Civil Society Benchmarks for the Doha preparatory process on Financing for Development

Civil Society Benchmarks for the

Doha Preparatory Process

on Financing for Development 

June26, 2008

 

Since the 2002 Monterrey Conference, financial flows to support the achievement of the Millennium Development Goals (MDGs) and other internationally agreed goals, especially in the South have remained grossly inadequate, unpredictable, and volatile. The rapid growth of global capital flows has not automatically led to a corresponding increase in means available for poverty eradication and decent work. Worse, recurrent crises and dynamics in the international financial system have had grave consequences for many developing countries. The political conditions for creating an enabling environment for development, linked to the six thematic areas of the Monterrey Consensus, have, by and large, not materialized.

 

Each year, the exodus of capital and tax avoidance practices are robbing the countries of the South of hundreds of billions of dollars. The exponential increase of foreign exchange reserves above all benefits the state budgets and the ailing economies of the USA and Europe. Portfolio investments and short-term private loans are highly volatile, and should the world-wide crisis on the financial markets become aggravated, they may be withdrawn as suddenly from developing countries as they flowed in.

 

Since 2002, there is a growing concern over lack of compliance by developed countries with their commitment to 0.7 percent of GNI to Official Development Assistance (ODA). Only a small proportion of the increase has contributed to the transfer of fresh money to the South. And yet, increased transfers are a necessary pre-condition for the fulfilment of internationally agreed development goals including the MDGs, for the effective eradication of poverty, and the fulfilment of the decent work agenda.

 

Poverty is based on a radically unequal distribution of income, coupled with unequal distribution of assets, unequal access to opportunities for decent work and employment, social services and benefits, and on the unequal distribution of political power. Unequal access to information and political participation are also part of this “inequality predicament”. This is largely the result of deep-seated and persistent imbalances in the current workings of the global economy which, according to the World Commission on the Social Dimension of Globalization, is “ethically unacceptable and politically unsustainable”. Women suffer disproportionately from the negative effects of these inequalities, as they have been drawn in growing numbers into the global economy as assembly-line workers, as migrant service providers, health care providers, food producers and petty retailers in the informal economy, with low wages, insecure employment, and unsafe and unhealthy working conditions. 

 

The current situation in many parts of the South is characterized by “growth without poverty reduction” or even “growth with growing inequities”. This is especially troubling when economic growth rates in the South have never been so good in many decades. Commodity prices are up and interest rates are down. However, there is a serious risk of sharply increased inflation and even stagflation in many countries, and growth has not resulted in redistribution or even a reduction in extreme poverty. Rather, all the evidence points to more inequality within and between countries. Money is not flowing where it is needed most, so that poor countries or poor sectors of the population within countries are excluded from participation, and fail to reap the benefits of development.

 

 

Today still over 862 million people are suffering from hunger and malnutrition, and with the current global food crisis, the number is rising fast. Prices of staple foods are rising from between 10 and 50 per cent, and will remain well above the levels of the last decade. These trends will hit the poor and hungry the hardest over the coming years, and will reverse hard-won gains in poverty alleviation. Diversion from food to fuel production to meet the growing demand for biofuel is cited as a factor forcing up prices. IFI-inspired policies leading to the dismantling of national grain buffer stocks, and shifts from food to export production have contributed to the crisis. Climate change, low grain stock levels, financial and commodity speculation, the control exercised by a few dominant multinational corporations over agricultural trade have also added to price rises and price volatility.

 

Therefore, coherent action is urgently needed by the international community to deal with the impact of higher prices on the hungry and poor. Long-term approaches are needed to address the root systemic causes of the crisis, and to reverse disastrous economic policies. But the rising concern over access to food and suggested measures to increase food production and availability run the risk of yet again paying little attention to the role and potential of women as producers of food in some of the poorest countries and regions of the world. Policy measures geared towards overcoming the food crisis must take these gender dimensions into account.

 

The foregoing analysis serves to highlight why governments are facing a double challenge at the up-coming FfD Conference in Doha: On the one hand, they have to find ways of substantially increasing the transfer in real terms of public resources to the South, while ensuring that public revenue is generated and mobilised for poverty eradication, decent work, achieving gender equality, and improving the livelihoods of the population. On the other hand, they have to agree to take steps to address the global imbalances and inappropriate economic and trade policies that are fuelling the current global crises in the food and energy sectors, and in the financial markets, and severely compromising development prospects for the countries of the South.

 

For one, it has now become clear that agriculture, food security and food sovereignty need to be put back on to the development agenda. Further, the challenge of financing climate adaptation and mitigation must be addressed. In this regard, international agreements must be based on the principle of additionality in relation to already promised resources for development. Civil society analyses point to the critical need, both to address the systemic weaknesses that have undermined the consensus reached in Monterrey, and to supplement the 2002 commitments with a package of new, concrete monitorable measures, coupled with a strong and explicit political commitment to implement them. Some key recommendations for such a package emerge from the analysis which follows:

 

A. Mobilising national resources

 

In order to achieve the international development goals and overcome dependence on external donors, whether governments, banks or the International Finance Institutions, the countries of the South need to substantially increase revenue from national resources, and channel these resources towards meeting the needs of the poor. The Monterrey Consensus had highlighted domestic resource mobilization both public and private as essential for sustaining productive investment and increasing human capacities. The domestic policy tools that can inform this process include fiscal reform, as well as fiscal and monetary instruments to moderate economic downturns and protect at risk economic sectors and populations from negative impacts. 

 

To achieve sustainable development, international measures are just as indispensable as fiscal reform at national level. Common and coordinated measures are needed to address the world-wide tax race to the bottom. More effective taxation of trans-national corporations, combating corruption, addressing the capital exodus to tax havens and achieving the return of misappropriated monies from foreign accounts to the countries of the South, these are only possible via increased multilateral co-operation.

 

 

 

1. Supporting the establishment of efficient and fair taxation systems and strengthening financial administration.

The key precondition to boosting public revenue is a progressive and efficient system of taxation, utilizing a broad and equitable tax base, and targeting those most able to pay. Earnings from capital and resource extraction should be taxed more heavily than earnings from labour. Tax systems should be more redistributive, with tax relief for low wage workers and the poor. A progressive system of taxation must also be gender sensitive, taking account of the differential holdings of assets and rents between men and women. Generalized value-added taxes should be discouraged, as they place a greater strain on the poor, owing to their regressive nature. National parliaments have a role to play in supporting tax reforms through legislative and policy measures. Development cooperation should also give increased support for these reform measures via demand-driven consultancy and technical assistance, and capacity-building for the establishment of efficient finance administration and independent audit offices.

 2. Transparent income reporting and effective taxation of transnational corporations.

An effective corporate tax must be an essential element of any efficient tax system. In this regard, tax exemptions or tax incentives for transnational investors in Special Economic Zones is counterproductive should be strongly discouraged and corporate tax regimes promoted in an internationally co-ordinated manner. All countries ought to implement laws on transfer pricing that would be based either on the arm’s length method or the formulary apportionment method, whichever is more practical to apply, and provides the best results.

 

More transparent international accounting standards for transnational corporations on a country-by-country basis are also needed. Reports on the profits earned and the taxes paid in each country where a company operates can provide information on transfer pricing and trade invoicing. Key information on private and corporate payment flows at home and abroad must no longer be concealed from tax authorities. Lax reporting requirements in the mineral oil, gas and mining industries in particular, must be addressed. Moreover, stabilization clauses in contracts in the extractive industry compensate foreign investors for market shocks resulting from political instability or adverse legislative changes. In particular, the host government underwrites the loss to a foreign investor in the event of adverse circumstances. Stabilization clauses of this nature constitute a legalized form of capital flight from mineral producing countries, particularly in Africa. 

 

Lack of transparency in reporting must be addressed, as it leads to misappropriation, corruption and tax evasion. Both the governments of the primary product producing countries and the companies involved must disclose the relevant data.

 

Since a competitive disadvantage may arise from the unilateral disclosure of information, voluntary disclosure requirements are inadequate. Instead, all companies ought to be legally required to disclose all information on taxes, profits, fees and other payment flows between them and public institutions in all countries in which they operate. Such disclosure requirements should, at a minimum, use the reporting template adopted by the voluntary "Extractive Industries Transparency Initiative"(EITI). Jurisdictions controlling major capital markets should make such disclosure a requirement for being registered in such markets. Country-by-country reporting should be included in international accounting standards as a binding requirement, particularly for the extractive sector. Host governments, including those implementing the voluntary EITI, should adopt regulations requiring disclosure of payments and receipts by government to foster greater accountability regarding the use of these financial flows. Best practice with reporting mechanisms should in turn be used as the basis for establishing a binding UN Treaty to provide global disclosure requirements for the extractive sector.

 

Preserving national policy space is also key. A government’s capacity to implement an effective corporate taxation regime should not be limited by conditionalities attached to aid, loans or trade agreements.

 

Sufficient appropriately skilled staff are needed in the tax authorities to ensure full implementation of tax laws, including those aimed at exposing malpractice, including tax evasion, illicit transfer pricing or the false declaration of import and export prices. Given the swift pace of financial and technological innovation, greater international support and co-operation are urgently required to assist countries of the South in building capacity to monitor compliance of trans-nationals and other enterprises with standards of accounting and reporting.

Supporting the repatriation of stolen public assets.

A more determined approach is required both in the countries affected by the flight of public assets, and in the context of international co-operation in order to reduce the misappropriation of public monies and the losses the state incurs owing to corruption and bribery. Here, the United Nations Anti-Corruption Convention must play an important role. The Convention ought to be ratified by all countries and implemented at national level as soon as possible. The Conference of Parties to the Convention must also set up an effective system of monitoring, to assess whether the states are effectively fulfilling their commitments regarding the Convention. Initiatives such as the StAR (Stolen Assets Recovery  Initiative) ought to be strengthened. Recovered assets should be used for meeting the MDGs.

 

4. Preventing capital flight to tax havens, strengthening world-wide tax co-operation and setting up an International Tax Organisation.

Given the considerable leeway that transnational capital enjoys, regulatory measures taken by individual governments will only meet with limited success. Co-operation among governments at international level is pivotal to the success of national tax reforms. One initial step towards combating tax avoidance would be the introduction of an automatic exchange of information between the financial centres and the tax authorities in the home countries of investors. Special United Nations sanctions ought to be imposed on countries and territories that are not willing to comply with such a measure (e.g. tax havens).

 

Cross-border tax evasion should be treated as a suspicious activity and as a money-laundering offence which must be reported to the relevant government authorities. In addition, world-wide co-ordination and co-operation regarding tax matters requires institutional strengthening. For as yet, there is no intergovernmental forum at global level that addresses taxation issues. In the short term, the UN Committee of Experts on International Co-operation in Tax Matters should be upgraded to an intergovernmental body such as a functional commission of the Economic and Social Council (ECOSOC), and adequately resourced. In the longer term, an independent International Tax Organisation ought to be created as a Specialized Agency of the United Nations.

 

5. Towards a more balanced domestic economic policy agenda - Promoting participatory and gender responsive budgets as tools for including the voices of the poor and of women in fiscal policy.

Public investments should be oriented towards the kind of diversified economic growth that provides opportunities for decent work, and for people at all levels to lead better lives. Increased government investment in support of social reproduction in the care economy should be promoted as a contribution to effective fiscal policy. Women, particularly the poorest women in a society, are often at the margins of economic governance and decision-making about fiscal policy. Participatory, gender-responsive budgets were developed as a tool for inserting people’s especially women’s voices into discussions of taxation, spending and debt, in order to underscore that budgets are not gender or interest neutral and that they should include the inputs of poor communities and other intended beneficiaries. They also enhance transparency and accountability.

 

The greater allocation of domestic resources toward gender equality is critical to achieving MDG3 and signals a country’s commitment to gender equality through investments of their own resources. National development planning needs to enhance the participation of women and actively take into account their concerns. To this end, national women’s and civil society organisations should be included in the process of planning, programming, managing, monitoring and evaluating national development plans, including through donor support, informed by the principles of national democratic ownership and mutual accountability.

 

The Monterrey Consensus had already stressed the critical need for reinforcing national efforts in building capacity for gender budget policies and practice while the 2005 High Level Dialogue emphasized that domestic resource mobilization should encourage gender-responsive budgeting to ensure that relevant commitments are made, and resources allocated. Public Finance Management systems and practices need to support rather than undermine participatory and gender responsive budgeting. Moreover, participatory gender responsive budgeting will be facilitated by gender- budget analysis and gender-disaggregated data, including time-use surveys that measure women’s unpaid work and its contribution to the national economy, to make visible women’s actual economic contribution in the National Accounts System. (ECLAC Quito Consensus 2007). These contributions should be costed as investments to the national economy, and used as a basis for providing matching funds for social services, family care and income generating activities, thereby freeing women for productive and decent work in the cash economy. 

 

Supporting the ILO’s Decent Work agenda

National economic policies need to foster the creation of decent work for all as a key step towards poverty reduction, gender equality and equitable growth. This includes training that improves women’s options across different sectors of the labour market, and access to finance for women entrepreneurs, especially in small and medium enterprises. Policies to create decent work should fully account for rapid changes in labour markets and opportunities related to trade liberalization. They should include labour adjustment measures such as training and redeployment. Social dialogue and social protection measures are key, as well as recognition of workers’ rights to join trade unions and bargain collectively for a fair share of the productivity gains of their labour. Particular efforts are needed to reach the large numbers of women in informal work, and to put in place the social safety nets that ensure the efficient functioning of labour markets. Attention must be given to the need for quality jobs with flexible time schedules and affordable child care that may be more critical for women than men (UNIFEM 2007).

 

B. Private capital for development

 

Two-thirds of world trade is carried out by multinational corporations (MNCs). Today, many corporations have become richer and more powerful than some national governments.

 

The conventional view among governments and international organizations is that private capital flows are per se conducive to development, particularly if they take the form of direct investment. For example, this is the view taken by the G8 in their 2007 Summit Declaration in Heiligendamm where they “reaffirm that freedom of investment is a crucial pillar of economic growth, prosperity and employment.”

 

Even though multinational corporations can be a force for good – providing jobs, boosting the economy and developing new technologies that can improve the lives of the poor, FDI does not automatically translate to development. Much of FDI in developing countries fails to translate to sustainable development because it operates as an enclave economy, narrowly oriented towards profit maximization and profit repatriation, while backward and forward linkages with local economies that could promote local enterprise development are weak, as is the transfer of knowledge and technology. Trade unions and other civil society organizations are concerned about the poor business practices of MNCs around the world, whereby irresponsible behaviour has led to abuses of workers’ rights, repression of poor and marginalised communities and environmental devastation. In many countries, enforcement of laws to counter such abuses is weak, and the penalties imposed for not upholding the law are too low compared to the financial benefits gained through not meeting legal obligations

 

In Export Processing Zones (EPZs) concessions accorded to MNCs extend beyond generous tax breaks to cover exemptions from obligations to observe core labour standards.  Workers in these EPZs, the majority of which are women, are unable to join unions and enjoy the benefits of proper collective employment contracts. In general, the policy framework within which MNCs operate, based on fundamental neo-liberal principles, are oriented towards the interests of investors, and aim above all at creating a favourable investment climate in the developing countries. World Bank policy prescriptions reinforce this policy framework. In its annual Doing Business Report, the Bank ranks countries on whether or not they have a favourable business environment, thereby providing guidance to investors as to where it would be profitable to invest. Through its labour indicators, the report gives low rankings to countries attempting to promote the decent work principles such as respect for core labour standards, and upholding the minimum wage. The net effect of this Report is therefore to undermine the decent work agenda, and by extension to hinder developing countries’ efforts at poverty eradication through decent work (ITUC 2008).

 

In order to reverse these trends and ensure that the activities of Transnational Corporations make a positive contribution to development, fundamental policy changes are required at international level.

 

1. Agreeing binding norms for transnational investors at UN level.

At the World Summit on Sustainable Development in Johannesburg in 2002, governments committed “(to) actively promote corporate responsibility and accountability, based on Rio Principles, including through the full development and effective implementation of intergovernmental agreements and measures (…)”.[i] In 2003, the UN Sub-Commission on the Promotion and Protection of Human Rights adopted the “Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights”.[ii] These norms represent a milestone in defining comprehensive legal principles for enterprises. They comprise human rights, humanitarian international law, the ILO’s Core Labour Standards, international environmental standards, consumer rights and anti-corruption regulations. However, they were not adopted by the UN Human Rights Commission in 2005 and were initially shelved. Since that time, the UN Human Rights Council has appointed a Special Representative to the Secretary-General (SRSG) on business and human rights, who was mandated to undertake a comprehensive mapping exercise on this topic, and submit his recommendations to the Council. Submitted to the Council in June 2008, the final report proposes the development of a framework for tackling corporate abuses based upon three pillars: the state duty to protect human rights, the corporate responsibility to respect human rights, and the need for access to effective remedies for victims, including through judicial mechanisms.

 

Each of these pillars is of critical importance. The Human Rights Council has renewed the mandate of the Special Representative to continue work on business and human rights. Concrete and effective recommendations should be developed in all three of the areas, informed by Southern expertise, experience and local realities, through consultation and in-depth case analysis.  The Doha review process should call upon governments to reaffirm their declarations made in Johannesburg, and actively promote the process of developing measures in the three critical areas defined. As regards the obligations of MNCs in the field of labour, the ILO Tripartite Declaration of Principles on Multinational Enterprises and Social Policy and the OECD Guidelines on Trans-national Companies outline clear expectations as well as follow-up mechanisms to regulate the behaviour of MNCs. These instruments should provide the basis for establishing a social regulatory framework for the operations of MNCs.

 

2.World Bank Policy Advice on FDI must be consistent with Core Labour Standards

Documented evidence of women workers who are heavily represented in the lower end jobs created by multinational investments and the global assembly line, whether within or outside Special Economic Zones, point to very long hours, unsafe and often unsanitary and unhealthy working environments and practices, and poor compensation. Decent work according to ILO standards is not the norm in these situations. In their business activities, foreign investors should support the ILO’s decent work agenda. In this regard, the international community, using the platform of the review of the Monterrey Consensus should call for a review and a revision of the World Bank’s Annual Doing Business Report.

 

3. Strengthening co-operation to stabilise capital flows and improving regulation of institutional investors

The Monterrey Consensus highlighted the need for “Measures [to] mitigate the impact of excessive volatility of short-term capital flows, [and strengthen] prudential regulations and supervision of all financial institutions, including highly leveraged institutions.”  Over the past few years, governments have repeatedly pointed to the problem of the volatility of short-term capital flows and the need for better co-operation to stabilise the international financial system.[iii] Moreover, the impact of uncontrolled commodity speculation on soaring food and fuel prices, driven particularly by institutional investors, has in recent times highlighted the urgent need for effective regulation, and coordinated actions. Some of the necessary measures include:

 

l        More stringent disclosure requirements for hedge funds vis-à-vis the financial regulatory authorities.

l        Higher margin requirements for commodity trading to discourage excessive speculation.

 

l        Rebuilding buffer stocks of food to reduce the transmission of price volatility from futures markets.

l        Strengthened international banking standards to restrict granting of loans to hedge funds and private equity funds.

 

l        Strict regulations applied to institutional actors investing in food and energy futures and in the highly speculative hedge funds.

 

4. No tax incentives for retransfer of profits from foreign investment

Investors withdraw their profits from the host countries because tax legislation is more beneficial for them in tax havens and sometimes in their home countries.[iv] Such incentives encourage the global tax race to the bottom. Governments ought to commit to abolishing all incentives for the transfer of profits. Instead, they ought to boost international tax co-operation with the aim of preventing all forms of ruinous tax competition, and ensuring that tax regimes mobilize adequate resources for development.

 

5. Actively taking advantage of instruments to promote foreign trade for environmental protection and technology transfer.

Multilateral rules for transnational investors can and should be used to ensure that private capital is beneficial for, and not detrimental to development. What is more difficult is attracting capital flows into economic sectors or regions of the world in which investing is risky or not particularly profitable. Here, special forms of government investment promotion could be undertaken. However, instruments promoting foreign trade such as export credit and investment guarantees should be made conditional on MNC compliance with environmental, social and human rights standards, and binding transparency criteria. Governments should simultaneously make use of them to actively support technology transfer to structurally weak regions of the South and to areas that are particularly worth supporting from a development angle, such as addressing climate change.

 

C. Fair rules for world trade

 

The Monterrey Consensus called for trade measures to ensure that trade plays its full part in promoting growth, employment and development for all. After more than six years, the Doha Round of trade talks that the Monterrey Consensus called to deliver such measures remains deadlocked, and its potential to live up to that call, uncertain.

 

In this regard, it is urgent that the WTO negotiations change their direction. Rich country governments should recognize that government regulation and interventions provide essential policy space to further economic development. Principally, the governments of the North ought to drop their demands on the countries of the South calling for onerous tariff reductions in all WTO negotiations. Instead, in the sense of Special and Differential Treatment, the countries in question ought to be able to define the speed and extent of further liberalisation steps in line with their development needs.

 

Ongoing bilateral negotiations are also a matter of concern. The European Commission’s schedule for the continuation of the European Partnership Agreement (EPA) negotiations is putting considerable time pressure on the ACP Countries, which are signatories of the "Lomé Convention" and some of which are still far away from independent regional integration. A large number of bilateral investment treaties proliferated in the last few years, promoting greater levels of investment liberalization than those existing at the multilateral level. The stipulations of the regional and bilateral trade and investment agreements that counter the development targets of Southern countries, especially ACP countries, have to be renegotiated.

 

All countries of the North should completely end their subsidies for agricultural exports to the developing countries, especially to Africa. The EU’s deeds should follow its words regarding its announcement to completely eliminate the remaining subsidies for agricultural exports by 2013, independently of the further course of negotiations in the WTO. In addition, measures should be taken to enhance the performance of local markets and protect them from foreign agricultural dumping.  This issue is is increasingly important in light of growing recognition that agricultural subsidies in the North have contributed to the current global food crisis. This crisis, on the other hand, reaffirms the need for subsistence farmers and small producers in the South, many of whom are women, to be supported in a variety of ways so that they can continue to grow staple food.

 

Importantly, the Monterrey Consensus, with its pursuit of a holistic approach, recognized that trade measures alone cannot ensure that trade promotes growth, employment and development for all. The FFD Review Conference, building on the overarching agenda of Monterrey, should call for an integrated assessment and negotiations, in the context of its follow-up process, to address the trade, financial and monetary pre-conditions for developing countries to utilize trade as a tool for development, the promotion of gender equity and full employment. It should, furthermore, recognize that such conditions are not present in the multilateral system today. Some of the elements of this “new trade deal” that should be listed for examination and discussion are:

 

1. The accumulation of domestic capital through trade

The FFD Review Conference should call for the accumulation of domestic capital for development to be placed at the center of agricultural, industrial goods and services trade, as well as investment policies. Inter alia, this calls for negotiations on Non-Agricultural Market Access (NAMA), the Economic Partnership Agreements (EPAs), and other Free Trade Agreements (FTAs) to withdraw requirements for developing countries to lower industrial tariff levels, given their potential to jeopardise industrial development, diversification of industries, and the creation of decent and productive employment. Such negotiations must further support the strategic use of tariffs, support and access to technology and the utilization of controls on foreign investment as a key tool to prevent transfer-pricing and erosion of public revenue bases.

 

While FDI has the potential for expanding exports, its impacts on growth and domestic capital accumulation are questionable. For example, the bulk of the windfall gains from higher commodity prices is being drained by increased profit remittances, rather than going to use by the commodity-producing countries. Transfer pricing and other revenue-eroding measures are made easier in the absence of controls on foreign investment and capital flows.

 

There is no straightforward connection between increased access to other markets and growth, let alone domestic process of capital accumulation in countries getting such access. While the Monterrey Consensus pays attention to the obstacles developing countries face when trying to access developed country markets, it does not acknowledge the broader challenge of developing countries' dependence on raw commodity exports with limited value added. In many cases, including where preferential schemes exist, developing countries are unable to take advantage of available market access provisions. This is because they lack the corresponding supply-side capacity. Strategic use of tariffs, support and access to technology are key to move into medium and high tech production and higher value added.

 

The FFD Review Conference should call for the accumulation of domestic capital for development to be placed at the center of agricultural, industrial goods and services trade, as well as investment policies. Inter alia, this calls for negotiations on Non-Agricultural Market Access (NAMA), the Economic Partnership Agreements (EPAs), and other Free Trade Agreements (FTAs) to withdraw requirements for developing countries to lower industrial tariff levels, the strategic use of tariffs, support and access to technology and the utilization of controls on foreign investment as a key tool to prevent transfer-pricing and erosion of public revenue bases.

 

2. Exchange rate and financial stability and trade performance

Growing levels of financial and exchange rate volatility have asymmetric impacts on the trade performance of developing countries, as compared to developed ones. (See “Systemic Issues” for further elaboration and recommendations)

 

3. Aid for Trade and the Multilateral Trading System

Aid for Trade can play an important role in helping developing countries that choose to develop through trade overcome some of the obstacles to do so. But Aid for Trade cannot be approached as a mere add-on to a flawed trading system in the hope it will fix its imbalances. On the contrary, Aid for Trade can only play a positive role if taken as a complement to a reformed trading system that refocuses its objectives on achieving full employment and sustainable development. Thus, the FFD Review should call for a realistic and joint assessment of what aid and trade both can achieve, as the necessary underpinning of any policies with regards to both aid and trade.

 

Member countries should commit in FFD to ensure that recipient countries play the central role in the Aid for Trade decision process. The structures for diagnostics, delivery and monitoring should ensure developing countries are free to use funds to enhance their capacities to advance their interests, regardless of what the donors’ interests might be. Trade-related programs should be untied, unconditional and non debt-creating. Aid for Trade promises should be additional to previously promised increases in aid.

 

4. The role of international financial institutions and donors in trade negotiations

The role of the IMF and the World Bank should be redefined away from trade policy. Trade and investment agreements should urgently operationalize effective mechanisms to redress the asymmetric impact that development finance institutions and agencies have had on the negotiating space of recipient countries.

 

The OECD's Aid Effectiveness agenda utilizes the World Bank's Country Policy and Institutional Assessment as an evaluative measure for lending worthiness that rests on elements which emphasize trade openness as a criterion of good policies and good governance. To be faithful to the principle of ownership it predicates, the OECD’s Aid Effectiveness agenda should drop requirements such as the CPIA or government procurement standards that prejudice the role and direction of trade policy in the development strategies of recipient countries.

 

5. Financial issues in free trade and investment agreements

The proliferation of provisions that constrain the capacity of governments to manage the financial sector, the capital account and sovereign debt in a number of trade and investment agreements runs contrary to the interests of developing countries, as they forcefully expressed in categorically rejecting their inclusion in multilateral trade negotiations in 2003. More importantly, these constraints are not consistent with the flexibility needed to successfully implement pro-development fiscal, monetary and banking policies, such as employment- or exchange rate-targeting, where governments may deem them necessary. Painful financial crises have been the product of exactly the type of policies that such provisions aim at crystallizing in legal rules and commitments. The risks intensify because trade and investment agreements also contain provisions for dispute settlement by supranational arbitral tribunals, so very delicate matters of regulation of the financial sector for development purposes may become subject to the decision of such tribunals. Trade and investment agreements should incorporate the lessons from past financial crises by avoiding impinging upon the flexibility to manage the financial sector, the capital account and sovereign debt.

 

D. Official Development Assistance

 

The flows of public resources from North to South remain indispensable for the financing of the internationally agreed development goals, including the MDGs. According to the Secretariat of the OECD Development Assistance Committee, aid from DAC member countries fell in 2007, and has risen since 2000 at only half the rate needed to reach donor targets. Overall, most donors are not on track to meet their stated commitments to scale up aid, and will need to make unprecedented increases to meet the targets they have set for 2010. Constantly reiterating the pledge to fulfil the 0.7 percent target is not enough. Political resolutions are needed on the quantitative increase and qualitative improvement of real financial transfers to the South as well as an understanding in principle among the donor and recipient countries regarding the (re-)definition and the framework of Official Development Assistance (ODA). This would require the following steps:

 

1. Overcoming donor dominance in the development discourse

A genuine partnership discourse on development issues is only possible in an institution in which the interests of all countries are equally represented. The OECD is structurally unsuitable in this regard. In contrast, the Financing for Development process provides a more comprehensive framework where clear agreements could be reached among countries, while the new Development Cooperation Forum (DCF) could become a suitable platform for democratic discussions and exchange of good practices, including standard-setting.[v] The DCF must be mandated to address the strategies, policies and financing of development co-operation as well as promoting coherence between the activities of the various development partners. This forum should receive the necessary political, institutional and financial support to enable it to convene the relevant development actors, including new official development assistance providers, for discussions on fundamental issues of development co-operation. Governments and civil society from the North and the South should be equally represented. It would thus become the key forum at multilateral level for the discussion of development cooperation, overcoming the democratic deficits of more limited and donor-driven dialogue processes of the OECD and the G8. The key challenge will be for governments to use the DCF truly to re-frame the uneven debates.

 

2. Redefinition of “assistance” required.

In order to meet their international obligations and show increases in ODA, the governments of the donor countries organised in the OECD Development Assistance Committee (DAC) are declaring as ODA, more and more expenditures that do not benefit the developing countries, or do so only partially. In this context, the practices of including debt cancellation, the imputed costs for educating students from developing countries and the costs of assisting asylum-seekers as components of ODA, are particularly dubious. Inflating ODA statistics with these items and simply shuffling funds from one item to another is questionable politically and methodologically because this results in the practice of aid distortion by the powerful donor countries. This is certainly not in accord with the decision of governments to focus their entire development policies on combating poverty and realising the MDGs, for which additional and predictable flows of funds are necessary, if targets are to be met. In his Report to the up-coming DCF, the UN Secretary-General recognizes this problem of questionable accounting of aid levels, and calls for the involvement of recipient countries in the formulation of accounting principles for determining aid quantities. Civil society organizations support this call, and insist that the issue of aid quality must also be addressed.

 

 

3. Timetable for increasing real official development transfers.

The timetable of the EU to realise the UN 0.7 percent target of GNI to ODA by 2015 had an important signalling effect. However, in order to increase the transfer of official aid to the extent required to achieve the MDGs, further steps are necessary. First of all, the two traditionally largest donors, the USA and Japan, have so far failed to commit to a substantial increase in their ODA, let alone to a binding 0.7 percent timetable. Second, many EU countries (including Germany) have as yet not submitted any medium-term financing plans indicating how they intend to meet their ODA obligations. Thirdly, even a massive increase in ODA on paper would be of little use to the people in the South unless it was linked to a genuine transfer of fresh money.

 

For these reasons, those governments of the North that have not yet done so, should agree to binding timetables to reach the 0.7% target by 2015 at the latest. All governments of the North should submit national ODA timetables ahead of the Doha Conference, in which they clearly state their quantitative financing pledges and determine in what year they intend to provide additional funding, and for what purposes. Such a timetable would help to achieve greater predictability in development financing, and better donor co-ordination. The grant component of ODA should be substantially increased, and prioritized over loans.

 

4. Removing conditionalities  that undermine national ownership.

Even the official development transfers from the traditional western donors that do get to the South can only make a lasting contribution to combating poverty and to achieving the internationally agreed development goals if they serve the purpose of financing national development strategies, and are spent in the interest of the people affected. Economic policy conditionalities undermine democratic ownership in the countries in question. New funding initiatives and projects emerging from South-South Cooperation that are simple, devoid of conditionalities, and strongly engage beneficiary communities, provide alternative modalities and practices. Nevertheless, the principles of the Paris Declaration are important and concerns about their interpretation, implementation and targets should be pursued in multilateral and multi-stakeholder spaces.

 

The following recommendations emerge from this analysis:

l        All economic policy conditionalities defined by the donors should be abandoned. Rather, efforts must be expended to deepen the global consensus on human rights, social, labour and environmental standards, as well as mechanisms for enforcement in more democratic multilateral fora, based on the principles of universal compliance, shared responsibility, and mutual accountability.

       The commitment to suspend aid tying ought to be extended to all countries and all aid modalities including food aid and Technical Assistance, with clear timetables. At the same time, special measures ought to be introduced to promote public procurement from domestic goods and services markets.

       The donors ought to i