Last week, three influential think tanks released a jointly-authored report on European development policy. The European Development Report 2013, called “Post-2015: Global Action for an Inclusive and Sustainable Future,” focuses on how global collective action can help developing countries achieve development.
The report establishes a link between achievement of development goals and reforms of the international financial system, thus helping raise pressure for inclusion of financial regulation issues in the new development framework.
The European Commission should take credit for having commissioned the report. However, it would be even better if it were to actually benefit and take advantage of it to shape its policy positions. A recent European Commission communication on the post-2015 development agenda, while containing some welcome references to financing for development aspects, is outstanding for its vagueness on the subject. The document acknowledges economic and financial crises as an aspect of the “enormous change” that the world has undergone in recent years.
It nonetheless fails to draw the implication of this in terms of controlling financial markets, an omission that provides stark contrast with the think tanks’ report. This latter clearly underscores two areas as the focus of reformers interested in making the financial system more conducive to development. The first one is financial regulatory reform in order to increase financial stability. “The lack of international financial stability affects the sustainability and predictability of external financial resources, both ODA and private flows, and limits their potential to contribute to development,” the report states. To back up its assertion, it refers to some of the impacts of the recent global financial crisis on growth and development.
The report sees broad agreement emerging on the need for regulatory reforms to be oriented towards curbing short-term speculative transactions that can distort markets and exacerbate crises. But it also sees only limited progress in financial reform at the global level, citing as evidence the lack of agreement on a global financial transaction tax (FTT ) and that cross-border cooperation in banking supervision and resolution remain inadequate.
The second area of global financial reform highlighted in the European Development Report is that of illicit financial flows, which it considers to involve three broad categories: (a) proceeds of criminal activities (including money laundering); (b) corruption; and (c) tax evasion and avoidance, including transfer pricing. Quoting estimates that illicit financial flows out of developing countries have reached USD 900 billion in 2009, the report mentions the emergence of broad agreement that they represent a drain on development resources and should be curbed.
But also here, in spite of the richness of proposals, the report speaks of substantial political challenges to achieve international cooperation to curb illicit flows. According to it, an important factor to take into account is the opposition of influential groups, such as financial institutions receiving illicit flows and tax-evading MNCs.
Of course, observers who have been arguing for some time now that it would be a serious omission to not address financial regulation in the development agenda to succeed the Millennium Development Goals, hope that the echoes of the report will extend far beyond Europe.
On a letter to the UN Secretary General submitted last year, members of the A Bottom Up Approach to Righting Financial Regulation Initiative demanded that the “role and parameters for regulation of finance in the context of the post-2015 development agenda be given a place commensurate with the significant influence that they will have in the success of such agenda.”
There is also a growing concern with inequality trends and broadening support for the new agenda to address it. Trying to reduce inequality without factoring in financial regulation reforms would be extremely hard, a recent study asserts, after exploring a series of financial channels that bolstered inequality in the recent decades.
There is a long distance to travel for such demands to be heeded. For instance, one of the influential actors in the post-2015 debate is a High Level Panel of Eminent Persons appointed by the UN Secretary General. In a communique issued after their fourth public hearings, the Panel addressed financing issues stating, inter alia, that “a post-2015 agenda should clearly specify the means of implementation, including financing for development.” That statement gives room to hope, but the lack of explicit commitment to address financial regulation issues gives also reason to worry that financing means may be only seen in terms of Overseas Development Assistance (or foreign investment).
This would be a huge step back. As the aforementioned letter argued, the impact of the 2008-09 crisis on the Millennium Development Goals “underscores the relevance of rules and policies for the regulation of finance in a successful global development framework.”
The new study can be a useful resource in ensuring this item does not fall off the agenda. “A new development framework could encourage reforms to create a more development-friendly financial system at the highest politically feasible level, be it national, regional or international,” the report argues.