A Report on the Second Substantive Session of the FfD PrepCom

Summary

The second FfD PreCom was held from 12-23 February 2001. The meeting began with statements by the President of the General Assembly, the Secretary-General, and senior officials from the IMF, World Bank, and WTO. In addition, the President of the Economic and Social Council addressed the meeting. After a round of formal statements of national or group positions, most of the PrepCom was in informal session discussing each of the chapters of the Secretary-General's report. Representatives of civil society organisations and the business community were allowed to make statements towards the close of each session. The last session on organizational matters was facilitated by Mr. Mauricio Escanero of Mexico. The co-chairs gave an oral summary of the views expressed in the informal dialogue.

Of the six chapter headings of the Secretary-General’s Report, there was general consensus from delegates especially in the informal sessions dealing with (I) mobilizing domestic financial resources, (II) mobilizing international financial resources and (IV) increasing international financial cooperation. Contention on key issues, however, marked the discussions on (III) trade, (V) debt and (VI) systemic issues (see below for more details)

The following are the main organizational decisions from the facilitator and points from the co-chairmen's summary (the written summary will be available two weeks from the close of the PrepCom).

The International Conference on Financing for Development will be held in Mexico in 2002 at the highest political level including at summit level. No exact dates were fixed. Earlier in the week, Kenya who had initially made a bid to host the FfD event decided to withdraw its offer and support Mexico’s bid. Mexico will announce the exact timing and location of the Conference at the third Preparatory Committee meeting. The US abstained from joining the consensus for the event to be a UN international conference; giving as reason that current US laws prevent the US from contributing financially to any international UN conference.

The third FfD PrepCom has now been split into two one-week sessions: the first 2-8 May 2001 will follow the 1 May ECOSOC - BWI High Level Dialogue; the second one-week session will take place in October/November during a recess of the Second Committee of the General Assembly. The final PrepCom remains 14 to 25 January 2002.

In the discussions that followed, Switzerland proposed that the business sector be included in the Third PrepCom proceedings. The FfD Secretariat will send applications to the business agencies interested in participating. The applications would then be sent to all missions and DESA and if there were no objections, the applications would be submitted to the third PrepCom for approval. From the discussions, it appears that the business sector will be accorded a different status than the NGOs. Discussions with the Swiss delegation suggests that they are keen to bring in the businesses represented at the Davos World Economic Forum into the FfD process. Ghana, Norway and the EU requested that specific time-slots be allocated for business sector inputs at the next PrepCom.

To prepare for the 3^rd FfD PrepCom, Governments have been requested to submit to the FfD Secretariat by 15 April a "concise identification of possible initiatives and themes. The Secretariat will give an inventory of these proposals to the Facilitator and make them available to the Prep Com in May. The Facilitator will prepare for the May meeting a "working paper... which will serve as the means to further focus the discussions of the substantive preparatory process". Building on the discussions in the first session and other relevant inputs, the Facilitator will then prepare for the October/November session a "concise first draft" to move the process toward the final preparatory phase.

The one over-arching theme of the PrepCom, according to the Chairmen’s oral summary, is the strengthening of the UN role on global economic and social issues. Other points included:

• Partnerships with and involvement of civil society, especially in relation to issues of international financial cooperation and systemic issues.
• The importance of global public goods and the need to make it relevant to development
• Environmental concerns and the challenges to sustainable development
• The importance of South-South and triangular partnerships especially in the area of ODA
• The setting up of a debtors’ club to negotiate debt problems
• Coordination of all stakeholder agencies in the area of systemic issues
• The importance of social protection and social safety nets and the need to integrate social and financial concerns

The following are the main discussion points raised by delegates during the informal sessions on the six chapter headings of the UN Secretary-General’s Report.

I. Mobilising domestic financial resources for development

There was a general consensus that this is perhaps the most important area in terms of FfD. However, the potential of domestic resources are linked to and influenced by various externalities and emergencies, for example terms of trade, problems of debt, the weaknesses of the international financial system (IFS), international cooperation and assistance, HIV-AIDs and natural calamities. As was expected, the developed countries and the BWIs stressed the need to ‘put one’s house in order’ in terms of governance in macroeconomic and financial matters; and the developing countries emphasized the pressing externalities that have a negative impact on domestic resources, no matter how sound domestic policies may be.

There was strong support for specific measures on tax reform, addressing corruption, institutional capacity-building and strengthening standards and codes in economic and financial systems.

Peru, the US, Ghana, Russia, Chile, Brazil, Nigeria, Pakistan, and especially Cameroon underscored the need to address the problem of corruption. The US proposed that the fight against corruption be taken also at the regional level and Cameroon recommended that an international mechanism be put in place before the 2002 FfD event, for the repatriation of illegal money taken out from developing countries.

Several governments also supported the need for tax reform at national level and cooperation in tax matters at an international level. China and the US emphasized national reform for transparency and ease in tax matters. Guatemala, Saint Lucia, and Chile added that international cooperation is much needed to address problems of double taxation, harmful tax competition. Chile supported the proposal for the setting up of an international tax forum. Pakistan called for measures to address the problems of tax havens.

Several delegates stressed the need for transparency and ownership of whatever domestic reforms for mobilization of resources, especially in the formulation and adoption of standards and codes. In this regard, the principle of national autonomy has to be upheld. This point was particularly emphasized by China and Malaysia. India called for standards and codes to be formulated in an inclusive manner at the international level.

II. Mobilising international resources for development: foreign direct investment and other private flows

The focus of discussions during this session were on:

• How to attract foreign investments, not merely for extractive industries but long-term and development-oriented;
• How to reduce the risks of volatile investments
• How to regulate the behaviour of TNCs, in favour of development

Foreign direct investments (FDI) should be development-oriented and support pro-poor growth. This was the message from several delegations, notably the EU, Norway, Chile, Indonesia, Belgium, Egypt, Italy, the Netherlands, Mexico, India and China. Also of concern are the bad business practices of TNCs such as evading taxes through transfer pricing and tax havens, engaging in harmful or unfair competition, corruption, and not respecting host country social and environment concerns.

Short-term, speculative investments create volatility and instability in financial systems. This point was raised by developing country delegations, who called for a stepping up of the reform of the international financial system (IFS) and the international financial institutions (IFIs). The IMF replied to these interventions by stating that the reform of the IFS and IFIs are very much underway; that the IMF is seriously looking at the problems of off-shore centers and the highly-leveraged institutions (HLIs).

TNCs were also criticized for M&A investments which merely transfer ownership and not generate employment; and the lack or absence of technology transfers in their investment patterns. Effective transfer of technology, access to markets abroad and growth with equity – these are criteria that should accompany investments. This points were raised by Malaysia, India, China, among others.

Credit-rating agencies also came under criticism by the G77, Russia, Saint Lucia, Malaysia, Brazil, for their lack of transparency and social responsibility.

The private sector cannot be forced to invest in specific areas such as social sector investments. Japan, Italy, the US and the World Bank raised this point. Governments can, however, promote a sound and enabling climate and cooperate with the private sector to ensure investment spin-off for development. In a comment to this, the co-chair, Ambassador Jayanama suggested that if there is a push for labour and environment standards to be imposed on trade flows, why not impose similar standards on investment flows.

Despite having all the necessary fundamentals and incentives, many developing countries still fail to attract FDI. And if governments put in place an efficient tax system, this has the effect of chasing away foreign investors. These are the dilemmas expressed by a number of developing country delegates. The World Bank and Norway explained this as a risk perception rather than risk assessment. The World Bank proposed the use of interlocutor agencies within a network of institutions at bilateral, regional and multilateral levels, to address these problems of the ‘credibility gap’.

The following are some recommendations supported by several delegations:

• Strengthening competition policies at the national, regional and internal levels. There was a hint, from the EU at reviving the Multilateral Agreement on investment (MAI), perhaps at the WTO. Russia, Guyana and the US supported the recommendation to set up a special international ad hoc forum for FDI dialogue and agreements. Barbados warned against the making of agreements without due and proper inter-governmental consultations.
• Promoting regional trade agreements
• Establishing standards and codes, but in an inclusive process
• Establishing best practices and good corporate citizenship. Norway provided specific examples on how profit, environment and social concerns can go together in investment decisions. The EU proposed that UNCTAD be actively involved in this area. China and Saint Lucia made mention of the need to revive the international code of conduct for TNCs. The World Bank, however, cautioned against setting too many rules for private investment.
• International cooperation in tax matters. The World Bank stressed the importance of corporate governance and suggested that TNCs open their books for accounting
• Institutional capacity-building, especially through South-South cooperation, for creating sound investment climate (Japan, EU and the World Bank supported the use of IFC and MIGA mechanisms)
• Credit-rating agencies should be more responsible, transparent and use public, objective and longer-term fundamentals as criteria in their assessments.
• International mechanisms and development of regional stockmarkets to address the issue of foreign portfolio investments and the risks they generate
• Ensure transparency in the international financial market and regulation of highly-leveraged institutions (HLI) such as hedge funds

III. Increasing international financial cooperation for development through, inter alia, official development assistance

All the interventions supported the recommendations for increased international cooperation for development, especially through improving ODA flows as well as its efficiency and effectiveness. Several delegates, notably the EU, made the linkage between ODA and trade – that aid alone will be insufficient if market access for developing-country goods are not provided for.

Among the developed country delegations, Ireland, Canada and the UK re-affirmed their commitment to increase ODA to meet the 0.7 percent target. The US and Australia expressed the difficulties and complexities of increasing aid. Developing country delegates called for a serious timetable for meeting the targets on aid.

A campaign needs to be mounted to educate taxpayers in developed countries for an increase in ODA; governments and taxpayers must be motivated to meet the ODA targets. This was the recommendation supported by Japan, Australia and Nigeria. Australia added that school children must also be educated in the issues of development

ODA plays a catalytic role to FDI and in many LDCs it is an important if not crucial source of investment. This point was raised by several developing country delegations. The special needs of Africa should also be prioritized.

The EU and the US reminded that CSOs/NGOs were also recipients of ODA and this must be maintained and strengthened. National ownership in the efficient use of ODA does not mean government ownership, but involve the private sector and civil society.

As for the efficient and effective disbursement and use of ODA, the following were listed as necessary factors: sound macroeconomic policies, transparency, good governance, observing human rights and commitment to sustainable development. Guatemala referred to studies showing that every unit of ODA today has been used for productive purposes. Other developing countries highlighted the high transaction costs and administrative complexities that recipient countries face, that also affect aid efficiency and effectiveness. To keep ODA transactions costs low, for example in procuring services from recipient countries. This was proposed by the Netherlands.

On the topic of Global Public Goods (GPG), a number of delegates requested that UNDP clarify the meaning and scope of the concept. The UNDP gave examples of GPG, viz. knowledge, information, the trade regime, health and pharmaceuticals, basic education, etc. The deadline for achieving the GPGs coincide with the time-frame for the Millenium Summit Goals. The UNDP is currently engaged in second study on GPGs and plan to set up a working group to look at concrete ways to go forward.

Peru called for ECOSOC to oversee the campaign on GPG. The Philippines highlighted the problem of unaffordable HIV-AIDs drugs because of the international patent regime. This should be an issue of GPG. The G77 expressed concern over the funding of the GPGs, that it should not draw away ODA resources.

IV. Debt

There were clear contentions between developed-creditor country (including the BWIs) and the developing country positions. While the former were explaining and defending the HIPC initiative and its prospects, the latter were expressing dissatisfaction at the pace and scope of debt relief. As the delegate from the Dominican republic put it: "…the debt issue has changed the consensus atmosphere of the earlier discussions [in the PrepCom]".

The main positions of the developing country delegates are the following:

• That the HIPC initiative is inadequate, it only addresses a small part of the total debt situation, it does not cover many other debtor countries and that the new PRSP conditionalities are new SAP-like burdens
• That debt-relief should cover the middle-income debtor countries
• That relief should address debt to both official and private creditors

Responding to the criticisms of the HIPC initiative, by developing country delegates, the US argued that the real problem is not with HIPC but with trade. The EU emphasized the importance of harnessing trade and savings as well as HIPC-released debt to channel to development. Canada insisted that conditionalities must remain. Japan complained of the administrative "burden" to developed countries, due to HIPC. And the World Bank explained that the "burden" caused by HIPC to debtor countries was due to the hurried manner to provide debt relief. The IMF proposed better management and harnessing of trade flows as measures to address long-term debt. The developed countries were also clear that there will not be any debt reduction for middle-income debtor countries; that perhaps debt restructuring may be worked out with the Paris Club. Italy was perhaps the only country that suggested a post-HIPC initiative that may be extended to middle-income debtor countries.

A number of developed countries were unhappy that more time could not be spent on this topic. Unlike the earlier sessions, the informal dialogue on debt ended with the familiar sense of ‘north-south’ divide with neither side showing any shift in position regarding the central issue of debt-relief through the HIPC process.

V. Trade

This topic appears as Chapter III in the UN Secretary-General’s report but was discussed in the fourth session in the second week of the PrepCom, to allow for new delegates coming from the capitals.

There were two areas of focus in these discussions:

• Market access for developing country goods, especially in agriculture, textiles and services
• Technical assistance and institutional capacity building for developing countries

While the BWIs shared a common platform with the developed countries on the debt issue, in the discussions on trade the BWIs were supporting similar recommendations as the developing countries. As the UNCTAD delegate put it – ODA brings about $50 billion into developing countries, FDI about $200 billion but exports of developing countries total $1500 billion and there is a projected $100 billion in extra gains from trade for developing countries if there were improved terms of trade. There will be rapid gains for developing countries if tariff peaks are removed, tariff escalation on processed goods are stopped and greater market access allowed for agriculture and textile exports. These were measures supported by the BWIs.

The IMF reminded that market access is not merely a problem developing countries are facing with developed countries. Developing countries face proportionately higher tariff barriers in commodities and agricultural goods from other developing countries, compared to the tariff barriers imposed by developed countries.

But market access is insufficient if developed countries are not equipped to export goods that meet internationally set standards. Therefore, the need for technical assistance and capacity building. Many developing countries also face capacity difficulties in engaging in the WTO process. This point was made by UNCTAD.

Market access is also insufficient if countries maintain protective subsidies. This point was raised by Australia, in relation to the agricultural sector in many industrialized countries.

A number of developing countries also pointed to the need for price stability to ensure developing countries benefit from what they produce.

The particular problems of landlocked developing countries in trade was presented by the delegate from Laos. Greater GSP privileges ought to be accorded to these economies.

LDCs welcomed the ‘all but arms’ initiative of the EU whereby duty-free and quota-free market access will be provided to all non-arms exports of LDCs and HIPCs. The EC delegate explained, however, that there were many "objective difficulties in implementing" this initiative. Clearer commitments to greater market access was made by Australia and New Zealand.

The US is "comfortable with [their] position on trade" and the African Growth and Opportunities Act (AGOA) which they argue provides for greater market access for African exports. Other developed countries such as the EU and Canada suggested that these problems are best left at Geneva and the WTO process and that a comprehensive solution to the trade problem must be linked to a necessary new round of trade negotiations.

The WTO made a lengthy statement on various processes or discussions underway or scheduled in the future, but gave no indication on what to expect from them in relation to the issues being discussed at the PrepCom. Chile made a remark to that effect.

On the whole, developed countries emphasized the importance of technical assistance and capacity building for developing countries to harness the benefits of trade. Developing countries, on the other hand were calling for better terms of trade – greater market access, correcting the imbalance implementation of the Uruguay Round Agreements especially in the matter of TRIPs, the Agricultural Agreement, Anti-Dumping measures, etc.; that labour, environment and human rights should not be linked to trade. Moreover, technical standards should not be used to restrict access.

VI. Addressing systemic issues: enhancing the coherence and consistency of the international monetary, financial and trading systems in support of development

Areas of focus in this session were:

• Reform of the IFS and IFIs
• Greater participation of developing countries in decision-making at the international for a such as the BWIs and WTO
• Strengthening of the UN system, particularly ECOSOC, in international social and economic affairs

UNCTAD and several developing countries criticized the IFIs and the WTO for the lack of transparency and participation of developing countries in their decision-making processes. Chile put it most strongly by comparing the decision-making dynamics at international forums to the race-segregation policies of the US in the past. Even in the G20, the International Stability Forum, and the Bank of International Settlements, there is poor or a complete lack of representation of developing countries. There were also statements expressing dissatisfaction at the pace and extent of the reform of the IFS.

Accompanying the criticisms were proposals to set up alternative and regional forums to deal with various financial, economic and trade matters. Thailand, Indonesia proposed the setting up of a south IFS and the Asian Monetary Fund. Argentina called for a new ‘architecture of development’ and China for a reform of the trade regime; Malaysia and China for an international forum to monitor the reform of the IFS; CARICOM for an international tax forum; and a few other developing countries calling for new forums, without specifying the type, because of the lack of transparency, accountability and participation in current international policy-making forums.

There were also support from Macedonia, Saint Lucia, Ghana, China, Peru, Philippines and Malaysia for strengthening of the UN system, especially ECOSOC, for the UN represents the ideal forum for international decision-making in important social and economic issues. Macedonia specifically proposed that the membership of ECOSOC to be reduced and function as does the Security Council. Some other countries – OECD, US, Netherlands, Mexico, Canada – supported the idea of strengthening ECOSOC but called for further dialogue on the matter.

Generally, the OECD countries and China were against the setting up of new forums and argued for keeping the division of labour among the various agencies – the UN, the BWIs and the WTO. They do support, however, ad hoc working groups on specific issues. The IMF and WB gave assurances that reform of the IFIs are underway and that the issue of greater participation in decision-making is something the BWIs member governments must take up. The WB also emphasized the tremendous potential in the cooperation already initiated by the BWIs and ECOSOC. Other OECD countries proposed that the UN should play a coordinating role in international cooperation but not to take on the mandates of the BWIs or the WTO.

The OECD representative, Mexico, CARICOM and Ghana called for international tax coordinating measures. The OECD, however, did state that the setting up of a global forum on tax matters may not be manageable or feasible in the foreseeable future.

In this session, as in the trade and debt sessions, there was the sense that positions were entrenched, this time on the issue of the reform of the IFS, IFIs and the WTO. UNCTAD and the developing countries were calling for specific reforms and for the UN to play a stronger role in the reform process. The OECD countries, however, especially the US were very defensive of the IFIs’ and the WTO’s mandates and the division of labour that is currently in operation.

The force of the US position was made clear in a strongly worded protest by the US delegate at what was perceived as UNCTAD’s "attack on the mandates of the BWI", that UNCTAD’s tone of criticisms was in a "tone out of keeping with the collegiality" of the UN proceedings, that UNCTAD was "questioning the internal governance of the BWIs… that they are incapable of democratizing their internal system". The US delegate stated that an official complaint will be sent to Mr. Reubens Ricupeiro of UNCTAD and the relevant Under-Secretary of the UN.