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Reforming the international financial system is no act of charity

Rolph van der Hoeven and Rob Vos are the authors of a chapter* of the recently published book ‘COVID-19 and International Development’. In this blog, they elaborate on their chapter, which is about the international financial system. They urge governments worldwide to implement four reforms, necessary to create more fiscal space and access to adequate external finance for developing countries.

Deep inequalities in pandemic response capacity

The global economic crisis provoked by the COVID-19 pandemic has painfully revealed the fundamental flaws in the international financial and fiscal system (IFFS). While advanced countries could engage in massive fiscal and monetary support measures, low- and middle-income countries lacked such capacities and were hit disproportionally. During the first year of the pandemic (2020), advanced countries provided fiscal stimuli to the tune of 12.5 percent of Gross Domestic Product (GDP) on average. This was three times more in relative terms than the stimulus in emerging and other middle-income countries, and almost 10 times more than governments in low-income countries could provide (Figure 1). This divergence in government support mimicked the inequality in vaccine roll-out.

Figure 1. Fiscal and monetary support in response to COVID-19, as of January 2021

Source: Van der Hoeven and Vos (2022), based on data from IMF (2021), Fiscal Monitor, Database of Country Fiscal Measures in Response to the COVID-19 Pandemic.

Four reforms to overcome financing flaws

As with past crises, a lack of adequate contingency financing forced poorer nations to take a big hit with lasting consequences. While high-income countries could engage in massive, and almost costless fiscal and monetary expansion, low-income countries saw their external debts increase to severe distress levels. In addition, they were forced to devalue their currencies, and curtail economic and social support programs. Consequently, an estimated 100 million to 150 million more people faced hunger during 2020, lifting the total number of people with not enough to eat to 810 million.[1]

The lack of fiscal space and access to adequate external finance for developing countries has its origins in the weaknesses of the International Financial and Fiscal System (IFFS). These structural weaknesses demand four urgent reforms, outlined below:

  1. Establish credible mechanisms for international tax coordination.

Such mechanisms would include, among other things, an internationally agreed, uniform corporate tax rate of approximately 25% to stop tax base erosion. This tax rate would hinder multinational companies shifting their profits to tax havens. Improved tax coordination should further include mandated publication of data on offshore wealth holdings. This would enable all jurisdictions to adopt effective progressive wealth taxes and facilitate the monitoring of income taxes effectively paid by the super wealthy. After years of deliberations, the G20 indeed agreed to a proposal for uniform corporate tax treatment in 2021. Unfortunately, at 15%, the rate is still significantly lower than we proposed, thereby falling short of making a more significant impact on boosting tax revenues and on limiting profit-shifting behaviour.[2]

  1. Establish a multilaterally backed sovereign debt workout mechanism.

Although existing mechanisms to renegotiate sovereign debts with private creditors have improved over the years, they are still far from adequate. This is due to the multiplicity of debt contracts, some of which are not subject to collective action clauses. These collective action clauses are perceived as preventing more drastic action in cases of crises; without them bonds could potentially lose a great amount of their value. A global institutional mechanism to renegotiate sovereign debts should, therefore, be put in place as soon as possible. To this day, sovereign debt solvency problems continue to be solved in an ad-hoc fashion, at little favourable terms to debt-distressed countries. Moreover, they are accompanied by policy conditionality. This leads to unnecessary hardship in affected countries.[3]

  1. Reform of policy conditionality attached to International Monetary Fund (IMF) contingency financing.

While the IMF has recognized the need for enhanced public spending by developing country governments, including those facing debt distress, in practice, however, it continues providing pro-cyclical policy advice. This means that the IMF asks for fiscal restraint, rather than deficit spending when economies are in recession.

  1. Increasing the availability of truly international liquidity by increasing Special Drawing Rights (SDRs) and making these available to developing countries.

As an important step in this direction, the IMF approved the issuance of US $650 billion in new SDRs in June 2021. However, no agreement has yet been reached regarding how these additional SDRs should be allocated to developing countries, and how they can leverage additional investment to foster sustainable development. Had such reforms been in place already, the pandemic response would have provided a fairer level playing field for emerging and developing countries. This would have mitigated the pandemic’s worst economic consequences.


Conclusion

None of these reforms should be seen as acts of charity. They are necessary to facilitate a global economic recovery that is both sustainable and equitable. As in past crises, government leaders have acted with a ‘me first’ attitude, as has been blatantly clear in the roll-out of vaccination programs. Some countries perceived this as a return to protectionism. This form of protectionism was evident in the unprecedented fiscal responses of high-income countries to protect the livelihoods of their own citizens, but which woefully disregarded the fate of people in low-income countries. The governments of those countries did not have the means to protect the livelihoods of their citizens to the same extent. Beggar-thy-neighbour policy responses, however, will affect global prosperity in the long term, and will make the Sustainable Development Goals elusive.


[1]  Laborde, D., Martin, W. and Vos, R. (2021) Impacts of COVID-19 on Global Poverty, Food Security and Diets, Agricultural Economics 52(3) https://doi.org/10.1111/agec.12624, and FAO, IFAD, UNICEF, WFP and WHO. 2021. The State of Food Security and Nutrition in the World 2021.  Transforming food systems for food security, improved nutrition and affordable healthy diets for all.  Rome: FAO. https://doi.org/10.4060/cb4474en

[2] A. Cobham, 2021 Is today a turning point against corporate tax abuse? Tax Justice Network, 4 June 2022

[3] INET. (2021). The pandemic and the economic crisis: A global agenda for urgent action (Interim report of the commission for global economic transformation). Institute for New Economic Thinking. https://www.ineteconomics.org/research/research-papers/the-pandemic-and-the-economic-crisis-a-global-agenda-for-urgent-action


Note

*This blog is based on: Rolph van der Hoeven and Rob Vos (2022), ‘Reforming the International Financial and Fiscal System for better COVID-19 and Post-Pandemic Crisis Responsiveness’, Chapter 2 in Papyrakis, E.(ed.). COVID19 and International Development, Springer

Opinions expressed in Bliss posts reflect solely the views of the author of the post in question.

About the authors:

Rolph van der Hoeven is Professor of Employment and Development Economics at the Institute of Social Studies (ISS)

Rob Vos is Director of Markets, Trade and Institutions Division at the International Food Policy Research Institute.

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Are CSOs really involved in the SDGs, as promised by the international community?

CSOs are recognized as key partners in the collaborative pursuit of the SDGs, which provide a positive framework for action and dialogue. However, a recent study found that those CSOs who manage to become and remain engaged are mainly part of the aid system and operate in urban locations. Does the inclusion of these powerful CSOs mean that civil society is included in the pursuit of the SDGs, or is the opposite the case?

Task Team SDGs Header

The 2030 Agenda for Sustainable Development recognizes that the realization of the Sustainable Development Goals (SDGs) can only be made possible by strong global partnerships and cooperation. Civil Society Organizations (CSOs) are recognized as key partners in the successful implementation and monitoring of the SDGs.

In the face of this increasingly urgent global agenda, the Task Team on CSO Development Effectiveness and Enabling Environment (Task Team) commissioned a research study focused on the identification of ‘factors that help and hinder the engagement of CSOs in the implementation of the SDGs’. The study was undertaken by the International Institute of Social Studies (ISS) under the leadership of ISS scholars Kees Biekart and Alan Fowler. Key findings discussed here are derived from the Synthesis Report, summarizing evidence from 21 case studies in six countries: Costa Rica, Ghana, Hungary, Lao PDR, Nepal, and Tanzania.

Enabling environments required

Advancing the role of civil society in development requires two things: an enabling environment for CSOs operation and CSOs’ commitment to their own effectiveness. CSO enabling environment refers to an environment that supports the establishment and operation of CSOs, including multi-stakeholder dialogues, legal frameworks, as well as policies and actions of donors and governments towards CSOs. CSO development effectiveness is concerned with what CSOs themselves can do to address their effectiveness, transparency and accountability in order to effectively engage in development.

The crowding out of non-dominant CSOs

Unfortunately, one of the main findings in this study is that there is a lack of diversity of types of CSOs engaged in SDG processes, with those CSOs that are part of the aid system and in an urban location at an advantage: “This six-country study sees not only an urban bias in CSOs pursuing the SDGs, but also an intellectual class bias that is globally connected,” the study shows (Biekart, Fowler 2020).

This finding is confirmed by the 2018 Global Partnership Monitoring Round of the Global Partnership for Effective Development Cooperation (GPEDC) as well as the OECD publication ‘Development Assistance Committee Members and Civil Society’ published this year. During the GPEDC 2018 Monitoring Round, CSOs reported that “…these consultations are not systematic, which hinders their ability to provide quality input. Results indicate that these engagement opportunities by both partner country governments and development partners could be more regular, predictable and involve a more diverse set of actors” (GPEDC 2019). Similarly, the OECD study concluded that “systematic dialogue with CSOs is much more common at headquarters level than at partner country level. Dialogue does not necessarily meet good practice standards such as inclusivity, joint agenda setting, co-ordination among members, accessibility and timelines” (OECD 2020).

From this study, it becomes clear that there is a wide array of local, traditional and/or informal civil society being ignored. CSOs’ SDG-related knowledge is diminishing at local, rural areas, which also means that those CSOs’ skills, interests and areas of influence are not being used as powerful resources towards the realization of the SDGs.

Possible explanations

The lack of diversity of CSOs engagement in the SDGs is explained by the fact that governments play a main role in deciding which CSOs to include or exclude in such dialogues. It can also be explained by the finding that the SDGs have not led to any significant change in the way donors within the official aid system support CSOs. There is no significant increase in coordination like a common SDG funding pot or an effective national platform for donors’ dialogue with CSOs. Traditional competitive bidding and short-term support to CSOs remain the norm. Donors’ support continues to benefit large (inter)national urban located CSOs. The OECD 2020 report confirms this finding by concluding that most of member funding favours member countriy and international CSOs.

Donors may need to consider different funding mechanisms and requirements, which can be met by those CSOs that have less experience with and access to international funding. This is an opportunity for donors to encourage cooperation between CSOs and provide capacity development support, which can improve CSOs’ chances of being included in development processes in the future.

A step backward?

Governments are generally interested in the additional resources that CSOs bring to the table, but with narrower rules that limit their autonomy as independent development actors. The study shows a variety of mechanisms used by governments to constrain civic space, like limiting information access, selective CSO inclusion/exclusion, and stringent laws inducing self-censorship. It is important to stress that this study found that the implementation of the SDGs does not by itself lead to an ‘opening’ of civic space. The GPEDC 2018 monitoring round also confirmed that the enabling environment for civil society organizations is deteriorating. CSOs’ engagement in pursuing the SDGs provides insights into whether or not civic freedoms are respected, but it does not necessarily mean that a country is complying with international civic freedom agreements.

The need for continued engagement

All these findings demonstrate clear non-compliance with existing international commitments to ensure that CSO contributions to development reach their full potential. The work of the Task Team is, therefore, pertinent and urgent: bringing together donors, partner country governments, and CSOs to engage in open and inclusive dialogue to find common ground; recognizing the role of civil society as a shared responsibility; and helping implement the SDGs.

About the author:

Vanessa de OliveiraVanessa de Oliveira is a Senior Policy Officer at the Task Team Secretariat. The Task Team Secretariat is hosted by ISS.

Are you looking for more content about Global Development and Social Justice? Subscribe to Bliss, the official blog of the International Institute of Social Studies, and stay updated about interesting topics our researchers are working on.