The idea of innovative financing for development (FfD) is now on the agenda of all major international fora and gaining support from the international community. This is according to Susan George, chair of the board of the Transnational Institute in Amsterdam, and an advocate of small taxes on international speculative transactions, who made the comment in the wake of a decision by 13 countries to introduce a levy on commercial flight tickets.

FYI: ALTERNATIVE TAXES

The Tobin Tax

The so-called Tobin tax, named after the Nobel Economics Prize winner who proposed to tax global currency speculations, received the most attention from the global community.

According to recent statistics, the currency exchange market has reached a value of USD1.5 trillion per day. Compare this figure to the total amount of international trade exchanges in goods and services, which is estimated at USD4.3 trillion per year. This means that the amount of money dealt in trade during one year is equivalent to the amount dealt on the foreign exchange market in three days.

The Tobin tax charged on each foreign currency transaction regardless of the transactions content and amount would create a disadvantage exclusively for those who, for speculative purposes, carry out many transactions per day, and not for those firms which import and/or export large amount of goods on a less frequent basis. Such a tax would vest governments with an instrument to control financial markets. The revenue could be used to finance development programmes in the fight against poverty. A further advantage is that the sums raised with this type of tax cannot easily be used by governments for other purposes, thereby decreasing their Official Development Assistance (ODA) contribution.

The Carbon Tax

The Carbon Tax on carbon dioxide emissions, which are mainly responsible for global warming and climate change, will be based on the polluter pays principle. Unfortunately, many initiatives regarding the Kyoto Protocol to the United Nations Framework Convention on Climate Change relating to carbon emissions trading, allow a company to buy and sell significant amounts of carbon dioxide emissions if it does not respect the parameters fixed by the protocol.

Consequently, the basic polluter pays principle becomes the he-who-pays-may-pollute principle. This is an example of an environmental issue addressed using exclusively economic and financial considerations, increasing the power and the influence of the financial markets over environmental issues.

Source: Baranes, A. (2005). The use of international financial markets to fulfill the MDGs: Part of the problem or possible solution? Fondazione Culturale di Banca Etica. Retrieved March 29, 2006 from <http://www.socialwatch.org/en/informesTematicos/91.html>. The countries that have agreed on the tax are Brasil, Britain, Chile, Congo-Brazzaville, the Cte d'Ivoire, Cyprus, France, Jordan, Luxembourg, Madagascar, Mauritius, Nicaragua, and Norway. Some countries like Britain, Chile, and Brasil already tax travellers; others have yet to start raising taxes this year. France will put the tax system in place by July 1.

The decision on the air travel tax was announced at the Innovative Financing for Development conference organised by the French government February 28 to March 1.

"This is the first step towards an international fiscal policy focused on financing development," an enthusiastic Brasilian minister for foreign affairs Celso Amorim told the Inter Press Service News Agency (IPS). "We are already discussing new taxes on other international transactions such as the trade in weapons, and speculative financial operations."

"Financing for development is...an area where political courage is needed. We must not rule out ideas solely for fear of controversy, said UN  Secretary-General Kofi Annan who attended the event.  He said the Paris conference had allowed the international community to "discuss concrete measures" to provide international cooperation and development programmes, especially those aimed at meeting the Millennium Development Goals (MDGs).

Annan praised the idea of raising an international air ticket solidarity tax for financing the MDGs. "Such initiatives have many virtues: they are practical; they are targeted at those who can afford it; they can be implemented rapidly; and they are flexible so that, over time, more countries can join."

Annan has earlier warned that unless development assistance is doubled to USD100 billion  annually, the worlds 132 developing nations will fail to meet the MDGs, which aim to reduce poverty, improve education and health care, eliminate diseases, and prevent environmental degradation, among others by 2015.

According to estimates at the 2002 FfD conference in Monterey, Mexico, overseas development aid would have to be doubled from the present USD60 billion a year if the MDGs are to be met.

Britain raises USD1.8 billion a year from commercial flights taxation. It has channeled this revenue into its annual budget and will henceforth allocate a percentage for international health needs.

The tax rate varies. France will impose a fee ranging from one to 40 euros per ticket depending on the destination. It expects to collect about 170 million euros (USD200 million) worth of taxes a year. Brasil will add a USD2 tax on about six million international air tickets a year.

The French government, which proposed the idea of a special tax on commercial flights, says  taxation in the 13 countries could generate about USD400 million annually. The European Commission has estimated that if adopted worldwide, especially in the industrialised North, the tax could raise up to USD10 billion  a year.

The Paris conference delegates representing over 90 countries and several non-governmental organisations agreed to create a 'Leading Group on Solidarity Levies' to consider similar proposals for innovative financing.

In a parallel development, a 40-member group that includes Britain, France, Germany, Norway, Mexico, Brazil, South Africa, Spain, and Chile, announced that it will lead negotiations to "finalise the modalities of implementation of an International Drug Purchase Facility (IDPF)" to fight  diseases such as AIDS, tuberculosis, and malaria.

The International Finance Facility (IFF): Development partner?

The British Governments proposal for the creation of the IFF with the intention of collecting funds through the sale of bonds as a means of achieving the MDGs over the next ten years has not been completely defined. This financial instrument, however, could be issued by the Organisation fro Co-operation and Development (OECD) for the rich countries to subscribe to and then be offered to the public at large. The bonds would have a 10-15 year life-span. The money collected would then be used to fight poverty.

However, bonds are usually considered to be one of the main causes of the worlds economic injustices.

Baranes points out that the most serious criticism of the IFF initiative is probably linked to the fact that the burden of repayment is transferred to future generations. Some governments are arguing that the current economic crisis hampers them from increasing ODA, and therefore support the IFF as a way to guarantee a certain level of ODA.

At present it is not clear which authority should be vested with the power of managing the money from the IFF. One possibility is that the sums be managed, in whole or in part, directly by the WB. When the Treasury of the United Kingdom presented the IFF, it explained that recipient countries of grants or particularly advantageous loans should be subject to tight conditions such as good governance, anti-corruption commitments, transparency obligations, and market liberalisation.

The IFF however does not take into account the overall role of the International Financial Institutions (IFIs) which generally have imposed conditions such as structural adjustments programmes on developing countries for the last 30 years.  The IFF could facilitate a further increase in IFIs control, and also amplify poorer countries dependency from the WTO, WB, IMF, and from the financial markets themselves in general.

Source: Baranes, A. (2005). The use of international financial markets to fulfill the MDGs: Part of the problem or possible solution? Fondazione Culturale di Banca Etica. Retrieved March 29, 2006 from <http://www.socialwatch.org/en/informesTematicos/91.html>.

The International Finance Facility (IFF) proposed by the British government, also won support.  The IFF is intended to raise money through bonds to finance immediate development to be repaid through future aid allocation. Also on the discussion table are a carbon tax on fuel use, the Tobin tax on currency transactions, a levy on international sales on weapons, and a global lottery.

Sources:

Deen, T. (2006). UN to put global taxes on centre stage. Inter Press Service. Retrieved March 20, 2006 from http://www.commondreams.org/headlines04/0709-08.htm.

Godoy, J. (2006). New tax takes off. Inter Press Service. Retrieved March 20, 2006 from http://www.ipsnews.net/news.asp?idnews=32367.