Responses to the challenges of globalisation: a study on the international monetary and financial system and on financing for development

Responses to the challenges of globalisation: a study on the international monetary and financial system and on financing for development

EU policy document offers a new strategy on globalisation and development financing

Discusses the reform of the international monetary and financial architecture as a response to global financial crises and the issue of financing and promoting development as a means to reduce global inequality. It attempts to reflect some of the ongoing debate among academics, policy makers and non-governmental groups as input for a policy discussion at Commission and Council level.

The paper reviews

  • the nature of globalisation
  • experience with the prevention and management of financial crises
  • quality and quantity of development aid
  • debt relief progress
  • trade measures and thepromotion of foreign direct investment

The report also makes recommendation on the use of alternative financing instruments:

  • a tax on international currency transaction: may look appealing, buts its feasibility is, however, not demonstrated. Various proposals have been put forward, but even if applied in the settlement system, issues such as the enforcement of the tax and the preservation of the tax base need to be addressed. To be sustainable, such a tax would most likely require a multilateral approach, including the compliance of the major international financial centre
  • a tax on carbon dioxide emissions and a tax on aviation fuel: discussed as means to internalise the negative environmental effects of carbon dioxide and other types of emissions by increasing the costs of emission. In terms of potential revenue, a global carbon dioxide tax might be the most promising; at international level, however, the political momentum has shifted to non-tax economic instruments such as emissions trading.
  • a tax on arms exports: while in principle the taxable base (production or trade) can be defined, there are various challenges and obstacles in practice. These include the lack of transparency in international arms trading and the voluntary nature of the existing international frameworks. Taking into account the data uncertainties characteristic of the international arms market, the revenue potential of a tax on arms trading is expected to be limited.
  • De-tax: advocated by the Italian government, this builds on voluntary consumer and vendor decisions to earmark one percent of the purchase at retail level to an international development project. The government would exempt this contribution ("de-tax") from VAT and company income tax. While this source of enhanced voluntary contributions lacks the predictability of tax-based revenues, it has the advantage that it can be introduced unilaterally.
  • the allocation of Special Drawing Rights (SDRs): a selective allocation, targeted at the poor countries or a general one whereby industrialised countries pool their new SDRs for use by developing countries. This has been proposed as a way to provide additional financing for development purposes. Ultimately, however, SDRs are not a free lunch. They constitute a right of a country to obtain a short-term credit with another country, the one that it buys currency from, at a specified interest rate. Conceived in the sixties as a tool to supplement a perceived shortage of international liquidity at world level, using an SDR allocation as a way to provide unconcessional long-term credit to developing countries does not seem to be a suitable approach.

A summary version of this paper is also available

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