‘Innovative’ financing for development – a useful update

Added 19/Jul/12

By Jesse Griffiths

I’ve just got round to reading the UN’s annual World Economic and Social Survey (affectionately known among finance geeks as the Wess) – which this year is a really useful update on innovative financing.  Inevitably a slightly bizarre mixture of different ideas, not all of them innovative, and not all about new financing, the Wess defines the topic as cross-border finance with public involvement through “…mechanisms are used in a new context or incorporate innovative features with respect to the type of resources or the way they are collected, or their governance structures.”

Here’s the most striking graph: estimates of how much each method might raise:

There’s also an extremely useful summary table on page vii – a bit too big to stick in this blog, but invaluable for those who want to know how the different proposals work, how much they might raise and the current state of play.

In some ways it makes depressing reading – despite a plethora of ideas, some with increasing support, there’s not much cash to show for over a decade’s effort:

“…, so far, these innovative mechanisms have not proved to be major fundraisers”.

“Overall “the funds have been mobilized in part through “securitization” of existing ODA commitments which are not additional to traditional ODA. However, most of these intermediated resources are not additional to traditional ODA. In fact, while difficult to estimate, probably only a few hundred million dollars have been added annually.”

But it’s also a reminder of how close some of these ideas are.  The Financial Transaction Tax – or Robin Hood tax – is moving forward through a ‘coalition of the willing’ in Europe, and recent independent estimates suggest it could raise much more than governments are letting on [and make the UN’s estimates seem very low].   

And also there’s still space for new ‘crazy’ ideas -they’ve included a proposal for a “tax of 1per cent on individual wealth holdings of $1 billion or more”, which they wryly note “is not yet in any international agenda”. I wonder why not…

In terms of scale, the big money items are either new issuance of  SDRs (Special Drawing Rights, the IMF- managed international reserve asset), or by loaning them to multilateral development banks or others to ‘leverage’ – a nasty buzz word, rife with problems and recently banned by the grammatical purists in the UK government.  Eurodad members have supported the former, but I remain deeply skeptical about the latter.  If scarce international resources are to be used to back more (debt-creating) lending, isn’t it far better to support national and regional banks, close to and controlled by the end users, rather than expand the Bretton Woods Institutions, which remain rich-country dominated.

Carbon taxes could also raise a lot - “…a tax of $25 per ton of CO2 emitted by developed countries is expected to raise $250 billion per year in global tax revenues.”  It would also be eminently sensible for other reasons:  “The most straightforward approach to reducing emissions through financial incentives would be to impose a tax on carbon dioxide (CO2) emissions” [take note carbon-traders.]

An interesting discussion of front-loading mechanisms such as the International Finance Facility for Immunisation (IFFM) and risk-guarantee systems like the Advanced Market Commitments (AMC) is deemed unacceptable by the final conclusion: “given their limited size and limited capacity to raise new funds, they do not contribute much, if anything, to closing the gap between current and projected levels of ODA and financial needs for development and global public goods.”

There’s also a decent discussion of some of the political barriers, and of the significant governance changes needed, among other things. It’s hard to do justice to a large topic and a substantial report in a short blog, but suffice to say it’s well worth a read.