The Systemic Approach to International Financing for Development and the Need for a World Tax and Financial Organization

Abstract

Monterrey Consensus (MC) inspired hope that some progress would be made in international financing for development (IFfD). However, at the beginning of a new decade, private capital flows continue to exhibit their defining characteristics (scarcity, spatial concentration, volatility and reversibility), the debt problem continues to limit the development prospects of many less developed countries and Official Development Assistance has remained as the insufficient final element of the whole system. Moreover, the consequences of global financial and economic crisis highlight the need for reforming the current financing system and the need to redesign key aspects of the international financialisation process. Hence, a systemic (holistic) approach to IFfD is required. This article analyses the recent evolution and current status of IFfD, examines the relationship between the current model and international financialisation, and proposes a set of measures intended to remove the bottlenecks that currently are found in both processes; most of these converge on the need for a World Tax and Financial Organisation.

Le Consensus de Monterrey a suscité l’espoir que des progrès seraient réalisés dans le financement international du développement. Pourtant, en ce début de décennie, les flux de capitaux privés continuent de présenter les mêmes caractéristiques (rareté, concentration spatiale, volatilité et réversibilité), le problème de la dette limite toujours les perspectives de développement d’un grand nombre de PMA, et l’APD reste le dernier élément faible de l’ensemble du système. En outre, les conséquences de la crise financière et économique mondiale mettent en exergue la nécessité de réformer le système financier actuel et de remanier certaines dimensions-clés du processus global de financiarisation. Ainsi, une approche systémique (et holistique) du financement international du développement est requise. Cet article analyse l’évolution récente et l’état actuel du financement international du développement, examine le lien entre le modèle actuel de ce financement et la financiarisation internationale, et propose un ensemble de mesures destinées à éliminer les goulets d’étranglement qui aujourd’hui entravent les deux processus ; la plupart de ces mesures appellent à la création d’une Organisation Fiscale et Financière Internationale.

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Notes

  1. 1.

    On the relationship between international financialisation and development, see Garcia-Arias (2013a).

  2. 2.

    Expansion in developed economies during this period facilitated an increase in ODA and the establishment of future ODA commitments.

  3. 3.

    The effectiveness of ODA is one of the most debated issues in the literature on development. According to some authors, there is sufficient empirical evidence for a positive causal relationship between ODA and growth, especially if the recipient LDCs develops orthodox economic policies (Burnside and Dollar, 2000; Dalgaard et al, 2004; Minoiu and Reddy, 2010). Even Morrissey (2001) suggested that this relationship may be independent of the recipient's economic policies. In contrast, some studies have not found evidence of this relationship (Rajan and Subramanian, 2008), and explanations of the failure range from bureaucracy, inefficiency, corruption, or some versions of Dutch disease in the LDCs (Alesina and Dollar, 2002; Rajan and Subramanian, 2011), to inadequate donors behaviour (Chong and Gradstein, 2008), or the problems of coordination among different donors, or between donors and recipients (Berthélemy, 2006). See, among others, Arndt et al (2010) or Temple (2010) for a survey.

  4. 4.

    Probably the increase in FDI to LDCs is an effect of financialisation caused by the transfer of productive capacity from developed economies to LDCs. This issue exemplifies the process of domestic financialisation in developed economies, where industrial frameworks hinder the post-Fordist model of accumulation and where financial capitalism prevails (Garcia-Arias, 2013a).

  5. 5.

    The debate on the contribution of FDI to development is much more complex. For an updated debate, see Narula and Driffield (2012), Zanfei (2012), Zhana and Mirza (2012) and the papers included in the EJDR [24 (1), 2012] special issue.

  6. 6.

    See Koechlin and Leon (2006), Acosta et al (2007) or Ponce et al (2011) for an updated debate on remittances and development.

  7. 7.

    It is beyond the scope of this article to analyse the current economic and financial crisis. See Crotty (2009), Wray (2009) or Garcia-Arias et al (2013).

  8. 8.

    The debate ‘more aid versus better aid’ is essentially non-dualistic, and the realm aim should be ‘more aid and better aid’ or even ‘better aid is more aid’.

  9. 9.

    See Kaul et al (1999, 2003) and Garcia-Arias (2002) for an analysis of GPGs.

  10. 10.

    ODA volatility increases the intensity of macroeconomic cycles in recipient countries, prevents long-term planning and blocks structural development initiatives, and decreases the effectiveness and efficiency of resource flows.

  11. 11.

    Without limitation, we highlight the Share of Proceeds from Certified Emission Reduction Units (CERs), the Solidarity Levy on Airline Tickets, the Pneumococcal Disease Advance Market Commitments (AMC), the Auction or Sale of Greenhouse Gas Emission Permits, the Affordable Medicines Facility-malaria (AMF-m), the International Finance Facility for Immunisation (IFFIm) or the Debt2Health Program. For a detailed analysis see, among others, Addison et al (2005), Atkinson (2005), Ketkar and Ratha (2009), Nordstrom (2009), World Bank (2009), and OECD (2011).

  12. 12.

    To address the NIFA in detail would be beyond the scope of this article. There is a vast body of literature on the subject; see Williamson (2004), Wade (2007), Thirkell-White (2007), Chin (2010), Eichengreen (2010), Helleiner (2010), Nesvetailova and Palan (2010), UNCTAD (2010), Gore and Kozul-Wright (2011), Morgan (2011), Ocampo (2011) or Major (2012).

  13. 13.

    The G-20 has addressed the issue of tax havens, at least since its meeting in 2009 (G-20, 2009). For an evaluation of the G-20's recent policies on the subject, see Bilicka and Fuest (2012) or Johannesen and Zucman (2012). For a more critical view of the G-20 summits, see Soederberg (2010).

  14. 14.

    The tax burden in LDCs is extremely low. This not only limits their ability to provide public goods but also significantly increases their dependence on external debt and ODA. That is, their ability to finance the creation of infrastructures and investments in human capital and ensure the effectiveness of public spending is limited. Therefore, to generate revenues and encourage development, these economies must increase and diversify their tax base and strengthen their fiscal management systems. However, in many LDCs, trade liberalisation, unstable growth and the deterioration of public sector performance have reduced tax bases and made them more unequal. Therefore, LDCs must make their tax structures more progressive, increasing their diversity and stability. However, this is not easy in a context of international fiscal competition that pushes overall levels of fiscal pressure (especially on more mobile agents and resources) to suboptimal levels.

  15. 15.

    See also Tanzi (2008), Sawyer (2009) and Pinto and Sawyer (2009).

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Acknowledgements

An early version of this article appeared as IIPPE Financialisation Working Paper No.11 (SOAS, University of London). I appreciate, without implication, feedback from people at SOAS, and the comments and suggestions from EJDR anonymous referees, who have contributed to significantly improving the article.

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Garcia-Arias, J. The Systemic Approach to International Financing for Development and the Need for a World Tax and Financial Organization. Eur J Dev Res 25, 60–77 (2013). https://doi.org/10.1057/ejdr.2012.39

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Keywords

  • international financialisation
  • LDCs
  • international political economy
  • new international financial architecture
  • global governance