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Africa: Global Solidarity Levy, 09/06/10




from africafocus@igc.org

date Mon, Sep 6, 2010 at 12:40 PM subject Africa: Global Solidarity Levy

Africa: Global Solidarity Levy

AfricaFocus Bulletin
Sep 6, 2010 (100906)
(Reposted from sources cited below)

Editor's Note

The turnover in foreign exchange markets has reached four trillion dollars a day, more than the total output of the U.S. economy in three months and more than a threefold increase from 2001. More than 80% of these transactions are speculative, as financial institutions trade currencies back and forth to profit from changes in rates. Yet, unlike almost all retail transactions, currency transactions deliver no revenues to public coffers. But now a group of 60 countries is proposing a new fee on currency transactions, which they call a "Global Solidarity Levy." At the proposed rate of only 5/1000 of one percent, such a "currency transaction levy" could bring in more than $30 billion a year, and perhaps much more.

This AfricaFocus Bulletin contains excerpts from the Report of the Committee of Experts to the Taskforce on international Financial Transactions and Development, which was released in July. The full report is available at http://www.leadinggroup.org/article668.html, and the concept and related innovative financing ideas are also discussed in the following related links: Leading Group on Innovative Financing for Development http://www.leadinggroup.org

"How Speculators Could Help Pakistan" Newsweek, Aug 27, 2010 - http://tinyurl.com/2exmam8

"60 States to Lobby U.N. for Currency Transaction Tax" Reuters, Sep 1, 2010
http://www.alertnet.org/thenews/newsdesk/LDE68021J.htm

"Small global taxes would make a big difference for world's 'bottom billion'" Bernard Kouchner, Katsuya Okada, Charles Michel Christian Science Monitor, Aug 31, 2010 http://news.yahoo.com/s/csm/20100831/cm_csm/323062

"The Currency Transaction Tax"
North-South Institute, October 2008 http://www.nsi-ins.ca/english/pdf/CTT.pdf

"Currency tax: A way to invest in our future" Rep. Pete Stark, The Hill, July 20, 2010 http://tinyurl.com/27s54co

Bank for International Settlements Triennial Report, September 2010
http://www.bis.org/publ/rpfx10.htm

For previous AfricaFocus Bulletins on innovative financing and related issues, see http://www.africafocus.org/aidexp.php


With this issue, AfricaFocus Bulletin is resuming publication after a break of several weeks. In the interval there have been several updates to AfricaFocus web pages, which will be described more fully in future messages. For now, I would like to particularly call your attention to the new Sponsor pages (http://www.africafocus.org/sponsors/sponsors.php), inaugurated with the participation of Africa Action, the African Activist Archive Project, and the Open Society Foundations, Africa. Also of particular interest for teachers and students is the revamped topical guide to the AfricaFocus archive, found at http://www.africafocus.org/topic.php

++++++++++++++++++++++end editor's note++++++++++++++++++++

Globalizing Solidarity: the Case for Financial Levies

Report of the Committee of Experts to the Taskforce on international Financial Transactions and Development

Manuscript completed in June 2010.

[Excerpts only. The full text of the report is available at http://www.leadinggroup.org/article668.html]

1. This report is a response to the request of the Taskforce on

International Financial Transactions for Development to assess the feasibility of innovative financing options to address global developmental and environmental challenges.

2. The aim of the report is to address a forgotten financial

crisis
the vast shortfall in finance required to meet international development and environmental commitments. Estimates for this funding gap are in the range of $324-336 bn per year between 2012 and 2017 ($156 bn for climate change, $168-180 bn for ODA--Official Development Assistance). Compounding the challenge, the global financial crisis and recession, and the resulting fiscal consolidations, have seriously undermined governments' ability to meet their pre-existing commitments. The recent sovereign debt crisis in Europe has only served to underline the severe pressure which is continuing to be placed on the fiscal positions of many countries.

3. This report links the funding crisis directly to what is termed the "global solidarity dilemma". Put simply, the growth of the global economy has not been matched with effective means to levy global economic activity to pay for global public goods. If the global community fails to fund the required mitigative and adaptive measures, we face a shared risk of global economic, financial, social and environmental instability, which would undermine the foundations of globalisation. In the view of the Committee, resolving this dilemma is central to addressing the funding gap in a sustainable way.

4. Given this context, there is a clear need to investigate innovative ways of financing development and environmental goals.

Given the scale of the funding gap, these will need to be of significantly larger scale than previously established innovative financing mechanisms. Our focus, therefore, is on mechanisms that can enable the wealth of the global economy to be channelled at a scale that can make a meaningful contribution to the crisis facing the funding of global public goods. This should be in a form that addresses the global solidarity dilemma and causes the least distortion to the real economy. Innovative finance, which we define as mechanisms based on global activities that can help to generate substantial and stable flows of funds, have a growing record of success. Notable examples include the air ticket solidarity levy and the International Finance Facility for Immunisation.

5. The Committee believes that the financial sector is the most appropriate point to levy such an innovative financing mechanism.

The architecture of the sector is intertwined with the globalised economy, is a primary beneficiary of the growth of the global economy, and--with the liberalisation of the capital markets--has been pivotal to the development of the global economy. As such, the financial sector is uniquely placed as a channel to redistribute some of the wealth of globalisation towards the provision of global public goods.

6. This report analyses financing options against a number of

criteria
sufficiency (where potential revenues are sufficient to make a meaningful contribution); market impact (where market distortions and avoidance are within acceptable limits); feasibility (where legal and technical challenges can be feasibly addressed); and sustainability and suitability (where the flow of revenues would be relatively stable over time, and the source suited to the role of financing global public goods). All the options considered are technically credible and have already been analysed, in different degrees of details, by respected economists and scholars.

The purpose of the analysis is therefore to assess the following options against the set criteria.

  • A financial sector activities tax

  • A ValueAdded Tax (VAT) on financial services.

  • A broad financial transaction tax

  • A nationally collected single-currency transaction tax

  • A centrally collected multi-currency transaction tax

...

  1. A single-currency transaction tax (CTT), levied unilaterally, by a tax raising jurisdiction and its Central Bank through its Real Time Gross Settlement (RTGS) or similar settlement infrastructure (e.g. EU's TARGET), has the advantage of political feasibility. To be viable, it would not have to be universally adopted and enforced and so could be introduced unilaterally by any country, group of countries, or currency zone that wished to do so. It is also technically feasible. The national basis of collection, however, raises issues of revenue stability, as the tax base may be subject to erosion over time due to domestic financing pressures.

  2. A global currency transaction tax (CTT) would apply to foreign exchange transactions on all major currency-markets at point of global settlement. An attractive feature of this option is that it appears to resolve the global solidarity dilemma. Although the financial sector, which benefits disproportionately from the globalisation of economic activity, would pay a significant contribution, the burden of payment would also ripple out from settlement institutions across global financial and economic activity. Revenue would not be raised in an asymmetrical manner by the nations with global financial centres, but would be spread across global activity to pay for global public goods. Global collection mechanisms also avoid the domestic revenue problem, enhancing stability. Despite these advantages, a global CTT has challenges. Principally, the tax would have to be scaled and other incentives weighed so that it did not lead to avoidance of centralised settlement. However, the Committee has concluded that these would not be difficult to introduce and are consistent with the direction of regulatory reforms currently being discussed to encourage centralised settlement, as well as with market trends in the same direction.

  3. Following the assessment of options against criteria, the report concludes that a global CTT is the most appropriate financing mechanism for global public goods. The report reviews the complex legal and technical issues that surround the implementation of a Currency Transaction Tax at the point of settlement, and concludes that the implementation of a global CTT is technically and legally feasible.

  4. There are two major policy tools to limit the scope for avoidance of a CTT. First, in a comparable to the UK technique of non-enforceability on relevant contracts untaxed by the Stamp Duty, the legal monopolies held by the Central banks of the currencies exclusively issued by those Central Banks offer a unique opportunity to frustrate, if not eliminate, geographical tax avoidance in an efficient way. Second, the Committee supports the policy trend towards increased central settlement of foreign exchange transactions and proposals for regulators to apply an additional capital adequacy requirement for counterparties whose transactions are not settled through an approved settlement arrangement and, as a consequence, represent increased risk to the financial system. As the impact of such additional capital requirement would exceed the cost of the CTT proposed, it would discourage evasion of the CTT, even though its main aim would be prudential.

  5. This option is recommended as it best meets the criteria as the most appropriate source of revenue to fund public goods and share the wealth generated by globalised economies. In the knowledge that financial institutions will pass on part of the cost of the levy, it would be distributed across global financial and economic activity. Proportional to their involvement, the economic market participants that participate in and benefit from globalisation, including the financial sector, would therefore pay a small fee to fund the global public goods that underpin and provide stability to the globalisation process. For this reason, we term our proposal a "Global Solidarity Levy" (GSL).

  6. The proceeds of the GSL would be paid into a dedicated fund. The governance of both the levy raising authority and the fund must uphold principles of accountability, representation and transparency. This report evaluates the governance and operational requirements for the distribution and administration of the funds, and proposes the establishment of a new Global Solidarity Fund financing facility for global public goods.

Introduction: The Global Solidarity Dilemma

The world seems entangled in an ever denser web of crises, spanning an ever wider gamut of policy concerns--global warming, poverty and inequity, failed and failing states, international terrorism and excessive financial volatility and crisis, caused to an important extent by under-regulated financial markets. In many countries, there is risk of flagging, if not negative, economic growth due to the effects of the continued financial crisis. Real or perceived fiscal constraints limit the ability of governments to maintain or increase their spending on financing development or mitigating climate change.

The world is passing through a transformation. Increasing openness of national borders and market integration have led to a growing volume of cross-border economic activity, and deepening policy interdependence among countries. As happened during earlier periods of major transformation, the reform of governance processes today, particularly in areas such as regulation and taxation, is lagging behind the change in private sector and commercial activity. The reform backlog leads to an accumulation and exacerbation of emerging inconsistencies and imbalances, so that lingering problems can assume crisis-proportions.

This is the situation in which we find ourselves today. It is a situation that urgently calls for policy innovation. In many actual and potential crisis areas new policy approaches have been identified. Just think of the many innovations in the field of mitigating, and adapting to, climate change, or the fight against global communicable diseases. So far, however the mobilisation of financial resources--finding for each respective challenge the right amount and right type of money, at the right time--has remained an important stumbling block. Yet, globalisation has not only contributed to many of the challenges we are facing today. It also offers new opportunities for meeting these challenges. One such opportunity is to recognise that while less crisis-prone, more balanced and sustainable globalisation benefits all, it is particularly true for those most engaged in transborder economic activity--international business corporations, investors, traders, shippers, as well as travellers. They have a major stake in such global public goods as open economies and enhanced global stability and security.

For example, airlines and maritime transport companies would benefit from averting the risk of storms and turbulences that might accompany global warming; and so would their clients, mainly international traders, investors and other travellers. Similarly, an outbreak of a communicable disease like SARS or avian flu could seriously jeopardize transnational economic and financial activity; and so would episodes of hunger and mass starvation in poorer countries due to droughts or flooding and other factors that could lead to a spiking of commodity prices. Furthermore, less and smaller financial crises would make the world economy a far more stable and prosperous place for investors, workers and consumers. Finally, there is also a broader argument that those benefiting from global economic activity have some responsibility to contribute towards social and environmental stability at the global level.

...

Globalisation and the growing human footprint on the natural environment have created a new operational international cooperation agenda: the provision of global public goods. This new strand of international cooperation calls for a new strand of financing.

...

The time is ripe for extending principles that are well-established within the national context to the international level. These are the "ability to pay" and the "beneficiary pays" principles.

Based on these principles, it can be argued that the main beneficiaries of more balanced globalisation should contribute to meeting the funding needs of global challenges, which, if left unaddressed, could seriously disrupt the efficient functioning of transnational economic activity.

...

If the world is not to enter into an ever-faster downward spiral of crises, we have, therefore, today to seek to tackle several of the most pressing global challenges. For this reason, the search for new, additional finance sources is imperative.

1 The Funding Gap: Development, Environment and Global Public Goods

The funding gap for international development and environmental challenges can be seen in the broader context of the international community's inability to fund "global public goods". ...

Although in Monterrey in 2002 the developed world agreed to contribute 0.7% of Gross National Income (GNI) towards development spending and meeting the Millennium Development Goals (MDGs), this was a reconfirmation of a 25-year old commitment, which remains unmet. In December 2009, the Copenhagen Accord agreed on actions to prevent an increase in global temperature above 2 degrees Celsius relative to pre-industrial times. Estimates suggest that this will require annual funding of $30 bn from 2010 to 2012 and $100 bn a year by 2020 to address the needs of developing countries alone. Despite the scale of the funding required, some studies have demonstrated that the costs of inaction or delayed corrective action are significantly higher than the costs of acting now (Stern, 2006).

Combining the funds needed to meet the MDGs by 2015, the Official Development Assistance (ODA) target of 0.7 percent of GNI, and Environmental crisis targets, the resource gap is in the range of $324336 bn per year between 2012 and 2017 ($156 bn for climate change, $168-180 bn for ODA).

Compounding the challenge, developed country governments are now struggling with vast fiscal consolidations as a result of the financial crisis and the global downturn it precipitated. The IMF estimated the net direct cost to advanced economies of the recent support to the financial sector at $862 bn, or 2.7% of GDP, which is likely to increase as result of new phase of sovereign debt crisis in Europe. In November 2009, the OECD predicted unprecedented post-war levels of government budget deficits and public debt for the coming decade. Total OECD government budget deficits and public debt are forecast to exceed 7.6 and 103% of GDP respectively by 2011, compared with 1.3 and 73% in 2007.

...

Against this backdrop of a quantifiable crisis of public funding in general, and for global public goods in particular, "innovative financing" has been receiving even more widespread interest as a source of predictable, sustainable and additional finance.

...


The Air Ticket Solidarity Levy
After 13 different countries expressed their interest in introducing this tax at the Paris conference held in march 2006, France was the first country of the Leading Group to implement it (July 2006), followed by ten other countries. the air ticket solidarity levy is charged to passengers taking off from airports in the countries implementing the scheme. the contributions levied at national level are then co-ordinated internationally for allocation, for the most part, to the UNITAID international purchasing facility.

The rate of the levy can be differentiated according to the level of development of participating countries and there is an additional option that enables to link the amount of the levy to the flight distance and/or the travel class. Rates can also be differentiated between domestic and international flights. in Niger, for instance, the amount of the levy for economy tickets is $1.20 for regional flights (within West Africa), and $4.70 for international flights. in the case of business/first class tickets, the levy is $6 for regional flights, $24 for international flights.

...

3.6 Central recommendation

The most appropriate source of funding for global public goods is the economic activity of the global economy itself, with the impact being proportional to engagement in the international system. This can be thought of as a fee, or a levy applied to the global economic system for the financial benefits obtained from the use of the "global commons", with the proceeds being used to fund the global public goods. This equates to a global responsibility for the global public goods that underpin the stability of the system: equitable human development and a stable natural environment. We do not recommend levying this fee directly on all economic actors in the global economy, but of finding a means of financing that would see the costs widely disbursed throughout the international system, whilst making sure that an important part of the burden is borne by those sectors that most benefit and are most able to make a contribution.

...

In the first instance, this reasoning led us to identify the global financial sector as the most appropriate source of revenues. International finance is inextricably linked with globalisation; it is the life-blood of the global economy. Global economic activity and global finance have co-evolved and are highly interdependent. ...

Also, some aspects of the financial system are intrinsically international. On balance, this is a major reason why this Committee does not recommend general financial transaction taxes (FTTs), taxes on financial profits and remuneration (FATs), or an extension of sales taxes to the financial sector (VAT). While each of these proposals has merits, especially for domestic funding, we do not find them well suited to the task of resolving the "global solidarity dilemma" and financing global public goods. While all have international components, none are purely global and all would draw upon financial activity at the national level significantly. ...

In the view of this Committee, the foreign exchange market, being the most internationally organised and integrated segment of the financial markets, and organising the international payment of investments, goods and services represents the best mechanism for achieving this goal. A small levy applied to international currency transactions would no doubt be partly passed on by financial institutions to their customers, other financial institutions (such as hedge funds) and corporations. These in turn would pass on some of the cost of the levy to their own customers, in a rippling process that would see part of the costs disbursed and shared throughout the international economy, in a way that broadly reflected the engagement of different participants, including the financial sector, with global economic activity. Within the financial sector, those actors that carry out more frequent financial transactions, such as hedge funds and investment banks, and who tend to be both highly profitable and pay high levels of remuneration, would pay a larger proportion of the total tax. This would also imply the tax was relatively fair, when compared with other options.

...

We further recommend that the proceeds are passed directly from the central settlement systems in which they are raised, to a body charged with financing international development and environmental crises. Some suggestions on how such a body could function are given below.

We use the word levy rather than tax deliberately. As argued above, this Committee conceives of these revenues as being a fee levied on the broad global economy to reflect access to the "global commons", and to the sharing of the wealth of globalised economies. Consequently it is not appropriate to think of this as a "currency transaction tax", but as a Global Solidarity Levy.

...

4.2 Governance of the use of GSL funds

4.2.1 the use of funds

The remit of this Committee is to raise funds for international development and environmental crises. In the first instance, this is inextricably linked to the challenge of meeting the MDGs by 2015, and so funds should be dedicated to sectors that require long-term stable funding, such as health, education, but also areas such as hunger and the prevention of food crises.

In the second instance, adaptation needs in developing countries are becoming ever more acute, and mitigation funding to enable poorer countries to switch to a low-carbon development path ever more needed.

...

4.2.2 Governance of the Global Solidarity Fund

...
A Global Solidarity Levy, both with respect to the governance of the levy raising authorities and the governance of a distribution and administration body for the funds, must uphold principles of accountability, democracy, fair representation and transparency.

...

When considering issues of governance, UNITAID provides a good example. it was launched in 2006 with the aim to scale up access to treatment for HIV/Aids, malaria and tuberculosis for the poorest people in developing countries by lowering the price of quality drugs and diagnostics and accelerating the pace at which they are made available. This relied on stable and predictable financial source generated by the air-ticket solidarity levy.

UNITAID composes of the executive board, the Consultative forum and the secretariat. the most important organ is the executive board. the board is UNITAID's decision-making body, responsible for establishing objectives, action plans and partnerships. the board consists of eleven members, including five representatives from founding countries (brazil, Chile, France, Norway and the United Kingdom), one from Africa chosen by the African Union, one from Asia, currently from Korea, two from civil society (NGOs and communities of people living with the diseases), one from foundations, and one from WHO. this board is chaired by Philippe Douste-Blazy, the former foreign minister of France.

...

UNITAID has also created the Consultative Forum in May 2007 so that voices of countries, NGOs, companies and other stakeholders outside the executive board can be heard in the board. There were 40-50 people who participated in the first Consultative Forum together with all board members, exchanging information and views with each other.

...


from africafocus@igc.org

date Mon, Sep 6, 2010 at 12:40 PM subject Africa: Global Solidarity Levy


Page Editor: Ali B. Ali-Dinar, Ph.D.

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