Financing for Development Priorities Today

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Jan 7 2025 (IPS) - The forthcoming fourth United Nations Financing for Development conference must address developing countries’ major financial challenges. Recent setbacks to sustainable development and climate action make FfD4 all the more critical.

FfD4

The FfD4 conference, months away, will mainly be due to efforts led by the G77, the caucus of developing countries in the UN system. The G77 started with 77 UN member states and has since expanded to over 130.

The 1944 Bretton Woods conference outcome was primarily a compromise between the US and the UK. In 1971, when its Bretton Woods obligations threatened to undermine its privileges, President Richard Nixon refused to honour the US pledge to deliver an ounce of gold for US$35.

Over two decades later, President Bill Clinton promised a new international financial architecture. It rejected Professor Robert Triffin’s characterisation of international monetary arrangements after the early 1970s as an incoherent ‘non-system’.

Foreign aid

Several issues are emerging as G77 priorities for FfD4. In 1970, wealthy nations at the UN agreed to provide 0.7% of their national income annually as official development assistance (ODA).

This was much lower than the 2% initially proposed by the World Council of Churches and others. Only 0.3% has been delivered in recent years, or less than half the promise.

Most ODA conditions reflect the priorities of donors, not recipient countries. New aid definitions, conditions, and practices undermine ‘aid effectiveness’, reducing what developing nations receive.

Despite breaking its ODA promises, the new European Parliament voted overwhelmingly to contribute 0.25% of national income to Ukraine. By early December 2024, Europe had provided well over half the USD260 billion in aid to Ukraine!

Some European nations now insist that only mitigation qualifies as climate finance. Although most developing countries are tropical and struggling to cope with planetary heating, little assistance is available for adaptation.

Debt

More recently, developing countries’ new debt has been more commercial and conditional but less concessional. With the transition to the Sustainable Development Goals (SDGs) in 2015, the World Bank encouraged much more commercial borrowing with its new slogan, ‘from billions to trillions’.

Following the 2008 global financial crisis, Western countries adopted unconventional monetary policies, eschewing fiscal efforts. Quantitative easing enabled much more borrowing, which grew until 2022.

However, most Western governments did not borrow much. Some private interests borrowed heavily, often for unproductive purposes, with some using cheap funds to finance shareholder buyouts to get more wealth.

Meanwhile, many developing countries went on borrowing binges as creditors pushed debt in developing countries in various ways. Rapidly mounting government debt would soon become problematic.

From early 2022 until mid-2024, interest rates rose sharply, ostensibly to counter inflation. The US Fed and European Central Bank raised interest rates in concert, triggering massive capital outflows from developing countries with the poorest worst affected.

Taxation

The Global South has long wanted the UN to lead negotiations on international taxation arrangements to provide more financial resources for development. However, the Organization for Economic Cooperation and Development (OECD) rich nations’ club has long undermined developing countries’ interests.

The OECD achieved this by misleading finance ministries in developing countries. It bypassed foreign ministries that had long worked well together on contentious Global South issues. With the OECD making up new rules for the world, developing country finance ministries signed on to a biased tax proposal on which they were nominally consulted.

At the FfD3 conference in mid-2015, the OECD blocked Global South efforts to advance international tax cooperation. An independent international commission proposed a minimum international corporate income tax rate of 25%.

Treasury Secretary Janet Yellen counter-proposed a 21% rate, the US minimum rate. However, at the G7 meeting he was hosting, Boris Johnson pushed this down to 15% while adding exemptions, reducing likely revenue.

Instead of distributing revenue as with a corporate income tax on profits from production, the OECD proposed revenue sharing according to consumption spending, much like a sales tax.

Poor countries would receive little as their population can afford to spend much less, even if they produce much at low wages. Rather than progressively redistribute, OECD international corporate income tax revenue distribution would be regressive.

Dollar

The US dollar remains the world’s principal currency for international transactions. US Treasury bond sales enable this, subsidising the world’s largest economy. Trump recently threatened the BRICS and others considering de-dollarization.

The leading BRICS proponents of de-dollarisation, Brazil and South Africa, have failed to persuade the other BRICS to de-dollarize. Instead, China’s central bank has issued dollar-denominated bonds for Saudi Arabia.

Special Drawing Rights (SDRs) should be issued regularly to augment discretionary IMF financial resources. This can be done without Congressional approval, as happened after the 2008 global financial crisis and the COVID-19 outbreak.

Such resources can be committed to the SDGs and climate finance.

But this cannot happen without collective action by the Global South seriously mobilising behind pacifist, developmental non-alignment. Inclusive and sustainable development is impossible in a world at war.

Available online here: Financing for Development Priorities Today

Fight Pandemic, Not Windmills of the Mind

By Anis Chowdhury and Jomo Kwame Sundaram

SYDNEY and KUALA LUMPUR, Jul 28 2020 (IPS) 

With uneven progress in containing contagion, worsened by the breakdown in multilateral cooperation due to mounting US-China tensions, recovery from the Covid-19 recessions of the first half of 2020 is now expected to be more gradual than previously forecast.

Pandemic response measure

In the face of the Covid-19 pandemic, many governments, especially of Organization for Economic Cooperation and Development (OECD) economies, have introduced massive fiscal and monetary packages for contagion containment, relief and recovery.

Such efforts represent a U-turn after long eschewing countercyclical fiscal policy, mostly for ideological reasons, such as dogmatic commitment to ‘budgetary balance’ and ‘fiscal consolidation’, besides giving central banks more economic policy discretion since the 2008-2009 global financial crisis (GFC).

The International Monetary Fund (IMF) estimated new government measures through mid-June 2020 at almost US$11 trillion. The Fund projected new borrowing by all governments to rise from 3.7% of global output in 2019 to 9.9% in 2020.

Projecting gradual recovery from the second half of 2020, the Fund expects average fiscal deficits to rise by 14% as global public debt reaches an all-time high, exceeding 101% of gross domestic product (GDP) in 2020-2021.

After much wrangling, EU leaders compromised on a new US$2.1 trillion (€1.8 trillion) package on 21 July. The European Commission has also activated the general escape clause in EU fiscal rules, allowing deficits to exceed 3% of GDP.

Complementary monetary initiatives include relaxing recommended Basel 3 capital buffers, lowering mandatory reserve ratios and easing terms for additional temporary credit facilities for banks and businesses.

Thus, central banks have committed an estimated US$17 trillion to extend ‘unconventional’ measures to buy corporate bonds, besides government bonds and government-sponsored mortgage-backed securities introduced during the GFC.

Windmills of financial minds

Macroeconomic economic policy makers must resist quixotic impulses to fight against financial ‘windmills of the mind’, instead fulfilling their responsibility to pursue consistently counter-cyclical macroeconomic policies.

Financial market analysts exaggerate real concerns, even using discredited research. Citing old research, even doubted by The Economist, a Forbes columnist insisted that “the surge in government debt” would cause “economic growth to decline”, claiming that government debt beyond 85% of GDP would slow growth.

Global public debt came to 83% of world output in 2019, up from 60% in 2008, before the GFC. This sharp rise happened despite austerity measures since 2010 when many G20 and OECD countries adopted fiscal consolidation.

That turn to austerity followed advice from the IMF, OECD and European Central Bank, who invoked influential, but misleading academic research. But fiscal consolidation “after the Great Recession was a catastrophic mistake”, concluded a Forbes columnist. It failed to deliver robust recovery, let alone sustained growth.

Subsequent IMF research found fiscal consolidation raised short-term unemployment, with even harder impacts in the long-term, hurting wage-earners much more than profit- and rent-earners. IMF chief economist Olivier Blanchard and his colleagues found Fund advice for early fiscal retrenchment inappropriate.

Windmills can block recovery

Reversing emergency expansionary measures too soon risks aborting recovery and may even trigger new recessions. Even an assets fund manager has acknowledged, “Like a course of antibiotics, an economic relief package is most efficacious when administered to completion”.

When President Franklin Delano Roosevelt tried to balance the budget in 1937 after securing re-election, the ensuing downturn ended the recovery, only revived after deficit spending resumed in 1939. Also, countries that abandoned fiscal expansion for consolidation from 2009 had worse recovery records than others.

Deficits and debt have, in fact, not been reliable indicators of long-term growth prospects. Obsessed with debt and deficits, while ignoring spending composition and efficiency, ‘deficit hawks’ tend to downplay the potential growth impacts of expansionary fiscal policy.

Nevertheless, the Fund continued to warn in January 2019 that high and rising public debt constituted “a potential fault line”. Pre-pandemic economic stagnation, tax cuts and poor commodity prices induced larger fiscal deficits, requiring more government debt, now compounded by Covid-19 containment, relief and recovery efforts.

Clearly, government macroeconomic policies should not be guided by financial market whims. Leaving policy making to such influential market signals can push an economy in recession into a lasting depression. The recent IMF leadership transition appears to have led to greater pragmatism just in time.

Investing for the future

The Fund’s April 2020 Fiscal Monitor urged governments to take advantage of historically low borrowing costs to invest for the future—in health systems, infrastructure, low-carbon technologies, education and research—while boosting productivity growth. After all, a year ago, advanced economies were spending only 1.77% of their combined GDP on debt interest—the lowest since 1975.

Unusually, it also advised governments to enhance automatic stabilizers, including a tax and benefit system to stabilize incomes and consumption, involving progressive taxation and social security payments or unemployment assistance.

Undoubtedly, politicians are often tempted, by lower debt costs, to borrow to spend more on “populist” programmes while cutting taxes. Such irresponsible fiscal policies need to be corrected.

Clearly, governments need to look at how money, borrowed or otherwise, is spent. If, for example, borrowed money goes into investments enhancing productivity, public assets can contribute not only to growth, but also to revenue.

Covid-19 recessions are quite different from recent ones following financial crises. Yet, all recessions threaten to become depressions if not quickly and appropriately addressed.

We are in for a long hard struggle, on both public health and economic fronts. Policies must not only be appropriate for the problems at hand, but should also create conditions for a better future, rather than simply trying to return to the status quo ante Covid.

As visionary leaders did during and after the Second World War, we need appropriate plans, not only to revive economies and livelihoods, but also to build a more dynamic, sustainable and equitable economy.

Also available online here: https://www.ipsnews.net/2020/07/fight-pandemic-not-windmills-mind/