Failing to achieve MDG 8: Just and equitable development finance still missing from the Foreign Affairs Council conclusions
Eurodad analysis June 2010
The Foreign Affairs Council of the European Union has just released the conclusions of their meeting in thLuxembourg on 14 June. These Council conclusions constitute the EU’s position on the Millennium
Development Goals (MDGs) that it will take to the UN General Assembly High-Level Plenary Meetings in New
York in September 2010. The ministerial agreement builds on the European Commission communications on
“Getting the Millennium Development Goals back on track: a twelve point EU action plan” published in April 1this year.
In the midst of concerns over the impact of the global crisis on development finance, Eurodad welcomes the
Council’s emphasis on the need for “the EU to take development objectives into account in non-
development policies that are likely to affect developing countries.” In this regard, the Council’s ground-
breaking support for “a more development-friendly international framework…to address harmful tax practices and tax evasion, (and to) increase domestic resources” is particularly encouraging.
However, the Council conclusions turn a blind eye to key issues on aid effectiveness, capital flight,
developing country debt and the reform of the International Financial Institutions, which are fundamental
to supporting the world’s poorest countries recover from the crisis, and to putting reforms in to place that contribute effectively to achieving the MDGs.
Main highlights
Some steps in the right direction. The conclusions agree to:
; Take development objectives into account in non-development policies that are likely to affect
developing countries, in accordance with its commitments on Policy Coherence for
Development.
; Support a Country by Country reporting standard for Multi National Companies (MNCs) and an
international framework for tax information exchange as a means to tackle tax evasion from
developing countries, including the disclosure of beneficial ownership of legal structures.
What is sorely missing? The Conclusions fail to:
; Propose binding actions on how to get back on track in scaling-up aid, and delivering on the aid
effectiveness commitments due in 2010.
; Explicitly support the UN tax committee, and provide assertive proposals to address transfer
mispricing practices from MNCs operating in developing countries.
; Provide lasting solutions to the developing country debt crisis, including on the need to establish
a debt work out procedure to deal with developing country debt difficulties.
; Commit to in-depth reforms of the IFIs to ensure greater representation of developing countries
and to make sure their finance contributes to effective and sustainable development.
1 For further information, see Eurodad’s comprehensive analysis of the April package, and in particular of the communication on tax and development, the staff working papers on aid effectiveness and financing for development.
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On tax and development
The Conclusions acknowledge that tax avoidance and tax evasion are “a major obstacle to domestic resource
mobilization” for developing countries and that capital flight “requires efforts from both developed and developing countries”. The Council supports efforts to strengthen tax systems and domestic revenue mobilisation as well as to “work towards a transparent and cooperative international tax environment” in
order to tackle tax evasion but also “other harmful tax practices”.
It is regrettable that the Council has not been more assertive and explicit in calling for the establishment of a Country-by-Country (CBC) reporting standard for MNCs, limiting itself to exploring this possibility. Yet, it is
very positive that the Council calls on EU Member States to “support ongoing consultation by the IASB on a CBC reporting requirement in IFRS 6 for the extractive sector” and beyond, which opens the way towards
CBC reporting in all economic sectors.
The support for a multilateral information exchange instrument and for the availability of the beneficial ownership of all legal structures is a very welcome step forward. Nonetheless, while the conclusions consider three options for exchanging information: automatic information exchange, spontaneous and on
request models, we regret that the Council does not differentiate between them, and importantly, that it does not make explicit how the automatic model is the most effective in combating cross border tax evasion.
Proposals to reduce incorrect transfer pricing practices are excessively vague and weak. The Council
supports research on innovative approaches to tackle this problem, which is welcome, but at the same time
it supports the implementation of the OECD guidelines on transfer pricing, which CSOs consider very inadequate to effectively address the problem, and excessively complex to be implemented by poor countries.
The Council states that International Financial Institutions (IFIs) should avoid “that EU funds are being used
directly or through Offshore Financial Centers (…) for the purpose of evading tax payment”. This is a very welcome step. Furthermore, it should be followed by the implementation of strong European due diligence measures targeting relevant actors such as Development finance institutions (DFIs), the EIB and other multilateral institutions supported by EU MSs such as the IFC. In this regard the EIB benchmark mentioned by the Council falls short and more stringent measures should be taken into account, as the European Parliament called for in its Resolution of 20 January 2010.
The Council also calls on the IMF to look, within the Reports on Observance of Standard and Codes, at whether a country is committed to the exchange of tax information and whether it treats “fraud” as a
criminal offence that should be treated as money laundering. While this is very welcome, we regret that it only considers the term “fraud” and did not include “evasion”, in accordance with the broader spirit of the
conclusions.
Finally, while the Council encourages the Commission and Member States to financially support initiatives such as CIAT and ATAF, it does not at all financially support the UN Tax Committee, as CSOs have long been
calling for.
On Official Development Assistance
The Council finally had to acknowledge that the EU will miss the 2010 aid quantity targets. It reaffirms the 0.7% target for 2015, but it fails to set up binding measures to make sure that the target will be met – such
as national legislation or intermediate 2012 targets– as a milestone for assessing progress towards the
achievement of the 0.7% target in 2015.
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Innovative financing for development, in particular the introduction of a Financial Transaction Tax, would help Member States to finance additional ODA in times of severe budget deficits. Unfortunately, the Council only takes note of existing processes on innovative financing rather than proposing their long overdue EU-wide implementation.
The Council focuses on the aid effectiveness items of division of labour and mutual accountability. Progress in these fields is overdue, but the Council does not recommend any binding actions. However, there are other areas where the EU could immediately make a difference through unilateral and/or EU-wide action. Real aid untying and making aid more transparent and predictable are such fields. However, the Council also fails to call upon Members States to endorse and implement the principles of the International Aid Transparency Initiative, including making public all conditions attached to aid, as a prerequisite for ownership and accountability. Untying aid is fully neglected and critical areas in which implementation lags far behind are completely left out, for instance how to ensure that all EU donors deliver on their commitment to use recipient country systems as the first option.
The coming High-Level Forum on Aid Effectiveness in Seoul may have to acknowledge that the Paris Declaration’s aid effectiveness targets which are also due this year suffered the same inglorious fate as the EU’s 2010 intermediate targets on aid quantity. In this light, the EU needs to step up efforts on implementing the aid effectiveness agreements. A strong impetus could come from translating the political and technical aid effectiveness commitments into binding legislation.
On developing country debt
Strikingly, the conclusions completely omit developing countries’ external debt problems. Given the
importance of debt resolution stated in MDG 8 and the increased risk of a new debt crisis in low and middle income countries, it is disappointing that the European ministers do not mention any measures to address developing country debt. This omission is even more striking at a moment when a debt crisis is looming at the heart of the European Union and a fair and transparent debt work out procedure is needed more than ever.
On the reform of the International Financial Institutions
In 2009 the G20 leaders assigned a major role to the International Financial Institutions in their attempt to address the impact of the global crisis on developing countries. And yet, the Council conclusions fail to acknowledge the full extent to which the reinvigorated role of the IFIs will shape the future landscape of development finance. Consequently, Europe is missing, once again, the opportunity to play a leading role in shaping a more legitimate, democratic and effective global architecture for development finance.
The Council’s support to “ensure swift and adequate implementation of the April 2010 reform in developing and transition countries’ voting power in the World Bank” is grossly inadequate. It fails to address CSOs and
developing country demands for parity of voting rights between developing and developed countries and the need for European consolidation in a single seat at the IMF and the World Bank to free up space at the IFI boards for developing countries.
With regards to the dramatic increase in new resources channelled to Multilateral Development Banks, including the World Bank and the IMF, there is a failure to address any of the long-standing challenges of IFIs in delivering genuinely developing-country owned and effective development finance (see Eurodad thdemands for reforms at the World Bank on the occasion of the 16 replenishment of the International
Development Association). In the wake of the global crisis, CSOs warned about the IFIs’ continued use of
flawed allocation mechanisms and of policy advice and economic policy conditions that stand in the way of
developing country recovery and long term sustainable development. Unfortunately, the conclusions fail to call for enhanced effectiveness of IFI lending, including by ensuring that they comply with high standards of Eurodad open letter to European leaders, June Council 2010 3
responsible finance and grant developing countries the necessary policy space to implement counter-cyclical policies.
On the use of aid to support private sector investments in the South
Also worrying is the call for increased public support to the private sector “through relevant EU Investment
Facilities and Trust Funds” and through the European Investment Bank (EIF) by promoting the “blending of
grants and loans in third countries including in cooperation with Member States finance institutions.”
Both the EIB and European Development Finance Institutions (DFIs) have a poor track record ensuring that the companies they support comply with the highest standards of responsible development finance (including on the use of off-shore jurisdictions) and contribute to effective and sustainable development in developing countries. Before EU development ministers rush to funnel meagre aid resources to the private sector, the EIB and DFIs should commit to tracking the development effectiveness of investments made by private sector companies that they support and to ensuring that these companies comply with the highest development finance standards.
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