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Some misconceptions on innovative financing…

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“Innovative financing is used as an excuse for States not to deliver on official development assistance commitments.”

FALSE! On the contrary, innovative financing from the outset has been designed to generate additional resources for development, and not be used as a substitute for traditional resources, as stated in declarations adopted by the United Nations and in various conclusions of Leading Group meetings. The ‘niche’ idea behind innovative financing versus traditional official development assistance (used in sectors or economic approaches that are not sufficiently targeted by traditional assistance) is also in practice a guarantee. The measurement issue in official development assistance (which raises the question of perimeters selected by the OECD DAC for this aggregate, which is by nature heterogeneous) must also be separated from the additionality issue (i.e. of whether innovative financing actually complements traditional financing).

“Innovative financing mechanisms are basically just taxes.”

FALSE! Several big categories of mechanisms have been successfully introduced, in which government can play multiple roles, including direct levying of funds (via development-directed taxes), facilitating or channelling private voluntary contributions, and acting as a guarantee to further allocation of private funds. Taxes do not represent one of these big categories of initiatives. There is considerable potential for private voluntary financing when consumers purchase goods and services, which could be better coordinated with public action (leverage). States could also play a larger role in providing incentives (tax instruments) and guidance.

“The taxes under consideration are global, supranational taxes.”

FALSE! The taxes under consideration or being implemented (the air-ticket solidarity levy in a dozen countries) are not “global taxes” in that they are mandatory or decided on a supranational basis. They are introduced on a voluntary basis by a group of States, which coordinate their base, rate and use. They are original in that they target sectors that have benefited from economic globalization and the opening of borders (transportation, tourism, telecommunications, the financial sector, etc.) and that are on average less taxed than strictly domestic activities (or not taxed at all, like the foreign exchange market).

“Innovative financing affects the smooth running of the market and influences its growth.”

FALSE! Often drawing on public-private partnerships, innovative financing is based on an awareness of a shared interest to finance development. Economic stakeholders (companies, consumers) who benefit the most from globalization can be interested in making a small contribution to help meet global needs (treating pandemics, tackling climate change, etc.). The funds will end up furthering economic stability and global prosperity. Moreover, it could be economically sound to financially address today’s needs (global public goods) whose cost for the global economy will be much higher if we wait to address them in the future. Lastly, when financing is provided through taxes, they can be designed to be as less distortive as possible from a micro-economic point of view (broad base, low rate, progressive revenue-based structure, possible exemptions).

“Innovative financing for development complicates aid architecture.”

FALSE! Countries involved in innovative financing give more importance to abiding by the principles of aid effectiveness and coherence. The priorities financed are those of internationally agreed goals in the area of development. The ways funds are used (pooling resources, concluding long-term contracts with suppliers, responding to recurrent needs of recipient countries) aim to make aid more effective and adapted. The governance of most existing mechanisms (GAVI, UNITAID, etc.) involves countries from various levels of development from every continent in an original way.

7 June 2013

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