6 December, 2013

Financing for Development: A Breakthrough Toolkit

By Ad Melkert

Financing for Development has evolved to be of considerable importance in the debate on what should follow the Millennium Development Goals (MDGs) after their 2015 deadline. The MDG campaign has long passed the stage where rhetoric seemed to trump practical results. There is now considerable evidence that targeted, sustained efforts to chase the Goals have great potential to help improve access to key services and living standards.

The challenge now is to ensure the collection and allocation of revenues to maintain and develop systems – such as health, education and sanitation – to seal progress achieved for the long term. This coincides with higher volatility of Official Development Assistance (ODA) as a source of financing with some traditional donors wanting to transfer less and emerging economies not keen to submit to conditionality.

Therefore the highest priority in financing for development should be for developing countries to generate domestic resources. In many places we see unprecedented economic growth, providing economic and social opportunity.

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The political challenge is to ensure that newly created wealth will not disappear into the pockets of the few as opposed to serving the needs and aspirations of the many.

How does this fit into the international campaign to invent new instruments to generate resources for the post-2015 agenda? It is tempting to think of taxation of financial transactions, carbon emissions, luxury consumption and whatnot as new sources for transfers from rich to poor. Some of these ideas have intrinsic value and should be further discussed. However there are reasons for caution.

First, introducing new tax collection instruments will take too long to keep up momentum for MDG implementation and follow-up. Proposals are often technically complicated and politically controversial. Endless discussions risk obscuring lower hanging fruits. The orchard where these could be picked is well known.  That is, a tax system based on three pillars of relatively predictable revenue: personal income tax, consumption tax (VAT) and corporate tax. Why not start with these in countries with a way to go? Politically, this is of course easier said than done.

Five breakthrough tools could make a difference:

1) Challenge the tax taboo

Daring to say that a race to the bottom in attracting investors is in nobody’s interest, and daring to confront multinationals on the balance between their own profits and the gains of the hosting society are key to progress. A similar message should extend to local tycoons and new middle classes: being rich on an island amidst an ocean of poverty won’t hold. Accepting this logic is not self-evident. Until the current global crisis “small government” sounded sympathetic. And not seldom, governments in developing countries are at the same time too small (in terms of the elementary capacities needed) and too big (the number of people employed never mind their productivity). Bottom line: a government needs critical mass and skills to lead the development process, and a healthy level of taxation to make that happen is indispensable.

2) Focus on old before new instruments

Organising the basics well (the trinity of personal income tax, consumption tax, corporate tax) and making use of good practices and systems is the preferred option. This should come before embarking upon ideas that might be tempting but not feasible in the short or medium term.

3) Transform informal into formal

Where to collect the revenue and whom or what to target in spending require that the tax base be broadened by lifting informal workers into the formal sector and having them pay taxes; in exchange for entitlements of universal coverage for old age, disability or unemployment. At the end of the day, there is no organised society and solidarity if most of economic activity is informal and undercover.

4) Use data to compare and assess

To measure = to know. A heavy informal sector causes neglect of important facts for development that are prerequisite to effective financing for development. Statistical capacity building provides the indispensable basis for measuring the success of MDGs, Sustainable Development Goals and other benchmarks of progress. It will help reduce wasting resources, thereby preserving a minimum necessary level of tax morale.

5) Reduce structural ODA dependence

It has always been a risk that Official Development Assistance (ODA) with all good intentions would create too much dependency of inherently uncertain inflows. Development means eventually earning your own income. MDG budgets should be based on that premise. This is not meant to discard ODA as an important source for supporting transition stages, experiments and emergency needs, particularly in landlocked or least developed countries or in post-conflict reconstruction. The crux is to reduce structural dependency on external income whilst building the systems to ensure sustainable revenues for sustainable social programmes. Financing for development is meant to promote exactly this.


Ad Melkert

Ad Melkert

Former UNDP Associate Administrator, former Special Representative of the UN Secretary-General for Iraq, and previous member of the World Bank’s Board of Directors, Ad Melkert was Minister of Social Affairs Employment (1994-1998) during his 16-year political career in The Netherlands.

Now director of 2i and 2c, he provides advice to private corporations and public institutions. (2iand2c@gmail.com)



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