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We Need a New Integrity in the Global Development Financing Debate

By John Sinclair
The UN Conference on Financing for Development (FfD) meets this July in Addis Ababa. It is designed to mobilize the trillions of new dollars needed to fully implement the UN’s new Post-2015 Agenda. The Agenda embodies the principle of “leaving no one behind” and has a bold core goal, the elimination of extreme poverty by 2030.
All very worthy, but will Western donors be seen as evasive in Addis and deliberately avoiding the need for “net new” resource? This is economist jargon for demanding two things: first, that donor support is genuinely additional, the “new”; second that there is no exaggerated labelling, i.e. that donors recognize that the new private investment they discuss will be substantially recovered as company profits or covered by loans from development banks, the “net.”
We know private flows far exceed traditional grant aid. But worrisome donors now talk about these trillions of investment dollars as being equivalent to “aid.” It is becoming political cover for the reality of almost stagnant grant aid. Is this fantasy, window-dressing, even a practical possibility? Recall that for all the talk, no developed country government can instruct a private company to invest for poverty reduction. Volkswagen locates in Brazil for profit maximization, not altruism.
We need to recognize that most private flows are going to the richest of developing countries, to China not a Cambodia. This distribution runs counter to the goal of “leaving no one behind.” The least developed countries for sure need both: responsible private investment and a bigger share of increased traditional grant aid.
So is there too much donor “window-dressing”? For those who believe in fairness (don’t we all?), it means that developed nations will be expected in Addis to pledge substantially the “net new” stuff that is needed by the poorest nations.
However improving global equity does not seem to be in vogue. Many traditional Western donors have let their grant aid stagnate. Canadian aid is down to 0.24 per cent of national income (GNI)… and still falling. Canada boasts of its competence in handling the global financial crisis, but then say the crisis has left us too poor to contribute. A better model is the U.K. Despite austerity it chose to protect its budget allocation for meeting the UN’s 0.7 per cent target. Most donors are not searching for “new net” but rather for innovative window-dressing allowing them to boast about new things they can count as “sort of like” aid.
Private sector activities have always been the life-blood of national economies in developed and developing countries alike. But now it is touted as the big innovation in development. In practice, this means the money multinational and their shareholders in New York and Toronto spend clearing tropical jungle to grow oil palms in Indonesia or building jean factories in Haiti. Donors, including multilaterals such as the World Bank note these huge gross flows in the IMF statistics, but conveniently overlook the large matching item called “remitted profits.” This can leave low-paid jobs in textile factories as the only “net new” benefit, discounting the occasional tragic fire, for say Bangladesh.

To compound the problem multinationals often find the means of paying minimal local taxes on their profits. Sometimes this is technically legal, sometimes essentially fraud via false documentation. The net effect is the same — a loss of public funds for social investment in the developing country. This leakage is now a major topic of discussion in the OECD and the G20, but there is all too little action on reformed global taxation systems, binding codes of good practice for multinationals including fair taxation where production occurs.
A new favourite topic are the billions of dollars recorded as remittances in the IMF statistics. This is the money saved by individuals born in the South, now working in the West, say a Haitian taxi-driver in Montreal or a Mexican fruit-picker in California. The remittances are mainly personal savings sent home to even poorer families. It issomewhat offensive that these millions of tiny personal transfers are now being discussed as new “treasure” discovered by Canadian and other aid officials that can be boasted of as some sort of “aid” financing.
We need a new integrity in the debate about financing global development, notably the Post-2015 Agenda. Its implementation will be costly. As in the past most costs will be born by developing countries themselves, hopefully with more effective local tax efforts. Private and public external contributions are all needed and valid but they must be measured in “net new” terms, not as relabelled traditional realities. Much better be honest with Canadian citizens who when polled say they want to be seen as generous donors to the most needy, surely not as protecting tax avoiders or trying to double-count the savings of a poor taxi-driver living in Montreal.
John Sinclair is a member of the McLeod Group, a development advocacy, as well as a regular lecturer/writer and consultant on development issues
The views expressed in this blog are those of the authors, and do not necessarily reflect the positions of CCIC or its members

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