ST/ESA/2000/DP.11DESA Discussion Paper No. 11

Resources for SocialDevelopment:Additional andInnovative Measures

Anthony Clunies-Ross

March 2000

United Nations

DESA Discussion Paper Series

DESA Discussion Papers are preliminary documents circulated in alimited number of copies and posted on the DESA web site

http://www.un.org/esa/papers.htm to stimulate discussion andcritical comment. This paper has not been formally edited and thedesignations and terminology used do not imply the expression of any

opinion whatsoever on the part of the United Nations Secretariat.Citations should refer to a “Discussion Paper of the United NationsDepartment of Economic and Social Affairs.”

Anthony Clunies-Ross

The author was Professor Emeritus, University of Strathclyde, Scotland,

United Kingdom. He taught at various universities chiefly on public finance

and public expenditure, project appraisal, development economics, and

macro-stabilization for developing countries. Besides regular appointments

he was a member of public bodies in Papua New Guinea, such as the

Tariff Advisory Committee, the Rural Minimum Wages Board and was also

adviser to Papua New Guinea Government on provincial-government

finance. He has published extensively and helped broaden the perspective

on economic systems and polices that work equitably and efficiently,

particularly in developing countries.

Authorized for distribution by:

John LangmoreDirectorDivision for Social Policy and DevelopmentRoom DC2-1370United NationsNew York, NY 10017Phone: (212) 963-5855/Fax: (212) 963-3062Email: Langmore@un.org

Additional copies of the paper are available from John Langmore.

United Nations

Department of Economic and Social Affairs

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Abstract

This paper considers various ways of securing and retaining additional resources for socialdevelopment: in many cases (but not all) with the help of joint international action. Besideoutlining methods for increasing public revenue available, it considers the acquisition ofresources through financial intermediation and community mobilization and throughincentives to commercial enterprise for appropriate research, and also explores how theerosion of existing sources of public finance can be resisted and the use of public resourcesmay be more effectively secured for social development through tying revenue to outlay, or atleast to the relevant level of government, and through fiscal stabilization.

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Contents

Abstract .......................................................................................... iii

Introduction...........................................................................................1

Measures Involving International Cooperation..................................4

Starving and Milking Corruption and InternationalCrime ...................................................................................................10

Self-Financing Measures: Intermediation.........................................12

Levies on Land Natural Resources...................................................14

Valorization and Development Charges: LinkingPayments to Local Benefits and Costs ............................................17

Reforming Public-Enterprise Pricing and Management..................18

Community Mobilization ....................................................................19

Stabilizing Fiscal Expenditure...........................................................20

Bibliography........................................................................................23

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RESOURCES FOR SOCIAL DEVELOPMENT:ADDITIONAL AND INNOVATIVE MEASURES

Introduction

Various ways of securing and retainingadditional resources for social development areexplored in this paper.The following items numbered P1.1 to P3.5are presented as priorities for consideration byindividual governments, and by the worldcommunity, under three separate heads relatingto whether international action is required andtheir degrees of political difficulty. Fromwithin those groups, P1.1-4, P2.1-3, and P3.1-5 are concerned with tightening governmentrevenue systems in the face of globalization,corruption, and international crime. P1.8-9cover opportunities for taxation (includinglocal taxation) with peculiar advantages thatare often not fully exploited. P1.5-7 dealwith ways of channelling labour and capitalinto social development that require publicfinance only for pump-priming, and forcreation and maintenance of managementcapacity. P2.4-5 concern mobilizing existingresearch resources and technology for meetingthe health needs of the world’s poor. P1.10and P2.6-7 are directed to fiscal (and generaleconomic) stabilization, which is often aprecondition for safeguarding publicexpenditure on poverty and socialdevelopment.

P1. Measures suitable for immediateaction by individual governments actingalone:

P1.1 Transparency, and the minimizationof executive discretion, in tax law andadministration, principally to reducethe opportunities for both corrupt andinnocent erosion of tax receipts;

P1.2 Removal, in all countries retainingthem, of tax allowances for bribespaid in foreign countries;

P1.3 Legislation in each country to makebribery in foreign countries a criminal offence;

P1.4 Confiscation of funds illegallyacquired, and blocking ofinternational transfers of funds underreasonable suspicion of beingillegally acquired; to this end,legislation requiring banks and

financial institutions to supply certaintypes of information (undersafeguards) to authorized publicauthorities;

P1.5 Progressive extension of microfinanceto the entrepreneurial poor, with themedium-term aim of moving toreliance on commercial finance forfunding it;

P1.6 Suitable intermediary arrangementsfor directing private funds to privatehouse-building;

P1.7 Maximum scope and encouragementfor community mobilization directedto the provision and maintenance oflocal infastructure, with a readiness toseek the cooperation of non-government organizations bothnational and foreign;

P1.8 Full exploitation of the possibilitiesof taxes precisely targeted on the site-value of land and the rents of othernatural resources;

P1.9 Legislative authority andencouragement for the arms ofgovernment responsible for localtaxation (a) to apply local site-ownership levies based on theincrease in property values arisingfrom the extension or improvement oflocal infrastructure, and also (b) tocharge property developers inadvance for the costs of the additionalinfrastructure that their projects willentail.

P1.10 Where short-term capital inflowsseem likely to become important as asource of instability, fiscalarrangements in place to make itpossible to discourage them.

P2. Measures that require internationalnegotiation and construction ofinstitutions, but probably face onlymoderate political obstacles, so

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that such preparation can startnow:

P2.1 Negotiation of limits on the form andextent of direct-tax incentives to inwardinvestors;

P2.2 Negotiation of downward limits onthe effective rates of corporate taxation;

P2.3 Formation of an embryo secretariatfor promoting internationalcooperation in tax matters;

P2.4 Mobilization of commercialenterprise---especially inpharmaceuticals---to developappropriate technological solutions tocertain major disease problems oflow-income and middle-incomecountries at manageable cost, forexample through an offer by theworld community to guarantee, byunderwriting, markets of specifiedextent at specified price maxima forsolutions meeting specified criteria.

P2.5 Clear definition and broadinterpretation of escape provisions inthe Trade-Related Aspects ofIntellectual Property Rights (TRIPS)Agreement that provide on certainconditions for normal patent rights tobe circumvented; andencouragement, in the case ofmedicines essential to public health,for full use of these escape provisionsby developing countries, with respectespecially to production and export-import of products under patent;

P2.6 Development of more effectiveinternational incentives and insurancefor stabilization of fiscal expenditurein countries heavily dependent onprimary exports;

P2.7 Machinery (with the purpose amongothers of stabilizing fiscalexpenditure) for temporarily blockinginternational capital movements thatthreaten excessively rapid changes ineffective exchange-rates of particularcurrencies.

P3. Measures where action is of greatimportance, but whereinternational agreement is needed,and obstacles of perception orinertia have probably to be

overcome before substantial stepscan be taken:

P3.1 Movement to a point at which alltransnational income from theservices of capital and know-how aresubject in the first instance towithholding tax at an internationallyuniform rate at source, whateversubsequent adjustments may be madefor ultimate distribution (a) of theultimate burden among personsaccording to residence, and (b) of theproceeds among governments;

P3.2 Negotiation of a formula based onobjective criteria for dividingtransnational corporations’ liabilityfor profits tax among jurisdictions;

P3.3 Progressive negotiation of changes innational legislation to make possible(under suitable safeguards againstinappropriate use) a system ofexchange of information among taxauthorities about the tax liabilities oftransnational-income-earners undertheir respective jurisdictions;

P3.4 Negotiation toward standarddefinitions of profits for corporation-taxpurposes;

P3.5 Establishment of an international taxorganization, with the function(among others) of adapting anddeveloping existing international taxconventions and of arranging andchampioning the negotiation of taxstandards and practices appropriate toa globalized economy.

Note: Insertions such as [P2.3] in the text referto the priority items above.

Additional sources to be tapped for socialdevelopment

There are plenty of additional sourceswaiting to be tapped for the socialdevelopment of the world’s poor---availableif governments individually and theinternational community can be sufficientlymotivated to tap them. They can be realizedthrough transparency, and the minimization ofdomestic discretion, over individuals’ taxliabilities; through rudimentary internationalcooperation in tax matters in order to preventtax erosion; through fundamentally reforminglaw and practice in the taxation of

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transnational income in order to reduceevasion and avoidance; possibly throughforms of internationally coordinated taxation;through providing incentives to commercialenterprises for research and developmentappropriate to the major health and nutritionproblems of developing countries, while stillallowing medicines essential to public healthin poorer countries to be available at close tounit direct cost; through blocking demand andopportunity for corruption in taxadministration and public contracts and endingany easy run for money-laundering; throughsmoothing the way for private funds to bechannelled as loans directly or indirectly forthe benefit of the poor; through fully andaccurately taxing the use of natural resources;through relating local levies individually tolocal infrastructural benefits and costs;through removing unfair and unproductivesubsidies from government activities; throughvarious means of reducing the massivetechnical inefficiencies typical ofinfrastructural services and of state enterprisegenerally; and through encouraging andcatalysing community participation indevelopment projects.

Because social expenditures are especiallyvulnerable to fluctuations in governmentspending-power, fiscal stabilization is highlyimportant to maintaining them. Here linkednational and international measures arerequired.

Inevitably a number of these devices entail aburden on someone, or political costs, or both.But the governments of the world individually,and even more if they will act together, can---by sensible choices among the variety of pathson offer---keep both economic burdens andpolitical costs low. Some moves will needextensive negotiation and institutionalconstruction before they can be implemented.Some, though perhaps politically impossiblenow, are potentially in the interests of allnations and need to be kept on the agenda for amore suitable time.

The approaches outlined in this paper do notfor the most part depend on new ideas. Theyare innovative in the sense that they are not yetpractised in many of the situations in whichthey might be useful. Some are additional inthe sense that they could well be appliedwithout reducing any other measures for

tapping or securing resources for socialdevelopment.

Devices are worth considering as extra ways ofproviding resources for social development ifthey:

A Reduce tax-degradation (the erosion ofeffective tax rates resulting fromcompetition among countries toattract inward investment); or

B Reduce tax-evasion or tax-avoidance; or

C Divert public or private financial,technological, or research resourcesby broadly equitable means to thebenefit of poorer countries andpeople; or

D Are wholly or largely self-financingbecause they enable private choices tobe more effectively fulfilled, with noneed, or relatively small needproportionally, for use of publicrevenue; or

E Raise or release extra public revenuewithout significantly discouragingenterprise, effort, or saving, orotherwise distorting resource-allocation; or

F Raise or release extra public revenue inways that are, or can be made,broadly equitable and politicallyacceptable; or

G Raise extra public revenue in ways thatactually improve resource-allocation; or

H Help safeguard social outlays by tyingtheir funding to them, or at leastdirecting it to the level of governmentresponsible for them; or

J Help safeguard social outlays by stabilizingfiscal expenditures.

One or more of these advantages (ondocatedby the appropriate letters in square brackets) isinvolved in each of the measures introducedbelow.

They are classified under the followingheadings.

1 MEASURES REQUIRING INTERNATIONAL COOPERATION 1.1 Conventions to limit tax-erosionarising from ‘tax-competition’ [A]

1.2 Reform of taxation of transnationalincome [B, C]

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1.3 Internationally-coordinated taxes [E] 1.4 Mobilizing commercial research

resources for appropriate healthtechnology [C, D]

2 STARVING AND MILKINGCORRUPTION ANDINTERNATIONAL CRIME

2.1 Transparency and rule-of-law [A, B]2.2 Removal of tax allowances on foreign

bribes, and criminalization of foreignbribes [B]

2.3 Action on money-laundering:information requirements andconfiscatory provisions [B]

3 SELF-FINANCING MEASURES:INTERMEDIATION FOR BENEFITOF THE POOR [C, D]

3.1 Commercialized microfinance3.2 Intermediation in housing finance3.3 Indexed bonds in small denominations

4 LEVIES ON RENTS OF LAND ANDNATURAL RESOURCES [B, E, F, H]

4.1 Taxes on the rent of resources otherthan land

4.2 Taxes on rental value of land(‘unimproved’ land value)

5 VALORIZATION AND DEVELOMENTCHARGES: LINKING LOCALLEVIES TO BENEFITS ANDCOSTS [E, F, H]

5.1 Valorization5.2 Development charges

6 REFORM OF PUBLIC-ENTERPRISEPRICING AND MANAGEMENT [E, F, G]

7 COMMUNITY MOBILIZATION [D]

8 FISCAL STABILIZATION TOSAFEGUARD SOCIAL EXPENDITURES [J]

8.1 Cushioning primary-export economies8.2 Convincingly killing the ‘rapid-

capital-flight’ bug

1 MEASURES INVOLVING INTERNATIONAL COOPERATION

1.1 Conventions to limit tax-erosionarising from ‘tax-competition’

International competition for inwardinvestment encourages tax-degradation, in theform of (a) the lowering of rates of corporatetax; (b) statutory direct-tax concessions toinwards investors; and (c) ‘flexible’provisions allowing for executive discretion tooffer further concessions. The last of theseprovides a fertile field for corruption and isconsidered below under ‘2. Transparency andrule-of-law’. All three act to ‘compete away’tax revenue. This process is not economicallyefficient. There is no reason to think that thejurisdiction that gives away most to theinvestor is allocatively the best. Nor is thereany strong reason to think that a lower tax allround will enhance production in such a wayas to increase the revenue collected at anygiven tax rate. Where the taxes concerned arebased fairly accurately on the economic rent ofthe natural resources used, there is nopresumption at all that reducing them willincrease economic efficiency in any way.

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So there may be gains in revenue all round ifeach government takes action (a) to restrictas far as possible executive discretion in theawarding of tax concessions to investors[P1.1]; and under international agreement (b)to restrict the nature and extent of thedirect-tax concessions that will be prescribedunder legislation [P2.1]; and (c) to set a lowerlimit to effective corporate-tax rates [P2.2].

1.2 Reform of taxation of transnationalincome

Tax on transnational income is full of holes.

The present system for taxing transnationalincome is wide open to avoidance and evasion.

However, there are simple ways in which thesystem might be reformed, provided therewere enough agreement among the majoreconomic and financial powers. Thesereforms could greatly reduce avoidance andevasion; there is no reason that the taxrevenue of any country (other than possiblysome of the present tax-havens) should bereduced as a result; at the same time they havethe potential at least of transferring revenuedifferentially to poorer countries.

What is needed to make the system watertight?

To minimize evasion, (1) income should betaxed as far as possible in the first instance atsource; and (2), where two tax authoritieshave claims on the same income, each shouldknow what has been declared about thatincome to the other. To minimize avoidance,(3) the jurisdiction under which income is tobe taxed should be determined by clearobjective tests.

None of these three conditions is fulfilled atpresent.

(1) The basic model underlying the presenttreatment of transnational income from capitaland knowhow (interest, dividends, royalties,management fees) is that it should be taxed inthe country of the income-earner’s residence.There are large exceptions to this in practice;but much income, especially interest, remainsuntaxed in the source country, and much of therest is subject there only to withholding taxesat low rates. It is likely that much incomenot taxed in the source country is not declaredin the country of residence and hence not taxedat all.

(2) There is very limited exchange ofinformation among national tax authoritiesabout individual taxpayers.

(3) Corporations that derive their income frommore than one country are supposed to divideit among jurisdictions for tax purposesaccording to the proportions generated in eachcountry. But this leaves large scope forjudgment on the part of the taxpayer; one taxauthority normally does not know what hasbeen declared to the others; and there isevidence that the discretion thus given to thetaxpayer is a means of considerable avoidanceand probably some evasion [Tanzi, 1995,pp.101-3].

Six measures to improve the system

These deficiencies might be overcome byinternational agreement to the following sixreforms (E1-6).

E1 Income would be taxed in the firstinstance as near to the source aspossible.

E2 Hence withholding-taxes on interest,dividends, royalties, and managementfees, if these payments are to crossinter-jurisdictional borders, would becollected universally, at a set ofuniform rates internationally agreed.There might or might not at the sametime be conventions providing for thetransfer of some of the withholdingtax so collected to the relevantcountry of residence of each taxpayer.

E3 Governments would be expected toadjust the overall tax burden fallingon individual residents underdomestic law with regard to their totalincome from all sources---using thecredit principle, not deduction orexemption, to take account of taxalready paid in other jurisdictions.[E1-3 are covered by P3.1.]

E4 Corporate and other enterpriseincome would be allocated amongjurisdictions according to a aninternationally agreed formula thatrelied as far as possible on objectivelyverifiable indicators, such asproportions of workforce, wage-bill,or capital assets, in various countries[P3.2].

E5 There would be an internationalsystem of coded identification for allindividual and corporate income-taxpayers. The code would not onlyrefer to the jurisdiction in which the

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taxpayer resided or was registered butalso be extended to record all thosefrom which she, he, or it derivedincome. Knowledge of the identity ofthe taxpayer attached to each codenumber would be confined to the taxauthorities of the jurisdictionsreferred to in the code number, butinformation relating to the taxpayer’sincome would be shared among them---in certain circumstancesautomatically, and in certaincircumstances on request.

E6 A tax-report to any tax authority ofthe income of a corporation or otherenterprise would be required to giveinformation relating to the total worldincome of the firm or agglomerateinvolved. Where a distribution ofthe enterprise’s income for taxpurposes between that authority andother authorities was proposed, theinformation and the proposeddistribution would be circulated to theother authorities involved. [E5-6 arecovered by P3.3.]

Though the above six arrangements areintended to fit together, they do not dependentirely on each other for their value. Anyone of them individually, if universallyadopted, would constitute an improvement.Some of these elements would serve to a pointas substitutes for others.

A further longer-term objective would be tonegotiate toward common definitions ofincome for tax purposes [P3.4]. This wouldsimplify and facilitate transnationalarrangements for taxing profits.

What if some countries would not play along?

Inevitably international compliance with anysuch set of rules would be incomplete. Mostof the existing tax-havens in a narrow sense(microstates that derive a large part of theirnational incomes from being tax-havens)would probably remain outside.

So long as those remaining outside wereconfined to the existing tax-havens in thisnarrow sense, the capacity of such tax-havensto reduce the tax revenue of the rest of theworld would probably be curtailed by the newarrangements. But most of the worldeconomy would need to be in if the systemwere to be reasonably watertight.

Would developing countries gain?

With a reasonably high agreed rate ofwithholding tax, say of the order of 20%, thereforms under E1-3 would almost certainlyinitially move substantial taxable capacity todeveloping countries. They arepredominantly source-countries rather thanresidence-countries for direct investment. Theywould also recover some revenue losses thatwould otherwise have been engineered throughtransfer-pricing executed by means of royaltiesor management fees. At the same time, it isprobable that tax-revenue in developingcountries would not suffer from the fact thatsome governments that had previously notdone so would now be taxing the interest fromnon-resident bank-deposits. Indeed somedeveloping countries might gain in the sharethey retained of their own residents’ depositsthrough the reduced attractiveness of movingfunds to major financial centres.

It is true that a large shift to withholding tax atsource might be agreed-to only on conditionthat some of the withholding tax collectedwould be subsequently transferred to thecountry of residence. This might reduce anynet advantage initially accruing to developingcountries. But, because of the reduction inevasion, considerably more revenue in total islikely to be collected, so that there would beroom for a deal that on the whole more thanrecompensed countries of residence for theshift while leaving source countries also withsubstantially more revenue than before.

There is no reason too why the further reformsproposed as E 4-6 above should not increasethe revenue of developing countries as well asthat of the rest---unless the particular countriesconcerned happened to be those with speciallylow corporate-tax rates. Even then anyrelative disadvantage through a less favourabledivision of taxable income than before wouldbe mitigated by the fact that improvedinformation would be likely to reduce evasionand so increase the overall tax base.

Strategy for getting there: an international taxorganization

The chances of agreement to a new regime forthe taxation of transnational income alongthese lines would be much enhanced if therewere an international tax organization, parallelto the other multilaterals and especiallycomparable to the World Trade Organization,that could act as a forum and source of

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information, and a champion for promotingsuch mutually-advantageous deals [P3.5]. Toavoid undue delay, a start might be made witha small secretariat to promote cooperation intax matters, without specific objectives relatingto the form that such cooperation should take[P2.3]. This might gradually take overresponsibility for various international taxconventions and their further development.

[The case for the proposals in this subsection isset out more fully in Clunies-Ross, 1999,which draws heavily on Tanzi, 1995, 1996.]

1.3 Internationally coordinated taxes

A number of forms of tax have been proposedthat would, inevitably or most naturally, beimposed by international agreement: forreasons of enforcement, or to prevent any onecountry’s being disadvantaged if it were to taxalone. In some cases these are taxes onactivities considered in general harmful or tohave negative externalities. These haveincluded taxes on arms exports, oninternational airfares, on hydrocarbon use, andon foreign-exchange transactions. The firstthree of these can probably be ruled out forvarious reasons as subjects for uniform,internationally-coordinated taxes, though thesecond and third have been quite successfullyapplied by certain countries independently.

Attractions of a tax on foreign-exchangetransactions

A uniform, globally-coordinated tax onforeign-exchange transactions, however, maystill be seriously considered. The case for itis that the annual value of foreign-exchangetransactions is so high (over $450 trillion) thata tax on them at a very low rate (say 0.1% orless---of the order of the rates charged bybanks for most of their currency exchanges),though it would have a negligible effect ontrade and long-term-capital flows, would, evenon the assumption of a quite highresponsiveness of the level of transactions,yield substantial amounts. Projections of$150 billion to $225 billion global revenuefrom a 0.1% tax would assume---surelyconservatively---that the level of transactionswould fall by 50-67% in face of the 0.1% tax.It is accepted that a part of these proceedswould have to accrue to the authorities thatcollected them---as an incentive to do so and arecompense for the cost incurred. In otherwords, what we should have is primarily acoordinated system of national taxes. But,since the distribution across jurisdictions of the

revenue collected would be wildlydisproportionate to the distribution of theburden of the taxes across the correspondingpopulations, a large share would need, as amatter of equity, either to be redistributedamong governments or to be retained forstrictly global purposes or for use in anti-poverty programmes in less-developedcountries.

Use of the tax against foreign-exchange crises

Once established, the administrativemechanism for collecting the tax would beadaptable, as suggested by Spahn [1996], toserve as a means of checking incidents ofmassive capital flight, such as have generatedmajor crises in the 1990s. This would bedone by an agreement whereby a higher,prohibitive rate of tax would automatically betriggered (unless the country affected refusedthe facility) whenever the sale of a particularcurrency took place at a rate more than acertain percentage from a moving-average ofrecent past rates. The fact that thismechanism was in place would limit the speedof exchange-rate changes, and the fact that itwas known to be in place would remove theincentive for rapid panic moves out of anycurrency. The mechanism need not in anyway impair the country’s autonomy over itsown exchange-rate policy; it would in factguarantee the country against a too-rapiddefeat of any policy it was following tostabilize the rate; if the country wished, itcould refuse the safeguard. Spahn’smechanism would be a neat method, but notnecessarily the only one possible, for fulfillingthis very important function.

Doubts about a foreign-exchange tax as aneffective, fair, and acceptable source ofrevenue

But how promising would a (possiblyuniversal) tax on foreign-exchangetransactions be as a source of revenue forsocial development?

Inevitably it would not only impose a burden(reduce disposable income) like all taxes, butalso compete with other sources of revenue.Its collection can be expected to reduce othertax bases--- though not to such an extent as toeliminate the net increase in tax revenue, evenif all the competing taxes would have beeneffectively collected, as they may well nothave been.

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Until now, the main doubts that have beenexpressed about such a foreign-exchange taxare: (a) that consistently collecting it may notbe administratively possible; (b) that its realburden will bear on countries inequitably; and(c) that political agreement will be too difficultto achieve.

(a) The main concern about the possibility ofimplementing the tax successfully has so farbeen that perhaps not all the ways in whichcurrencies can be exchanged can be identifiedby the authorities; that any that were not taxedmight be used as substitutes for those thatwere; and that any authority that failed tocollect the tax would attract the market to itsjurisdiction.

(b) A concern about its equity is that it wouldbear more heavily on countries with more‘open’ economies than on those of comparableaverage income whose economies are lessopen, and (far more important) that revenuewould accrue quite disproportionately tocountries hosting the main foreign-exchangemarkets or (depending on the method ofcollection used) issuing the major ‘vehicle’currencies. But the equity problem could beremedied by subsequent redistribution of someof the revenue, as suggested above.

(c) The political concern has been that it hasbeen held to need the cooperation ofgovernments whose jurisdictions covered atleast all significant foreign-exchange markets.

Is the tax administratively feasible?

Kenen [1996], following this approach to theadministration of the tax, concluded that, eventhough some transactions would have to beexcluded from its scope, yet, provided therelevant governments took part, the tax,collected in and through the trading markets,would be ‘technically feasible’. Yet doubts onthe score continued.

However, the debate on the tax’s enforceabilityhas been carried forward by a recent paper[Schmidt, 1999], in which it is arguedpersuasively that, if the tax were to becollected through the settlement system forforeign-exchange trades, rather than throughthe trading markets themselves, it could bemade administrable and watertight, regardlessof the form of the financial instruments used,the location of the parties, or the site in whichthe payments were made.

Schmidt’s argument is as follows. Theoverwhelming bulk of foreign-exchange tradesnecessarily go through a system of netting andsettlement among the banks, and this hasbecome increasingly organized, centralized,and regulated. The need of traders to avoidsettlement-risk (the risk to one party that theother will not honour the agreement) requiresthat both sides of any trade should be settledsimultaneously. It has recently becomepossible, through technological developments,to achieve such simultaneous settlementuniversally, and central banks have requiredbanks within their jurisdictions to use thenetting-and-settlement system that has beendeveloped. This requires that all the originalgross foreign-exchange trades should berecorded. It is probable that even foreign-exchange trade carried out through exchangeof securities will seek to go through the systembecause that is the cheapest way of avoidingsettlement-risk. Economies of scale in thenetting-and-settlement process has beendriving settlement toward a single worldnetwork (to be formalized in the year 2000under the CLS Bank), in which records of allgross trades have to be held. Beside theprecautionary commercial incentive to use thissystem, there are regulatory powers that thatcan be invoked to keep the whole of thesettlement arrangements within it provided thecentral banks of the major-currency countriescooperate to that end.

A fee is collected on transactions that use thesystem. A tax on the same transactions couldbe collected as an addition to this fee. Andany individual country acting alone could atleast tax the transactions settled within its ownbanking system.

Is it worth pursuing?

Undoubtedly there are plenty of politicalobstacles in the way of a universal foreign-exchange tax (albeit nationally imposed andcollected), but the potential payoff---in termsof revenue readily and reliably availablewithout significant allocative distortion---would be high. If the main obstacles to auniversal set of national taxes whose proceedscould be directed in part to world social needsand other global public goods are indeedpolitical, persuasive effort might be directed atovercoming them. However, given thepolitical position in the year 2000 and theuntried character of some of the administrative

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case, a foreign-exchange tax is not put forwardhere as a priority.

1.4 Mobilizing commercial researchresources for appropriate healthtechnology

Private corporations---notably inpharmaceuticals and farm supplies---commandhuge research-and-development resources, butthese have been used almost entirely to meetthe needs of rich countries that provide theoverwhelming bulk of the markets. Thus, of1,223 drugs licensed across the world from1975 to 1997, only 13 were for tropicaldiseases and only 4 of these were developed bydrug companies [Trouiller, cited Pilling, 1999].A number of drugs and vaccines that wouldserve vital needs in poor countries are tooexpensive to be widely used, and some ofthese are withdrawn from sale because thesmall number of the people able to buy themmakes them uncommercial. When drugs areunder patent, prices charged are often farabove the unit-costs of manufacturing them.As a result, though bacterial and parasitic andsome viral diseases of temperate climates havevery largely been eliminated, yet in the tropicsrespiratory diseases, malaria, dysenteries,tuberculosis, and hepatitis B each continue tocause deaths numbered in millions every year.Other diseases are perennially debilitating tohuge numbers. And, for whatever reasons,AIDS has become an enormously greater killerin certain poor and tropical countries thanelsewhere.

Despite these failures, the big drug companiesare likely to be essential to the solutions. Noone else has remotely comparable R & Dresources. The task is motivating them todevelop products that not only serve themedical needs but are cheap enough to bewidely used.

This task potentially conflicts with another,which is to gain access for poor people toexisting drugs. Patents and the monopoly thatthey convey are held to be necessary formotivating the large investments thatdeveloping new drugs entails. Yet patentscommonly mean prices far above the actualcosts of production for as long as the patentspersist, namely for 20 years. In the pastmany developing countries have notrecognized the patents, and there has beenproduction within their territories of drugsunder patent. Others, without their ownpharmaceutical industries, have imported thesecheaper versions. Yet recently, as part of

WTO membership, there has been pressure toobserve (from the years 2000 and 2006respectively for two groups of developingcountries) the Trade-Related Aspects ofIntellectual Property Rights (TRIPS)Agreement, which requires respect of patents.Apart from whatever use might be made ofvarious escape provisions in the TRIPSAgreement, this would require a number ofdeveloping countries to pay much higherprices than before, prices moreover far abovethe costs of producing the medicines. Forexample, fluconazole, a drug used to treatcryptococcal meningitis, one of the diseasescommon among people with HIV/AIDS, costs$14-25 for a daily dose where Pfizer hasexclusive rights to sell it, but only $0.75 a daywhere there is competition. This difference issaid to be a matter of life and death forhundreds of thousands of people withHIV/AIDS [Pecoul et al., 1999].

Both these problems are extremely serious.Care needs to be taken that solving oneproblem does not aggravate the other: forexample, that dropping patent protectionaltogether in developing countries, withoutother action, does not reduce any tendency fordrug companies to address the needs of thosecountries.

For the first of these problems, as it applies tomedicines, several proposals have beenmooted: (a) for governments of drugcompanies’ home countries to give fiscal andother concessions to them for expenses ofdeveloping drugs to deal with conditions thatare ‘rare’ in the countries concerned, as in theUS Orphan Drug Act; (b) for suchgovernments to obligate companies to direct acertain proportion of their resources toneglected diseases; (c) for international andinter-company private-public arrangementssuch as the one recently initiated under WHOauspices over malaria, in which research-and-development costs are reduced throughpooling the information already available inthe various companies, in exchange for certainrights extended to the companies participating;or (d international underwriting in such a wayas to guarantee markets to companies fortechnical solutions meeting certaineffectiveness and cost criteria.

(a) US experience since 1983 suggests that theorphan-drug device is not very useful indeveloping treatment for tropical diseases,partly because the effectiveness of the schemefor developing certain drugs has seemed todepend on exclusive access under specially

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favourable conditions to markets in the USitself [Trouiller et al., 1999]. Extension ofthese exclusive privileges to tropical countries,in order to enhance the attractiveness ofdeveloping drugs for tropical conditions, mightnegate much of the benefit by raising priceunduly. (b) Compulsory direction of R & Dresources to neglected conditions does notappear to have been tried. (c) The public-private partnership on malaria is still new buthas been attacked for giving the companiesexcessive rights in relation to theircontributions. )

(d) A proposal for attacking the incentive anduser-price problems together has been made bySachs [1999, p.17]. This is that the worldcommunity (say, a consortium of industrializedcountries and multilaterals) might guaranteemarkets of a certain level to the first drug orvaccine for one of the major tropical diseasesthat met certain performance and priceconditions [P2.4]. The guaranteed sumsmight need to be large because developing adrug may cost $300-500 million. But theymight take the form of the underwriting ofpurchases by national authorities and othersrather than straight promises to buy theguaranteed amount; and, insofar as they wouldbe paid out, it would be over a period of yearsin the future. The basic supposition behindthe Sachs proposal is that there is a marketfailure that needs to be corrected. It might beseen somewhat like this. If the companies candevelop sufficiently cheap solutions to themajor diseases of tropical countries, they willprobably realize large enough markets torecoup their costs. But whether they willactually be able to do this or not is oneuncertainty too many for them. The worldcommunity in effect needs to take on this partof the risk in order to make the connectionbetween the technological resources and thecrucial needs that they can meet---with theirenormous implications for reducing prematuredeath, suffering, and loss of productive power.

For the second of the major problems, theremay be a need to revise the TRIPSAgreement as it applies to the sale of patentedmedicines in developing countries. Thismight, for example, involve allowing ‘tieredpricing’, with appropriately lower prices indeveloping countries (related, say, to unit costsof production) as a condition of patentrecognition. But much can be done bysuitably clarifying, liberally interpreting,applying, and upholding, the escapeprovisions that have been written into theexisting Agreement to cover vital public-healthneeds [P2.5]. (Some developing countrieshave been put under pressure, with threat oftrade sanctions, not to exert those rights[Wilson et al., 1999]). In particular:(1) There should be a commitment that no

member of the WTO will attempt todiscourage a developing-country memberfrom using the scope given it under theAgreement, for example, for allowing themanufacture, under so-called ‘compulsorylicense’, of a patented drug.

(2) The rights, under the Agreement, ofcountries where ‘compulsory licenses’have been taken out, to export and importsuch drugs should be clarified, and, ifestablished, respected and their use bydeveloping-country members encouraged.

(3) Restrictions on the laboratory use ofcurrently patented drugs, and of publicinformation about them, for the purpose ofregistering such drugs for production aftertheir patents have expired, should berelaxed in order to speed the process ofregistration, so that the period of patentprotection is not effectively prolongedbeyond the agreed 20 years.

(4) Consideration should be given toextending the transitional period forimplementation of TRIPS for some or alldeveloping countries.

(5) The WHO’s Essential Drug List should beexpanded to include drugs that would beregarded as essential if their prices werelower.

2 STARVING AND MILKING CORRUPTION AND INTERNATIONALCRIME

Governmental corruption has a number of ill-effects. Statistical studies support the beliefthat it reduces expenditure on education andhealth, reduces the productivity of publicinvestment and infrastructure, and reducespublic revenue---as well as reducing foreigndirect investment and the rate of economicgrowth [Tanzi, 1998, pp.585-6].

2.1 Transparency and rule-of-law

Removing the opportunity

Corruption of tax authorities is regarded as oneof the main reasons why many taxes indeveloping countries realize so much less

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revenue than knowledge of the tax basessuggests they should. Much of theopportunity for corruptly reducing tax duewould be removed if taxes were fixedrigorously by law so that no executivediscretion was possible. Since it will not bepossible to remove executive discretionentirely, at least it should be minimized(confined to the interpretation of clear rules) ,and any significant decisions, and reasonsfor them, should be recorded and the recordpublicly available (so-called transparency)[P1.1]. Transparency and minimizingadminstrative discretion can not be guaranteedto end corruption in tax administration. Butthey make any reduction of tax for corruptreasons much easier to detect if anyone isconcerned to do so. If the government andsenior officials are permissive about tax-corruption, there is not much chance that itwill be curbed; but, if there is a will to reduceit, transparency and minimal administrativediscretion will help by making the concealmentof corrupt agreements much more difficult.

Even when there are no corrupt payments,discretion over the granting of tax concessionscan easily erode revenue for no sound reason.Officials wanting (with the best of motives) toattract foreign investments may be led to giveaway too much because they are likely toknow less about the investing firm’s realintentions than the investing firm itself. Strictlimits to the concessions fixed or allowed bylaw can overcome this effect of relativeweakness. But there are likely to bepressures and temptations for ‘flexibility’ untilthere is wide international agreement, asadvocated in 1.1 above, for restricting bothexecutive discretion in this matter and theconcessions allowed under legislation [P2.1].

2.2 Removal of tax allowances forforeign bribery; criminalization offoreign bribery

Attacking the demand

An important part of the demand for illegalfavours in developing countries arises fromOECD-country investors. There are newresolutions, under OECD auspices, forgovernments to penalize any of their ownresidents who contribute to it.

OECD countries agreed in a Recommendationof April 1996 that members should not allowbribery of foreign officials to be a tax-deductible expense [Ervin, 1998, p.152]. By

late 1999 it was said that 18 countries hadlegislated accordingly [P1.2].

In 1998 the OECD agreed to a Convention onInternational Bribery [see UNDP & OECDDevelopment Centre, 1998, Appendix 2] thatrequired signatories to establish that briberyof a foreign public official was a criminaloffence under their own law and to take otheraction to make such criminalization effective.Though there are the usual arrangements forthe Convention to come into force after somany countries of significant weight ininternational transactions have formallyaccepted, approved, or ratified it, there is nogood reason why any country, OECD memberor not, signatory or not, should not take therecommended action unilaterally [P1.3].

2.3 Action on money-laundering:information requirements andconfiscatory provisions

Discovering and seizing the proceeds

Money-laundering refers to the use of financialintermediaries for disguising the origins ofearnings from criminal activity. What itprotects typically are earnings from extortionand from illegal drug, sex, and firearm sales,and income seeking to evade tax. It dependson secrecy, among banks and other financialinstitutions, about customers’ accounts.

The first task is to reach internationalagreement on rules for financial institutionsthat would give reasonable confidentiality todepositors and borrowers on matters relevantto their position as commercial competitors,while at the same time allowing theirgovernments, and foreign governments with alegitimate interest, access to information witha bearing on criminal activity or on theliability of taxpayers within theirjurisdictions. (This is covered, insofar as itrelates to tax liability, in 1.2 above.)

It is extremely likely that some countries thathave made a reputation from banking secrecywould resist any such provision even if therewas wide agreement upon it in the rest of theworld. It would be important to look forways of inducing them to cooperate or else ofneutralizing the effect of their non-cooperation.

Similarly, there should be internationalagreement on guidelines for laws that wouldpermit a government to confiscate after dueprocess, from a financial institution within its

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jurisdiction, sums corresponding to amountspassing through the institution that could beshown to be the proceeds of crime. Lawsmight also be agreed to permit governments tostop foreign-exchange transactions on the

part of institutions that are on good groundssuspected of handling the earnings of illegalactivity [P1.4]. There might be a resolution todirect any confiscated funds to social purposes.

3 SELF-FINANCING MEASURES: INTERMEDIATION

Here are included ways of obtaining funds,either specifically for the benefit of the poor orin ways by which numbers of the poor arelikely to benefit, through financialintermediation rather than through taxation. Itis a question of removing blocks to certaintypes of loan transaction that would be ofvalue to both lenders and borrowers---withvery poor people benefiting directly orindirectly. These methods have the greatadvantage that they can be employed withoutthe need to raise or commit public funds, or atleast without the need to do so after an initialperiod.

3.1 Commercialized microfinance

Access to capital markets for the very poor

Microfinance is here taken to cover lending invery small amounts to the ‘entrepreneurialpoor’. It has been introduced in a number ofcountries in South and Southeast Asia, LatinAmerica and the Pacific, following approachespioneered most famously by the BangladeshGrameen Bank. These ventures have shownthat lending to the very poor is possible, withhigh recovery rates on the loans, and at rates ofinterest that can be high enough eventually tocover the full costs, and furthermore that bythese means the incomes of many poorfamilies can over a period of years besubstantially increased---provided certain rulesof good practice are observed.

The rules of good practice required have beensummarized from abundant experience andwell documented [e.g., Conroy et al., 1995,pp.74-91].

It is important for governments to deal withmicrofinance at arm’s length: through NGOsor else through autonomous state-ownedinstitutions either set up specifically formicrofinance or operating for the purposethrough specialized arms. Grant-financeprovided by the state from its own resources oraid funds should be treated as seedcorn tocover the initial high-cost period of lending inany locality and thus to finance expansion, butnot to finance continuing operations, whichshould be put onto a commercial basis as soon

as that can be done. The reasons for this,given that it has been shown to be possible, isthat, though it is vital that there should becontinuous availability of new loans for pastborrowers, public and charitable funds can notbe relied upon to flow indefinitely; and that,the more existing lending operations can bemade self-supporting, the further canfinance for the very poor be extended.

Once operations are fully self-supporting,covering market interest-rates as well as therelatively high administrative costs ofmaintenance and expansion that are necessaryin this type of lending, potentially vastresources of commercial loan-capital areavailable. For governments, it is a matter of(a) persuading commercial banks to set upspecial departments to deal withmicroborrowers directly, or else (b) equipping(or creating) other lending-borrowing agenciesto act as intermediaries between the ultimatecustomers and the banks, and ensuring thatthese agencies have the expertise needed forthem to be regarded by commercial banks asreliable borrowers. In addition, adequatetraining of managers is crucial [P1.5].

That such completely self-supportingmicrofinance is possible while covering largenumbers of borrowers is evident from severalexamples, notably that of the Association forSocial Advancement (ASA) in Bangladesh,with a million clients at the end of 1997, whichis regarded as having covered its full financialcosts [Goodwin-Groen, 1998, pp.3, 8].According to a study covering East Asia andthe Pacific [ibid, pp.5-8], virtually allsuccessful microfinance institutions chargecommercial rates of interest. Those that doinclude the Grameen Bank (2.1 millionborrowers) and BRAC (1.5 million) inBangladesh, and the Unit Desa scheme of theBank Rakyat Indonesia (2.5 million).Though most are not fully self-sufficient, theGrameen Bank is one of those that wasregarded as 80% or more so in the mid-1990sand subsequently took measures calculated tofill the gap [ibid., p.7]. Some that are notfully financially self-sufficient cover theirwhole operational expenses. The same study[p.3] cites findings of the end of 1995 that 6

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million households in Bangladesh wereprovided with microfinancial savings andcredit services. This number represented 25%of rural households, and 20% of all poorhouseholds, in that country. It seems that thishuge operation goes a large part of the waytoward paying for itself and its expansion.

3.2 Intermediation in housing finance

More private housebuilding by anyone meansmore and cheaper housing for the poor.

The durability of housing means that, whenmiddle-income people build new houses forthemselves in order to upgrade theiraccommodation, they release other dwellingsfor those below them on the income scale,which as a result tend to fall in price. Theprocess continues down the housing andincome ladder. More middle-income housing---built commercially or by households forthemselves--- means more low-cost housing.So whatever facilitates unsubsidized privatehousebuilding will increase the supply andreduce the market price of accommodation forthe poor.

There appears in many countries to be a latentdemand for improved housing that requiresonly the supply of finance, in suitable form butat full market rates of interest, to becomeeffective. Spending on housing has theadvantage in countries with abundant unskilledlabour that it is highly labour-intensive in theinputs that it demands and so can generatenational income with a relatively low importcomponent. A switch of spending towardhousebuilding is likely to be a switch towardlocal inputs and to mean therefore that morenational income than before can be sustainedfrom a given level of foreign-exchangeearnings. Linking the supply of funds tothe latent private demand for housing willthus tend to increase potential national incomeas well as freeing accommodation for the poor[P1.6].

Colombia in the early 1970s began an attemptto make full use of this opportunity [Currie &Rosas, 1986]. The government’s role wassimply to set up a framework for deposit-and-loan institutions under suitable rules. Thekey requirements were that the lenders shouldreceive an assured positive real rate of interestand that the borrowers should have theirservicing obligations phased evenly in realterms over the life of the loan. Uncertaininflation at moderate or higher rates, especiallycoupled with caps to interest rates, would

under normal lending conditions prevent boththese requirements from being fulfilled.

The device adopted was the simple one ofcreating intermediary institutions not subject tointerest-rate caps that indexed daily to theprevailing price level the value both of whatthey had borrowed and what they had lent.The declared rate of interest charged and paidwas thus a real rate. The institutions couldcontract to pay depositors enough---andconsistently enough whatever might happen tothe price level---to persuade them not to hoardtheir money in unproductive form or to send itabroad. Because their loans were indexed (thenominal value of the unrepaid part of thecapital continually increasing with the pricelevel) the rate of interest to the borrowerscould be modest and also consistent; the high(and often highly variable) nominal rates thatwould have been required in conventionalunindexed housing loans under inflationaryconditions were therefore unnecessary. Thismeant that the loading of very heavy realservicing obligations on to the early part of therepayment period (the ‘front-end load’) wasavoided: the real servicing obligations couldbe spread evenly over the life of the loan. Onthe assumption that borrowers would belimited in the proportion of their income thatthey could devote to the servicing of housingloans at any time, a system that spread the realburden evenly would enable people to borrowfor housing lower down the income scale thanone that concentrated it at the start of theperiod. A simulation [ibid., Annex 1]assuming a rate of inflation of 23% year, 15-year loans, a real interest-rate of 7.5%, and alimit of 25% of income that a borrower couldafford to spend for servicing in the first month,showed that this smoothing of the servicingburden as a result of the indexation wouldreduce by about 60% the critical level ofhousehold income below which a householdwould be unable to borrow.

Colombian experience was that, under theseconditions, the real interest-rates sufficient toattract large amounts of capital did not deter anabundance of borrowers. While depositsgrew in real terms at an average compoundrate of 20.9% a year for 10 years from the endof the first full calendar year of operation[ibid., Annex II, Table II], by the middle of thesecond year of operation loans were absorbingdeposits virtually in full [ibid., Annex II, TableIII] and continued to do so for most of that 10-year period. A housebuilding boom wasprecipitated in Colombia in the early 1970s,which was associated with a large increase in

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urban employment. There were analogousexperiences in other South American countriesthat adopted similar devices.

3.3 Indexed bonds in smalldenominations

Attracting small and risk-averse lenders

If a government wants to discourage the fundsof private savers from moving abroad and toattract them for public purposes, it isreasonable to issue bonds whose value is fullyindexed to inflation and at rates of interestcomparable with current world rates. Smalllenders might be further attracted if thegovernment agreed to buy the bonds back atany time at their indexed values with only asmall discount.

4 LEVIES ON LAND AND NATURAL RESOURCES

Levies on the possession or use of naturalresources have several advantages. One isthat the entities on which they are based cannot move from one jurisdiction to another. Asecond is that in principle taxes can beimposed upon them up to just short of their fulluser-value (their ‘resource rent’) withoutdiscouraging effort, saving, or enterprise, andgenerally without any distortion in resourceallocation. A third that often applies is that,where the state is the owner of the resourcesand a private person has acquired their use infull knowledge of the conditions, there is noobjection in equity to taxing their use up totheir full user-value.

Governments do often collect taxes that fallmore or less on natural-resource use, but fail totake full advantage of the opportunities offeredbecause the taxes fall on other activities orfactors as well. If very high rates are to beimposed without economic loss, the taxes mustbe closely targeted to the value of theresources rather than falling also on labour,capital, or enterprise [P1.8].

4.1 Taxes on the rent of resources otherthan land

For the use of most natural resources otherthan land (minerals, hydrocarbons, watersources, forests, fisheries, broadcastingwavelengths), there is no publicly-knownmarket-price that can readily be applied toestimate the user-value or rent in each case.There are broadly two approaches to taxingthem that may be efficient: ex-ante and ex-post.

4.1.1 Ex-ante: auctioning of rights

Auctioning of rights in advance of anydevelopment expenditures has been applied tooffshore hydrocarbons in producing fields bythe US federal government since 1954 (‘cash-bonus bidding’), and by some other authorities

and landowners in North America. Thesuccessful oil company pays only what it hasbid. So it would seem that bidders can not bedeterred by the existence of the auction. Nofirm has to bid more than it believes it canrecover from use of the resource. Since thesum is paid before any development can begin,decisions on exploitation (extent, speed,timing) can not be affected by it, so that the taxcan not generate any misallocation.Moreover, the method has the advantage that,as well as collecting revenue, it also allocatesthe use of the resource to one firm by a methodthat can readily be protected from favouritismor corruption. Since a resource in thecategories we are considering, if it can berightly claimed by anyone at all, is anendowment of humankind at large, which noperson has created and over which (in mostjurisdictions) no one has been given reason tobelieve she or he has purchased a permanentclaim, it is entirely fair and reasonable that itsfull property-value should be realized forpublic purposes.

Auctioning may be applied also to forests,water, fisheries, and wavelengths. It does notseem to have been used for deposits of metalores. The reason for this exclusion isprobably that a considerable outlay is oftenneeded before the mining company can assessthe extent, and hence with other informationthe value, of the deposit, and to make thatoutlay worthwhile it needs to have an assuredright to exploit if it should choose to do so, nota claim that will depend on whether it laterbids the most.

The US has taken sealed bids for oil and gasleases in order to minimize the chances ofcollusion among bidders. There may bereason for using open bids in the case of someother kinds of resource such as forests wherethe location of one developer’s lease in relationto those of others may affect the value of the

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lease to him. But open bids entail a greaterrisk of collusion.

It can be presumed that, if there is known orbelieved to be competition for leases, thebidder will bid close to the full amount thathaving the lease is worth to him. Subject tothat qualification, the highest bid is thereforeheld to be a good indicator of the rent of theresource. Evidence from the early period ofUS experience with the auctioning of oil andgas leases [Mead, 1974] suggests that whatwas collected by the authorities in bidsactually exceeded what could reasonably beconsidered the true rent of the resources. Afurther estimate for the period 1954 to 1977[Jones et al., 1979, p.887] indicates that, of atotal gross sales value of oil and gas from theUS Outer Continental Shelf of $33.4 billion,$25.3 billion (roughly three-quarters) went tothe government as revenue, of which $19.7billion was the proceeds of cash-bonus bids.

But is important also to remember that, afterthe big oil-price rises of 1973-80, the sameextractors in the US were held to be makingexcessive profits not envisaged when they bidfor their blocks, and briefly and crudely a taxon these excess profits, one that had not beenpart of the original deals, was added on. Theneed for this could have been avoided if therehad, beside the auctioning of rights, been aprovision for a satisfactory ex-post tax asoutlined below.

In all cases where there are doubts aboutwhether auctioning will yield much revenue,or indeed doubts whether it will go close torealizing most of the resource-rent in allcontingencies, it can be combined with othermethods, preferably the ex-post devicesmentioned below. Added to other taxes,auctioning rights will still not in itself deterinvestment or lead to social-income losses bydistorting allocation.

4.1.2 Ex-post: taxing discounted-cash-flowor equivalent

The approach characteristic of Papua NewGuinea since the late 1970s, and of Australiafor offshore oil and gas since 1985, has beenone in which the economic rent of the resourcehas been estimated, progressively asexploitation proceeds, on the basis of cashflows actually associated with the extraction,which are then discounted (accumulated) at aninterest rate that is supposed to approximate tothe cost of capital for the activity concerned.As positive net cash-flows over the life of the

operation to date are realized, they are taxed ata proportional rate. So the base on which thetax is calculated has had the cost of capital, aswell as the costs of other inputs, deducted.These charges---a so-called ‘resource-renttax’---are applied before corporation tax isassessed, and they become expenses forcorporation-tax purposes [Garnaut & CluniesRoss, 1975, 1983; Goss, 1986]. The idea ofthe resource-rent tax is that its base willrepresent the financial surplus of the extractionas the investing firm itself (applyingdiscounted-cash-flow appraisal) will assess it.Taken alone, it will approach neutrality in thatonly the surplus (representing the valuecontributed by the natural resource), not thenormal reward of any other input, such aslabour or capital, will be taxed. The rate ofthe resource-rent tax therefore may be highwithout serious loss of efficiency. However,it must be well below 100% in order to avoid‘gold-plating’ (outlays that are really of aconsumption nature for the benefit ofmanagement or owners of the extracting firm).

From the viewpoint of the revenue authoritiesa resource-rent-type tax would fill the roleoften played in the taxation of mining projectsby an ad-valorem ‘royalty’ on the value of theproduct (or, what would have much the sameeffect, a government ‘share’ in the output), or aspecially high rate of corporation tax on theextracting firm, or some other special levy.These are all designed to charge the extractingfirm for the fact that it has been given rightsover the natural resource. There are clearreasons, however, why a number of thesealternatives will blatantly depart fromneutrality and hence efficiency. An ad-valorem royalty on the product, for example,will make further extraction unattractive to thefirm well before this would have been the casein the absence of tax. However, in order thata resource-rent-type tax should come close tofalling exclusively on the economic rent and soavoid distorting effects, the rate at which thediscounting of cash-flows is applied forpurposes of estimating the tax base should beclose to the rate likely to be applied by theextractors in their own decisions.

For oil and gas, and for other auctionableresources, there is no general reason why boththe cash-bonus and the resource-rent taxshould not be used together in order toovercome any incompleteness of either in itscover of the economic rent. This would notin effect be charging for the economic renttwice. The combined total of the two chargeswould not simply be the sum of what each

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would realize individually. The approach toneutrality of either would not be impaired.

To summarize: it would seem that some formof prior auctioning of rights will be appropriatefor water, fishing, forestry, and radiowavelengths---in all of which some reasonableestimate can usually be made in advance of thequality of the resource and the returns to beexpected on it---and also (at least in somecircumstances) for oil and gas. For metals,prior auctioning may not be appropriate, and inthese circumstances a resource-rent-type taxmay give the best approach to a charge fallingexclusively on the economic rent. If, evenwhere auctioning seems appropriate, there isany likelihood that the price reached byauctioning may fall seriously short of the trueeconomic rent of the resource, a resource-rent-type tax may and probably should be appliedas well as the auctioning of the rights.

With renewable resources, there should ofcourse also be conditions imposed on the userto maintain or restore the value of the resource,and the lease should have a fixed period.

Note that what has been said here applies mostdirectly to new allocations of rights. Whereextracting firms have acquired rights under oneset of fiscal rules, any change in the rulesapplying to them has to be considered carefullyfor its possible unfairness and for theuncertainty that it may generate among futurefirms considering the acquisition of rights.

4.2 Taxes on rental value of land(‘unimproved’ land value)

Taxation on real property, especially for local-government purposes, is common. But, inorder to avoid distorting effects such as thediscouragement of building, such taxes shouldbe based on the rental value of the naturalresource exclusively, that is on the unimprovedor site value of the land: what the value of thepiece of land would be if it had no buildings onit but its circumstances were otherwiseunchanged---its value solely on account of itssize, natural quality, and position. It is truethat much of this value will commonly be dueto developments of human origin around it,but these are just as much a gift to the holderof the land as is the land itself. (This form oflocal-government tax is normal in Australiaand has been applied elsewhere.) For generalpurposes of efficient allocation undercompetitive-market conditions, ad-valoremtaxation of unimproved rather than improvedvalue has the advantage of neutrality: it does

not discourage building and site-improvement.

Where, as is often the case in and aroundgrowing cities, the value of land is expected torise, land may be held for speculative reasons,and this will tend to raise its price. Anyspeculative element in the price of land may beheld to be due to imperfection in the markets(specifically the absence of a satisfactoryfutures market [Tideman, 1999]). Thisraising of the price for reasons other than a risein use-value is socially inefficient in itstendency to raise barriers to using the landproductively. Provided the tax onunimproved value is frequently updated, thehigher the proportion of the value of the land atax collects, the less attractive is holding theland for speculative purposes and hence themore of this speculative element in price willbe removed with the barrier to developmentthat it represents. In these conditions the taxis better than strictly neutral in that it removesan anti-productive distortion [ibid.].

Land’s (unimproved) value may be raisedconsiderably by developments (such as urbanexpansion or changes in land-use planning)that occur quite independently of any sacrificeor other decision on the part of its owner oruser and are often, in part at least, publiclyfunded. There is a strong case in equity fordiverting at least the value of such gains to thepublic rather than leaving it with the luckyowner who happens to be holding the landwhen they occur. An ad-valorem tax on theannual unimproved value of land that isrevised as the market-value changes goessome way to meeting this requirement. (Thehigher the rate, the more thoroughly it doesso.) (But see also the device expounded insection 5.1 below.) It is no satisfactorysubstitute to auction land rights for a singleonce-off sum that allows them to be held inperpetuity. Where the state is already thelandowner but contemplates privatization ofthe use of the land, there is a great advantagein not alienating it to private buyerspermanently but instead making it availableunder a lease---on the understanding that thebulk of the payment for the lease will beassessed ex-post, that is annually or more oftenon the current use-value of the land. Unlikean oil-producing block, a piece of land is likelyto be permanently valuable, and in many urbansettings increasingly so as time goes on. Alease for a rolling period of years can give theuser considerable security of tenure, and therecan be formalized provisions for giving adeveloper the full value of improvements if theland is ever withdrawn from his use.

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However, it is obvious that, where land is theprincipal property of many poor people, anygeneral tax on land that aims to tap part of itseconomic rent must be applied with extrememoderation. One solution is to exempt fromtaxation individual holdings of land below acertain value. Also, where land has beenbought on one set of assumptions about thetaxation that will fall upon it, for the state toincrease the burden on it without similarlyincreasing the burden on other assets mightwell be regarded as unfair and should thereforeprobably be done only very gradually.

Much cited as an example of the effect ofshifting toward unimproved-value taxation isthe case of Pittsburgh in Pennsylvania, whichswitched the form of its city ‘rate’ (real-

property tax) so that the burden increased onthe value of the land itself and fell on that ofnew structures. A careful study by Oates &Schwab [1997, p.17] observes that ‘followingthe change in regime at the end of the 1970sPittsburgh experienced a striking buildingboom, far in excess of anything that took placein other cities of the region’; and theyconclude that the change in system was indeedimportant, as the theory would suggest,because of its effect in reducing forms of taxother than that on unimproved land value.

Land as a tax base has the further advantagefor the present purpose that revenue derivedfrom it is generally the province of subordinateor local governments, and these often have theresponsibility for major social expenditures.

5 VALORIZATION AND DEVELOPMENT CHARGES : LINKINGPAYMENTS TO LOCAL BENEFITS AND COSTS

5.1 Valorization

Relating local tax measures closely to benefitsreceived has been advocated as a way ofreducing the political objections [P1.9]. Amethod of doing this was undertaken veryseriously in Colombia from the late 1950s [seeDoebele & Grimes, 1977]. It was used as away of financing a number of urbanimprovements, notably roads, pavements, andsewers. It was known as valorization. Thecharges for any particular work were dividedamong the owners of properties held to befavourably affected by it. The total chargeswere not higher than the cost of theimprovement (rather modestly assessed). Butthey were allocated among property-owners inproportion to the assessed benefits that eachreceived in enhanced value. They were inprinciple lump-sum levies, but their paymentwas spread over a period of up to five years.The ratio for each paying household betweenthe sum due and its income determined thelength of spread, so that no one had to pay inany year more than a certain proportion ofincome. Other adjustments were made forthe relief of poor property-owners. It wasestimated around 1977 that about 80% of sumsdue for Bogotá had been collected by the endof the statutory five-year period, and that, ofthose that had run twelve years or more fromthe date at which the obligation had beenincurred, 96.2% had been collected [ibid,p.57].

The assessment of benefits required asystematic use of a variety of different formsof information. Appeals were allowed toRepresentatives who had been elected byproperty-owners in the city concerned but didnot themselves own property within it. For alarge project---the Sewage Master Plan inBogotá---the city was divided into three andeach of these parts into up to 100 districts forvalorization purposes.

The problem of timing---that the worksinevitably took place before much of the levieswere paid---was met by various devices.There was a revolving fund, apparently withsome initial direct state or municipal finance.Also contractors could be paid in bonds, whichthey could sell [ibid., p.60]. Property-ownerswere allowed to pay their dues in these bonds,with discounts for paying early.

On the assumption that the benefits of each ofthe projects exceeded the costs and that theassessment of relative benefits was accurateand complete, all those involved should havegained. Opposition was mainly from thericher property-owners. Doeberle & Grimesspeculate that they may have sensed that theywould have done better in a system in whichinfluence counted for more. They judgenevertheless that on balance high- and middle-income households probably benefited moreabsolutely on average than poorer ones---though this may have been due in part to initialpeculiarities of the scheme, later changed.Their final verdict is that there were benefits to

22

all income-groups but that redistributiveeffects were small and mixed [ibid., p.73].Various forms of probable gain to poorfamilies from the works concerned, in spite ofwhat they would have to pay in charges asproperty-owners or in increased rent astenants, were mentioned. Manyinfrastructural works are worth, even to poorpeople, far more than their pro-rata cost [seee.g. World Bank, 1994, p.49].

According to the 1994 World DevelopmentReport, commenting on such schemes,

Important for success are theparticipation of prospectivebeneficiaries in planning andmanaging projects, care in planningand implementation, an effectivecollection system, and---in manycases---significant advance financingfrom general government revenues sothat works may be started on time[World Bank, 1994, p.51].

5.2 Development charges

A different application along somewhat similarlines is to charge urban property-developers inadvance an estimate of the pro-rata share ofthe public-sector cost of providing additionalpublic facilities (such as water, drainage,sewerage, policing, road maintenance) thattheir development projects will entail. Thistype of device has been used in Korea and inNorth America [ibid.].

***Insofar as the infrastructural projectsconsidered here have a large ‘social’component in contributing to the basic materialneeds of poor households, these means offunding have a particular value for the presentpurpose. They place the revenue directly atthe disposal of the government agency that hasto make the expenditures. In the case ofvalorization, there is in fact no possibility ofdiversion. This advantage is added to themanifest fairness and efficiency of theapproach.

6 REFORMING PUBLIC-ENTERPRISE PRICING AND MANAGEMENT

The reference here is particularly to the pricingand management of infrastructural services---power, water, sanitation, transport,communication---but what is said refers also topublic enterprise in general.

There are two separate issues. Very largeadditional resources in many countries couldbe found for public purposes---with additionaladvantages---by charging for public utilities attheir full cost. Also inefficiency and waste inthe delivery of infrastructural services leads toconsiderable reduction of real income; thegains from eliminating this waste could beeither passed on to the consumers or retainedby the government.

An estimate for the early 1990s [World Bank,1994, pp.11, 120-1] is that mispricing ofpower, water and railways alone in developingcountries cost the governments $123 billion offiscal resources in a year. At the same timetechnical inefficiencies in power, water,railways, and roads reduced the communities’real income by $55 billion. These figures cannot simply be added, but each can reasonablybe compared with the total annual investmenton infrastructure in those countries of about$200 billion. If demand for existing servicesremained unchanged, pricing at full cost could

thus allow this figure to be increased by about60%, a figure about five times the contributionof overseas-aid-type finance to those countries’infrastructure investment.

This is potentially a huge well of additionalresources. Removing subsidies andcorrespondingly expanding services may workstrongly to the net benefit of the poor, whowould often willingly pay the full average cost[ibid., p.49] rather than be without the service.Management may be improved by a variety ofdevices, of which straight privatization is onlyone. Removing subsidies (and thecorresponding need to ration services) removesa fertile field for corruption, and for manyservices it is conducive to environmentalimprovement.

All this is of great importance; but, because theargument is well-worn and there has beenmuch opportunity and even pressure fordeveloping countries to take advantage of theresources that would be released, the subjectwill not be pursued further here

Much evidence and guidance on these mattersis given in two World Development Reports[World Bank, 1992, 1994].

23

7 COMMUNITY MOBILIZATION

Resources for social development may also besupplied without tapping the public finances---through provision of some or all of the inputsfree of charge by the members of thecommunity that is to benefit from thedevelopment. Often in these cases, however,the government still has an important role toplay as remover of obstacles, networker,catalyst, cooperator [P1.7]. Numerousexamples could be given. Two well-publicized and strikingly successful instancesmay be mentioned here. They have somecommon features.

Sewerage in Karachi squatter settlements

The story of the Orangi Pilot Project is givenbriefly in World Bank, 1992, p.109, fromwhich the following outline is derived.

When Akhter Hameed Khan began working inthe Karachi settlements he found that a priorityfor the people was removal of excreta andwastewater from the streets. They wanted atraditional sewerage system and they wantedgovernment to provide it. When attempts toachieve this failed, the Orangi Pilot Projectwas started with a little outside funding. Thebusiness of providing the sewerage wasundertaken by the people who were to use it.At the time of the account, about ten yearsafter the start of the project, more than 600,000poor people in Karachi had been supplied withadequate sewerage services at a cash cost ofless than $50 per household.

The achievement seems to have been due to acombination of innovative techniques devisedby the engineers and architects on the project;the elimination of corruption and slacknessassociated with government operations; thesupply of free labour by members of thecommunity; and eventually a communityorganization with enough influence to inducecooperation from the municipal authorities,which extended the trunk sewers.Community inputs and control, while not thewhole story, were clearly crucial.

The community’s support was mobilized andits control exercised through a ‘nested’ or‘federal’ structure of residents’ organizations.Each unit of the ‘lowest’ level of organization(based on the ‘lane’) consisted of about fifteenhouseholds, who elected a ‘lane manager’.Lane committees elected members toneighbourhood committees, each of whichcovered about 600 households. This structure

corresponded apparently to the tributary formof the sewerage system.

Water management in a Sri Lankan irrigationproject

At the end of 1980, the Gal Oya Left Bank waspart of a huge and troubled irrigationsettlement in Sri Lanka. It had over 20,000farmers who had been settled there from avariety of areas and both major language-communities, many of them regarded astroublemakers in their places of origin. Thesystem was managed from above by officials,and the farmers were notoriouslyuncooperative. There had been muchdestruction of irrigation facilities and neglectof necessary maintenance. Irrigation officialsin charge were commonly remote and arroganttoward farmers, and also negligent, and anumber were believed to be corrupt. Waterwas used very wastefully, and about a third offarmers situated downstream got no irrigationwater at all. Tamils, who were a minority inthe area, were represented disproportionatelyamong these unfortunate ‘tailenders’. Therewas considerable mutual hostility amongfarmers over water disputes. [The story isrecorded, with the charm and interest of anovel, in Uphoff, 1996.]

The Gal Oya Water Management Project,starting in March 1981, took place under theauspices of the a government research andtraining institute (ARTI) and a foreign NGO (aunit of Cornell University), with finance fromUSAID. The aim was to improve watermanagement through bringing farmers toparticipate in it---with more cooperativebehaviour among farmers and as a resultimproved performance of local officials. Akey element was the appointment of (initially32) “Institutional Organizers” (IOs), younggraduates from farming backgrounds, whowould be allocated in small groups toparticular parts of the scheme, would get toknow the farmers, and gradually, it was hoped,would inspire the creation of farmers’organizations.

These organizations were built up from below,eventually into a structure with four layers,representing the hierarchy of connectionswithin the irrigation network. The lowestlevel (each unit associated with a fieldchannel), the first to be established, was smallenough for personal acquaintance and meetingamong the farmers it covered. In this nested

24

or federal structure related to the physicalshape of a network, there are similarities withthe Orangi project.

The project met at first with varying hostilityand scepticism among officials. It alsostarted in a specially bad year when water wasunusually low and conflicts might have beenexpected to flourish.

Yet, within six weeks, 90 per cent offarmers in a pilot area over 2,000hectares were voluntarily undertaking aprogram which they devisedthemselves, with organizers’encouragement and facilitation. Theycleaned channels, some of which hadnot been cleaned for 15 or 20 years;rotated water deliveries, so that tail-enders would get a fair share of theavailable water; and saved waterwherever possible to donate to farmersdownstream who would otherwisereceive little or no supply. Suchdemonstrations of altruism andcooperation are generally consideredunlikely. They were quite remarkablebecause Gal Oya farmers, resettled intothe area two or three decades earlier,had previously been known for theirconflictual and individualistic behavior,‘even murders over water’, … [ibid,p.viii].

And the process continued and spread over theproject area, with concrete and measurableresults. ‘Within five years, water useefficiency had almost doubled in the Left Banksystem’ (ibid, p. 9). The same amount ofwater as before entering the system, nowproperly husbanded and distributed, hadproved enough to satisfy virtually all farmers,the majority of whom had regarded themselvesas short of water before.

Yet these material achievements (continuing inessentials at least for the fifteen years untilshortly before the second edition of the bookwent to press) are perhaps no more remarkablethan the changes in attitudes that lay behind

them. It was not uncommon for upstreamfarmers to go out of their way, getting up atnight for example, to make sure that thesystem of conservation worked, so thatdownstream farmers would get their share ofwater. Local irrigation officials came as amatter of routine to treat farmers with respect,and became far more diligent and helpful.Most striking of all are the efforts made onseveral occasions by Sinhalese farmers toprotect the persons and property of Tamilofficials, farmers, and fishermen in the face ofethnic violence [ibid., pp.76, 101, 102].***Schemes such as Orangi and Gal Oya aresuccesssful in part through being able tobypass the government. Not only do they notdepend directly on the public finances but theyalso escape the corruption, waste and cynicismthat frequently go with government operations.They enlist not only people’s free labour butalso their interest, enthusiasm, and ingenuity.Because they depend on general cooperation,they have to develop a form of organizationthat will make voluntary cooperation work,and this process can have valuable byproducts,as Gal Oya shows.

But can government in that case do anything tohelp bring schemes like this into being?First, it can as a matter of policy give approvalto such projects and authorize cooperation withthem in all the many fields in which they mayhave a role. Second, there is frequently avital input that the state can provide withouttaking initiative away from the community:dealing with the trunk-sewers in the case ofOrangi, providing the services of theInstitutional Organizers in Gal Oya. Third,because success often depends on acombination of community and governmentwith an NGO as initiator and catalyst, theremight be regularized government contact withthose NGOs likely to spark communityinitiatives in social development, so that allthree parties may make their appropriatecontributions if any such move is projected,and government may ensure that at least itdoes not obstruct.

8 STABILIZING FISCAL EXPENDITURE

Unplanned and fluctuating governmentspending is likely to mean that social outlayssuffer…

Securing resources for social development islikely to depend on medium-term fiscal

planning, This involves both stabilizing theoverall level of fiscal expenditure as far aspossible and setting constant-price orproportional limits to the various majorcategories of expenditure. If the first of thesetasks can be achieved, the second is

25

comparatively easy---a matter of internalpolitics---and the purposes of fiscal planningcan be fulfilled. So we concentrate on thefirst: stabilizing overall fiscal expenditure.

…but what can you do if revenue varieswildly?

This presents great difficulties if revenue isfluctuating widely. What is needed in thatcase is both(a) a consistent attempt on the part of thegovernment to relate fiscal outlays in eachperiod to trend or ‘expected’ revenue (afterallowance for planned borrowing or repaymentor lending); and (b) protection orinsurance against extreme exogenousfluctuation in fiscal revenue and nationalincome. The second (b) gives the first (a) amuch enhanced chance of success, and it mayalso be used as an incentive for attempting (a).

There are two main exogenous sources ofextreme instability to which developingcountries may now be subject.

One is the instability arising principally fromfluctuations in primary-export earnings butcapable of being aggravated by other changes,for example, in prices of food and energyimports, in world interest-rates, and inabsentee-worker remittances. We shall callthis type-A instability. It is the instabilityagainst which the IMF’s Compensatory andContingency Financing Facility (CCFF) andthe European Union’s STABEX and SYSMINschemes have been directed. It is obviouslylikely to be most acute in countries heavilydependent on primary exports.

The other, type B, is the instability peculiar sofar to the 1990s and tending to affect semi-industrialized or industrializing middle-incomecountries. This is the instability resultingfrom massive capital-flight and capable ofoccurring even when macroeconomic variablesseem satisfactory. Having imposeddisastrous shocks on six major countries(covering a tenth of the world’s population),and threatened others, over the five years up tothe time of writing, it has to be taken seriously.

Though the same countries may be susceptibleto both sources of instability, they demand twoquite different modes of treatment.

8.1 Cushioning primary-exporteconomies (for type A) [P2.6]

For type A, the CCFF has made a small andinconsistent contribution to stabilizing theexternal spending-power of the countries thathave resorted to it [see, e.g., Kumar, 1989],while there are studies that suggested that onthe whole STABEX had actually beendestabilizing [see, e.g., Herrmann, 1983].Both schemes are now under question.

There must be genuine insurance…

What is wanted is a form of insurance thatconsistently and to a significant extent bluntsthe impact of exogenous shocks on totalexternal spending-power. To make thispossible, what is needed probably is: (a) aninsurance fund to which participating countriesmake non-repayable contributions whenexogenous factors are favourable in relation totrend and receive non-repayable transfers whenthey are unfavourable, the relative magnitudesof the two for comparable deviations beingdetermined by projections of the relevantexogenous factors across the system in orderthat the scheme can expect to be self-financing; (b) to this end for each country acomposite indicator of exogenous factorsaffecting income, probably translated into acommon measure according to their impact onexternal purchasing-power; (c) provision bythe international community for backstoppingof the insurance fund in case, in spite ofreasonable planning for self-sufficiency, itshould run out of resources.

…and incentives for domestic disciplines tosmooth fiscal expenditure…

At the same time, positive encouragementshould be given to each participating countryto adopt a fiscal discipline, which relatesoutlays, as suggested above, to revenue‘expected’ according to medium-term trends.A decision might be made by the participatingand underwriting governments to confineaccess to the scheme to such countries as havecommitted themselves to such a fiscaldiscipline in an approved form. Alternativelyprivileges within the scheme might be given tocountries adopting and maintaining such afiscal discipline.

…with individual producers also cushioned.

The fiscal-stabilization problem can also bereduced insofar as the disposable income ofindividual households can be stabilized.Where crop earnings vary greatly, thetraditional approach has been to use nationalproducer-price-stabilization schemes. These

26

(though technically quite capable ofcontributing considerably to stabilization bothindividually and nationally, as has been shownby certain countries such as Papua NewGuinea) have come into disrepute because oftheir abuse by governments. In response arecently formed International Task Force onCommodity Risk Management, staffed by theWorld Bank, has been investigating thepossibilities of using market devices, such asforwards, futures, and options, in order toprovide individual crop-producers, andindividual purchasers of imported food andenergy commodities, with a measure ofstability in the prices they receive or pay.This project has large implications not only fornational stabilization but also for the welfareof the individuals concerned, potentially verylarge numbers.

8.2 Convincingly killing the ‘rapid-capital-flight’ bug (for type B)

The hazard of instability of type B requiresmeasures to stop any rapid speculative capitalflight. Because such flight depends onexpectation that it will happen, measures thatmake it appear impossible or highlyimprobable will in fact prevent it fromhappening. Two kinds of measure are likelyto serve the purpose: (i) those that discouragecapital likely to be speculative or highlymobile from moving into the countryconcerned; and (ii) those that can prevent, orare publicly recognized as being able andready to prevent, any very rapid effective-exchange-rate changes of the country’scurrency. While improvements in the micro-management of the country’s financial andbanking system may reduce the probability ofcapital flight, there is no guarantee that anyparticular level of improvement will be enoughto convince the holders of mobile capital thatrapid depreciation is impossible. Suchimprovements are likely to be in any case aslow process, and their recognition by thosewho operate in the financial markets mayfurther lag behind the reality.

Penalizing ‘short-term’ capital inflows…

(i) The first approach appears to have beenfollowed successfully by Chile with itsrequirement from 1991 until 1998 that anynon-equity foreign-capital inflow (laterextended by removing the exemption forequity purchase in the case of financial firms)should be accompanied by a fixed-one-year-term, non-interest-bearing deposit in thecentral bank, amounting to a certain fixed

percentage of the inflow. This was clearlydesigned to bear much more heavily on mobilefunds, than on capital entering with long-termintentions, and it appears to have altered thecomposition of inflows in favour of the longerterm [Eichengreen, 1999, pp.51 ff.]. AndChile did certainly avoid the ‘East Asian’ typeof capital flight that affected Mexico andBrazil. Eichengreen stresses that, to beeffective, such a deposit requirement shouldcover as nearly as possible all kinds of inflows.He argues that restrictions on inflows arelikely to be more readily enforceable thanrestrictions on outflows [P1.10].

…and ensuring that rapid capital-flight cannot pay.

(ii) The second approach is exemplified by thesuggestion from Spahn [1996] mentionedabove in section 1.4 that, if the machinerywere in place for collecting a universal tax onforeign-exchange transactions, such a tax at aprohibitive rate might be temporarily imposed(cued by an objective indicator) ontransactions out of any currency whoseeffective exchange-rate had fallen more than acertain amount below ‘trend’ (as defined sayby a moving average). The mere‘announcing’ that such a measure was in place,to be used automatically in the statedcontingency, would almost certainly do thetrick.

In fact, if the propositions in section 1.4 aboveabout the foreign-exchange-settlement systemhold true, the central bank of an individualcountry acting alone could have such amechanism in place against flight out of itsown currency, and, by merely announcing thefact, probably avert the danger. (But aninternationally agreed and coordinatedmechanism might generate more credibility.)Because it is possible to trace all thetransactions in a country’s currency that aresettled in its banking system, this wouldprobably be a fairly watertight way ofidentifying currency exchanges, and it wouldhave the advantage over the usual form ofrestriction of capital outflows that it wouldcome into force (if at all) only temporarily,that it would not require regulatory distinctionsamong different forms of capital outflow, andabove all that the announcement that it was inreadiness would very probably remove thenecessity of its ever actually being applied.Current conventional wisdom is that a countrywould be wise to leave some latitude toexchange-rate change and merely to aim by themeans mentioned to avert extreme movements.

27

But, even where a country was targeting byother means a more-or-less stable rate, theremight still be a strong case for the mechanismthat we have been discussing as a second lineof defence [P2.7].

Priorities

The priorities proposed are listed with theExecutive Summary above. They have beendrawn up by leaving aside (i) measures thathave already been the object of much externalpressure or technical assistance; (ii) solutionsof a kind likely to be highly specific toindividual countries; (iii) projects probablytoo controversial in the year 2000 to make

their consideration now fruitful. Some of thepriority items [P1] do not need internationalagreement, though coordination betweengovernments may help. Among those that dorequire international action, a distinction hasbeen made between those [P2] on whichnegotiation might perhaps begin or proceedforthwith, and those [P3] that may have to waitfor greater shifts of prevalent habits andattitudes.

Altogether there is a wide national choice, andalso a large and challenging set of internationalagenda.

Anthony Clunies Ross, December 1999

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*

* Consultation and help on the paper: In

November 1999, during a visit toNew York and Washington DC, thecompiler of this paper had the benefitof consultation with, or contributionsfrom, a number of people in andaround the United Nations Secretariat,the World Bank and the IMF. Theseincluded, from the nationaldelegations, Ambassador BagherAsadi of Iran, Eduardo Galves ofChile, and members of the Surinamand United Kingdom delegations;from the Secretariat, Under-Secretary-General Nitin Desai, IanKinniburgh, John Langmore, BarryHerman, Gautam Mukhopadhaya, LulHassan, Sergei Zelenev, AlbrechtHorn, Suresh Shende, and Oscar deRojas; from UNICEF, JanVandemoortele; from UNDP, NessimShallon; from the InternationalAssociation Against Drug Abuse andDrug Trafficking, Ronald B Brinn;from the IMF, Ke-Young Chu,Sanjeev Gupta, John Norregaard,Adam Bennett, Paul Cashin, and BlairRourke; from the World Bank, FunkeOyewole, Donald Larson, and ShaneStreifel. Special help was alsoreceived from John Conroy of theFoundation for DevelopmentCooperation, Brisbane; Nathan Ford,of Médecins sans Frontières, London;and Roger Sandilands, of theUniversity of Strathclyde, Glasgow.None of these people is responsiblefor what has emerged here, but theircontributions are gratefullyacknowledged.

29

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