Commentary

Why Addis Ababa Matters For Latin America

On July 13 of the current year, Addis Ababa, Ethiopia saw the inauguration of the Third International Conference on Financing for Development.

The conference came in preparation for the newly agreed upon Sustainable Development Goals1, which are to set the structure in which international actors will work to achieve global development.

Organisations, institutions and countries all pledged to fund efforts to end poverty and achieve sustainable development2. The UN, World Bank and their partners made available USD$12 billion through a Global Financing Facility, to improve maternal health and reduce child mortality; similarly, the Bill & Melinda Gates Foundation alongside Canada, Japan and the United States, committed to a total of USD$214 million for development endeavours; other country groups and organisations followed suit.

More interestingly, the OECD and UNDP, under the same framework, announced the launching of the programme Tax Inspectors Without Borders. As opposed to pledging money, the programme is designed to help developing countries increase domestic revenues by strengthening their tax audit capacities3.

Why the OECD and UNDP’s commitment in Addis Ababa matters for Latin America is a loaded question.

Tax Inspectors Without Borders (TIWB) is a project that acknowledges what the Monterrey Consensus in 2002 and the Doha Declaration in 20084 advocated for:

Financing development is not only a matter of international aid and donations, but of a country’s own ability to fund, in a sustained manner, their own development projects.

In this vein, the TIWB programme will assist Latin America with targeted tax audit strategies and with matters of international taxation. The latter being a particularly interesting characteristic of the plan as the continent’s economic growth is increasingly threatened by the scale of illicit financial (out)flows – at around 3% of GDP5 – from tax evaders and criminals.

Improving tax-auditing capacities is an important tool to tackle tax evasion and thus increase a country’s revenues. In the early 2000’s, Chile was experiencing high Value Added Tax (VAT) evasion, with taxpayers blatantly avoiding payment by faking invoices. The country set on a reform venture of their auditing system: they increased the number of auditors and gave them specialized training, simplified the registration process and introduced electronic invoicing to their system.

The non-compliance rate fell from 20% to 15% in the course of 5 years6.

Recently, with one of the pilot projects of the TIWB programme in Colombia, positive results were evidenced when, after a series of tax audit advice and guidance were set in motion, tax revenue increased in the country USD$36.6 billion in 2011 to USD$47.7 billion in 20147.

A sound tax system that can efficiently mobilise national resources is essential for Latin America’s fight against poverty and subsequent development.

With 13.3% of the continent’s people living in poverty8 (around 80 million people), national programmes that target the poor, such as conditional cash transfers (CCTs), need a stable flow of income. CCTs in Latin America are financed by national governments, and have proven to have inequality-reducing effects in Chile, Mexico, and Brazil9. In the latter countries, their CCT programmes achieved to reduce overall inequality by 5%10.

Indeed, most of the world’s programmes targeted at the poor are actually funded by national governments11. This makes stable and sufficient tax revenues a moral imperative.

Increased revenues are not only beneficial for targeted programmes, they also augment the ability of governments’ to invest in the provision of public goods, such as infrastructure, education, health. The volatility inherent to Latin American countries’ tax systems12 due to high levels of tax evasion and implementation problems is therefore detrimental not only for the poor, but for society as a whole.

Tax Inspectors Without Borders is essentially tackling under-financing from the roots. It is offering Latin America and other developing regions the opportunity to strengthen one of its core institutions; successful pilot programs, such as the Colombian case cited above, certainly lift hope of the benefits that may arise for our continent once the programme is properly in place and full-fledged.


1 The adoption of the SDGs by Member countries is set to happen in September 2015. For the list of the 17 goals agreed upon, visit: http://www.un.org/sustainabledevelopment/sustainable-development-goals/

2 A concise article on the Conference’s highlights can be found here: https://storify.com/un/third-international-conference-on-financing-for-de

3 The full initiative can be found here: http://www.undp.org/content/undp/en/home/presscenter/pressreleases/2015/07/13/tax-inspectors-without-borders-oecd-and-undp-to-work-with-developing-countries-to-make-tax-audits-more-effective.html#

4 Both agreements highlight the importance of building local capacity to mobilise national resources. The OECD summarises what this means for trade: http://bit.ly/1fZ4vXj

5 For a panel report on illicit financial flows from Latin America and other developing regions, refer to the 2014 report of the Global Financial Integrity Institute: http://www.gfintegrity.org/report/2014-global-report-illicit-financial-flows-from-developing-countries-2003-2012/

6 Russell, Barrie (2010). Revenue Administration: Developing a Taxpayer Compliance Program. INTERNATIONAL MONETARY FUND: Fiscal Affairs Department. Pp.13.

7Source of total tax revenue in Colombia: Author’s calculations with data from Recaudo tributario http://www.dian.gov.co (DIAN: Dirección de Impuestos y Aduanas Nacionales) Exchange rate: end of period Banco de la República. Figures differ from the official numbers given in the TIWB press release at: http://www.undp.org/content/undp/en/home/presscenter/pressreleases/2015/07/13/tax-inspectors-without-borders-oecd-and-undp-to-work-with-developing-countries-to-make-tax-audits-more-effective.html#

8 For a full note dedicated to explaining poverty in Latin America: http://www.economist.com/blogs/americasview/2014/01/poverty-latin-america

9 For full study on CCTs in the three countries, refer to the working paper Conditional Cash Transfers in Brazil, Chile, and Mexico: Impacts Upon Inequality. Available at the International Poverty Centre’s website: http://www.ipc-undp.org/pub/IPCWorkingPaper35.pdf

10 Working Paper Conditional Cash Transfers in Brazil, Chile, and Mexico: Impacts Upon Inequality. (pp. 11). Available at the International Poverty Centre’s website: http://www.ipc-undp.org/pub/IPCWorkingPaper35.pdf

11 Banerjee, Abhijit and Duflo, Esther (2012). Poor Economics. Penguin Books. Pp. 5.

12 Gómez Sabaini, Juan Carlos & Jiménez , Juan Pablo. (2012). Tax Structure and Tax Evasion in Latin America. CEPAL. Online source: http://repositorio.cepal.org/bitstream/handle/11362/5350/S1200023_en.pdf?sequence=1

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Experiences, Learning

The Age of Sustainable Development: What gets measured, gets managed

This is a series from our writers Holly Narey and Michelle Gonzalez Amador who are taking Jeffrey Sachs’ online course The Age of Sustainable Development. They will be sending out an update on the course every week. Click here for more on all our writers. Check this tag to see all posts on this topic.

Have you heard the phrase ‘what gets measured, gets managed’? Jeffrey Sachs has, apparently, and he is a big fan.

When talking about development projects in a wider context, it is hard to get a clear picture. Part of the reason of this is because most projects have such a small impact in the overall development framework. It is easy to have a pessimistic view when we remember the statistic which introduced us to this course: there are one billion people living in extreme poverty.

This one statistic, however, does not show the progress over time. In the 1980’s, for example, the World Bank calculated that a little more than half of the people n the developing world lived in extreme poverty. By 1990, it had gone down to 45%, and by 2010, around 20%.

Setting goals

Lesson 5 of the series focused on the importance of setting goals for development, using the Millennium Development Goals as an example.

Economic progress, Sachs echoed from Keynesian ideas, is not the permanent problem of the human race – given no important wars and no significant population increase, that is. The real problem lies in concentrating efforts for a particular goal. That is true achievement of the MDGs: an ambitious project to fight extreme poverty. They are clear goals for people to understand, to promote, and to use to urge governments to take serious action that could end extreme poverty. They may be ambitious, and to a certain point, onerous, but they serve the purpose of setting the ideal to help mobilize efforts that would otherwise be disperse. Beneath those eight, broad and ambitious goals, there are twenty one specific and quantified targets and sixty detailed indicators that have better allowed us to measure the progress made.

The story so far

Because of the unenforceable nature of the MDGs, efforts may be uneven or prioritized differently from country to country. For example, China’s remarkable economic growth is a big part of the success of reduction of poverty (MDG 1). However, more globalized achievements have been found in the steady decline of malaria and other tropical diseases.

The establishment of the MDGs has both propelled the scaling up of development projects, and also permitted us to identify the remaining challenges. These include:

  • Agriculture in Africa. The source of food supply for the continent faces many obstacles. Namely the low yield and the lack of funding to invest in better management for irrigation, good seeds variety, etc.
  • The lack of government investment in infrastructure. A particular issue in certain parts of the developing world, this leaves regions isolated, hindering trade and its spillovers.
  • High fertility rates. Not only does this pose a problem for urban-planners but also, in terms of food and other production, directly influencing the environment.
  • Food security. As broad as this is it continues to be one of the biggest challenges if poverty eradication wishes to be environmentally sustainable.

How to tackle poverty

Sachs makes an interesting three-pronged proposal to tackle poverty:

  1. Investing in GMOs. Sachs used the case of India’s green revolution in the 60’s to back this point up. Certainly a controversial topic, as GMO production is, to my knowledge, monopolized by MONSANTO. Sachs himself did not say it, but perhaps it is important to note that, for such an action to work, certain prerequisites need to be met, particularly concentrating research in solving specific agricultural challenges in poor regions, as opposed to general increase in food production.
  2. Official Development Assistance. Otherwise said, a temporary injection of funds for targeted investments so that a poor place can jump-start a process of sustainable growth. Highly contested by other experts, such as Easterly or Moyo, who’ve used Sach’s own love for hard data against himself by exposing the side-effects of Aid money in African countries, it is probably the most complex solution, for it involves political will and efficient management from the part of the receiver-country. Sachs argues that because of the inherent risks of borrowing money, such as debt-crisis, a financial grant could provide the initial investment a country needs to leave the poverty-trap. Sadly, it has been shown that certain countries have become dependent on AID money, in detriment of initiatives to mobilize their own resources.
  3. Practical interventions: specifically, the Millennium Villages. Implementation has always been a big issue for development practitioners. By designing such a project and applying the MDGs as a guiding principle, Sachs wished to understand through empirical evidence which where the hardest steps of implementation. In its eighth year, the extremely controversial Millennium Villages project has, Sachs argues, shown that it is possible to help mobilize a community. ‘By harnessing the energies of communities, with a little bit of help, best practices, etc. tremendous things can be achieved’ concluded Sachs. Probably the solution that concentrated more on explaining the project than on explaining the findings, it still gave a spot-on argument. Realizing the potential of social capital in each community can lead to high-impact beneficial changes in a development framework.

Lesson 5 has been the most controversial lesson thus far, exposing the personally biased ideas of the professor. Whatever the faults of Sachs and despite his many detractors, he has clearly held onto his vision of ending poverty sometime soon.

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Learning

The Age of Sustainable Development: “Economic development is new”

This is a series from our writers Holly Narey and Michelle Gonzalez Amador who are taking Jeffrey Sachs’ online course The Age of Sustainable Development. They will be sending out an update on the course every week. Click here for more on all our writers. Check this tag to see all posts on this topic.

The third lecture started by Sachs pronouncing the concise phrase in the title and then followed with a construction of the current state of the global economy.

Both the first and the second session were characterized by an interactive model, in which the video-lesson would engage you in the learning process by allowing you to identify the challenges ahead and, in the case of people from a developing country (such as myself), identify your context with the one being presented by Sachs. This third lesson, however, was slightly different.

Professor Sachs managed to relate each subject to one key idea from which all sorts of issues stem. While “Economic development is new” is a strong phrase filled with possibilities, what followed added a layer of historical interest: “It began after the Industrial revolution. Before, the world was equal. Equally poor.”

However gloomy the prospect of a future in a world with a widening income gap and pollution that appears irreversible might seem, Sachs reminded us how, sometimes, it is necessary to look at the past and remember the real context of such challenges. In terms of the course, introducing at this point a brief history of the evolution of the modern economic world after two sessions of challenge facing and context reviewing, is, I think, fantastic.

My take: there might still be challenges ahead, but we have come very far in the development process!

Economic growth, says Sachs, has one key ingredient: technology. But, for the process to begin, various pre-conditions were needed. It is a process of interaction that starts with know how, followed by the connection of the different geographical economic areas and processes: raw produce from rural areas must reach the city where it will be manufactured, adding value, and then sold back to the rural areas.

The UK was the lucky region that met all of the conditions early and escaped from the extreme poverty threshold (approximately $2000/person), and, as a form of ripple effect, its neighbouring countries soon caught up, leaving the peripheries out of the process. Sachs went on,

“Modern economics combines the natural resource base, the technological know how, and the spreading market economy”.

The question arises, then, how can we make sure every country – not just the lucky ones – has the opportunity to be part of the economic growth process?

We were presented with two broad but spot on ideas. The first way to do so is for a country to invest in continuing innovation and thus generate endogenous growth (hint: think of a returns to scale process). The second way for process inclusion is by obtaining the existing technology from other nations. Sadly, the latter leaves the country in a constant catch-up dynamic.

Sachs, of course, is a promoter of endogenous growth. He pointed towards the idea that the future of the world depends on the increasing production of technology. Since we are not allowed, legally, to give out all of the information of the course, I will close up this entry with a key argument for you to further analyze: economic (and sustainable) development now depends on proper diffusion of the know how!

(Hint: if your answer to this question doesn’t involve ‘globalization’ in it, you’re doing it wrong)

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Learning

Age of Sustainable Development: Introduction

This is a series from our writers Holly Narey and Michelle Gonzalez Amador who are taking Jeffrey Sachs’ online course The Age of Sustainable Development. They will be sending out an update on the course every week. Click here for more on all our writers. Check this tag to see all posts on this topic.

If you are passionate about international development, you’ve probably heard/read the name Jeffrey Sachs more times than you can count. Whether you disagree completely with his proposals or you absolutely adore his ideas and intend to follow his footsteps (see these Foreign Policy articles for overviews of Sachs’ view and his opponents’ views), reading him and judging is probably a given if you want to get into global development.

So, as a form of rite of passage from a development-curious person towards an opinionated development intern, we’ve (that is, Holly and Michelle) decided to take Sach’s new online course “The Age of Sustainable Development” on Coursera.

Part of what attracted me (Michelle) to the course was coherence. Sachs proposes a multidimensional approach for development and yet, he seemed unreachable for a regular student outside of the New York area. Joining the Coursera team shows commitment to the idea of trying to make education more accessible to people around the world, as one of the challenges within the societal dimension.

The course itself has a simple design. The lectures, split into manageable chunks of between ten to fifteen minutes, were interspersed with questions ensuring that any listener would remain focused. Each session is then followed by a quiz, that focuses on what should have been learnt from the lessons, along with building participants’ awareness of information tools such as gapminder.com or data.worldbank.org/indicator. The quiz is designed to encourage the use of both qualitative and quantitative skills, asking you to interpret graphic data and calculate possibilities. Finally, the course website has a forum feature, which allows you to create and respond to threads, opening the possibility of discussion on a particular topic of interest from the lesson with other users/students.

The first session was enjoyable. As enjoyable as looking at shocking statistics about the current state of affairs is, of course. It is true that some of the facts that were introduced were not new to us; however, they served to set the context we will be working on, in and outside the course. An example of the more well known facts with which he opens up the subject were:

  • 7.2 billion people currently inhabit the world, out of which more than 1 billion live in extreme poverty.
  • In a world with greater economic production, the population has risen alongside that – it more than tripled in the 20th century. We are expected to reach 8 billion people by 2024 or 2025.
  • Half of this expanding world population lives in cities, designed to support a certain(…ly far smaller) amount of people. By 2030 the percentage will rise to 70%. An important part of human development will thus depend on sustainable urbanization, smart cities, smart architecture, smarter technological systems, etc.
  • Misguided technological advancement can physically (i.e. environmentally) hurt the earth. Not only are the CO2 emissions affecting the ozone layer, but they affect the chemistry of the ocean, making its water more acidic. The way we put nitrogen based fertilizers into the soil, in such large amounts, changes the normal nitrogen cycle.

This definitely gives you something to think about…

But while all of the technical information was very informative there were two main ideas which showed why the course will be a great time investment. The first one being that Sustainable Development is not only analytical but also a normative for an ethical approach. What is a good society? From this basic question Sachs presents his idea about the triple-bottom-line approach, economy, society, and environment. And, of course, the list of words that compose the ‘development jargon‘ these days: socially inclusive, environmentally sustainable, good governance – the list goes on.

The second idea stems from all of the topics presented: at the essence of Sustainable Development is problem solving. A starting point towards defining sensible goals for a crowded, interconnected planet. This problem solving focus is strongly emphasised by Sachs.

If we keep these two ideas in mind while watching the video-lessons, we might actually be able to understand the concept of Sustainable Development objectively. Building on what is said (in, admittedly, Sachs’ well-known perspective) but without limiting ourselves to it.

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