Financing for Development – new integrity needed

Financing for Development, the Net New challenge

– blog for  published Jun 4/2015. by John Sinclair 

 The UN Conference on Financing for Development (FfD) meets this July in Addis Ababa. It is designed to mobilize the trillions of new dollars needed to fully implement the UN’s new Post-2015 Agenda. The Agenda embodies the principle of ‘leaving nobody behind’ and has a bold core goal, the elimination of extreme poverty by 2030.

All very worthy, but will Western donors be seen as evasive in Addis and deliberately avoiding the need for ‘Net New’ resource? This is economist jargon for asking two things: that donor support is genuinely additional, the ‘new’; also that there is no false labelling, that we recognise that the new private investment will be substantially recovered as profits or declared as loans from development banks, the ‘net’.

We know private flows far exceed traditional grant aid. But worrisomely donors now talk about these trillions of investment dollars as being equivalent to ‘aid’.

It is becoming political cover for the reality of almost stagnant grant aid. Is this fantasy, window-dressing, even a practical possibility? Critically will it be ‘net new’? Practically, developed country governments cannot instruct private companies to invest in poverty reduction, rather than profit maximization.

We need to recall that most private flows are going to the richest of developing countries, to China not a Cambodia. This distribution runs counter to a goal of ‘leaving nobody behind’. The least developed countries for sure want both: more private investment and a bigger share of traditional grant aid.

So is there too much donor ‘window-dressing’?  However for those who believe in fairness (don’t we all?) it means that developed nations are expected to contribute substantially the ‘Net New’ stuff that is needed by the poorest nations.

However global equity does not seem to be in vogue. Many traditional Western donors have let their grant aid stagnate.  Canadian aid is down to 0.24% of national income (GNI)…  and still falling. We boast of our competence in handling the global financial crisis, but then say it has left us too poor to contribute.  A better model is the UK.  It chose to protect its budget allocation for meeting the UN’s 0.7% target. Western donors are not searching for ‘new net’ but rather for innovative ways of reporting and boasting about other things we can count as ‘sort of like’ aid.

Private sector activities have always been the life-blood of national economies in developed and developing countries alike. But now it is to be the big innovation in development. In practice, this means the money multinational and their shareholders in such as New York and Toronto spend clearing tropical jungle to grow oil palms in Indonesia or building jean factories in Haiti. Donors, including multilaterals such as the World Bank, note these huge gross flows in the IMF statistics, but conveniently overlook the large matching item called ‘remitted profits’.  This can leave as the only ‘Net New’ benefit for say Bangladesh low-paid jobs, sometimes even tragic death in a factory fire.

To compound the problem multinationals often find the means of not paying taxes on their profits. Sometimes this is technically legal, sometimes essentially fraud via false documentation. The net effect is the same – a loss of public funds for social investment in the developing country (and often also to the investor’s home country as profits are parked in tax havens). This massive leakage is now a major topic of discussion in the OECD and the G20, but there is all too little action on reformed global taxation systems, binding codes of good practice for multinationals, rules on fair taxation in the country where production occurs, etc. We need to make tax avoidance history.

One last example of missing ‘net new’ are the $ billions recorded as  ‘remittances’ in the IMF statistics. Key at the human level is the money saved by individuals born in the South, now working in the West as say a taxi-driver in Montreal or picking strawberries in California. The remittances are the personal savings they send home to even poorer mothers in Guatemala or Ethiopia. It is somewhat offensive that these millions of tiny personal transfers back home are now being discussed as new ‘treasure’ discovered by Canadian and other aid officials that can be boasted of as some sort of national ‘aid’ money.

We need a new integrity in the debate about financing global development, notably the Post-2015 Agenda. Its implementation will be costly.  As in the past most will be born by developing countries themselves, hopefully with more effective local tax efforts. Private and public external contributions are all needed and valid but they must be measured in ‘net new’ terms, not as repackaged old goods. Much better be honest with Canadian citizens who when polled say they want to be seen as generous donors to the most needy, surely not as tax avoiders or trying to double-count the savings of a poor Haitian taxi-driver living in Montreal.