Financing for development: What actions are needed on debt and illicit capital flows?

In order to achieve the new sustainable development goals, it will be essential to secure sufficient financing for development (FfD). In preparation for the next FfD-conference in Addis Ababa in July 2015, the report of the Intergovernmental Committee of Experts on Sustainable Development Financing (ICESDF) states the need to strengthen a global partnership for sustainable development. How can the international financial architecture be improved to ensure sufficient financing for development?

The ability of states to finance sustainable development is severely hindered by both illicit capital flows and the recurrence of sovereign debt crises. The report of the ICESDF states the need for fair and effective resolution of debt crises, and the need to put in place measures to fight illicit capital flows. How can the FfD-conference provide specific actions to be taken to improve the framework of dealing with debt crises and illicit capital flows?

Eurodad, The Norwegian Forum for Development and Environment, Save the Children Norway and SLUG – Debt Justice Norway host a high-level panel event during the World Bank and IMF annual meetings.

• Bjørn Brede Hansen, Deputy Director General, Norwegian Ministry of Foreign Affairs
• Gail Hurley, Policy Specialist at UNDP
• Patricia Miranda, Latindadd
• Amar Bhattacharya, Brookings Institution

Moderator: Joseph Kraus, Senior Policy Manager, Transparency & Accountability at ONE Campaign

Joseph Kraus

How can FFD conference deal with issues of illicit capital outflows and debt resolution?

Patricia Miranda

• Tax system needs to be put on agenda at regional level
• Domestic debt is also key issue, and debt/GDP ratios have nevertheless not increased thanks to robust growth
• We propose that a better tool is needed to consider debt that considers private and external debts and incorporates a human development dimension.
• It’s also necessary to address Vulture funds, currently a live issue in Argentina but relevant to many countries in the region.
• The recent UN general assembly decision is significant in the run up to the Financing for Development conference in Addis Ababa where we have to aim for much more ambitious than previous conferences

Gail Hurley

• The SDGs have given a significant set of tasks
• Three factors will influence how we see debt evolve
• The SDG agenda will be very costly to fulfill, though there are opportunities for policy coherence]
• Absent exponential increases in public funding poses a serious resource problem, which is likely to lead to rising debt levels – which is already happening, and is occurring for countries at all income levels
• The environment of financing has diversified, including public and private, domestic and international sources
• Secondly, the data revolution will shift capacities, helping debt prevention
• Thirdly there will necessarily be a change in the term and nature of investment, including the need for significantly increased public transfers
• Public finance will remain important, and therefore despite rhetoric that aid and international public finance should now only focus on poorest and crisis, the reality is it will have to in very different directions
• Therefore the location of international public finance flows will change
• The implications for Addis and debt issues going forward?
• A major hangover from the Monterrey 2002 consensus on fFD, is the ongoing failure to implement some form of sovereign debt resolution.
• There has been progress, and is finally part of the agenda, as we’ve seen at UN DESA, UNCTAD’s development of principals, and of course the recent UN resolution which had 124 countries voting in favour, the IMF has called for a strengthened approach to collective action clauses
• IT’s necessary to consider the role of emerging economies, which are projected to grow and become more influential, they will be both sources and recipients of finance
• They will increasingly have the power to undermine or support future work, and could be vocal and strong advocates of some form of fair and transparent debt resolution mechanism – so these countries are the ones who may be the game changes.

Bjørn Brede Hansen

• Norway is a co-facilitator of the process leading up to Addis, and we hope to be re-appointed, perhaps with Guyana
• As such we are not really there to push our own positions, but nor will our government be silent on important issues, which illicit flows and debt are two of those
• Norway has proud history on debt issues, and is the only country to cancel debt and not part of its ODA, we were the first to have an independent debt audit, and the first to move to full 100% cancellation for HPIC countries.
• Debt will be a key issue leading up to Addis, some consider the independent expert committee is weak, but it’s probably fairer to say that they could have been more specific, but this is in the nature of multilateral processes
• It is true what Gail said regarding increasing debt levels
• In the backdrop of the Argentina New York court verdict, the issues remain tricky
• We sympathise with the aim of the UN resolution but are skeptical of the value of a convention, and the process may have been rushed and somewhat premature, and perhaps counter-productive.
• A heated debate is likely in general assembly in the second committee, but I do expect a lot of commotion
• We do all agree I believe that the system is inefficient, there are market based approaches, and exciting news on collective action clauses, including the pari passu clause, so things are progressing.
• We do need something along the lines of a statutory approach, if possible a mechanism that is independent and outside foo the UN
• We should continue to call for that.
• Illicit flows are also important, and estimates range around $1 trillion annually leaving developing countries, as against $150 billion in ODA.
• We have argued that the World Bank should address this far more aggressively analytically and in engaging with countries.
• We are in a positive dialogue with the Bank now.
• Part of the problem is that several forums are working on it, including OECD, the global forum, and so on.
• For the FFD process, we do hope that it will lead to some sort of target in Addis, in the open working group recommendations there is currently a recommendation, but it’s not currently measurable, so whether that is in reach or not will be important to assess.

Amar Bhattacharya

• Two focuses
• Firstly to stop outright theft – including illicit flows – which can incidentally benefit from mechanisms in the international architecture which were developed to address terrorist and criminal networks of financial flows
• The other dimension is on the corporate side, which for developing countries very much involves multinationals
• Tax avoidance by individuals remains also a significant problem in the developing world
• The issue that is currently under intense discussion, the facts of which are well known. Taxes on corporations in DCs are often 18-20% of tax revenue, as opposed to 10% roughly in OECD
• Secondly the Buffet rule, wherein billionaire Warren Buffet pays a fraction of the tax that his secretary does, is also true of the advantage that larger and multinational corporations enjoy over small businesses.
• A further problem is the taxation on natural resources. The IMF has focused a great deal on this issue.
• Another important aspect is the race to the bottom, as developing countries are pressured to offer ill-advised and costly incentives to attract foreign direct investment, and there is a need for a common understanding.
• All that money going to corporations is not going to human development, and as such we need to stop the subsidization of the corporate world at the expense of development
• A final dimension is the question of information – and note that countries’ capacity to use and capture information is relatively limited, and perhaps instead of focusing on high technology simple universal principles should be agreed to target worst offenders
• Finally the question of beneficial ownership remains fundamental, and requires international action – such as the anti-corruption working group of the G20 – and over the last year there has been tangible progress, but developing countries have no real voice in that forum
• The global forum has become a more universal body, but the capacity of developing countries to participate in it, and to comply with automatic exchange rules and the subsequent revamping of technical assistance and capacity building.
• Note the IMF does provide considerable support, but its role is often fleeting. The World Bank has left this area alone, while the OECD is a more technical body.
• Donors are therefore needed to provide assistance, moreover there will need to be coordination and mutual support.