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Helping to finance development

By Hans van Ginkel

The United Nations has 191 member states, many of whom seek to escape from a debilitating poverty trap through development. The sustainability and quality of economic growth as well as an equitable distribution of incomes are critical for the improvement of the quality of life of all people.

Under its second rector, Soedjatmoko, the UNU introduced the concept of human development. The broad acceptance of this approach has led to the much-valued annual Human Development Report of the UNDP. 

In the meantime, the link between justice, peace and development – or, more darkly, between injustice, inequality and violence – has also become more clearly understood. It is with this in mind that the world's leaders adopted the Millennium Development Goals four years ago.

Contrary to the trend of increased skepticism and growing questioning of multilateral solutions to global problems, leaders agreed in 2000 to a set of specific development goals and targets to be achieved by 2015. As of this year, we are well behind in the MDG targets, despite commendable progress in some sectors and in some parts of the world, in particular East Asia.

One serious obstacle to meeting the MDG targets is the lack of financial resources to invest in development projects. If the world's poorest countries are to invest in the basic services and infrastructure to generate growth and employment, enhance the dignity of human life, and promote human development, they need an additional $50 billion each year from public and private sources.

On the one hand, international organizations are thought to be the key to the free movement of capital, services and goods. On the other, there are signs of donor fatigue everywhere. The promises made, let alone honored, only cover about one-third of the amount needed. 

If countries met their pledged target of 0.7 percent of GDP as foreign aid, no additional source of development money would be necessary. Alas, this is unlikely in the foreseeable future. Instead, in the last few years it is spending on the military that seems to have gone up significantly once again, dashing hopes of a peace dividend resulting from the end of the Cold War.

A study by the U.N. University's World Institute for Development Economics Research (UNU-WIDER) in Helsinki examines a range of proposals and possibilities for raising additional finance for development.

Specifically, the seven new sources of development finance it looks at are global environment taxes; a tax on currency flows; creation of a new Special Drawing Rights; a U.K.-proposed new International Finance Facility; increased private donations for development; a new global lottery or premium bond; and increased remittances from emigrants to home countries (which already amounted to $80 billion in 2002).  Other possibilities that the study did not scrutinize include a tax on international travel, arms exports and the Internet.

Obviously, we cannot review all the seven options in this short space. But let us take a closer look at a couple of them. A global tax on carbon use of just one cent/yen per liter, levied only on high-income countries, would by itself raise the necessary additional $50 billion of annual revenue.

Alternatively, a currency transactions tax -- known as the "Tobin tax" after James Tobin who first proposed it as a means of combating financial volatility -- of 0.04 percent would also raise the extra $50 billion.

The U.S. Congress in particular remains opposed to any new global taxes. There is also debate among experts on the technical feasibility of a currency transactions tax. Yet another question is, would a new global carbon or currency tax require universal agreement and participation by all countries before it could be introduced?

What if the Tobin tax was introduced and implemented by the European Union and Switzerland (which remains at the financial center of Europe even though it is not a member of the Union)? The financial sector would most likely complain about a loss of competitiveness vis-a-vis the U.S. But if the tax really does increase financial stability, it could in fact strengthen the euro and the euro zone.

Moreover, both the carbon tax and the Tobin tax give rise to what is called a "double dividend." That is, in addition to raising revenue for development, they help to reduce environmental damage and currency volatility, respectively. But for them to have such effects, they would have to be imposed at significantly higher rates. And if they have a doubly beneficial effect, it is also likely that they will be attacked from two different directions.

Other questions would also have to be answered before we could move ahead with any one or more of the seven options examined in the study. For example, should a new global carbon tax be levied at the same rate on all countries? The flat rate would seem to be fair to the extent that emissions cause the same environmental damage wherever they occur. 

A progressive carbon tax rate, on the other hand, would more accurately reflect the unequal distribution of world income -- which is why we need innovative sources of development finance in the first place. A new global tax on the arms trade would create the moral hazard of the world acquiring a vested interest in the growth of the arms trade, when the goal should be to reduce and halt it.

The point is not that there are no additional costs involved in innovative and creative sources of financing for development. Rather, the point is that there are alternative sources of development finance, some involving new tax instruments, others requiring voluntary contributions and reallocations.

The sense of solidarity and philanthropy that underpins emergency humanitarian assistance and foreign aid must be complemented with a matching commitment to fairness and equity, so that globalization benefits all and does not worsen already crippling inequalities.

The United Nations is committed to the goals of poverty alleviation and the eradication of extreme poverty. UNU is committed to advancing knowledge for human security and development. Our ambition is for the UNU to be the font of intellectual authority for the operational activities of the U.N. 

Japan is today the world's second-biggest aid donor, and the main donor to the UNU. By studies such as the "New Sources of Development Finance," we aim to assist the international community in making informed choices from available policy options. That is our ethos of service to Japan, the United Nations and the countries and peoples of the world. We have to work hard together to make sure that when the world takes stock of progress in meeting the millennium goals, we will be well pleased with the report card.

Hans van Ginkel is UN Under-Secretary-General and Rector of UN University. This commentary was published in The Japan Times to mark UN Day on October 24.

© 2004  United Nations University