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How far have we come on responsible finance standards?

Added 22 Sep 2016
It’s been two years since Eurodad reported that for every $100 a developing country makes, $10 are lost, flowing out of the country. Although we’d been saying for many years that more money flows out of developing countries than goes in, I remember that the scale of it even came as a surprise to us. 

But the reality is that developing countries continue to suffer from profits taken out by foreign investors, lending by developing countries to rich countries and particularly from illicit financial flows (IFFs). Last year’s “Mbeki report”, which had been commissioned by the African Union and the United Nations Economic Commission for Africa, estimated that Africa is losing more than $50 billion annually in IFFs. And, the report argued, “these estimates may well fall short of reality because accurate data do not exist for all African countries, and these estimates often exclude some forms of IFFs that by nature are secret and cannot be properly estimated (…). The amount lost annually by Africa through IFFs is therefore likely to exceed $50 billion by a significant amount”.

The Panama Papers last year, and now the leaked Bahamas files, reminded us once again that corporations can still structure their financial activities in such perverse ways in order to avoid taxes on a massive scale. Some rich individuals that popped up in the Papers even received indirect support from public development banks (PDBs) for money-laundering purposes, which perhaps unintentionally also exposed some other flaws in the financial system: the suspect financial and development additionality of publicly-backed private lending and the use of financial intermediaries by PDBs to invest in small and medium-sized enterprises. 

Therefore, at last year’s UN summit on Financing for Development in Addis Ababa we argued that the quality of the financing that developing countries receive needs significant improvement. Those who have followed our work a bit in the last couple of years might remember that already in 2008 – in the midst of a global financial crisis – we made an attempt to offer a valuable alternative with the release of our first “Responsible Finance Charter”. The idea behind the Charter was to “go beyond a do-no-harm approach” by setting out the standards that are needed to ensure that public lending to developing countries actively delivers positive development outcomes. 

We decided to revise the Charter in 2011 to broaden its scope by including publicly-backed private lending and investment with a development purpose. Indeed, since the financial crisis we’ve seen how many DFIs have used blending mechanisms to increase their support and lending to private companies, and to partner with private financiers in funding these activities. At the European level this includes using ever larger quantities of ODA to subsidise private companies based in OECD countries. Likewise, we’ve witnessed how the World Bank and G20 increasingly started to promote public-private partnerships as the right tool to finance the infrastructure projects for which developing countries are crying out, often not paying attention to liabilities which can pose a huge fiscal risk to the public sector. 

While many of the standard-setting institutions which were mentioned in Eurodad’s Charter in 2011 still set the tone today at the national, regional and global levels (for example the OECD’s Guidelines for Multinational Enterprises, the United Nations’ Guiding Principles on Business and Human Rights and the Equator Principles), since 2011 a significant number of old standards have been revised and new ones emerged. These include, for example, the OECD’s High-Level Principles of Long-term Investment Financing by Institutional Investors and the OECD Principles for Public Governance of Public-Private Partnerships

Unsurprisingly, many of the new standards specifically address debt sustainability issues. For example, in 2012 UNCTAD released two sets of principles: Principles on Responsible Sovereign Lending and Borrowing and Basic Principles on Sovereign Debt Restructuring. And at a time when countries like Greece are burdened with illegitimate debt and strangled with austerity measures, it released a Roadmap on Sovereign Debt Workouts. Eurodad previously reported that the timing of this roadmap could not have been better. 

Since 2011 we continued to take note of these and other new and revised standards and quickly concluded that, half a decade after the last revision, it was time to update the Charter once more.

Thus, to kick off this process, I have put together a timely overview of today’s responsible finance standards promoted by various official multilateral or international organisations, including the World Bank Group, United Nations, G20 and OECD. The briefing, which can be accessed here, examines the issues covered by old and new standards, the actors they seek to influence and the mechanisms they have in place to encourage or enforce implementation. This will not only help us to identify the key criteria to focus on in the next Charter, but hopefully also you, be it when conducting research, developing advocacy strategies or targeting policymakers.