DEVELOPMENT: Innovative Financing Takes Concrete Shape

Mario Osava

RECIFE, Brazil, Apr 24 2006 (IPS) – Chile and France will begin in July to charge a special tax in airports which will go towards the purchase of medicines for poor countries afflicted by HIV/AIDS, malaria and tuberculosis.
Chile and France will begin in July to charge a special tax in airports which will go towards the purchase of medicines for poor countries afflicted by HIV/AIDS, malaria and tuberculosis.

Innovative ways to raise funds to finance development in poor countries were the focus of one of the 250 seminars and workshops that formed part of the second Brazilian Social Forum, held Thursday through Sunday in Recife, the capital of the northeastern Brazilian state of Pernambuco.

The tax on air tickets to be implemented in Chile and France is realistic and feasible, unlike other new taxes that were proposed, because it is a mixed mechanism, levied by national authorities but coordinated at an international level, Alexis Guardia, research director at the Chilean Foreign Ministry s office on international economic relations, told IPS.

The new tax is the first to arise from the search for innovative sources of funding aimed at meeting the eight Millennium Development Goals (MDGs) adopted by the international community in 2000, one of which is to halt and begin to reverse the spread of HIV/AIDS, malaria and other major diseases.

The other MDGs are a 50 percent reduction in poverty and hunger; universal primary education; reduction of child mortality by two-thirds; cutting maternal mortality by three-quarters; the promotion of gender equality; ensuring environmental sustainability; and a global partnership for development between the rich and the poor. The target date is 2015.
The tax on air tickets will bring in some 250 million euros (308 million dollars) a year in France and between four and five million dollars in Chile, according to estimates.

However, these amounts are tiny compared to the 50 billion dollars a year needed to meet the 18 specific targets encompassed by the MDGs.

The Brazilian government of Luiz Inácio Lula da Silva also plans to donate 12 million dollars, which will come out of the administration s annual budget once Congress approves the proposal. In the meantime, Brazil will discuss a permanent source of solidarity financing, which may or may not be a tax on plane tickets, reported Alan de Sellos, the Brazilian Foreign Ministry s secretary of human rights.

If the 13 countries that have committed themselves to participating in innovative new forms of financing to purchase medicine for poor countries all agree to levy the tax on air tickets, some 400 million euros (500 million dollars) a year could be raised.

Brazil, Chile, the Democratic Republic of Congo, Ivory Coast, Cyprus, France, Jordan, Luxembourg, Madagascar, Mauritius, Nicaragua, Norway and the UK announced the decision at the conference on innovative financing for development held on Feb. 28-Mar.1 in Paris.

The need to come up with funding to fight poverty in the world was discussed at the World Food Summit in 1996, because of the failure of industrialised countries to live up to a commitment adopted over three decades ago to earmark 0.7 percent of their gross domestic product (GDP) to official development aid.

The United Nations General Assembly, which adopted the MDGs in 2000, took the debate into the terrain of concrete targets, which require it was established two years later 50 billion dollars a year in contributions, noted Guardia.

Of the 10 innovative financing mechanisms identified by a group of experts created for this purpose, four are international taxes that would be difficult to adopt in a world that is undergoing an institutional transition in the midst of economic globalisation but which still lacks the world government needed to implement them globally, he said.

On the other hand, the tax that Chile and France will begin to apply as of July is entirely feasible, said Guardia. All taxes generate distortions in relative prices, as well redistributing income and rewarding or punishing certain activities, he added.

A proposed tax on foreign exchange transactions, known as the Tobin tax after James Tobin, the U.S. economist who proposed it in 1972, has gained popularity in recent years as a potential means of supporting development in poor countries, and is one of the innovative mechanisms recommended by the working group.

It has been estimated that the Tobin tax could raise 15 billion dollars annually, based on the proposed rate of 0.01 percent.

Moreover, such a tax would be positive in every sense because of the regulatory role that it would play by reducing speculation on currency markets and contributing to the stability of developing economies, stressed Peter Wahl, an international financial expert with the German non-governmental organisation (NGO) World Economy, Ecology and Development (WEED).

Guardia, however, disagreed with this view, arguing that a much higher tax than 0.01 percent would be needed to discourage speculation. He also maintained that the current balance of forces in the world and the difficulty in applying such a tax essentially rule out the possibility of its adoption in the near future, much like other proposed taxes on weapons sales and the pollution of the environment.

Nevertheless, the debate on a tax on foreign exchange transactions is ongoing, and it might be possible to envision the adoption of an initiative like this five years from now, he told IPS.

A more feasible mechanism, given the support expressed by wealthy countries, is a reduction in the commission paid by migrants when they send remittances back to their home countries. An estimated 80 billion dollars are spent every year on these commissions around the world today.

A 10 percent increase in the current volume of remittances resulting from the fact they would be less costly to send could represent a major contribution to the economies of developing countries.

However, one of the main reasons that commissions on these transactions are currently steep is because undocumented immigrants must deal with informal intermediaries, which raises the political issue of legalising the status of foreign workers in rich countries, observed Guardia.

The efforts by non-governmental organisations (NGOs) to promote new financing mechanisms have already earned the backing of various countries around the world.

Brazil, France and Chile started up the movement of governments working towards this goal, and were subsequently joined first by Spain and later by Germany and Algeria. They now make up a group of nations that actively advocate the adoption of international taxes like the Tobin tax and a proposed tax on weapons sales, reported Alexandre Tiphagne of Coordination SUD, a network of over 100 French NGOs.

These new mechanisms are meant to be additional sources of financing, while industrialised countries must continue to be pressed to fulfil the 30-year-old promise of devoting 0.7 percent of GDP to official development assistance, Tiphagne underlined.