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Manual Finance & Development, September 2010: 47

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Financing needs have also reached that level for a handful of European countries that have been the focus of intense financial market scrutiny—Greece, Ireland, Portugal, and Spain. By contrast, only a few emerging market countries have financing needs of a similar magnitude. With elevated financing needs and market concerns about future policies, average maturities on government securities in advanced economies have shortened and spreads have risen sharply in some countries—including Greece, Portugal, Ireland, and Spain—raising borrowing costs and adding to fiscal strain.

Greece has called on exceptionally large financial support from the IMF, European Union EU institutions, and EU member countries to support an aggressive fiscal consolidation plan, while a number of other European countries have announced adjustment measures. By , gross public debt ratios in advanced economies are projected to reach an average of percent of GDP when weighted by economy size —with the United States joining Belgium, Greece, Italy, and Japan as advanced economies with triple-digit debt levels.

In some advanced economies, debt levels will still be rising in , and in only a handful—Australia and Korea, plus a few smaller ones in Scandinavia and central Europe—will gross debt levels stay below 60 percent of GDP, the approximate median unweighted level that prevailed for advanced economies before the crisis. Reducing public debt to more prudent levels—say to the 60 percent precrisis median—will require a sizable and sustained belt-tightening in many advanced economies. Economists tend to focus on the controllable deficit—the so-called primary deficit, which excludes interest expense.

They are also interested in the underlying fiscal position, adjusted for the effects of the business cycle on revenues and spending. IMF staff projections suggest that, on average, if the cyclically adjusted primary balance improves by nearly 9 percentage points of GDP over the next 10 years and is then kept unchanged for another 10 years, debt levels will return to 60 percent of GDP by Primary deficits are expected to average 4! The adjustment will involve turning it into a sustained surplus of 4 percent of GDP from onward.

Adjustment requirements vary; they are driven by starting deficit and debt levels. This consolidation would be on top of any automatic gains from higher revenues and lower spending on unemployment benefits and other social safety net programs that will come with recovery from the crisis. As of July , the largest consolidations among advanced economies to reach the 60 percent debt level by appear to be needed in Greece 17 percent of GDP, 7! The United States also faces a big adjustment need—nearly 11 percentage points. This is more than twice the consolidation needed in Belgium or Italy, two countries long saddled with high public debt.

Why is the necessary fiscal adjustment so large in the United States? A number of factors are at play:. These factors have combined to leave the United States with a very large underlying primary deficit the deficit adjusted to take into account changes in revenue and spending that stem from the business cycle of 6! These high-debt countries provided less stimulus.

Several of these countries also have substantial government assets that could be used to repay debt, if needed. For emerging economies, the challenge is less daunting.


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For them, debt levels viewed as prudent are lower than in advanced economies—possibly 40 percent of GDP—but many are already there. The emerging economy average is 38 percent of GDP. But several important countries—Brazil, Hungary, India, Malaysia, Pakistan, Poland, and Thailand among them—have debt above 40 percent. A reduction in the structural primary balance of about 3 percentage points of GDP on average must be reached by , and maintained until , to bring debt levels below 40 percent of GDP.

Moreover, emerging market circumstances vary widely. Some with relatively high debt levels, such as Brazil and Hungary, also have sizable primary surpluses, limiting their adjustment needs if they can maintain the surpluses. Others, such as India and South Africa, have benefited from relatively deep domestic sources of financing. Some Eastern European countries have been hard hit by the crisis—Latvia, Lithuania, and Poland—while others, including Bulgaria and Estonia, entered the crisis with lower debt levels and stronger fiscal positions.

Developing countries also confronted the crisis with sharply reduced deficit and debt levels than they had at the start of the decade. For a group of 43 developing countries, debt levels dropped, on average, from over 80 percent of GDP in to under 40 percent of GDP in The improvement was helped by debt relief and by improved fiscal positions, as deficits were cut from 4 percent of GDP in to less than 2 percent, on average, in — Stronger fiscal positions and lower debt created room for an active response to the crisis, which helped lessen the impact and duration of the downturn compared with past crises.

Developing country budget deficits fell back to an average of 4 percent of GDP as a result of the crisis, reversing the gains made over the s.


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  • However, as global growth is restored and countercyclical fiscal support is withdrawn, budget deficits should decline gradually to 2! For some developing countries, however, improvements in fiscal balances brought about by the restoration of growth will not be sufficient to stabilize public debt levels and further adjustment—or sustained mobilization of highly concessional donor support or grants—will be needed.

    In sub-Saharan Africa, for example, this includes a handful of countries in west Africa Burkina Faso, Mali, and Niger and a few natural-resource-producing countries Botswana, Chad, and Nigeria , whose prospects could change rapidly should international commodity prices increase. Problems in advanced economies, however, could threaten this scenario. Developing country budgets continue to receive sizable grants 4 percent of GDP, on average and concessional financing from advanced countries.

    If cash-strapped advanced economies reduce support—and growth slows and interest rates rise—developing economy debt could resume a sharply upward trend and either force cuts in spending or threaten the gains made in the precrisis period. Expected spending pressure from aging populations makes adjustment in advanced economies more complex. On average, spending on health and pensions is projected to increase by 5 percentage points of GDP or more over the next 20 years.

    This would continue the trend of age-related spending increases of the past few decades, with health spending accounting for most of the change. Key drivers have been new, more expensive diagnostic and treatment technology; aging populations, which need more health care; and higher incomes, which result in greater demand for health care. Belgium, Finland, Germany, the Netherlands, Russia, Slovenia, and the United States face aging-related spending pressures in excess of 5 percentage points of GDP over the next 20 years.

    France, Greece, Ireland, Spain, the United States, and the United Kingdom all confront difficult dual problems: high adjustment requirements of 8 percentage points or more to reduce public debt to precrisis levels and additional health and pension spending pressures of 4 percent of GDP or more. Confronted with the prospect of higher taxes and massive spending cuts, country authorities might naturally reach for a less demanding adjustment target and borrow the difference.

    After all, they might reason, Italy and Japan have lived with higher debt levels for many years. But high debt levels would ultimately translate to higher interest rates and slow growth, even assuming the debt can be easily rolled over. IMF estimates suggest that the nearly 40 percentage-point rise in the debt-to-GDP ratio that has occurred could lead to an increase in interest rates of about 2 percentage points over the next several years, with adverse consequences for emerging and developing economies.

    Further estimates suggest that the 40 percentage-point increase in debt could lead to a slowdown of growth by a half to a full percentage point per year. Indeed, if governments fail to adjust, the combination of higher interest rates and lower growth would increase the required consolidation effort at the same time that age-related spending was growing.

    Of course, failure to roll over the debt would lead to more dire consequences. Although the global economy is recovering, the pace varies across regions and downside risks persist. Recent adverse market developments have mostly reflected fiscal uncertainties. To preserve the recovery, authorities in many advanced economies should reassure markets by communicating concrete and ambitious fiscal consolidation strategies with a visible anchor, in terms of an average adjustment pace or a fiscal target to be achieved over the medium term.

    This seems broadly adequate, although some countries must commence tightening already this year because of market concerns. Fiscal adjustment should be accompanied by reform of goods, labor, and financial markets to boost economic growth—including reducing barriers to competition in retail distribution and network industries, such as telecommunications; reforming employment insurance; and decentralizing wage bargaining. Strong growth is key to successful adjustment. What should the consolidation for advanced economies look like?

    The report contended that better governance of the global economic system, significantly higher levels of aid and freer markets would go a long way towards achieving the international development goals defined during the world conferences and summits of the s. UN Member States adopted the Monterrey Consensus, consisting of six general categories of issues: mobilizing domestic financial resources; mobilizing international resources for development; trade; international financial cooperation for development; debt; and systemic issues including enhancing the coherence of the international monetary system to support development.

    The outcome document included three sections: confronting the challenges of FfD: a global response; leading actions; and staying engaged. Member States agreed to mobilize financial resources and achieve the national and international economic conditions needed to fulfil internationally agreed development goals, including those contained in the Millennium Declaration, to reduce poverty and improve social conditions.

    Informal consultations on this draft took place in September, and drafting sessions were held in October and November The Doha Conference, which took place in the midst of a global economic crisis, included plenary meetings and interactive multi-stakeholder roundtables on the six major thematic areas of the Monterrey Consensus. In addition to the summaries of the plenary meetings and roundtable discussions, the report of the Conference included a Doha Declaration on Financing for Development, adopted after intense negotiations.

    The Declaration reaffirmed the Monterrey Consensus; stressed the need to maintain aid commitments despite global economic uncertainty; and called for a UN conference at the highest level to examine the impact of the world financial and economic crisis on development. Stressing the need for coherence and coordination and to avoid duplication, the resolution emphasizes the need for effective coordination between the preparatory process for the conference and the preparations for the UN summit to adopt the post development agenda in September There was broad consensus to: build on the Monterrey Consensus, with some additions; synergize with the post process; and include a strong gender focus.

    It was announced that the Co-Facilitators would prepare a zero draft reflecting the discussions before the next drafting session.

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    It was agreed that the Co-Facilitators would prepare a revised draft, and the comments provided by delegates would be compiled in a separate document. At the first additional informal session, from May , delegates conducted a paragraph-by-paragraph review of the revised draft. In addition to the earlier two main sections of the zero draft, this draft included data, monitoring and follow-up as a third section. The first 47 paragraphs of a new revised draft, incorporating comments from the first additional session, were considered at a second additional session, from May , while the remaining paragraphs were considered at a third additional session, from June Differences still remained on a number of issues, including: follow-up and review; international public finance; technology; tax; deliverables; and guiding principles such as the principle of common but differentiated responsibilities CBDR and universality.

    Delegations first conducted a reading of the 12 June version of the draft outcome in plenary, to discuss further bridging proposals put forward by the Co-Facilitators. The Co-Facilitators issued three new versions of the draft outcome during the course of the meeting. After two more weeks of informal consultations, including some under the auspices of UNGA President Sam Kutesa, the third drafting session finally came to a close on Tuesday, 7 July. With Member States still unable to reach consensus on the draft outcome document, the Co-Facilitators proposed that the latest version of the text be further considered at the Conference itself.

    The Co-Facilitators said pending issues included CBDR, the relationship between FfD3 and the post development agenda, and questions relating to tax. He called for a new and universal global partnership among people, business, and civil society. Recalling how development finance has fundamentally changed since the Monterrey Consensus, Desalegn said FfD3 could be a turning point from business as usual. Secretary-General Ban called for an ambitious and universally inclusive financing framework to implement the SDGs, highlighting the need for: a social compact for greater social protection; a package for least developed countries LDCs , including a commitment to increase official development assistance ODA ; a technology facilitation mechanism TFM ; gender equality; and protecting and preserving the planet and natural resources.

    Min Zhu, Deputy Managing Director, IMF, said that the IMF will expand access to concessional finance facilities, target concessional financing to the poorest countries, and maintain long-term zero interest rates for fragile and disaster-affected countries. They elected 25 Vice Presidents to the Bureau. General Statements: In the general debate that followed, Thomas Boni Yayi, President, Benin, highlighted the need to address climate change through technology transfer.

    Macky Sall, President, Senegal, called for the improvement of debt conditions, and highlighted the need to scale up development assistance. Uhuru Kenyatta, President, Kenya, called for timely and adequate fulfillment of ODA commitments; a follow-up mechanism for FfD3; and addressing the composition and functionality of the UN tax committee.

    Hassan Sheikh Mahamud, President, Somalia, called for a comprehensive solution to financial governance to prevent constraining remittances from reaching the people. Heads of State and Government, ministers, and heads of delegation delivered statements in plenary throughout the Conference. Andreas Mavroyiannis, Special Ministerial Envoy, Cyprus, called for inclusiveness and solidarity in advancing the development agenda. Jasudasen, Special Representative for the Minister of Foreign Affairs, Singapore, urged stepping up technical cooperation efforts.

    Gustavo Meza-Cuadra, Peru, underscored the need for effective monitoring and review of the commitments taken. Habib Abbas, Syria, urged combatting terrorism, which he said saps resources that could be used for sustainable development. Collin Beck, Solomon Islands, stressed the need to connect rural populations to global markets through technological empowerment, such as through operationalization of the technology bank for LDCs announced by Turkey.

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    Valerie S. Bruell-Melchior, Monaco, emphasized the role of technology transfer.

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    Gabriel Constantin Bartas, Romania, said a strong global partnership is the key to success of the post development agenda. Nawaf Salam, Lebanon, lamented the refugee crisis facing his country, and noted that development financing can reduce vulnerabilities that lead to conflict. Marcelo E. Scappini Ricciardi, Paraguay, emphasized building human resources and increasing competitiveness by developing information and communication technologies ICTs. Imam Santoso, Indonesia, emphasized the need for renewing the global partnership.

    Citing the case of Cyclone Pam, which severely reduced gross domestic product GDP in his country, Odo Tevi, Vanuatu, underscored the challenges that states vulnerable to external shocks still face even if they graduate from LDC status. Martin Kreutner, International Anti-Corruption Academy, called for investment in anti-corruption education to ensure the effective implementation of the SDGs. Cecile Leque-Folchini, International Organization of La Francophonie, stressed the need for an international fiscal system that is strong and just.

    Cyriaque Sendashonga, International Union for Conservation of Nature, proposed exploring other paths to fund sustainable development including through removing subsidies that are harmful to the environment. Fuad Albassam, Organization of Petroleum Exporting Countries Fund for International Development, advocated access to energy for all as an effective means to achieve social and economic development.

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    Saleh Sahboun, League of Arab States, emphasized political will; peace and security; continued ODA provision without discrimination; and reform of financial and economic institutions. Aeneas C. Paul Maseli, UN Industrial Development Organization UNIDO , noted that industries can significantly increase the domestic tax base, as well as draw the necessary investment, innovations and dynamism to the development system.

    Gary Fowlie, Director, International Telecommunication Union, illustrated the potential of ICTs to harness solutions for sustainable development by highlighting mobile banking services developed for and by Africans. Johan Cels, Office of the UN High Commissioner for Refugees, called for greater coherence between humanitarian assistance and development programming.

    Global partnership and the three dimensions of sustainable development: The first roundtable on this theme was held on Monday afternoon. Omer noted the need to strengthen tax systems and establish transparency in structures governing North-South, South-South and triangular partnerships. In the discussion, delegates, inter alia , called for legal and regulatory frameworks to create enabling environments for private sector engagement; stressed the need to reverse the trend of decreasing ODA to LDCs; highlighted the challenges faced by MICs in resource mobilization; and stressed the need to include local authorities in resource mobilization plans.

    Delegates also considered the role of micro, small and medium enterprises MSMEs as vectors of inclusiveness for women, youth and poor communities; the role of innovative finance including Islamic finance; the importance of breaking down silos within the UN and elsewhere; and the role of an international tax body to deal with tax evasion and avoidance, and regulate tax cooperation.

    The second roundtable on this issue, Roundtable 3, took place on Tuesday afternoon. Greening said the draft Addis outcome includes firm commitments to ODA while moving the finance conversation beyond aid. Mannan stressed the need to return from FfD3 with more confidence and hope in the process. Clark highlighted the following questions for discussion: how to build better partnerships; how different financing sources are mutually reinforcing and aligned with sustainable development; and how to translate the Addis outcome into concrete commitments that are fulfilled.

    Maatia Toafa, Deputy Prime Minister, Tuvalu, called for new models of sustainable development centered on the blue economy. Julia Gillard, Chair of the Board of Directors, Global Partnership for Education, urged: strengthening domestic resources and bringing new donors and the private sector into education; strengthening donor coordination; and enhancing science, technology and capacity building.

    Jeffrey Sachs, Columbia University, called for a change in mindset to approach the SDGs, and stressed the role of partnerships to resolve global challenges. Ambroise Fayolle, Vice President, European Investment Bank, called for: smart use of ODA; strengthened risk mitigation mechanisms; and platforms to attract institutional investors. In the ensuing discussion, participants stressed the need for: a complete paradigm change; an open, predictable and rules-based multilateral trading system; phasing out fossil fuel subsidies; and additionality of climate finance.

    Participants also raised, inter alia : the potential of a new global partnership on sustainable oceans; asymmetries between developed and developing countries in the quality of education; the need to reduce cost of public service delivery; the lack of concessional resources for MICs; the lack of coherence between development and humanitarian financing; terrorism as a threat to sustainable development; and the importance of regional agencies in building capacities for domestic resource mobilization.

    Roundtable 5 took place on Wednesday afternoon. Yi called on the panel to outline ways the global partnership can be used to find solutions to economic, social and environmental challenges around the world. Stressing that equity and CBDR form the bedrock of sustainable development action, Jayant Sinha, Minister of State for Finance, India, said the global partnership needs to: end poverty; integrate the three pillars of sustainable development; level the playing field in economic and financial governance; include innovation; and have a strong monitoring and review mechanism.

    Ngozi Okonjo-Iweala, former Minister of Finance, Nigeria, highlighted infrastructure development as linking the pillars of sustainable development. Dereje Alemayehu, Coordinator, Global Alliance on Tax Justice, warned against undermining the mandate and responsibility of the UN and an unfettered role of the private sector in development financing; and said the principle of CBDR should pervade all global efforts to solve global issues.

    Naoko Ishii, Chief Executive Officer, Global Environment Facility, highlighted the need for well-defined priorities, strong policies, and integration of environmental sustainability into economic systems. In the discussion, delegates considered, inter alia : the importance of policy space for development; the importance of the climate change funding mechanisms to assist SIDS; widening the tax base to enhance domestic resource mobilization; the role of financial markets in funding development; and experiences from Asia in catalyzing finance for development.

    Delegates also stressed: innovative ways to leverage financing; the importance of property rights and rule of law in creating enabling environments; the role of social protection systems and safety nets in promoting economic growth; returning illicit financial flows IFFs to developing countries to finance implementation of SDGs; and decent work as essential for an expandable tax base. Ensuring policy coherence and an enabling environment at all levels for sustainable development:. Roundtable 2 on this theme took place on Tuesday morning. Bolund said investing in women and girls is a means to increase resources for sustainable development, and increase global gross domestic product.

    Escobar highlighted the need for enabling national and international environments to incentivize private sector engagement. Guy Ryder, Director-General, ILO, said accelerating the growth of decent work opportunities is a means to, as well as an end of, sustainable development. Joseph Stiglitz, Columbia University, advocated: a UN forum to address taxation; international laws on restructuring sovereign debt; and changing accounting rules of the IMF to align with development objectives.

    Wellington Chibebe, Deputy Secretary-General, International Trade Union Confederation, noted that the draft outcome lacks guidelines to implement social protection systems. Delegates discussed, inter alia : the need for policy space in developing countries for country-led planning; IFFs as a human rights concern; the importance of social protection for the rural poor; the role of capacity building in creating coherence; governance reform of IFIs; removing obstacles to the development of SIDS; medium-and long-term development strategies for achieving the SDGs in LDCs; the health sector as an investment in employment and sustainable development; financial access, risk sharing, and dispute settlement challenges faced by MICs; and measures against multinationals involved in IFFs.

    Roundtable 4 took place on Wednesday morning. Jaime Alfredo Miranda, Deputy Minister for Foreign Affairs, El Salvador, said the public finance system must align with the SDGs, and called for the establishment of a world council on economic coordination. Ato Getachew Adem, Minister of the Planning Commission, Ethiopia, prioritized national planning and programming systems, strong macro-economic and fiscal frameworks, and the involvement and coordination of sub-national level actors as elements for successful policy coherence. In the ensuing discussion, delegates considered, inter alia : the need for investing in planning ministries; human rights and rule of law; addressing systemic inequalities in international trade; addressing climate change and development finance simultaneously; addressing barriers in remittances outflows; harmful trade practices that undermine sustainable development; the major role of the private sector; mainstreaming the UN-supported Principles for Responsible Investment; adverse consequences regarding dispute settlement processes between investors and governments; maximizing the impact of ODA; the role of finance from IFIs in unlocking private-sector FfD; the need for trade to be coherent with human rights and conventions under the ILO; and national experiences in promoting policy coherence for development.

    Roundtable 6 took place on Thursday morning. Pawlik stressed the importance of enabling environments, noting that without sound policies and healthy regulatory environments, MOI cannot have a lasting impact. Gatete underscored implementation of the AAAA as crucial. Wu said such implementation would require horizontal coherence between sectors, as well as vertical coherence across the local, national and global levels. Joan Clos, Executive Director, UN-Habitat, stressed the need to: empower local and regional authorities to implement sustainable development actions, recognize urbanization as a tool for development, and include local authorities in future FfD discussions.

    Stressing that the world needs to be clear on seeking coherence between its needs and values, Stefano Prato, Managing Director, Society for International Development, noted that there needs to be a balance between losing national sovereignty through making international commitments and gaining democracy in the management of global financial institutions. In the ensuing discussion, delegates stressed: partnerships at the local level; trade as an instrument for development; implementing the Paris Declaration on Aid Effectiveness; the potential of public-private partnerships and dialogue; the need for more inclusive global decision-making; the need to revise biased trade rules; stepping out of ideological silos; adequate financial and human resource allocation at the local level; and creating fair and effective debt mechanisms.


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    • They also considered: the role of corruption in impeding development; including the business sector in development planning, agenda setting, and implementation; monitoring MOI for the post agenda; the importance of capacity building for local authorities; the importance of global guidelines for debtor and creditor responsibilities in borrowing and lending; and sexual and reproductive health and rights. The Main Committee briefly met three times in closed meetings during the week, once on Tuesday and twice on Wednesday. Chair Ghebreyesus thanked delegates for their flexibility, saying the document was not perfect, but contained many good elements, and called on the Committee to approve it.

      Conference President Desalegn opened the closing plenary at pm on Thursday, 16 July. Chair Ghebreyesus introduced the draft outcome of the Conference, saying it reinvigorates and strengthens the partnership for development finance, and emphasizing the need for political will for its implementation.

      He listed the following issues, among others, as inadequately accommodated in the text: explicit reaffirmation of CBDR in the context of the global partnership for development; integrity of post and FfD3 as separate negotiation tracks; specific needs of MICs; an upgrade of the UN tax committee; and an explicit reference to countries and people living under foreign occupation. The EU said the true value and strength of the AAAA is that it brings together domestic resources, investments, international public finance, and good policies and creates a single universal framework that integrates the three dimensions of sustainable development.

      The US said the AAAA is a non-binding document that does not create rights or obligations under international law; and that it provides the means to implement the post development agenda. She raised concerns regarding the inclusion of the right to development, and said debt-restructuring negotiations should take place within a framework where creditors and debtors can legally enforce contractual terms.