Sharing the wealth

A U.N.-commissioned panel argues that financing for the developing world requires more free trade, an increase in debt relief - and, surprise, a genuine commitment from G-7 leaders.

A U.N.-commissioned panel argues that financing for the developing world requires more free trade, an increase in debt relief - and, surprise, a genuine commitment from G-7 leaders.

By Lucy Conger
September 2001
Institutional Investor Magazine

To help raise funds for developing countries, a global tax should be imposed on companies that pollute the environment. No going business should be spared.

“From a technical respective, the tax is impeccable,” says one of its proponents. “Make polluters pay.”

Another wacky scheme from a leftist ideologue? Not at all. The suggestion comes from former Mexican president Ernesto Zedillo, and the provocative notion is just one of many advanced by a United Nations-commissioned panel of former government ministers, leaders of international agencies, international development specialists, global banking executives and businessmen. The 11 panelists, who included Zedillo and Robert Rubin, former U.S. Treasury secretary and current member of the Citigroup office of the chairman, had accepted an invitation from U.N. Secretary-General Kofi Annan to make a six-month study of development financing. (The other panel members: former finance ministers Abdulatif Al-Hammad of Kuwait, Jacques Delors of France, Alexander Livshits of Russia, Abdul Magid Osman of Mozambique and Manmohan Singh of India; David Bryer, the recently retired director of Oxfam U.K.; Mary Chinery-Hesse, a Ghanaian and former deputy director general of the International Labor Organization; Rebeca Grynspan, former vice president of Costa Rica; and Masayoshi Son, founder and CEO of Japanese e-finance giant Softbank Corp.)

The question before them: How can developed countries help better the lives of the 1.2 billion people who subsist on less than a dollar a day?

The panel’s little-noticed 72-page report, released in late June, presents a comprehensive agenda for boosting funds for development, creating investment-friendly policies in developing nations, ending trade barriers and increasing bilateral aid. It makes an especially strong case for expanding free trade, advocating the elimination of the hundreds of trade barriers that still stymie third-world exporters. Case in point: the duties that hurt many African agricultural commodities exporters. “The total [official] aid to Africa only cancels out the deterioration in terms of trade that the continent suffered in the past 20 years,” says the report’s author, John Williamson, an economist at the Institute for International Economics and a well-known advocate of the “Washington consensus” of standard economic reforms, from budget austerity to investment and trade liberalization.

The panel calls for moderating the conditionality on International Monetary Fund and World Bank lending and for an increase in debt relief; it also gives a nod toward policies favored by nongovernmental organizations, such as fostering tropical agriculture and medicines, limiting carbon emissions and conserving biodiversity.

None of these proposals is new, of course, and all of them face daunting odds of ever coming to fruition. But they come at an interesting juncture: Amid an ongoing wave of antiglobalization protests, the panel has produced a document that is, in the main, decidedly pro-globalization. It calls upon the IMF and the World Bank to play significant roles in the fight against poverty and economic crises.

The appointment of Zedillo to head the panel sparked controversy because of his long-standing defense of globalization and harsh stance against antiglobal activists. “It was a surprise. He is seen as a neoliberal who is very close to what financial markets think, and his appointment did not satisfy expectations for someone more neutral,” says Humberto CampodÑnico, a Peruvian economist who tracks financing for development for Desco, a development study center in Lima.

Indeed, nongovernmental organizations are taking a critical look at the report’s proposals. “The idea of the report is to do some retouching so that globalization will work better,” CampodÑnico adds. “But with no critique of globalization, the report serves the objectives of globalization.”

Certainly, funding the proposals will not come cheap. The panel estimates the total cost of the various recommendations at about $50 billion a year. That’s in addition to the $63 billion in current annual aid and lending programs. “There was a strong feeling that $50 billion to $100 billion is peanuts in the world economy, which has expanded in the past decade, while aid has gone down,” says panel member Bryer.

When asked whether the recommendations are idealistic, Williamson replies, “We see our role as trying to raise the sights.” Adds Zedillo, “Some things might sound like nonstarters, but it is our belief that we should put things on paper, and one day people will realize that these proposals have to be tackled.”

Annan convened the independent panel to provide a brief that will set the agenda for debate by governments as part of the U.N. initiative known as Financing for Development. By selecting former policymakers and financiers, Annan signaled his intent to try to enact at least some of the U.N.'s lofty development goals.

An international summit will be held in March 2002 in Monterrey, Mexico, at which at least 50 heads of state and 100 finance ministers will debate the proposals in the report and discuss antipoverty and global development strategies. According to recent estimates, 80 percent of the world’s population subsists on less than 20 percent of global income. In the past 30 years, official assistance - traditionally the leading source of development financing - has fallen to 0.24 percent of the aggregate GNP of the world’s 22 richest countries.

The panel’s report aims to lay out the options for raising the money to realize some of the goals of the U.N. Millennium Declaration, which representatives of 191 nations adopted last year. That document articulated several ambitions for the next 15 years. It hopes to cut in half the number of people who live on less than a dollar a day. It also aims to reduce the global rate of maternal mortality by 75 percent and child mortality by two thirds.

Unlike previous U.N. consensus-building efforts, this panel has worked more closely with the Bretton Woods institutions, soliciting input from the IMF and World Bank. “For the first time that I can remember, there is a closer involvement of the Bank and Fund in a debate in the U.N. context,” says Reinhard Munzberg, the IMF’s special representative to the U.N.

“Our posture is that this is an excellent opportunity to advance a series of important themes and to encourage constructive discussions of all the dimensions of a difficult but important problem,” says Enrique Rueda-Sabater, a senior official at the World Bank. Jos, Angel GurrÕa, a former Mexican finance minister, sees the involvement of Bretton Woods institutions as part of a larger “process of introspection” in which the IMF and the World Bank are taking a hard look at their proper role.

The panel takes up the trade grievances of developing countries and endorses a new approach, a so-called development round of trade talks, to be launched at the November ministerial meeting of the World Trade Organization in Doha, Qatar. Says Zedillo, “The world cannot afford another failure like Seattle.”

The report mounts a sweeping attack on the protectionism that continues to restrain global free trade. The panel also recommends a review of issues unresolved since the 1993 Uruguay round of trade talks that have effectively become technical barriers to trade, such as subsidies.

Not surprisingly, the panel members could not agree on one of the most sensitive questions in multilateral negotiations - whether the rules governing trade in services should be liberalized. “The development round should concentrate on merchandise rather than raising a host of issues,” says Zedillo.

Even though trade is not free enough, capital markets demand more regulation, the panel concludes. The report endorses “bailing in” the private sector, getting investors to extend maturities, in times of financial crisis. Specifically, it backs the notion of collective-action clauses in global bonds. These lower the threshold of bondholder approval required to change the terms of the securities, thus making it easier for a developing country to restructure its debt.

The clauses go a long way toward eliminating so-called free riders, Zedillo notes, referring to the bondholders who thwart debt restructuring without assuming any risk of their own. “Free riders,” says Zedillo, “are a serious problem every time there is a threat of a debt crisis.”

Collective-action clauses will certainly meet with resistance among issuers. “While there is widespread agreement among investors that such measures would facilitate more orderly responses to debt crises, it seems that no issuer wants to go first on this,” says Mohamed El-Erian, a portfolio manager at Pacific Investment Management Co.

Assuming an equally controversial stance, the panel proposes a role for capital controls, although under only certain very particular circumstances. Liberalization of capital movements should be phased in gradually and in times of macroeconomic stability, and temporary controls on capital inflows can be appropriate to control capital surges, the panel suggests.

The panel’s recommendations for reforming the Bretton Woods institutions call for the IMF to beef up its efforts to prevent financial crises and moderate conditionality on lending. The Fund is looking to soften its performance targets for lending. The group urges the World Bank to focus more of its lending on longer-term education, health services and social programs and on social safety nets that help the poor withstand financial crises, rather than on more conventional programs of structural adjustment. Mustering the resources to fund global public goods - including peacekeeping, disease prevention and researching tropical medicines - will require “alternative funding,” the report states, advocating the collection of international taxes. Of course, no suggestion could be more contentious. The panel proposes that the debate on the subject be taken up at next year’s Monterrey summit.

In its report the panel considers two possible international taxes: the so-called Tobin tax on financial transactions, and a carbon tax on fossil fuel consumption. These days, a small group of NGOs - most prominently Attac, a French group - is pushing the Tobin tax, named after Nobel-laureate economist James Tobin. They argue that a modest tax, of fewer than 50 basis points on international currency transactions, would generate billions every year. How would a Tobin tax be collected? It’s a subject of raging debate.

While the report proposes a serious study of the feasibility of implementing such a tax, many panel members are skeptical that the Tobin tax will ever see the light of day. “Within the group, we have strongly diverse views on the Tobin tax, but we didn’t have time to look into it. We haven’t done enough work on this,” says Bryer. However, the idea may get a boost in the September meeting of European finance ministers, who will debate the tax at the behest of Belgian Prime Minister Guy Verhofstadt, the new president of the European Union.

To institutionalize a political force for global development, the panel endorses a long-standing proposal for the creation of a high-level U.N. council that focuses on economic issues. “The world is going to have to think sooner or later about an apex organization, the idea of a U.N. economic security council,” says Williamson.

Of course, no bureaucratic entity can take the place of effective political leadership. Pressed about how the panel’s ideas might become reality, Zedillo and others agree that their proposals would gain currency if they garner the staunch support of high-level political leaders of the developed world. The ideal candidate to offer such backing: the president or prime minister of a Group of Seven nation who strongly believes that the developing world deserves a lot more help from the West.