1963-2013 - 50 years of Research for Social Change

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The Financial Transaction Tax: A means to aid reform and universal social protection?

1 Feb 2011

The history of aid shows an inverse relationship between aid on the one hand and the policy space and the level of economic growth of recipient governments on the other. That is, when aid levels rise, there are more policy conditions imposed on recipient governments by donors, which reduces "policy space" or the autonomy of governments to design policies and respond to the policy priorities of citizens. This is a factor contributing to the weak correlation between aid and economic growth. By constraining the capacity of the recipient governments to suggest alternatives, aid, ceteris paribus, may inhibit economic growth and poverty reduction at the national level and, consequently, progressive redistributive of resources at the global level. This is especially the case when significant levels of aid are not delivered through national budgets and aid resources are not related to the expenditure patterns and priorities of recipient governments.

For instance, studies by UNRISD suggest that aid policies based on structural adjustment and poverty reduction strategy papers (i.e. medium- term government strategies required by the IMF and World Bank) were ineffective in terms of poverty reduction since the constrained policy space of the national governments due to conditionality almost always resulted in the reduction of public provision of social services such as health, education and sanitation from which the poor are most likely to benefit.

Conditionality of the World Bank as well as the IMF is perceived as a major cause of the all-too-common inverse correlation between aid and growth and a reason why African countries are ecstatic about China’s aid which appears to come with no conditionality attached. However, you don’t get something for nothing. Economic assistance represents an extended arm of foreign policy, which does not come without conditions, which too often seem to strengthen the structures generating poverty and inequality.

Aid is only part of a development equation and has to be analysed in the broader context of trade, domestic and international resource mobilisation and the international governance system (Better Aid, 2008). To address these broader aspects of development gains, the financial transaction tax (FTT) is being promoted by a wide range of civil society organisations as a way to generate revenues for a variety of developmental projects. An increasing number of research findings argue for the advantages and feasibility of the FTT as a developmental financing tool. Can the FTT solve the above- mentioned problems related to aid? Will it foster the creation of a new financial architecture – a viable alternative to present donor-recipient arrangements? What kinds of incentives can be devised to attract the largest possible pool of contributors to the FTT on a global scale? Can a new source and disbursement method of financing for development address the broader issues of recipient ownership, harmonisation and alignment of donor and recipient development priorities and mutual accountability in development partnerships, which the Paris Principles sought to address with little progress to date?

Financing should be designed and implemented within the context of a broad development strategy in which financial arrangements and development policies are mutually reinforcing. It is particularly so in the case of social policy, which is a central element for sustainable, democratic and equitable development.

The UN Social Protection Floor initiative promotes universal access to essential social transfers and social services. It is a critical initiative that the UN is attempting to place prominently on the G20 agenda. It is a noble initiative but one which needs more elaboration and sophistication based on research to establish its logic, feasibility and impact. One of the major questions involved in this research, apart from financing, is the method to achieve it, i.e. universal or targeted approach. The Brazilian experience shows, however, that the dichotomy between universal and/or targeted approach is not productive. Both approaches are necessary, as demonstrated by Bolsa Familia, a Brazilian program widely recognized as a "best practice" to reduce poverty, which is situated within the framework of universal social protection. Bolsa Familia demonstrates the step-by-step procedure towards achieving social security and social services for all, positioning their targeting schemes as steps towards universalism.

If universal social security and social services guarantee the effective reduction of poverty, how should the global community ensure this guarantee? How can targeting schemes be designed as steps toward achieving universalism? What are the financial implications of universalism for developing countries? How can diverse financing mechanisms, such as domestic revenues, aid and the FTT enhance efforts to achieve universalism?

The G20 Seoul Summit set forth a "Multi-Year Action Plan on Development" with an emphasis on "growth with resilience" which features social protection. However, this approach must be informed by approaches to achieve universalism. Civil society has its work cut out for it. First, it must inform the G20's program on "growth with resilience" and then it must refine its support for the FTT so as to address the deficiencies with the current aid architecture.

The French G8/G20 Summits are good opportunities for global civil society to have an in-depth discussion on the Financial Transaction Tax within a broad context of development strategy, i.e. the relationship with other resources such as domestic revenues and aid, the potential impact of taxes spent on social security and social services in developing countries, and the implications for global governance.

Originally published in the January 2011 issue of the Heinrich Boell Foundation Newsletter,"G20 Update"