Three developments over the past few weeks provide pointers to how the rich, whether individuals or nations, behave when it comes to meeting obligations.
The Paradise Papers have revealed how wealthy and powerful individuals use tax havens—some do it legitimately and some for re-routing illegal wealth—to either avoid or evade tax liabilities. The examples also highlight how this corrosive affliction equally infects industrialists and politicians.
The second example relates to the behaviour of rich nations, which have unabashedly deployed evasive tactics at Bonn, host to the 2017 UN Climate Change Conference to implement the Paris Agreement signed in 2015. The rich countries have been trying every trick to avoid meeting commitments on reducing greenhouse gas emissions, arresting climate change and funding developing and poor countries to help counter the effects of climate change. The US, European Union and some other rich countries—including Australia, Canada and Japan—have blocked efforts by developing nations to review the developed world’s performance vis-à-vis commitments.
Developing nations have been blaming the rich for sidestepping commitments made under the Kyoto Protocol, which placed mandatory emission reduction targets to be achieved during 2012-15. Later, through what is known as the Doha Amendments, the target date was extended to 2020. Developing countries have been arguing that to finalize the rule-book for the Paris Agreement, as the successor to the Kyoto Protocol, it is necessary to understand the achievements so far.
For instance, as part of the Copenhagen Accord of 2009, the developed countries pledged to provide developing nations with $30 billion during 2010-12 and $100 billion every year till 2020 to help mitigate climate change effects. The understanding was that since the industrialized nations were historically responsible for greenhouse gas emissions and the consequent global warming, they have a moral obligation to help poor countries, especially island nations, offset the adverse effects of climate change. But, as data shows, the rich are not only in breach but have been dissembling: Apart from reneging on their promise, they have also been padding funding data.
The third example crosses the Atlantic Ocean to Washington, DC, where the annual meetings of the World Bank and International Monetary Fund were held a month ago. Among other things, the agenda included the Bank’s pivot towards a new financing mode, for which it has been laying the ground over the past few months. The new strategy is called the “cascade approach", under which Bank president Jim Yong Kim proposes to convert “billions into trillions", essentially by leveraging the Bank’s financing and crowding in private investment.
The Bank released a document in September titled “Maximising Finance For Development: Leveraging The Private Sector For Growth And Sustainable Development". This builds on a preceding March 2017 document called “Forward Look—A Vision For The World Bank Group In 2030, Progress And Challenges". This document defines the scope: “... The Cascade first seeks to mobilize commercial finance, enabled by upstream reforms where necessary to address market failures and other constraints to private sector investment at the country and sector level. Where risks remain high, the priority will be to apply guarantees and risk-sharing instruments. Only where market solutions are not possible through sector reform and risk mitigation would official and public resources be applied." Currently focused on infrastructure, the approach will be later extended to financial services, healthcare, education and agribusiness.
On the surface, it sounds like a logical progression of the Bank’s strategy and, at a theoretical level, the right thing to do. The Bank, in some senses, seems to be heeding conservative economists who have for long contended that the Bank crowds out the private sector and, therefore, must step back and facilitate private sector project funding. But there’s no avoiding the tricky questions: How do you manage the political economy of reforms, who will bear the risks, how will risk be eliminated, what will be the role of user charges, what is the private sector’s exact role, and, what happens in countries with minimal private sector presence? There are also concerns about involving the private sector in healthcare and education, especially because private and public interests are rarely aligned. Many of these concerns have already played out in India.
To be fair, the Bank’s hands are tied because the rich countries, especially the US, have refused to provide additional capital. India’s finance minister Arun Jaitley was forced to comment at the annual meeting: “The possibility of generating sufficient resources through the management levers has had only a marginal impact given the scale of capital requirement, and hence, early capital infusion into WBG (World Bank Group) is an imperative... The excessive emphasis on the ‘Cascade Approach’ to determine suitability of the financing source and mechanism does not have potential to make a big difference. Applying cascade approach to every project posed to the World Bank will lead to considerable delay. We should be careful in applying this approach especially to social sector projects."
What is worrying is that the lessons of 2007 and earlier crises are being forgotten as soon as the first signs of economic growth are visible in the Western economies.
Rajrishi Singhal is a consultant and former editor of a leading business newspaper. His Twitter handle is @rajrishisinghal.
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