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A crisis is too good to waste

Article by Foreign Policy Centre

July 13, 2009

The downturn provides invaluable opportunities for the UK, especially in the context of the recent G20 summit, to drive action on three fronts – social protection, IMF reform and tax justice – that will benefit poor countries.

At the summit, Gordon Brown led global leaders to commit to a $1,100bn programme of support; with resources for the IMF trebling to $750bn. Leaders reaffirmed their commitment to achieving the Millennium Development Goals by earmarking almost 5 percent ($50bn) of the overall package to low income countries.

OECD data suggests that the UK was one of just a handful of countries to provide the largest aid increases in 2008. In his 2009 Budget address the Chancellor, Alistair Darling, resisted the temptation to profit from the fact that the UK’s original aid commitments were based on higher economic growth predictions. Recognising that merely honouring these original targets could lead to significant falls in actual aid flows – due to the devaluation of sterling and its impact on the international purchasing power of UK aid – Her Majesty’s Treasury dug deep. The UK Government remains on track to reach the UN 0.7 percent of gross national income target by 2013.

Aid can never be regarded as a panacea to address all development challenges. It can, however, be used to provide a rapid response by implementing social protection programmes – essential during adverse economic times. With support from DfID, social protection schemes already provide regular transfers of income or assets to the poor in countries like Ghana, Kenya and Zambia.

The colossal G20 increase in IMF resources, without a clear commitment to reform either governance or conditionality is troubling. Since 1997, IMF reform has been a longstanding ambition of the Labour government. Yet some 12 years later, little has changed. The UK has the opportunity to use its IMF executive board seat to push for reform. As well as providing a greater voice and presence for low income countries, the IMF needs to end the much discredited austerity measures that often accompany IMF bailouts. In addition, as floated by Lord Meghnad Desai, a reformed IMF has the potential to develop a new role in an emerging world order, where the US dollar is no longer the global reserve currency. As a global central bank, it could help recycle and invest surplus global savings, eliminating absurdly cheap credit during times of prosperity.

The G20 communiqué agreed to strengthen the global financial system by tackling offshore financial centres, end banking secrecy, improve the quality of global accounting standards and protect public finance. Today’s crisis has accelerated a momentum to secure a “new global deal on tax.” With London as a global financial hub, the UK is best placed to lead this.

World Bank figures suggest that total tax losses from developing countries exceed the £28-42 billion required annually to meet the MDGs by 2015. ActionAid, a UK NGO estimates that 60% of global trade occurs between different parts of a single company. Yet, through low-priced export and high-priced import transactions, between these business entities, real profit levels are masked resulting in minimal tax contributions. Another NGO, Christian Aid, suggests that in 2006 developing countries lost between $858.6bn and $1,060bn in illicit capital flight. The UK can take decisive action to determine who pays what, where, and promote fairer and more transparent tax policies and administrations.

There is growing domestic and international support to protect the vulnerable during times of crisis, to reform obsolete financial institutions and secure a fairer deal on tax. The time to act is now.

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