A Currency Transaction Tax To Finance Development?

The UN is slated to review progress on the MDGs “and other international development goals” during this month’s high-level meeting in New York. UN Secretary-General Ban Ki-moon hopes the meeting “will not only result in a renewal of existing commitments but also can decisively galvanize coordinated action among all stakeholders and elicit the funding needed to ensure the achievement of the Goals by 2015.” The issue of inefficient, inadequate funding capacity is a particularly crucial one.

Funding shortfalls in development aid are common. In high-level meetings, such as at the United Nations or the G8/G20 summits, countries often commit billions of dollars to address a host of issues. From combating extreme poverty to fighting climate change or improving maternal health, leading nations regularly make public commitments to allocate funding for development. The reality of these financial commitments, however, is often very different than what the rhetoric suggests. For example, monies already budgeted can be re-allocated to meet a commitment (with no new funds being made available), funding timelines are extended over a period that suits the donor’s priorities and, sometimes, these public pronouncements never translate into real, new funding.


Innovative Financing for Development

One initiative in particular is focusing on an aspect of volatile, unpredictable levels of official development aid (ODA): the Leading Group on Financing for Development (LGFD). The LGFD, founded in 2006, is a product of the Paris Ministerial Conference on Innovative Development Financing Mechanisms. Composed of 55 member countries members, five observer countries, 15 international organisations and more than 20 NGOs, the LGFD’s mission is to promote discussions and actions about setting up innovative development financing mechanisms.

The LGFD, currently chaired by Japan, is preparing a session on the sidelines of the UN MDG review summit which will highlight “the new instruments under study” for innovative development financing. One of these instruments is the introduction of a tax on currency transactions, which the Leading Group on Financing for Development will propose to Heads of State and Governments.

The idea of a tax on currency transactions was in fact originally developed by Nobel Prize-winning economist James Tobin in the 1970s, as a way to reduce exchange rate volatility and promote international economic stability, but it never garnered the political support necessary to be implemented.

The current proposal, though, is based on the findings of a committee of experts which the the LGFD appointed to examine the viability of financial levies as alternative funding mechanims. In their report, the committee of experts supports a plan to levy a tax of 0.005% on international financial transactions in British sterling, euros, dollars, and yen, which would be funelled to a new multilateral fund, the Global Solidarity Fund. This fund would focus on two priority areas: meeting the MDGs and “mitigation funding to enable poorer countries to switch to a low-carbon development path.”

The proposal is enjoying strong support from the European Parliament, which adopted a resolution in June 2010 “[calling] on the EU unilaterally to introduce a tax on currency and derivatives transactions in order to fund global public goods, including the MDGs.” While the plan would necessitate the participation of the United States in order to generate the expected $25-35 billion, the U.S. has notoriously been opposed to such taxes. French foreign minister Bernard Kouchner, however, alluded to the possibility of the 60 countries of the LGFD implementing the tax with or without the United States.


The successful case of UNITAID

Recurrent funding shortfalls in official development aid – in particular multilateral funding – lead to inefficiencies, duplication and a poor allocation of resources. Already, some mechanims meant to stabilize and improve multilateral funding flows are proving successful; UNITAID is a good example. Launched in 2006 by Brazil, Chile, France, Norway and the United Kingdom, UNITAID is an international drug purchase facility which provides “sustained and strategic market intervention that aims both to decrease the price of medicines for priority diseases (HIV/AIDS, tuberculosis, malaria) and to increase the supply of drugs and diagnostics.” The initiative has raised over US$ 1 billion and funded treatments for more than 21 million people in 94 countries since its inception, UNITAID says.

What’s unique about UNITAID is that it is financed in part by an air ticket solidarity levy. By the end of 2008, revenues from this levy accounted for 72% of UNITAID’s financial base. Multi-year budgetary contributions from donor countries and the Gates Foundation complement this funding. France, which also happens to be one of the biggest supporters of the currency transaction tax, generated an extra €160 million in aid in 2009 through the air ticket solidarity levy.

In a global financial context deeply marked by the recent crisis, the proposed tax on currency transactions, which is seen as an effective mechanism to address the issue of volatile aid flows for priority areas (MDGs, climate change), will hopefully garner broad international support. Perhaps the current political trend toward increasing governance and tightening regulation of highly-speculatory activities – like currency trading – will boost the proposal’s appeal to UN member states.