From utopian ideas to action
Innovative financing for development, discussed for the first time in Monterrey in 2002, has emerged from two observations:
Limitations of official development assistance ($120 billion) to achieve internationally agreed goals. So-called traditional ODA also raises qualitative questions. It fluctuates significantly from one year to the next and is fragmented (there are over 4,000 aid relationships according to the OECD DAC).
Second, limitations of the market economy and private flows - trade and investment-(attracted by profitable and volatile countries/sectors only - as could once again be seen recently with the financial crisis).
At the same time, international solidarity imperatives, such as the Millennium Development Goals, promotion of growth and the emergence of new needs relating to the preservation of global public goods (tackling climate change) require increased amounts of more stable, predictable and sustainable financial flows.
As a result, there is an intermediary place for additional innovative financing mechanisms for development, which address the shortcomings of the market economy and traditional official development assistance.
They aim to meet the major challenges we are facing, especially in the health sector: financing ways for demand to be met (drugs are in the North and the people who need them in the South), financing ways to ensure research (develop new vaccinations), finding ways to ensure regular and predictable financing (access to treatment), finding ways to speed up disbursement of aid (frontloading), especially when it is economically sound to change the way it is done over time (vaccinations), finding ways to influence market prices (pooling resources, long-term contracts with suppliers).
These financing mechanisms are innovative for three reasons: (i) because of the nature of the resources and the way they are collected (more money for health, education, etc.); ii) because of the way they are used (more health, education, for money) and iii) because of their mode of governance (not involving the conventional North-South relationship, but multilateral management, partnerships with private bodies as financers including the Bill and Melinda Gates Foundation, or as operators on the ground).
Today we can talk about six major categories of innovative financing for development that all help raise these new, more stable, predictable and sustainable resources (over $2.5 billion thus far):
(i) Taxes based on globalized activities, set up in a coordinated way by a group of countries and whose use is jointly managed (the air-ticket solidarity levy, which is UNITAID’s main contributor).
(ii) Guarantee mechanisms (International Finance Facility for Immunization - IFFim, advance market commitments - AMCs, see pilot AMC for a new pneumococcal disease vaccine) which influence the way resources are allocated over time (IFFim) or create economic incentives (AMCs).
(iii) Market mechanisms (auctioning of resources with quotas and use of a fraction of such resources for development: e.g. CO2 auctioning - see Germany).
(iv) Voluntary contributions from individuals, companies or consumers (see the Millennium Foundation, RED products for the Global Fund), with the participation of States that can take several forms (tax incentives, channelling of resources, etc.). We can also include in this category policies aiming to lower migrants’ remittances and to optimize their use to further development.
(v) Debt-management mechanisms, with ’debt to health’ and ’debt to nature’ type mechanisms and initiatives aiming to take greater account of external shocks affecting developing countries (counter-cyclical non-concessional loans whose annual payments vary according to the fluctuations of developing countries’ export revenue).
(vi) International lottery mechanisms for development, an idea originally put forward by the FAO, and that can take multiple forms (internationally coordinated private lotteries, lotteries organized by States themselves, States contributing a fraction of tax revenue, etc.).
1. "Innovative financing is used as an excuse for States not to deliver on official development assistance commitments." FALSE
On the contrary, innovative financing from the outset has been designed to generate additional resources for development, and not be used as a substitute for traditional resources, as stated in declarations adopted by the United Nations and in various conclusions of Leading Group meetings. The ’niche’ idea behind innovative financing versus traditional official development assistance (used in sectors or economic approaches that are not sufficiently targeted by traditional assistance) is also in practice a guarantee. The measurement issue in official development assistance (which raises the question of perimeters selected by the OECD DAC for this aggregate, which is by nature heterogeneous) must also be separated from the additionality issue (i.e. of whether innovative financing actually complements traditional financing).
2. "Innovative financing mechanisms are basically just taxes." FALSE
Several big categories of mechanisms have been successfully introduced, in which government can play multiple roles, including direct levying of funds (via developmentdirected taxes), facilitating or channelling private voluntary contributions, and acting as a guarantee to further allocation of private funds. Taxes do not represent one of these big categories of initiatives. There is considerable potential for private voluntary financing when consumers purchase goods and services, which could be better coordinated with public action (leverage). States could also play a larger role in providing incentives (tax instruments) and guidance.
3. "The taxes under consideration are global, supranational taxes." FALSE
The taxes under consideration or being implemented (the air-ticket solidarity levy in a dozen countries) are not "global taxes" in that they are mandatory or decided on a supranational basis. They are introduced on a voluntary basis by a group of States, which coordinate their base, rate and use. They are original in that they target sectors that have benefited from economic globalization and the opening of borders (transportation, tourism, telecommunications, the financial sector, etc.) and that are on average less taxed than strictly domestic activities (or not taxed at all, like the foreign exchange market).
4. "Innovative financing affects the smooth running of the market and influences its growth." FALSE
Often drawing on public-private partnerships, innovative financing is based on an awareness of a shared interest to finance development. Economic stakeholders (companies, consumers) who benefit the most from globalization can be interested in making a small contribution to help meet global needs (treating pandemics, tackling climate change, etc.). The funds will end up furthering economic stability and global prosperity. Moreover, it could be economically sound to financially address today’s needs (global public goods) whose cost for the global economy will be much higher if we wait to address them in the future. Lastly, when financing is provided through taxes, they can be designed to be as less distortive as possible from a micro-economic point of view (broad base, low rate, progressive revenue based structure, possible exemptions).
5. "Innovative financing for development complicates aid architecture." FALSE
Countries involved in innovative financing give more importance to abiding by the principles of aid effectiveness and coherence. The priorities financed are those of internationally agreed goals in the area of development. The ways funds are used (pooling resources, concluding long-term contracts with suppliers, responding to recurrent needs of recipient countries) aim to make aid more effective and adapted. The governance of most existing mechanisms (GAVI, UNITAID, etc.) involves countries from various levels of development from every continent in an original way.
Different levels of action
The world today is confronted with an undeniable "resource squeeze". On one hand, there is an economic, financial and food crisis dramatically affecting States’ resources against a backdrop of unprecedented global debt. On the other hand, there are needs relating the management of interdependency and international solidarity, which have been growing in recent years, especially in the context of the financial crisis. MDG-related needs, which are worryingly behind schedule in some areas and some countries are compounded with new financial needs relating to climate change: $100 billion from public and private funds need to be raised by 2020 according to the Copenhagen Accord.
Three levels of complementary action must continue to work in synergy to meet these challenges:
The universal level: the United Nations, which by nature deals with global solidarity challenges, has played a decisive role in recognizing innovative financing for development. In 2002, innovative financing mechanisms were mentioned in the Final Declaration of the Monterrey International Conference on Financing for Development and were at the top of the agenda of the Doha Conference, which called for a scaling up of innovative financing. Since 2004, several countries’ initiatives, such as the Brazil-Chile-Spain-France quadripartite group against hunger and poverty, have also played a decisive role in this area.
The multilateral level: in addition to the United Nations, it has been useful to establish a pioneering group to share experiences and best practices, in order to rally political support and serve as a think tank for launching concrete initiatives. This has been the role of a the Leading Group on Innovative Financing to Fund Development (known as the "Leading Group") since 2006 which counts 60 States, international organizations and NGOs among its members. It has an informal structure with a rotating presidency (currently held by Japan). Its secretariat is ensured by France. The Leading Group has effectively promoted the implementation of such financing, at times dispelling misconceptions, and has sought to assess the actual impact of innovative financing on development. Several task forces have been set up within the Leading Group to deal with particular topics (financial integrity, education, international financial transactions). Other initiatives, such as the Task Force on Innovative International Financing for Health Systems, have also played an important role in catalyzing initiatives and financing mechanisms.
The level of operators is also essential: at the most practical level, bodies managing innovative financing - the Global Fund, GAVI (a foundation) and UNITAID (a fund hosted by the WHO) - must move forward together. The lessons they have learned provide a crucial guide for States.