for the purposes of those discussions, where financing for development would be a key pillar.

“Aid is never enough”

The European Union stated that “aid is never enough” and that developing countries “cannot depend on ODA.”  While expressing support for use of a financial transactions tax to support development, the EU stressed that developing countries’ state budgets remain the most important source of their development finance, and as such, each country has “primary responsibility for their own development.” The EU also pointed to the “emerging market economies” and “big developing countries” as the “new big players in the global economy who must play their part in aid disbursement.”

The EU said it accounts for 65% of aid increases since 2004 and accounts for half of global aid, and despite currently falling short of the 0.7%-of-GNP goal, it reaffirmed its commitment to meeting the targets by 2015.  The recently agreed Busan Partnership for Effective Development Cooperation was welcomed for creating an agreed framework for aid and development effectiveness which embraces the roles of emerging economies, civil society and other development actors, alongside traditional donors.

(The Busan Partnership emerged from the 4th High-Level Forum on Aid Effectiveness held on 29 November-1 December in Busan, South Korea, following intense debate on whether developing countries providing South-South aid should be subject to similar standards as developed countries from the OECD, with the fundamental question of whether South-South cooperation should be “collapsed” into the North-South aid commitments of developed countries.)

The EU further said that stronger national tax systems, policy and governance frameworks to create a domestic environment that mobilizes development are very important. An open trade and investment policy remains one of the most effective tools for promoting economic recovery, it added.

Spain took a very distinct view from the EU and said that despite the impacts of the economic crisis on the ability of traditional donors to meet financing commitments, the developed countries should be very aware of the fact that ODA levels comprise very low percentages of donor budgets, and as such remain critical to reducing poverty and making headway in development.

Financing for development is the fulcrum of development, Spain stated. In the effort to seek new forms of financing, Spain has been working very closely with the pilot group on innovative financing.  A financial transactions tax of 0.005% would be able to generate between $24-25 billion per year in revenue, and would also target derivatives trading in carbon emissions.  Such a sum would be able to garner enough funds to complete Africa’s MDGs, which is estimated at a cost of $72 billion per year.  More headway also needs to be made in dealing with the illicit trafficking of capital and tax evasion.

The United States concurred with the EU in saying that ODA from governments and multilateral organizations is no longer the primary driver of economic growth.  In the 1960s, ODA accounted for 70% of capital flows to developing countries, but today, because of private sector growth and increased trade, domestic resources, remittances and capital flows, ODA only accounts for 13% of financial flows to developing countries.  This shift, the US asserted, means that old distinctions like “donor” and “recipient” are less relevant. The US delegate quoted Secretary of State Hillary Clinton who said, “We need every provider of assistance at the table, emerging and traditional, public and private.  And we need to make sure we get past the old divisions so we can deliver results for everyone.”

Sweden, on behalf of the Nordic countries, Denmark, Finland, Iceland, Norway and Sweden, said that the Monterrey Consensus is being carried out by the Nordic countries through three key elements. Firstly, mutual accountability is encouraged by driving member states to intensify efforts to live up to the 0.7% target for ODA, which is still a critical source of financing for development.

The Nordic countries welcomed the principles underpinning the Busan Partnership.  Transparent processes, outcome-oriented programming, results-based management and effective monitoring were key elements highlighted in Busan.  Additionally, innovative mechanisms for financing could make a positive contribution in assisting developing countries to mobilize additional resources for development and combating climate change.

Secondly, mobilization of domestic resources implies that each country has the primary responsibility for its own development.  Provision of public goods, redistribution of wealth and government accountability require fair, effective and efficient tax systems.  The UN, for its part, could assist developing countries in broadening their tax base and developing policies to eradicate poverty through a more equitable and responsible allocation of resources. 

 Thirdly, combating illegal capital outflows from developing countries could free up significant resources, and UN bodies could have a role to play in that arena as well. Sweden stressed that the UN and the Bretton Woods institutions have complementary mandates, and that civil society and the private sector should play a stronger role in global development.

Smart investment

Deputy Secretary-General of the UN Asha-Rose Migiro, in her opening statement at the General Assembly dialogue, stated that even as economic contraction and belt-tightening squeezes aid budgets, developed countries must meet their ODA commitments. Noting the “fragile and uneven” recovery from the economic and financial crisis, rising unemployment and persistent poverty, she said that developing countries need additional help to recover. “Aid is not charity, but instead a smart investment in the global economy,” she continued, calling for innovative new ways to strengthen traditional aid, including more investments in public services, environmental and social protection, as well as a more equitable taxation system. 

Acting President of the General Assembly, Gary Francis Quinlan (Australia), speaking on behalf of Assembly President, Nassir Abdulaziz Al-Nasser (Qatar), at the opening, said the dialogue was taking place at a time of heightened concern, as political divides were hampering action to tackle Europe’s sovereign debt crisis, weaknesses in the global financial sector and volatile food and energy prices.  Given that environment, it was critical that developing countries undertook measures to address poverty, expand productive employment opportunities and finance such measures on a sustained basis.

When senior government officials and diplomats took the floor, they pledged commitment to the priority areas of the Monterrey Consensus, which include: (i) mobilizing domestic and international financial resources for development; (ii) bolstering global trade as an engine for development; (iii) increasing international financial and technical cooperation; and (iv) tackling external debt and systemic issues through the international monetary, financial and trading systems.

The President of the UN Economic and Social Council (ECOSOC), Ambassador Lazarous Kapambwe of Zambia, said that achieving the MDGs remains the primary objective, and success rests strongly on a vibrant and functioning global partnership for development, which ECOSOC has a central role to play in promoting. A major challenge in achieving long-term growth in LDCs is funnelling investments from public and private sources into productive capacities and the creation of decent jobs. 

South-South cooperation should be an important element of the international development strategy, including infrastructure and industrial projects. In the area of trade, it is necessary to intensify efforts to achieve the development-oriented outcome of the Doha Round, to eliminate agricultural subsidies in developed countries, to further strengthen aid for trade, and to avoid “green protectionism”.

The high-level segment of the General Assembly dialogue was followed by three roundtable discussions on: (i) the reform of the international monetary and financial system and its implications for development; (ii) the impact of the world financial and economic crisis on FDI and other private flows, external debt and international trade; and (iii) the role of financial and technical development cooperation, including innovative sources of development finance, in leveraging the mobilization of domestic and international financial resources for development.