#03 development cooperation
Jens Martens

Public Development Finance: Old Commitments – New Challenges

Whether the international development goals, and the Millennium Develop Goals (MDGs) in particular, will be achieved by 2015 is also a question of money. Without sufficient public funds, the countries of the South cannot build schools, health posts, streets or water pipes, nor pay the salaries of teachers, nurses and tax collectors.

Of course more public funds in no way automatically guarantee progress in economic and social development. The decisive factor is what the funds are used for and if they are used effectively. Additionally power relationships inside a society, conflicts within and between states, and global economic framework conditions all have a considerable influence on development processes. Still, the mobilisation of sufficient public funds is a necessary precondition for development.

The need for financing is huge and has only been exacerbated by the global economic and financial crisis and looming climate change. The costs of reducing greenhouse gas emissions and the necessary adaptation measures to climate change alone will cost the countries of the South an estimated annual sum of around 100 million euros.

The effects of the global economic and financial crisis have considerably raised the need for public funds in many countries of the South. On the one hand, income from taxes and royalties has dropped, while on the other the percentage of budget resources needed to make interest and amortization payments has increased.

First priority: Mobilisation of domestic resources and combating tax evasion

Most countries of the South finance the lion’s share of their development on their own. As a global average, public development aid only accounts for 0.9 percent of the gross national products of these countries.[1] To date their governments have not, however, been able to come close to fully exploiting the potential of domestic resources to enable them to provide sufficient public goods and services. Many countries of the South miss out on billions in income year for year because they do not have an effective tax structure, their financial management is weak and subject to corruption, the rich elite move their fortune outside the country, investing it in tax havens and secrecy jurisdictions, and transnational corporations evade paying the treasury by using tax holidays, manipulating transfer pricing and using other profit transfer tricks. According to estimates by the Washington think tank Global Financial Integrity, illicit financial flows from developing countries reached a total of 1,260 billion US dollars in 2008.[2] As such they were ten times as high as public development aid (Official Development Assistance, ODA) to these countries (121.5 billion US dollars).

This has seriously limited the financial leeway of the governments of many developing countries and emerging nations, not just in absolute numbers but also in relation to the economic power of their respective country. In these countries the percentage of state revenue from the gross national product (GNP) is far below the average of industrialised nations. According to World Bank estimates, in countries with low and medium incomes the percentage of revenue to the central government is just 20.2 percent of the GNP (2008), contrasting with 38.1 percent in Euro Zone countries.[3]

A bundle of national and international measures is needed to strengthen the public authorities in developing countries, close tax loops and prevent capital flight. These include:

  • Supporting governments in creating more efficient and fair tax structures and fiscal authorities
  • Effective measures against the manipulation of transfer pricing
  • Country-by-country reporting for firms and banks like that set out in the US American Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd Frank Act) from July 2010, initially for companies in the extractive industries
  • Binding rules for the automatic exchange of information between state agencies
  • Effective support for stolen assets recovery as described in the United Nations Convention against Corruption – highly topical in view of the political upheaval taking place in the Arabic region

At the same time, the transparency of state finances must be increased while the participation of parliaments and civil society is strengthened. This is the only way to ensure that governments truly use the additional income to fight poverty and realise international development goals.

Insufficient rise in ODA

For many countries of the South, and especially the poorer countries of Africa, official development aid continues to be essential to complement their own revenue. However, there is a need for basic reforms with respect to quantity, quality and the normative framework of the transfer of public funds. For although actual financial flows remain far below the commitments made by donors, their character as “aid” continues to maintain the paternalistic donor-recipient relationship and perpetual dependence.

The ODA of the 23 donor countries involved in the OECD’s Development Assistance Committee (DAC) was around 119.6 billion US dollars in 2009, a two billion dollar drop from the year before.[4] In 2010 the OECD estimates an increase to around 126 billion US dollars.[5]

The percentage of gross national income (GNI) given as ODA was 0.31, still well below the set goal of 0.7 percent. The EU missed its collective target of increasing the ODA quota to 0.56 percent of the GNI in 2010 by a wide margin. According to prognoses from the European Commission, the ODA payments made by the 27 member states in 2010 were ten billion euros lower that the amounts their heads of government and state had pledged in 2005 as part of the EU’s graduated scheme.[6]

Eleven countries apparently reached the interim goal while 16 missed it completely. In absolute numbers the countries with greatest discrepancy between the pledged and actual level of ODA were Italy with 4.9 billion euros and Germany with 2.7 billion euros.

To win back credibility, the European Commission is demanding a clear demonstration from all 27 member countries of their willingness to reach the 0.7 percent goal by 2015 as promised. It has suggested a 4-point plan to reach this objective:[7]

  • Express confirmation of the collective 0.7 percent goal for the EU by 2015.
  • The adoption of realistic and verifiable national ODA action plans in which governments set out how they plan to reach the agreed ODA increase by 2015.
  • The creation of an EU internal annual peer review mechanism to which every member government must submit a monitoring report detailing progress made in meeting their ODA obligations
  • The creation of a binding mechanism for increasing ODA. As an example, the Commission referred to statutory regulations in which the 0.7 percent goal is legally anchored, such as have been adopted by Belgium and Sweden.

The glaring gap between pledged and actual ODA has created an utterly unique development policy consensus in the German Bundestag. In February 2011, members of the Bundestag from all parties, ranging from the Christian Democratic Union to the Left, made a unified call for compliance with the 0.7 percent goal.[8]

Only one out of two euros is “country programmable aid”

The quantitative increase in ODA says very little about how much aid actually flows South as fresh money. In fact a considerable part of ODA does not consist of real financial transfers and as such is not directly available to the governments of the South. This is why the OECD distinguishes between official development aid (ODA) and aid that the governments of recipient countries can budget for reaching their development strategies. The OECD calls this second type “country programmable aid” (CPA).[9]

According to the OECD definition, this is ODA (gross) minus debt relief, humanitarian aid, administrative costs, costs for asylum seekers, ODA not paid by the central development institutions, schooling costs for students from developing countries and other smaller expenditures. In 2008 the proportion of CPA for all DAC countries was 54 percent, and only 39 for Germany.[10] To clarify: The distinction between CPA and ODA in no way means that humanitarian aid, debt relief or expenses for the employees of development ministries are of no development policy value. At the same time the criteria of country programmability alone is not indicative of the use of funds and quality of programmes. However increasing CPA is still a necessary precondition for covering the external needs of these countries for public development finance.

Instead there have been many efforts of late to expand the definition of ODA in order to reach the 0.7 percent target. As early as 2008, the UN General Secretary addressed this problem in his report in preparation for the Doha Conference on Financing for Development. He noted: “There continues to be an urgent need to increase the overall volume of aid flows net of debt relief, technical assistance and emergency relief to meet the internationally agreed development objectives, including the Millennium Development Goals. (…) In the spirit of Monterrey, discussions between both donors and recipients need to be rekindled (…) on what kinds of flows should really be counted as ‘aid’”[11]

This is also a clear statement by the UN General Secretary that the question of what is defined as “aid” can no longer be determined by the Western donor countries in the DAC alone, and that recipients needed to be heard here as well.

A new normative framework for financing development

This issue at hand here is, of course, about much more than just a new definition of “aid”. In view of the growing number of critics of the current concept of aid who run the spectrum from Yash Tandon (“Ending Aid Dependency”) to Dambisa Moyo (“Dead Aid”), we need a new approach to financing development. This includes a new normative basis for public financial transfers from rich to poor countries and a new gauge beyond the 0.7 percent target.

In 2010 the 0.7 percent target celebrated its 40th anniversary of non-fulfilment, since the governments in the UN General Assembly set the target in 1970. The decision was based on the then dominant concept of catch-up development. It was felt that a “big push” was needed in foreign capital to allow developing countries to reach a “take off” towards sustainable economic growth. Experts from the World Bank estimated the capital gap at around ten billion dollars. Today that would be the equivalent of around one percent of the GNI of the industrialised countries. In 1969 the Pearson Commission from the World Bank recommended giving developing countries 0.3 percent of the GNI in the form of private capital and 0.7 percent in the form of official development aid. This marked the birth of the 0.7 percent target. Today this 0.7 percent figure has more symbolic political importance than anything else as an “indicator of the willingness to help” on the part of rich countries. The 0.7 percent target cannot answer questions about what reaching international development goals will actually cost, how much developing countries could contribute themselves and how much external capital would be needed to fill the gap. We need to change perspectives to arrive at answers, to move away from a proposal approach to a needs-oriented approach to financing development.

All estimates of the need for external development financing along with the additional finance needs for climate protection measures and climate change adaptation show, however, that the aid needed goes well beyond the 0.7 percent of the GNI mark. As long as countries cannot agree on other target figures though, the 0.7 percent goal will remain politically relevant. The justified criticism of the original context the 0.7 percent target was based on in no way legitimise turning away from international obligations.

Further development of the UN General Assembly resolution from 1970 to adjust the normative framework of financing for development to the realities of the present is long overdue. This could take place as part of a human rights convention based on the Declaration on the Right to Development from 1986, the Principle of Common but Differentiated Responsibilities from the Rio Declaration from 1992 and the Polluter Pays Principle. This would alter the charity character of financing for development, giving it a legal foundation based on the solidarity principle. Heads of government and state hinted at this as early as 2000 when they adopted “solidarity” as one of the six “fundamental values for international relations in the 21st century, noting:
“Global challenges must be managed in a way that distributes the costs and burdens fairly in accordance with basic principles of equity and social justice. Those who suffer or who benefit least deserve help from those who benefit most.”[12]

Footnotes

[1] cf. UNDP (2007): Human Development Report, Table 18
[2] cf. Kar, Dev/Curcio, Karly (2011): Illicit Financial Flows from Developing Countries: 2000-2009. Update with a Focus on Asia. Global Financial Integrity.
[3] cf. World Bank (2010): World Development Indicators. Washington, D.C., Table 4.10
[4] cf. OECD press release from 14 April 2010 (www.oecd.org)
[5] cf. www.oecd.org.
[6] cf. European Commission (2010): Commission Staff Working Document: Financing for Development – Annual progress report 2010 Getting back on track to reach the EU 2015 target on ODA spending? Brussels (SEC (2010) 420), Annex 2, 3 and 4. The heads of state and government of the European Union pledged at their summit meeting on July 16 and 17, 2005 in Brussels to collectively raise their ODA to 0.56 percent of the GNI by 2005 and to 0.7 percent of the GNI by 2015 (www.consilium.europa.eu).
[7] Ibid., p. 18f.
[8] cf. www.thilo-hoppe.de
[9] cf. Benn, Julia et al. (2010): Getting Closer to the Core – Measuring Country Programmable Aid. Paris: OECD (Development Brief, Consultation Draft, Issue 1, 2010).
[10] cf. OECD (2010): Review of the Development Co-operation Policies and Programmes of Germany. Paris, p. 32.
[11] UN Doc. A/62/217 from 10 August 2007, Point 78.
[12] United Nations Millennium Declaration, 8 September 2000, Section 6
(www.un.org) - page not found.