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Why the Addis Debt Chapter Falls Short

15 Sep 2015

  • Author(s): Juan Pablo Bohoslavsky

Why the Addis Debt Chapter Falls Short
This contribution is published as part of the Think Piece Series The Road To Addis and Beyond, launched to coincide with the third and final drafting session of the outcome document of this summer's Third International Conference on Financing for Development. In this Series, global experts discuss a range of topics complementary to the UNRISD research project on the Politics of Domestic Resource Mobilization on how to fund social development and raise provocative or alternative perspectives that can generate further ideas and debates. Please share your thoughts on this article in the comments space below.

This think piece discusses the shortcomings of the debt chapter of the outcome document negotiated at the Third Financing for Development Conference in Addis Ababa in July 2015. While recognizing that a commitment to uphold human rights was made, the author argues that human rights should be at the core of development financing, guiding both its means and goals, so that funds are spent without unfairly sacrificing anybody’s rights, particularly those of the most vulnerable groups. The author suggests that it is only by adopting a human-rights oriented framework to development financing, including among others, efforts aimed at combating illicit financial flows and those aimed at regaining debt sustainability for countries required to undertake economic adjustment programmes, that the sustainable development goals can be achieved by 2030.

Juan Pablo Bohoslavsky is United Nations Independent Expert on Foreign Debt and Human Rights.

Human rights and financing for development


Heads of State gathered in Addis Ababa from 13 to 16 July 2015 for the Third UN Conference on Financing for Development to affirm their commitment to addressing the challenge of financing and creating an enabling environment for sustainable development, building on the implementation of the Monterrey Consensus and the Doha Declaration,1 while identifying the obstacles and constraints therein and addressing new and emerging issues. A contribution to the implementation of its upcoming Sustainable Development agenda, the UN recognizes that the financing needed to achieve the development goals by 2030 is in the order of trillions of dollars annually.2

But international development financing is not just about more resources.3 To ensure that everyone can enjoy a decent life free from hunger and with access to education, health care, housing and drinking water, human rights must be at the core of development financing. In fact, under the core human rights treaties, states have an obligation to mobilize and allocate the maximum available resources for the progressive realization of economic, social and cultural rights, as well as for the advancement of civil and political rights and the right to development.4 Development financing should therefore be guided by the principle enshrined in the United Nations Declaration on the Right to Development, that the human being is the central subject of development and should be its active participant and beneficiary.

Human rights law should guide both means and goals of development financing, so that funds are spent without unfairly sacrificing anybody´s rights, particularly those held by the most vulnerable groups. One example: if the necessary financial means to build a dam are obtained in a region where this new energy source could make a positive economic difference, the rights-based requirements to consult with local communities and conduct environmental impact assessments should still be respected.

One of the aims of the Addis Conference was to ensure that international agreements, rules and standards were consistent with each other and with progress towards the future Sustainable Development Goals. It is true that the outcome document of the conference, the Addis Ababa Action Agenda, includes a commitment to human rights upfront. Yet, this should not be lip service. Human rights could have been more vigorously incorporated into some of the substantive sections of the outcome document. Focusing on two issues that were discussed at Addis Ababa, illicit financial flows and debt restructuring, let me explain how.

Illicit financial flows


I recently submitted a thematic study on the issue of illicit financial flows to the Human Rights Council.5 In a narrow sense, illicit financial flows are funds which are illegally earned, transferred or utilized, and include all unrecorded private financial outflows that drive the accumulation of foreign assets by residents in breach of relevant national or international legal frameworks.6 While it is extremely difficult to know the scale of the problem due to the hidden nature of illicit financial flows, Global Financial Integrity estimates7 that developing countries lost USD 991.2 billion in illicit financial outflows in 2012, an increase of 1.8 per cent from 2011. Since 2003, illicit financial outflows have increased in real terms by about 9.4 per cent per annum.

A serious resource drain
The significance of such a resource drain is demonstrated by comparing those figures with official development assistance (ODA) received by developing countries. In 2012 ODA stood at USD 89.7 billion, meaning that for every dollar in development assistance spent in 2012, more than USD10 left developing countries in the form of illicit financial outflows.8

Although a certain percentage of illicit financial outflows re-enters developing counties in the form of illicit inflows, those funds do not make up for the loss of capital through illicit outflows, and deprive governments of resources required to realize progressively economic, social and cultural rights. They also undermine efforts to build up effective institutions to uphold civil and political rights and the rule of law and justice, in particular tax justice.

When multinational business corporations engage in tax evasion or in questionable tax avoidance schemes running against the spirit of law and fairness their behaviour may have adverse human rights impacts. Transnational tax optimizing schemes of well-known multi-national companies, for example, have in many highly developed nations raised the question whether they contribute in a fair and equal manner to the public budget, in line with the benefits they derive from public infrastructure, skilled labour or other publicly financed goods. In developing countries similar concerns have been raised. Here international corporations active in extractive industries and other sectors engage in tax avoidance or evasion while at the same time benefitting from tax breaks or exploiting the weak capacities of tax collecting and law enforcement agencies. Money is lost that is needed to pay for public health care, education and social security to ensure the realization of economic, social and cultural rights or building up independent and well-functioning tax administrations. Private financial institutions in states which receive illicit financial flows have frequently failed to exercise sufficient due diligence with customers, including politically exposed persons (as someone who has been entrusted with a prominent public function is referred to by tax and corruption specialists), and have thus facilitated the concealment of assets in foreign jurisdictions that have been stolen from states and their peoples.

Safe havens and secrecy jurisdictions
It is laudable that the outcome document of the Addis Ababa Conference strongly emphasizes combatting corruption and illicit financial flows and improving the fairness, transparency and efficiency of taxation systems. Yet the language on tackling the facilitating environment of illicit financial flows in recipient countries, on secrecy jurisdictions and safe havens is rather weak. It remains ambiguous what the Action Agenda understands as a “safe haven” and what states or financial institutions should actually do within the next fifteen years to reduce incentive structures for corruption, tax evasion and avoidance. The Addis Ababa Action Agenda calls of course for the right action: States should strengthen their regulatory frameworks at all levels to further increase transparency and accountability of financial institutions, the corporate sector and public administrations. However, as long as it is not further specified what the strengthening of regulative frameworks will entail, there is the risk that states may implement a few symbolic measures with only limited impact. The commitment to reduce the size of illicit financial flows by 2030 could have been more specific, time-bound and measurable.

It should be noted that secrecy jurisdictions go beyond offshore tax paradise islands and also include major financial centres. The Financial Secrecy Index is an attempt to undertake an independent ranking of such jurisdictions. Created by the Tax Justice Network, it ranks 82 jurisdictions according to their financial secrecy and the scale of their activities using a set of 15 indicators. These indicators include an assessment of their banking secrecy, the availability of public registers for trust funds and foundations or ownership of companies, compliance with international anti-money laundering recommendations and whether companies are required to comply with country-by-country reporting.9 According to Tax Justice International the top 10 secrecy jurisdictions do not only include known tax havens like the Cayman Islands and Jersey, but also lists Germany, Hong Kong, Japan, Lebanon, Luxembourg, Singapore, Switzerland and the United States of America. One can of course debate the methodology of this ranking, but it is safe to say that the problem of secrecy jurisdictions goes beyond the offshore tax paradises well-known to the public imagination.

Debt restructuring and adjustment


Austerity measures have widely been prescribed as a medicine to countries in debt distress. However, the question should not only be to find ways to regain debt sustainability, it is also about ensuring respect for the fulfilment of economic, social and cultural rights when countries are required to undertake economic adjustment programmes.

Let us take a brief look at the Greek crisis to substantiate this.10 In Greece, public debt is predicted to reach 180 per cent of GDP this year, against 130 per cent at the end of 2009.11 The harsh conditionalities of the Greek adjustment programme have resulted in severe cut-backs in social spending, including pensions, health care and education, raising concerns about the ability of the Greek government to ensure basic economic and social rights. The austerity and reform policies implemented since 2010 have so far not been able to bring Greece back on track. They have rather deepened the social crisis in Greece, and have clearly not stimulated the national economy to the benefit of the Greek population. Unemployment has remained at 25 per cent, disproportionately affecting women and young jobseekers. According to latest available data, one out of two young adults is jobless. In addition, the number of people at risk of poverty and social exclusion has increased to 36 per cent, the highest percentage in the Eurozone.12 As with the case of Greece, unsustainable debt burdens and austerity policies in many low-income, middle-income and highly developed countries have also resulted in retrogressive measures affecting the enjoyment of economic, social and cultural rights, showing that unsustainable debt is a global problem.13

An inadequate response
Therefore it is worrying that the Addis Ababa chapter on debt omits any reference to human rights, most importantly to the UN Guiding Principles on Foreign Debt and Human Rights that were endorsed by the Human Rights Council in 2012. We cannot continue to discuss debt and global partnership in the UN context ignoring respect for human rights. If we acknowledge that financial crises provoke massive violations of economic and social rights, then marginalizing human rights law from the discussion on how financial markets should work does not seem to be the most adequate strategy to promote development.

The Greek tragedy underlines the need for timely, orderly, effective and fair debt restructuring. But since the 2003 Monterrey Consensus, time has passed and progress has been limited. There is a legal void at the international level on how to deal adequately with situations in which a state is unable to pay back its debt. The Addis Ababa Action Agenda remains weak on this issue. On the one hand, there is no link between debt sustainability assessments and countries’ need to finance their human rights obligations. On the other hand, there is no comprehensive legal nor contractual human rights-oriented framework to solve collective action problems posed by sovereign debt crises.

The Addis Ababa text reproduces the inadequate response we have seen so far to the problem of sovereign debt restructuring and the lack of consensus around this issue. This is also reflected in major lenders' decisions not to participate in recent negotiations in the context of the UN General Assembly leading to Resolution 68/304 (September 9 2014) to establish an international legal framework for debt restructuring.

Much can in fact be done
In fact, there is much that can be done in terms of establishing a meaningful and development-oriented legal framework. The ad-hoc committee established by General Assembly resolution 69/247, tasked with elaborating a multilateral legal framework for sovereign debt restructuring processes, has just approved a set of crucial principles governing debt restructuring, which was recently approved by the General Assembly.14 Among them are sovereign immunity, sustainability, good faith, transparency, impartiality, equitable treatment for creditors, legitimacy and majority restructuring. Whether these principles should be considered soft law, whether they will be endorsed by states and other stakeholders, or whether they should already be regarded as customary law and/or general principles of international law as reflecting domestic laws (art. 38, Statute of the International Court of Justice), remains however an open question. The work done in the recent years by the UNCTAD Expert Group on Sovereign Debt seems to indicate that those principles reflect customary law and general principles of international law to a large extent15 and, as such, are legally binding.16

While the human rights implications of each of these principles still need to be assessed,17 the discussion in the General Assembly around the standards to be applied to debt restructuring is becoming more and more comprehensive and public law-oriented. This gives some hope that human rights aspects will be more carefully considered in such contexts in the future. It is difficult to understand why this debate is hardly reflected in the Addis Ababa Action Agenda.

Another positive measure taken recently has been the debt relief provided to countries hit by natural disasters or health epidemics. However, a stronger commitment by states to work towards a fair and harmonized approach to debt relief in such contexts would have been desirable. Financial policies should in any case not be limited to debt relief after a disaster has already occurred. It is even more important to make sure that states enjoy sufficient fiscal space to adequately respond to and minimize the risk of natural disasters, epidemics and economic shocks in the first place. This is a lesson that can be learned from the West African countries affected by Ebola.

Making human rights integral to development financing


Looking forward it is most important to make human rights integral to development financing in practice. A continuous, broad and consistent governmental effort to set a legal framework providing incentives to promote human rights to those taking decisions in financial markets seems to be crucial. There are a number of reasons why this discussion should take place and decisions be taken prominently in United Nations fora. Human rights law, when applied even to the most complex financial transactions, makes a concrete difference in favour of those who usually suffer the most from the effects of debt crises.18

Our joint efforts to reach the sustainable development goals by 2030 should be informed by the obligations states have assumed under international human rights law, and the debt field should not be exempted from this principle.

FOOTNOTES
1 A/Res/69/313, Annex para. 1.
2 Report of the Secretary – General, Outcome of the Third International Conference on Financing for Development, Advance Unedited Version. A/70/150.
3 See “Human rights must be at the core of development financing”, available at http://www.ohchr.org/Documents/Issues/IEDebt/Paper3FFD22May2015.pdf.
4 See OHCHR: Key messages on Human Rights and Financing for Development, available at: http://www.ohchr.org/Documents/Issues/Development/KeyMessageHRFinancingDevelopment.pdf.
5 10 February 2015, A/HRC/28/60, available at http://daccess-dds-ny.un.org/doc/UNDOC/GEN/G15/021/21/PDF/G1502121.pdf?OpenElement.
6 10 February 2015, A/HRC/28/60, para. 4, available at http://daccess-dds-ny.un.org/doc/UNDOC/GEN/G15/021/21/PDF/G1502121.pdf?OpenElement. See also: Dev Kar and Karly Curcio, “Illicit financial flows from developing countries: 2000–2009” (Global Financial Integrity, Washington, D.C., 2011), p. 3.
7 Kar and Spanjers, “Illicit financial flows from developing countries: 2003–2012”, p. vii.
8 10 February 2015, A/HRC/28/60, para. 10, available at http://daccess-dds-ny.un.org/doc/UNDOC/GEN/G15/021/21/PDF/G1502121.pdf?OpenElement. See also Kar and Spanjers, “Illicit financial flows from developing countries: 2003–2012” (see footnote 5), p. vii.
9 For details see http://www.financialsecrecyindex.com.
10 See “Greek crisis: Human rights should not stop at doors of international institutions, says UN expert,” Geneva, 2 June 2015, available at http://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=16032&; and “Not at the cost of human rights – UN expert warns against more austerity measures for Greece,” Addis Ababa, Geneva, July 15 2015, available at http://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=16238&LangID=E.
11 A/HRC/25/50/Add.1, para. 22. Available at: http://www.un.org/ga/search/view_doc.asp?symbol=A/HRC/25/50/Add.1.
12 According to Eurostat 2014 data, available at: http://ec.europa.eu/eurostat/tgm/refreshTableAction.do?tab=table&plugin=1&pcode=t2020_50&language=en.
13 See for example, Tim Jones, The new debt trap: how the response to the last global financial crisis has laid the ground for the next, London, Jubilee Debt Campaign, July 2015, available at: http://jubileedebt.org.uk/wp-content/uploads/2015/07/The-new-debt-trap-report.pdf and Isabel Ortiz and Matthew Cummings, The age of austerity, a review of public expenditures and adjustment measures in 181 countries, New York: Initiative for Policy Dialogue, March 2013, available at: http://policydialogue.org/files/publications/Age_of_Austerity_Ortiz_and_Cummins.pdf.
14 Resolution 69/319 of 10 September 2015. See draft resolution A/69/L.84, available at: http://www.un.org/ga/search/view_doc.asp?symbol=A/69/L.84.
15 See this legal research at http://www.unctad.info/en/Debt-Portal/.
16 See “Restructuring of sovereign debt: UN Expert stresses GA principles are binding.” Available at http://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=16408&LangID=E.
17 Focusing on the principles of legitimacy and sustainability, see this exercise in my forthcoming 2015 annual report to the General Assembly.
18 “Human rights impact must be addressed in vulture fund litigation – UN experts,” Geneva, November 27 2014, available at http://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=15354&.

ABOUT THE AUTHOR
    Juan Pablo Bohoslavsky is United Nations Independent Expert on Foreign Debt and Human Rights. He holds a law degree (National University of Comahue, Argentina), an LL.M. in Corporate Law (Austral University, Argentina) and a European Doctorate in Law (University of Salamanca, Spain). Prior to his appointment as UN Independent Expert, he worked as a law firm partner in Argentina litigating on behalf of corporations and non-governmental organizations, as a legal consultant for the Argentinean state to arbitration cases related to international investments, and for the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). From February 2011 to April 2014 he worked as a Sovereign Debt Expert for the United Nations Conference on Trade and Development (UNCTAD) coordinating the Expert Group on Responsible Sovereign Lending and Borrowing. He has published on sovereign financing, foreign investment, transitional justice and human rights.

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This article reflects the views of the author(s) and does not necessarily represent those of the United Nations Research Institute for Social Development.