Two new mechanisms for financing aid are close to being agreed.First, yesterday's UK Guardian reported that France and Britain have agreed to raise billions of dollars for health and education by floating bonds on the world's financial markets. France backed Britain's international finance facility in return for British support for a levy on air travel. A working party will be set up which will report back before the annual meetings of the International Monetary Fund and World Bank in Singapore in September.Second, today's Globe and Mail reports that 13 countries have backed France's proposal for a tax on plane tickets:
The traditional methods of helping poor countries, through debt relief and yearly pledges of assistance, have proved inadequate, Mr. Chirac said. To solve the chronic problems of disease and poverty in developing nations, he added, rich countries must come up with innovative money-raising ideas. Taxing airline passengers is one way to "mobilize some of the fruits of globalization" and help create a steady and predictable stream of money for research, low-cost drugs and public-health programs in Africa, he said.
Are these good proposals? Read below to find out.First, the industrialized countries have promised, first at Monterey and then again at Gleneagles, that they will significantly increase aid flows. Provided that they also improve the way that aid is delivered, these increases will accelerate growth in developing countries and help to reduce poverty. So measures to increase finance for development are welcome.Second, the sums required to meet these commitments are small relative to the budgets of rich countries, and additional tax measures or innovative financing are not required to achieve them. For the UK to reach 0.7% of GDP over the next 2 years would take about 14% of the increase in public spending that is already planned. The US would reach 0.7% of GDP by 2010 if, of the planned increase in total outlays that is envisioned in the Administration's 2007 Budget, less than a fifth of the increase were allocated to foreign assistance. This means that innovative financing mechanisms are not required to meet aid commitments.Third, the case for new taxes should be made on the merits of the tax, not on how the proceeds will be spent. The absence of duty on aviation fuel may mean that air travel is currently under-taxed, which may make it sensible to introduce a airline passenger duty as a proxy for a fuel tax. But the case for taxing air travel should stand or fall on its own merits, not on the need to increase aid. Similarly, the case for spending the revenues on aid should be based on an assessment of whether the aid will be effective. In general, it is unwise to link particular expenditures to particular sources of revenue.Fourth, the International Finance Facility for Immunization (IFFIm) is a commendable initiative. By securing commitments from donors for future funding, and using those commitments to front-load spending and make it more predictable, donors can obtain significantly more value for their contributions than if the money is simply paid out year after year. We have estimated that the health benefits of the spending can be increased by at least 22% in this way.Fifth, it does not follow from the merits of IFFIm that all aid should be front-loaded in the same way. Front-loading and predictability are particularly beneficial in the case of vaccines, for the reasons set out in our analysis. But these are not generally applicable to other forms of aid. The broader International Finance Facility only makes sense if the benefits of bringing forward spending exceed the costs of doing so. There may be investments for which this is true. Investments should be considered case-by-case to determine whether this is true.Sixth, while it is welcome that President Chirac is proposing additional resources to buy essential medicines, there is a significant danger that this will not push down prices, as he intends, but rather drive them up. (Generally, prices rise rather than fall when demand goes up.) Only if donors are willing to change the way that they buy drugs - in particular, use the new mechanisms to enter into long term purchasing agreements - will the result be lower prices.Seventh, the US Government has traditionally been sceptical of these sorts of new financing mechanisms. Some of these proposals do not fit easily into the US budget process. But to the extent that these mechanisms will make aid more stable and predictable, and better planned, and so achieve more impact with the contributions being made by US citizens, the US should look positively at participating so that US aid can also be more effective.
