Info Service on Finance and Development (Jul15/09)
The Third Financing for Development Conference in Addis Ababa: Failing to finance development?
A paucity of political ambition yields a tragic retrogression from the Monterrey and Doha agreements, while no new financial commitments are made for the Sustainable Development Goals. Whither the post-2015 development agenda?
21 July 2015, New York, Bhumika Muchhala (Third World Network)
The Third International Conference on Financing for Development (FfD) in Addis Ababa concluded on 16 July in bad faith as developed countries reject a global tax body and dismiss developing countries’ compromise proposal to strengthen the existing United Nations committee of tax experts. Usually, when large conferences end after conflicts and climax in intergovernmental negotiations, there is some sense of exhilaration. This did not happen in Addis Ababa. Instead, there was deep disappointment amidst developing countries and many UN staff and outrage amidst civil society groups who had been following the FfD process over the last year. But among developed countries, there was relief, at best, or complacency, at worst. As the representative of Japan said in the final plenary, many developed countries including Japan felt relief.
As the civil society coalition on FfD stated in its reaction to the outcome document, a fundamental opportunity was lost to tackle structural injustices in the current global economic system and ensure that development finance is people-centered and protects the environment. Not only does the Addis Ababa outcome not rise to the world’s multiple crises, including finance, climate and distribution; it lacks the necessary ambition, leadership and actions to be associated with the post-2015 development agenda. Indeed, the outcome is wholly inadequate to support the operational Means of Implementation (MOI) for the Sustainable Development Goals (SDGs), and exposes an unbridged gap between the rhetoric of aspirations in the post-2015 development agenda and the reality of the void of actions in the Addis Ababa outcome, which does not commit to new financial resources let alone scaling up existing resources.
In light of the agreements in the Monterrey Consensus (2002) and the Doha Declaration (2008), the Addis Ababa Action Agenda displays a retrogression from the commitments of the past, which undermines the FfD mandate to address international systemic issues in macroeconomic, financial, trade, tax and monetary policies.
Failing to finance development?
The hallmark failure of the 3rd FfD conference is the missed opportunity to create an intergovernmental tax body, despite the persistent push into the 11th hour by a critical mass of developing countries led by India and Brazil. Such a global tax body, that would enable the UN to have a norm-setting role in tax cooperation at an equal capacity to that of the current monopoly of the OECD countries, would have been a meaningful advancement in global economic governance and domestic resource mobilization. The intransigence of developed countries against such a key step demonstrated their unwillingness to democratize global economic governance and their disregard for FfD and UN standards of “good governance at all levels” and “rule of law.” The core argument of developing countries is that given the reality that they are most affected by illicit financial flows, tax evasion and avoidance and transfer mis-pricing by large corporations, they should have an equal say at an international negotiation table on tax rules.
Given the glaring absence of new financial commitments, let alone the assurance of new and additional financial resources for climate and biodiversity finance (legal commitments of developed countries under the respective UN treaties), the majority of funds needed to finance the SDGs will come out of domestic budgets. However, ample research shows how hundreds of billions of dollars are extracted out of the corporate tax purse of developing countries, particularly in the resource-rich African continent. This is due to the very loopholes and tricks in the international tax architecture that is defined and dominated by the OECD. A global tax body could have shifted this power imbalance and delivered some fairness to global political economic structures.
The Addis Ababa outcome legitimizes the predominance of private finance through blended finance andpublic-private partnerships (PPPs). This is problematic precisely because it is unattached to accountability measures or binding commitments based on international human and labor rights, and environmental standards. A fast-growing body of evidence substantiates global concerns over an unconditional support for PPPs and blended financing instruments. Without a parallel recognition of the developmental role of the State and robust safeguards to enable the State to regulate in the public interest, there is a great risk that the private sector undermines rather than supports sustainable development.
The Addis outcome’s blind trust in PPPs and blended finance is premised on the notion that such arrangements will lower the risk for private investment. The outcome makes no mention of the critical importance of inclusive and sustainable industrial development for developing countries, for the objectives of supporting economic diversification, adding value to raw materials and ascending the value chain, improving economic productivity and developing modern and appropriate technologies. Civil society had hoped that being in Addis Ababa governments would remind themselves of the African Union’s Agenda 2063 based on shared prosperity through social and economic transformation.
Similarly, there is no critical assessment of current trade regimes. Instead of safeguarding policy space, the Addis outcome fails to critically assess international trade policy in order to provide alternative paths to commodity-dependence, eliminate or at least review investor-state dispute settlement clauses, and undertake human rights impact and sustainability assessments of all trade agreements to ensure their alignment with the national and extraterritorial obligations of governments.
Furthermore, the additional steps to address gender equality and women’s empowerment seem to speak more to “Gender Equality as Smart Economics" than to women and girls’ entitlement to human rights and show a strong tendency towards the instrumentalization of women by stating narrowly that women’s empowerment is vital to enhance economic growth and productivity.
Regression in systemic issues
The core competencies of FfD are comprised of international systemic issues such as capital flows, external debt, trade, financialization and the monetary system. The ability of the UN to address systemic issues is routinely challenged by developed countries that argue that these issues are outside the domain of the UN. Power and control over systemic issues and reforms are thus kept exclusively in the rich countries’ domain of the Bretton Woods Institutions (the International Monetary Fund and World Bank), the G7 and the G20. However, not only does the UN have a longstanding history in substantively analyzing and proposing reforms on systemic issues, it is also the only universal forum where all countries, from the smallest island nation to the poorest landlocked country, have a voice and a vote in the General Assembly.
The UN is also the only universal forum that connects systemic issues to the global partnership for development. The latter recognizes North-South cooperation based on historical responsibility and varying levels of development and capacity among Member States of the UN. And there is a vital acknowledgement of the global rules and drivers that determine national policy space for development.
With regard to such systemic reforms, the Addis Ababa outcome explicitly ignores a landmark initiative in the UN itself to establish an international statutory legal framework for debt restructuring. Instead, it reaffirms the dominance of creditor-led mechanisms, such as the Paris Club, whose inequitable governance was criticized in the Doha Declaration of 2008. The Addis outcome also welcomes existing OECD and IMF initiatives which do not address the scale of debt problems afflicting many developing countries today, such as Jamaica, which according to its finance minister’s intervention in Addis Ababa, won’t be able to finance its SDGs until its external debt can achieve sustainability in 2025. Clearly, servicing creditors has to precede development goals in this scenario. Reversing this order by incorporating national development financing needs into debt sustainability analyses was neglected by most Member States in the FfD negotiations.
In spite of the global recognition that capital controls are crucial to developing countries ability to protect themselves from financial crises, the outcome document demotes the use of “capital flow management measures” as a last resort “after necessary macroeconomic policy adjustment.” This is a regression from the 2002 Monterrey Consensus, which recognized that “Measures that mitigate the impact of excessive volatility of short-term capital flows are important and must be considered.” Financial regulations, particularly on derivatives trading, goes unheeded.
Similarly, the Addis outcome makes no call for special drawing rights (SDR) allocations. Again, this is a step back from Monterrey, which addressed SDR allocations in two clauses. SDR allocations, if carried out on the basis of need, could serve as a development finance tool by boosting developing countries’ foreign exchange reserves without creating additional dependency on primary reserve currencies. Unlike most global economic arenas, FfD has the mandate to address international monetary system reform in a development-oriented manner. The Addis outcome, again, missed this chance entirely.
Despite these critical retrogressions, there are two beacons of light in the Addis outcome: the establishment of a Technology Facilitation Mechanism (TFM) in the UN that supports SDG achievement, and an institutionalized FFD follow-up mechanism that will involve up to 5 days of review every year to generate “agreed conclusions and recommendations.”
However, this follow-up forum is to be shared with the review of MOI for the post-2015 development agenda, going against developing countries’ call for the FFD follow-up to be distinct and independent from that for the post-2015 development agenda in order to maintain focus on the specificities of the FfD agenda.
While the TFM has positive potential, especially if it addresses intellectual property rights and endogenous technological development in developing countries and does not become a platform to facilitate a narrow ‘green economy’, it is at the same time not tantamount to the financing backbone of the development agenda. As such, the TFM helps obscure the paucity of political ambition on the FfD agenda.
A crisis of multilateralism
Perhaps the starkest mark of a process that occurred in bad faith is the fact that negotiations never transpired in Addis Ababa. There were no official plenary, no proposals articulated and no document projected onto a screen to amend.
Instead, what took place over four days in Addis Ababa was a behind-the-scenes pressure campaign exerted by the most powerful countries onto most developing countries. One developing country delegate revealed that the pressure included bullying and blackmailing to silence many developing countries that cannot afford to be politically defiant.
Another delegate disclosed that he had never before experienced such an absence of transparency within the UN. Some observers commented that what transpired in Addis Ababa was akin to a ‘Green Room’ style of discussions, where private talks are held in small groups without any gesture of openness or transparency. (Such Green Room tactic was characteristic of the GATT and the World Trade Organization, giving rise to extensive criticism.)
A central strategy of developed countries was the distortion of developing country narratives and the creation of new narratives to undermine the longstanding arguments of developing countries. Throughout the FfD negotiations in New York, theEuropean Union (EU)created a narrative of ‘the world has changed.’ The EU argued that developing countries’ emphasis on international public finance as the primary source for financial resources and developing countries' red line on the relevance of the Rio principle of common but differentiated responsibilities (CBDR) to FfD does not reflect a world that has changed since Monterrey in 2002.Much of the FfD text is still premised on an ‘outdated’ North-South construct, the EU said, which does not reflect the complexity of today’s world. Germanyreinforced the EU’s position, adding that the G77’s positions do not consider the reality that emerging economies are now capable of taking on some of the financing burdens for development .
In response to this challenge laid on middle-income countries, India provided a succinct response. India pointed out that the 30 richest countriesof the world account for only 17% of the global population, but over 60% of global GDP, more than 50% of global electricity consumption andnearly 40%of global carbon dioxide (CO2) emissions. The UN report on “Inequality Matters - World Social Situation 2013,” said that in 2010, high-income countries generated55% of global income, while low-income countries created just above1% of global income even though they contained 72% of the global population. India clarified that despite therelatively faster rates of growth in developing countries, international inequality has not fallen.
The above UN report on inequality shows that excluding one large developing country (i.e. China), the Gini coefficient of international inequality was higher in 2010 than as compared to 1980. India concluded that these figures attest to the fact of the North-South gap, saying that Member States will be doing themselves a disservice if reality is misrepresented.
Implications for post-2015 and climate change
The ways in which key concepts such as “transformative,” “ambitious,” “rule of law” and “enabling environment” were used, or misused, by developed country negotiators in the FfD negotiations have made their developing country counterparts wary of the gap between actual meaning and rhetorical application.
The term ‘enabling environment’ is used by developing countries to refer to an enabling environment for development. This involves development-oriented reforms in the international financial and trade architecture, such as addressing unfair agricultural subsidies in developed countries or pro-cyclical macroeconomic conditions attached to financial loans.
However, developed countries also use the phrase ‘enabling environment’ with equivalent vigor. Except that they are referring to an enabling environment for private investment, such as business-friendly taxes and labour market deregulation.
The experience of the FfD negotiations suggests that when these terms are tossed about in the post-2015 and climate negotiations, they will be associated with limiting the policy space of developing countries. For the most part, this limitation is linked to facilitating private sector activity through multi-stakeholder or public-private partnerships that involve shared financing between multiple entities while most decision-making remains in the seat of the private sector.
Meanwhile, an implicit ebbing, if not a reneging, takes place on the public and international financing obligations of developed countries. Consequently, financing and decision-making shifts to institutions where developing countries have to compete with representatives of the private sector and private foundations for voice and representation.
As the last two weeks of scheduled post-2015 development agenda negotiations conclude in New York (20 to 31 July), the repercussions of the FfD experience remain to be witnessed. Will developing countries unite with renewed strength and determination to bring multilateralism back? Or will the retrogression in commitments and actions induced by Addis Ababa drag the post-2015 outcome down to its lowly ambition? While prospects are uncertain for now, what is increasingly clear is the stark fact that the geo-political offensive in the UN has not abated. If anything, it has become even more pronounced. In fact, the current geo-political dynamics among UN Member States renders a troubling irony to the international community as it embarks on its most ambitious sustainable development paradigm for the next 15 years.+