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Finance and the future: post 2015 development goals need new economic norms and targets

Added 22 Mar 2013

As the UN’s high-level panel on the post 2015 development agenda prepares to meet in Bali, it is clear that no worthwhile development goals can be met without fundamental changes in the international financial and economic system. This includes exposing the dark corners of global finance, supporting domestic resource mobilisation, insisting on responsible financing standards and overhauling the economic governance system.

The United Nations is in the midst of an expansive process to decide what the global framework for anti-poverty and sustainable development should be after 2015. Eurodad members and partners have been pushing hard for ambitious goals to end extreme poverty, tackle inequality, ensure women’s rights and protect the planet. In  the spirit of the ‘post 2015’ debate – which is both about establishing global norms and about pinning down concrete targets – we suggest four key norms that need to change to make finance work for development, and some of the concrete steps that would indicate we’re on the right path.

We must put an end to corporate secrecy, shadow systems and tax havens

The global financial system is dominated by huge black holes where public regulation, taxation and control are minimal, epitomised by the central position of tax havens. Recent research by the Tax Justice Network estimates that there is $7.3–$9.3 trillion in untaxed financial assets in tax havens. This originates from 139 countries – most of them developing nations. At the same time, global companies and financial institutions use this opaque, unregulated system to evade their responsibilities, particularly through dodging taxes. They are abetted by the weak demands for transparency that governments make of them.

The ever decreasing ability of public institutions to tax, regulate and direct finance leads to a race to the bottom – governments reduce regulations and offer tax breaks and incentives to placate increasingly mobile international capital and firms. Recent research by Eurodad member ActionAid shows how one multinational company alone has cost the Zambian government almost $18 million in lost revenues through tax dodging practices, and has negotiated special tax breaks that “could likely cover the entire cost of the interventions needed to tackle child malnourishment in Zambia”. 

A central part of any attempt to create ‘the world we want’ – which is the UN’s catchphrase for their post 2015 consultation – will be to end the shadow financial system, close down tax havens and regain our ability to regulate, tax and direct finance. One key way to do this is to remove the secrecy that is at the heart of the problem. Key measures Eurodad has proposed include: creating public registries of companies so that the real or ‘beneficial’ owners can no longer hide their identities; and requiring transparent reporting by multinationals on a country-by-country basis of all their activities and profits.  

The importance of national strategies and domestic resource mobilisation cannot be over-emphasised

Recent research by Eurodad shows that domestic resources are several times larger than external finance for developing countries. Unfortunately, the picture is often looked at through the wrong end of the telescope, particularly when it comes to private finance, where attracting foreign investment is assumed to be the central objective. In fact, as the United Nations Conference on Trade and Development (UNCTAD) has shown, foreign investment has widely varying impacts, and the key is how it is managed, regulated and directed at a national level. Eurodad has also pointed out the numerous flaws in the current emphasis on ‘leveraging’ international private finance.

Similarly, many have shown how successful development efforts have been driven by clear and effective national strategies. Eurodad and our partners have long emphasised that developing countries need the policy space to develop their own sustainable development strategies. Too often, international institutions and agreements in trade, investment and finance undermine their efforts. For example, Eurodad is currently part of a coalition calling on the World Bank to change its procurement policies and advice so that it can begin to support developing countries to use their public spending to boost domestic industries.

Of course, many countries face a chronic lack of public finance to invest in the basic services and infrastructure needed to build strong economies. Eurodad research has shown that, in 2010, aid represented almost 10% of GDP in low-income countries. Pledges to increase aid and improve its quality must be honoured, but these will be hindered unless there is also a commitment to overhaul procurement practices to stop funnelling aid through rich country corporations and start spending far more of it in developing countries, where it can stimulate the domestic private sector.

All finance should abide by strong ‘responsible financing’ standards

Radically improving transparency, regulation and democratic influence over the financial system is extremely important, but we also have to raise the standards required of all financing. Eurodad has, over many years, developed a rigorous Responsible Finance Charter, which goes beyond a ‘do no harm’ approach to one that ensures that lending and investments actively deliver positive development outcomes. The UN has picked up this agenda, and UNCTAD has set out its own Principles for sovereign lending and borrowing. The UN’s willingness to take this international agreement further, by strengthening such principles, expanding them to cover private investment, and giving them teeth, will be a key indicator of whether all finance can be transformed into a tool for development.

Poor global economic governance is at the heart of the problem

The dominant international financial institutions, particularly the International Monetary Fund (IMF), lack legitimacy due to their undemocratic structures, and too often continue to aggressively promote an outdated economic paradigm. Although there has been some movement – emerging markets recently forced the IMF to abandon its objections to the regulation of international capital flows – a sea change is needed to reform the system and its institutions, including the promotion of regional alternatives. For example, Eurodad is part of an international coalition calling for a fair and effective debt resolution mechanism that is open and transparent, comprehensive, independent of creditors, and that treats debt on the basis of its impact on human needs, and its legitimacy. The UN has recently started work on this urgent priority, and the ever-deepening crisis in the Eurozone shows once again what happens in the absence of such a mechanism.

It is vital to set ambitious goals to end poverty, protect the environment and tackle inequality. However, such goals can only be one part of the solution. They can only be meaningful if they are accompanied by concrete action to change the economic and financial systems that cause poverty and inequality and stand in the way of sustainable development. 

 

tags: Post 2015