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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 to profit from changes
in rates. Yet, unlike almost all retail transactions, currency
transactions deliver no revenues to public coffers. 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 financiing 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
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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
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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]
Executive Summary
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
...
10. 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.
11. 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.
12. 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.
13. 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.
14. 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).
15. 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.
...
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providing reposted commentary and analysis on African issues, with
a particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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