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Heinrich Bцll Foundation
Heinrich Bцll Foundation

Financing development towards the MDGs: What needs to be done?

An Issues Paper and Call to Action

Sony Kapoor & Meenoo Kapoor
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Heinrich Bцll Foundation

July 2005

SARPN acknowledges the Heinrich Bцll Foundation as the source of this document.
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Executive Summary

The very modest commitments announced at the recent G-8 summit only serve to highlight the urgent need for large scale action on financing development. This paper helps highlight some ways that large new resources for development could be mobilized urgently.

Equally as important as delivering significant increases in external resources to developing countries are the questions of mobilizing increasing amounts of internal resources and stopping resources fleeing the country in the form of capital flight.

There is, no doubt, an urgent need to enhance the delivery of external resources to developing countries to both address historical imbalances and to meet basic humanitarian needs as enshrined in the Millennium Development Goals. A simple increase in aid of the kind needed to meet the MDGs does not seem to be forthcoming despite some promising steps taken at the G8 Summit in Gleneagles. This makes it all the much more urgent to explore various mechanisms that fall under the ‘innovative sources of financing’ categorization. Some such as remittances and international taxation are particularly relevant.

Remittances from workers abroad have become a major and stable source of external finance for a number of developing countries. However, the money from these remittances does not go into the revenue of the government but instead goes into private hands. The costs of transferring resources from abroad regularly exceed ten percent of the face value of the transactions. Action to reduce these costs would help increase the amounts of remittance flows at least by a few billion dollars annually. Developed countries should also share tax revenues on immigrant remittances with the recipient countries. Even a 50% sharing could help increase developing country government resources by billions of dollars annually. Another idea would be to consider making remittances tax exempt.

A number of developing countries hold massive amounts of foreign exchange reserves which have large opportunity costs associated with them. Such reserves also help subsidize consumption in a number of developed countries, especially the United States. Legislating for a currency transaction tax in developing countries or issuing large amounts of special drawing rights (SDRs) to developing countries will help them significantly reduce the amounts of reserves they hold and devote the resources released to development initiatives instead.

Financial transaction taxes and environmental taxes can help mobilize billions of dollars of new money that can be ring fenced for development purposes. Such proposals have the advantage of mobilizing recurring and predictable sources of revenue with minimum distortionary effects on the economy. The International Financing Facility (IFF), a recent British proposal, can help frontload some of the additional money raised through various initiatives for investment in time-sensitive initiatives such as immunization. This is needed now, if the Millennium Development Goals (MDGs) are to be achieved at all, especially in Sub-Saharan Africa.

Mobilizing significant quantities of domestic resources in developing countries through increased emphasis on micro-savings and non conventional savings can also help add billions of dollars to money available for development. Perhaps the largest possible contribution on the domestic resource front can be made by capturing and harnessing vast amounts of latent social capital that exists in most developing country rural communities.

In order to stem the leakage of domestic resources, it is critical to cancel unpayable debt immediately and take steps for a fair treatment of all outstanding arrears and debt stocks that remain after the cancellation.

Even more important for stopping the leakage of resources is the need to clamp down on tax haven activity, which facilitates capital flight out of developing countries. This occurs mostly in the form of trade related mis-pricing of imports and exports and the illegal movement of wealth abroad.

Co-ordinated action against the race to the bottom in taxation to attract inward investment would also help developing country governments mobilize a much larger and fairer amount of tax revenues from companies, investors and rich individuals.

These actions to stem capital flight and tax avoidance have an added advantage as they will also help developed countries increase their tax mobilization significantly and also successfully close some of the loopholes that terrorist financing networks exploit.

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