European Development Report: SDG’s require effective national and global financial regulation

By Marina Ponti, Social Watch

As negotiations on the draft outcome of the Financing for Development Conference resume at the United Nations in New York, the European Commission launches its 2015 European Report on Development titled Combining finance and policies to implement a transformative post-2015 development agenda to contribute to the debate[1].

The European Commission sends a strong message in its 377 page-long report: the Sustainable Development Goals will require substantial additional finance (well beyond ODA), but any additional financing should be coupled with reformed policy frameworks at the local, national and global level to bring about the expected results.

In other words, the achievement of the SDGs needs finance, and finance needs effective policies to deliver on the expectations of the new universal and transformative post 2015 agenda. The Report’s premise is the steady increase of finance accessed by developing countries since the 2002 Monterrey Consensus. For instance, in 2011, developing countries accessed to an additional USD 0.9 trillion in private international financing, USD 3 trillion in private domestic finance and USD 4 trillion in public domestic revenues, while public international finance increased only by USD 0.1 trillion and represents less than 1.5% of the total resources available.

Therefore, one of the Report’s main conclusions is that it is not a shortage of finance, which will hinder the attainment of the SDGs but rather a lack of appropriate policy reform both at the national and international level.

On the positive side, some of the Report’s policy recommendations support and can help safeguard important paragraphs of the current Financing for Development outcome draft.  To name but a few:

Global taxation: the Report calls for collective action on global tax rules. Although it acknowledges the efforts being made at the OECD to discuss reforms in the global tax system, it also recognizes that it is unclear when such reforms will be agreed to and –most importantly- that developing countries need to be involved in such discussions as reforms could affect them significantly. Therefore, the Report can be helpful to the proposed UN global tax body.

Illicit capital flows: The Report highlights how illicit capital outflows undermine financial capacity, economic development and revenue collection. It also highlights that, between 2002 and 2011, USD 60.8 billion was illegally moved into or out of Ghana, Kenya, Mozambique, Tanzania and Uganda through trade mis-invoicing, which generated tax revenue losses worth between 7% and 12% of total government revenue. Therefore, the findings of the Report could be used to safeguard the language on curbing illicit capital flows of the current FFD3 Outcome Document.

 Transnational companies (TNCs’): The Report points out that most OECD countries do not always tax TNCs where production takes place. This enables them to shift profits to low-tax jurisdictions and legally avoid taxes. When TNC’s use transfer-pricing mechanisms – the price differentials are often10% or more, which translates into a loss of revenue amounting to UDS 3.5 billion annually in South Saharan Africa alone. The Report advocates for fairer pricing strategies that could significantly boost national GDP, as shown by the case of Colombia where transfer-pricing adjustments made as a result of audits on TNC’s have increased tax revenues by 76% (from 3.3 million in 2011 to 5.83 million in 2012). The evidence on TNC’s contained in the Report could be used to advance the discussion on accountability frameworks for multinational corporations.

On the negative side, the Report endorses the current “paradigm” in which ODA and other sources of public resources should be invested to leverage private sector involvement in developing countries. Although it recognizes the challenges of such involvement and the fact that there is little evidence on the benefit for LICs (spell out), it fails to address the need to establish clear and transparent benchmarks and accountability mechanisms for such blended interventions. Moreover, the Report fails to address (perhaps not surprisingly) some of the more systemic policy issues, which have hindered development gains so far and will challenge the attainment of the SDG’s.

Public Private Partnerships (PPPs): the Report makes constant reference to PPPs without providing any evidence of the benefits brought by this modality to developing countries. On the contrary, the Report acknowledges that “governments need the capacity and the skills to engage with, evaluate and manage PPPs, and acknowledges that where public investment management is poor or where political capture by private interests is prevalent, PPPs could have deleterious effects since they can easily be used to bypass spending controls, with the result that governments and taxpayers ultimately bear most of the risk”.

Agricultural subsidies: the Report is very timid on this issue, only to mention that “ the presence of agricultural subsidies in developed and emerging economies has a net negative effect on developing countries overall”. However, it fails to reference the impact that the EU Common Agricultural Policy has had and the need to reform it.

Trade: the Report calls on emerging economies and other trading blocks to follow the EU “Everything but arms” initiative on Duty-Free Quota-Free (DFQF) access for LDC’s. However, it fails to acknowledge that EU rules of county of origin have undermined any benefit from the initiative and have de facto denied LDCs products’ access to the EU market.

Accountability: the Report stresses the importance for the SDGs’ achievement of developing “an appropriate system of monitoring and accountability” at the national and international level and it calls for accountability and transparency frameworks in several of the chapters. However, it neither formulates nor proposes a global accountability mechanism or accountability measures for private sector entities.

Human rights: last but perhaps most importantly; it is utterly disappointing that the European Report only mentions human rights once (when quoting the UN Secretary General).  Human rights must be central in the post 2015 agenda, they need to form the basis of the SDG’s and can provide universal benchmarks to make sure that all finance and economic activities -both public and private- promote (and not undermine) the post 2015 people’s agenda. Does this imply that development financing and policy frameworks should not be based on human rights?

By Marina Ponti, Social Watch


[1] The report is a joint effort by the European Commission and four member states (Finland, France, Germany and Luxembourg) with research and analysis support by ODI (Overseas Development Institute), ECDPM (European Centre for Development Policy Management), the German Development Institute, the University of Athens and the Southern Voice Network.

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