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E/CN.17/1997/2/Add.23 |
Economic and Social Council
Distr. GENERAL
22 January 1997
ORIGINAL: ENGLISH
COMMISSION ON SUSTAINABLE DEVELOPMENT
Fifth session
7-25 April 1997
Overall progress achieved since the United Nations
Conference on Environment and Development
Report of the Secretary-General
Addendum
Financial resources and mechanisms*
(Chapter 33 of Agenda 21)
(* The present report was prepared by the Department for Policy Coordination and
Sustainable Development of the United Nations Secretariat as task manger for
chapter 33 of Agenda 21, in accordance with arrangements agreed to by the
Inter-Agency Committee on Sustainable Development (IACSD). It is the result of
consultation and information exchange between United Nations agencies,
international and national organizations, interested government agencies and a
range of other institutions and individuals.)
CONTENTS
Paragraphs Page
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . 1 - 7 3
I. KEY OBJECTIVES AND MAJOR EXPECTATIONS . . . . . . . 8 - 9 4
II. SIGNIFICANT ADVANCES IN THE FINANCING
OF SUSTAINABLE DEVELOPMENT . . . . . . . . . . . . 10 - 18 4
A. Private capital flows . . . . . . . . . . . . 11 - 14 4
B. External debt . . . . . . . . . . . . . . . . 15 - 18 5
III. PROMISING CHANGES IN THE FINANCING
OF SUSTAINABLE DEVELOPMENT . . . . . . . . . . . . 19 - 30 6
A. Domestic economic instruments . . . . . . . . 20 - 23 7
B. National environmental funds . . . . . . . . . 24 - 25 7
C. Domestic private investment in
sustainable development . . . . . . . . . . . 26 - 27 8
D. International financial mechanisms . . . . . . 28 - 30 8
IV. UNFULFILLED EXPECTATIONS . . . . . . . . . . . . . . 31 - 35 10
A. Official development assistance . . . . . . . 32 - 35 10
B. International innovative mechanisms . . . . . 36 - 39 10
V. EMERGING PRIORITIES . . . . . . . . . . . . . . . . 40 - 44 11
Tables
1. Total net resource flows to developing countries . . . . . . . 13
2. Official development assistance performance of OECD
Development Assistance Committee countries, 1992 and 1993 . . 14
INTRODUCTION
1. The present report reviews progress made in the implementation of the
objectives set out in chapter 33 of Agenda 21 (Financial resources and
mechanisms), taking into account the decisions taken by the Commission on
Sustainable Development on that subject in 1993, 1994, 1995 and 1996, at its
first, second, third and fourth sessions. Chapter 33 of Agenda 21 provides an
agreed framework for the financing of sustainable development, and is related to
the implementation of all other chapters of Agenda 21.
2. Agenda 21 acknowledges that, in general, the financing for its
implementation will come from a country's own public and private sectors.
However, it clearly places the financing of sustainable development within the
global economic context by stating that developing countries will need
substantial new and additional funds for the implementation of sustainable
development programmes, and that official development assistance (ODA) should be
a main source of external funding for those countries, especially the least
developed countries.
3. Interestingly, the most important source of external finance for
developing countries since the United Nations Conference on Environment and
Development (UNCED) has been private capital flows, particularly for Latin
American and Asian countries that have embraced outward-looking strategies and
sound macroeconomic policies. Nevertheless, the conclusions and recommendations
of international experts have regularly emphasized that while private flows are
a necessary condition for sustainable development they are not sufficient,
because first, most of the poorest countries do not obtain substantial amounts
of private capital, and second, sustainable development requires some types of
social and environmental investments that do not attract private capital.
4. There have been three main developments concerning the flow of public
resources to developing countries since UNCED: first, a decrease of ODA in both
absolute terms and with respect to donors' gross national product (GNP), which
at 0.27 per cent in 1995 was far from the Agenda 21 target of 0.7 per cent;
second, successful implementation of many debt relief programmes, which have
improved the debt indicators of many developing countries or slowed their rate
of deterioration (although further efforts are still needed in sub-Saharan
Africa and other highly indebted poor countries); and third, some shifts in
official development finance toward social and environmental areas (see
table 2).
5. As regards innovative financial mechanisms that can raise new and
additional funds, some have already been implemented. Although so far they have
raised only a small amount of resources, they represent a promising source of
finance for the future. Among those mechanisms the most important at the
national level have been economic instruments, such as pollution charges, taxes,
subsidy reductions and tradeable permit programmes. At the international level,
some promising progress has been achieved by joint implementation programmes,
international environmental funds and national environmental funds, which have
started attracting external financial resources.
6. In the area of finance, the work of the Commission in the UNCED follow-up
process has benefited from work by the Bretton Woods institutions, the
Organisation for Economic Cooperation and Development (OECD) and other
international organizations. In addition, three expert group meetings on
financial issues of Agenda 21, held at Kuala Lumpur in 1994, at Glen Cove, New
York, in 1995, and at Manila in 1996, which were sponsored by various donors,
provided valuable inputs. A fourth expert group meeting on financial issues was
convened at Santiago at January 1997, sponsored by the Governments of Chile and
the Netherlands.
7. Sections I-IV below provide a more detailed assessment of the performance
of financial mechanisms since 1992, and categorize major developments as
significant advances, promising changes and unfulfilled expectations.
I. KEY OBJECTIVES AND MAJOR EXPECTATIONS
8. The main objectives of chapter 33 of Agenda 21 are (a) to establish
measures concerning financial resources and mechanisms for the implementation of
Agenda 21; (b) to provide new and additional financial resources that are both
adequate and predictable; and (c) to seek the full use and continuing
qualitative improvement of funding mechanisms to be utilized for the
implementation of Agenda 21.
9. Agenda 21 recognizes that, in general, a country's own public and private
sectors should provide the bulk of the resources for sustainable development
financing. However, ODA was expected to be a main source of external funding
for developing countries, especially for least developed and other low-income
developing countries. Thus, UNCED reaffirmed the target of 0.7 per cent of
developed countriesþ GNP for ODA. Debt relief of both low and middle-income
developing countries was also an explicit concern in Agenda 21, which called for
measures to address that problem. Chapter 33 also urged that policies be
implemented to increase the level of foreign direct investment (FDI). In
addition, UNCED raised expectations about the contribution of innovative
financial mechanisms to the mobilization of new and additional financial
resources.
II. SIGNIFICANT ADVANCES IN THE FINANCING OF SUSTAINABLE DEVELOPMENT
10. The two major developments concerning financial resources and mechanisms
for sustainable development since UNCED are the unexpectedly large increases in
private capital inflows to developing countries, and significant progress
towards the alleviation of the external debt burden of developing countries.
A. Private capital flows
11. The average of annual private capital flows - excluding export credits -
to developing countries from OECD Development Assistance Committee (DAC)
countries in the three-year period from 1993 to 1995 was about $126 billion
(about 62 per cent of the total net resource flows from DAC countries to
developing countries), which compares with a $60 billion annual average for the
period 1990-1992 (which then represented about 45 per cent of the total net
resource flows from DAC). More importantly, FDI from DAC countries, a type
of investment that is more stable and reliable than portfolio investments and
international bank loans in the long term, has increased from an annual average
of $25 billion (about 19 per cent of total net resource flows) in the period
1990-1992 to an annual average of $47 billion (about 23 per cent of total net
resource flows) in the period 1993-1995 (see table 1). In real terms, both
total private flows and FDI have almost doubled between 1992 and 1995.
12. Developing countries have expressed their concern that private capital
flows, in particular portfolio investments, are very volatile, which poses a
threat to the stability of exchange rates. Recognizing that, in general, large
external capital movements are likely to be the market response to changes in
expectations about domestic economic performance, the 1995 meeting of the
International Monetary Fund (IMF) Interim Committee enhanced the IMF ability to
monitor the economic policies of member countries and increase the transparency
of national policies through improved and more timely provision of data. IMF
has also substantially increased its capacity to provide emergency funds in case
of future threats of currency collapse. At its fourth session, the Commission
recommended further in-depth studies on that issue.
13. Developing countries are concerned that private capital flows are
concentrated in a few developing countries (12 countries accounted for about
80 per cent of total private flows and three quarters of FDI in developing
countries during the first half of the 1990s), mostly middle-income countries in
Asia (which accounted for about two thirds of the expansion of total private
flows) and Latin America that have adopted outward-looking strategies and sound
macroeconomic policies.
14. It can be argued that if one measures those flows relative to developing
countriesþ GNP, both private flows and FDI have been more evenly distributed
than their absolute figures indicate. In fact, the average ratios of FDI to GNP
have increased for all developing regions since 1990. Nevertheless, an analysis
of those figures across countries shows that the ratio of FDI to GNP of the
poorest countries is still less than half of that of middle-income developing
countries.
B. External debt
15. One of the most important reasons why the poorest economies do not attract
private capital is their high level of external debt relative to export
capacity. The high level of debt payments has a negative effect on domestic
investment, including the investment necessary to attract private capital.
16. Debt-to-export ratios - the main indicators of an economy's ability to
repay its debt - of most middle-income developing countries has substantially
improved in the 1990s. The debt problems of the 1980s for middle-income
developing countries have been alleviated through a combination of sound
domestic economic policies, liberalization of international trade and capital
movements, rescheduling of bilateral external debt and the introduction of new
instruments, such as Brady bonds and debt conversion programmes (of which debt-
equity swaps have undoubtedly been the most successful, particularly in Latin
America until 1994). However, the debt burden of heavily indebted low-income
countries has not improved in the last several years. In fact, those countries
paid only 39 per cent of their total debt service in 1994, and their average
debt service ratios are expected to more than double between 1994 and 1997.
That burden has obviously hampered their development potential and will continue
to do so. In fact, the external debt problem of low-income countries has been
repeatedly identified by the Commission as a threat to achieving sustainable
development, and a more comprehensive and durable approach to assist those
countries has been recommended (see E/CN.17/1996/38).
17. During the past few years, important efforts have been made to address
that issue. Bilateral donors, particularly the Paris Club, have gradually put
in place more comprehensive debt rescheduling and debt relief programmes that in
some cases may eventually amount to 80 per cent reductions of selected debt
stocks. The International Development Association (IDA) Debt Reduction Facility
has also had an important impact on reducing the commercial debt of the poorest
countries through buy-back programmes. Those initiatives have achieved the
stabilization and even reduction in some cases of the debt stocks of the
countries involved, and have thus helped to decrease the rate of growth of the
ratio of debt stock to exports. However, that ratio is still unsustainably high
and continues to increase. One of the reasons for that deterioration, despite
the efforts of debt alleviation programmes, is that such programmes have only
addressed partial aspects of the debt problem, leaving some of the largest
components of the external debt problem, such as multilateral debt, unresolved.
18. In that context, the initiative of the IMF Interim Committee and the IMF
Development Committee, which at their April 1996 meeting proposed a new
framework of action to resolve the debt problems of poor heavily indebted
countries, is a real breakthrough, because that initiative is based on a
comprehensive approach to the solution of the debt problem that recognizes that
all the main creditors (bilateral and multilateral) of a particular country
should cooperate and coordinate their contributions to the alleviation of the
recipient's debt burden. The initiative will target the external debt of 41 of
the world's poorest and most heavily indebted countries, and its implementation
will be conditional on sound domestic economic policies. Total costs are
estimated at $5.6 billion to $7.7 billion (depending, among other things, on the
export performance of the debtor countries), provisionally divided among
multilateral (57 per cent), bilateral (41 per cent), and private (2 per cent)
creditors. Plans call for phased debt relief by bilateral and private creditors
to be topped off by enough multilateral debt relief to bring countries to a
sustainable debt position.
III. PROMISING CHANGES IN THE FINANCING OF SUSTAINABLE DEVELOPMENT
19. Given the current scarcity of public resources, additional funds need to
be mobilized through increased use of economic instruments (general tax reforms,
eco-taxes, subsidy reduction and tradeable permit schemes), increased
private-sector involvement, national environmental funds and innovative
international financial mechanisms. In addition, further shifts in priorities
of international organizations in the allocation of resources to sustainable
development objectives are required.
A. Domestic economic instruments
20. Domestic economic instruments can contribute to the financing of
sustainable development in two ways: as an incentive to reduce environmentally
harmful activities and as a source of revenue for sustainable development
programmes. Proceeds from environmental economic instruments implemented to
date, however, are sometimes returned to industry to finance environmental
investments and sometimes used to reduce other taxes, thus becoming "revenue
neutral".
21. In principle, economic instruments could be effective and efficient
instruments for financing sustainable development. In practice, however, their
implementation has been limited due to important political and administrative
obstacles. The most important obstacles are their perceived effects on income
distribution and competitiveness, the need for a well-developed administrative
infrastructure to levy them, and the lack of full knowledge about their
economic, social and environmental consequences. However, such mechanisms are
increasingly being used in OECD countries, as well as in some developing
countries and economies in transition.
22. Examples are general tax reforms involving new taxes on fossil fuels
compensated by changes in income and general energy taxes in Norway, Denmark,
and Sweden; domestic eco-taxes, such as carbon taxes in Finland and the
Netherlands: taxes on air and water emissions in several Eastern European and
Asian countries; taxes on pesticides and fertilizers in several OECD countries;
subsidy reductions, such as the reduction of environmental unfriendly farm and
coal production subsidies in several OECD counties; and tradeable permit
programmes such as the tradeable sulphur dioxide emission permit scheme in the
United States of America and transferable fishing quotas in Iceland and New
Zealand.
23. With regard to OECD countries, studies have shown that first, economic
instruments do affect the behaviour of polluters and users in the expected
direction; second, in general, undesired effects of economic instruments can be
compensated for by the use of other policy instruments; and third,
redistributional schemes can help to protect industries from the potential loss
of international competitiveness that may result from the implementation of
economic instruments.
B. National environmental funds
24. Environmental funds are innovative financing mechanisms that can pool
revenues from various types of resources (earmarked taxes and charges,
concessional grants or loans, debt-for-nature swaps, interest on endowments
etc.) to provide long-term funding for environmental programmes. The success of
those mechanisms is reflected in their growing number in developed and
developing countries and economies in transition that have adopted them.
25. Advantages of those mechanisms are that they provide a relatively stable
source of funding; attract finance from diverse sources, including external
sources; provide accumulated expertise in identifying and managing environmental
projects at the national or local levels; and can build capacities of local
communities and non-governmental organizations. However, they do not always
address broader social and economic concerns, they do incur relatively high
administrative costs, and they may not always provide the legal and financial
safeguards that donors require.
C. Domestic private investment in sustainable development
26. Private-sector investment can be very effective in promoting economic
growth and can at the same time have positive social or environmental effects.
Examples are efficient power production, water supply and treatment, renewable
energy, waste management, and the application of cost-effective and clean
technology.
27. In that context, the Commission has repeatedly reminded Governments of the
necessary conditions for sustained private investment, including the adoption of
macroeconomic, legal and environmental policy frameworks that are clear,
credible and stable. In addition, the protection of property rights and access
to finance by the private sector are of great importance. Access to finance can
be facilitated by deregulated domestic financial markets, promoting co-financing
and venture capital funds, build-operate-transfer schemes for the financing of
infrastructure projects, and privatizing utilities.
D. International financial mechanisms
28. There are some successful models for international financial mechanisms,
such as joint implementation programmes (e.g., the pilot phase for activities
implemented jointly (AIJ) established by the Conference of the Parties to the
United Nations Framework Convention on Climate Change at its first meeting and
international environmental funds (e.g., the Global Environment Facility (GEF)
and the Montreal Protocol Environmental Fund (MPEF)) which have transferred
developed country resources to developing countries for investments in
sustainable development related to the protection of the global environment.
29. After the successful completion of its pilot phase, GEF was replenished
by $2 billion in 1994. Joint implementation programmes have expanded
significantly: the secretariat of the United Nations Framework Convention on
Climate Change reported to the Conference of the Parties to the Convention at
its second meeting 32 ongoing or planned AIJ activities worldwide. However,
both the GEF and AIJ programmes are still small relative to the need for
external funds for the implementation of the global aspects of Agenda 21.
30. The incentives for developed countries to participate in joint
implementation programmes could be substantially enhanced through the
establishment of binding commitments on global and national emission reduction
targets (which are absent during the current AIJ pilot phase of the United
Nations Framework Convention on Climate Change, and are due for review at the
end of the decade). Further replenishments of international environmental funds
should be considered, and the 1997 negotiation for a new three-year
replenishment of GEF will have special importance in that regard. Both joint
implementation programmes and international environmental funds are seeking more
involvement of non-governmental organizations and private-sector investors in
existing and new programmes. GEF and MPEF provide good examples of how public
funds can leverage private resources.
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31.Financing sustainable development: the World Bank
Since UNCED, the World Bank has embraced the concept of sustainable
development, balancing social and environmental concerns in its lending
programmes. There are two promising developments that confirm that trend.a/
First, the increased interest of the World Bank in the environmental and social
effect of its projects in developing countries, and second, the tenth and
eleventh replenishments of its concessional lending arm, IDA.
As regards the environmental and social concerns of the World Bank,
starting from a small portfolio for environmental issues before UNCED, the
Bankþs loan portfolio for environmental projects reached $10 billion in 1995 and
$12 billion in 1996 (distributed across 137 projects in 62 countries and 153
projects in 68 countries, respectively). Thus, about 36 per cent of the Bank's
lending since UNCED has either targeted the environment directly or had some
form of positive environmental effect. Furthermore, in 1995 the Bank started
providing -green accountingþ of the $87 billion it has committed in the past
four years (1993-1996). It has also actively participated in the management of
GEF and MPEF, and has started incorporating environmental and social assessments
into Bank-financed projects.
The main challenges for the future role of the World Bank in sustainable
development are to complement project-specific environmental assessments with a
sectoral and regional environmental focus; increase the importance of social
assessments of its projects; increase the involvement of the private sector in
sustainable development projects; and improve available information on global
and environmental trends.
As to funding for IDA, agreements have been reached on the funding for
IDA 10 and IDA 11 since UNCED. Agreement on the funding of IDA 11 was reached
in March 1996, after difficult negotiations. That pledge, together with other
IDA resources (from IDA 10 carry-over, credit payments and contributions of the
International Bank for Reconstruction and Development), will enable IDA to fund
a programme of special drawing rights (SDR) of 14.5 billion over the next three
years, down 6 per cent on estimated requirements and also below the SDR of
16 billion of IDA.b/
a/ See Mainstreaming the Environment, 1995 issues, and Finance and
Development, December 1996.
b/ See Development Cooperation, 1996 report (Paris, OECD).
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IV. UNFULFILLED EXPECTATIONS
32. The major unfulfilled expectations can be found within the areas of ODA
and international tax schemes.
A. Official development assistance
33. The average ODA in the period 1993-1995 was lower than in the period 1990-
1992, both in absolute terms and as a percentage of GNP (which at an average of
0.29 in the period 1993-1995 was the lowest level in decades). Only four
countries achieved the Agenda 21 ODA goal of 0.7 of donor's GNP: Denmark,
Sweden, Norway and the Netherlands (see table 2). Measured at 1994 prices and
exchange rates, ODA decreased by 9 per cent between 1990 and 1995 (see table 1).
34. The disappointing performance of ODA is particularly important for the
poorest developing countries (average ODA to the least developed countries has
decreased to below 0.10 of donors' GNP in the first half of the 1990s, far below
the 0.15 target of the United Nations Programme of Action for the Least
Developed Countries), which have little access to other sources of external
finance.
35. The main reasons for the poor performance of ODA in the early to mid 1990s
include budgetary austerity in donor countries, poor performance of aid
recipients and the belief of some donor countries that private capital flows can
substitute for ODA to some extent.
36. At its third session, the Commission proposed ways to enhance the
effectiveness of ODA through the elaboration of national sustainable development
strategies, with the participation of all interested parties; the use of ODA to
leverage additional domestic and external resources, through such schemes as co-
financing, joint ventures, underwriting of country risks and venture capital
funds; and the promotion of public and political support in donor countries for
raising ODA levels.
B. International innovative mechanisms
37. Traditionally, Governments have been unwilling or reluctant to cede
sovereign taxation power to international bodies. As a result, not much
progress has been made since UNCED in the discussion of international taxes,
such as the international tax on air transport, the Tobin tax or an
international carbon tax.
38. In its discussions, the Commission has focused on the proposed
international air transport tax and the Tobin tax. Although there is agreement
that both taxes could be an important source of revenue, there is currently
insufficient political will to go much beyond the discussion of technical
details.
39. With respect to international tradeable emission permits, the United
Nations Conference on Trade and Development (UNCTAD) has undertaken extensive
research on the design and implementation of an international tradeable
greenhouse gas emission programme, and is currently cooperating with the
Earth Council to develop a pilot emission market.
40. At its substantive session of 1996, the Economic and Social Council
discussed new and innovative ideas for generating funds for economic
development, and concluded that more research was necessary on that topic.
V. EMERGING PRIORITIES
41. The Commission has discussed the issue of financial resources for
implementating the UNCED commitments by taking a comprehensive and balanced
approach that focuses on external, domestic and innovative sources of finance.
In spite of significant progress in the discussion of finance for sustainable
development at both the national and international levels, more research work on
the formulation of policy options needs to be undertaken to consolidate the
progress achieved so far and address a large number of unresolved issues.
42. Among the most important unresolved issues, for example, are the
unfulfilled UNCED commitments on ODA and the crisis of development aid in
general. Other issues concerning external finance include the unresolved debt
problem of some developing countries and the controversial relationship between
FDI and sustainable development.
43. With respect to domestic resource mobilization for sustainable
development, it may be necessary to consider a wider range of instruments and
mechanisms, and to discuss reforms in such areas as public expenditures
(subsidies, military spending and unproductive public expenditures).
Furthermore, policy guidance is needed on how to redirect financial resources
through macroeconomic and structural reforms. In addition, it will become
increasingly important to discuss how greater private-sector participation in
the financing of sustainable development can be achieved.
44. As to innovative mechanisms, at the national level it will be most
important to promote environmental taxes and charges and learn from the
experiences of countries that have made significant progress in that regard. At
the international level, the main issues are to enter into a debate on political
obstacles and to discuss technical problems in greater detail.
45. The above-mentioned examples of unresolved issues in the debate on finance
for sustainable development outline to some extent the unfinished agenda at the
national and international levels. A fourth expert meeting on financial issues
of Agenda 21 was scheduled to be held at Santiago from 8 to 10 January 1997 to
provide analysis and develop policy options on some of the unresolved issues.
Notes
1/ See Report of the United Nations Conference on Environment and Development,
vol. I, Resolutions Adopted by the Conference (United Nations publication, Sales
No. E.93.I.8 and corrigendum), resolution 1, annex II.
2/ The information on DAC countries contained in this section can be found in
Development Cooperation, 1994 and 1996 reports (Paris, OECD). The information
on non-DAC countries can be found in World Debt Tables, 1996 (Washington, D.C.,
World Bank). It is important to clarify that the DAC figures do not include
portfolio equity investments or any type of capital flows that developing
countries obtain from non-DAC countries (mainly other developing countries in
the same region). Adding non-DAC capital flows for the period 1993-1995 would
increase the total amount of capital flows substantially. For example, the
total amount of private flows to developing countries for the period 1993-1995
would increase by approximately 20 per cent, and total FDI would increase by
approximately 60 per cent.
3/ Unless otherwise specified, information contained in this section can be
found in World Debt Tables, 1996 (Washington, D.C., World Bank).
4/ See Development Cooperation, 1996 report (Paris, OECD).
5/ See "Heavily indebted poor countries: debt initiative", World Bank pamphlet,
November 1996.
6/ See "Environmental funds for sustainable development", proceedings of a
seminar for interested members of the OECD/DAC Working Party on Development
Assistance and Environment (Paris, April 1995).
7/ See Global Environmental Facility, annual report, 1995 (Washington, D.C.),
for more detailed information.
8/ See Joint Implementation Quarterly (Groningen, the Netherlands, JIN
Foundation), September 1996.
9/ The information contained in this section can be found in Development
Cooperation, 1994 and 1996 reports (Paris, OECD).
10/ See F. Joshua, "Design and implementation of pilot systems for greenhouse
gas emissions trading: lessons from UNCTAD's GHC research and development
project", paper presented at a conference on controlling carbon and sulphur
international investment and trading initiatives, London, Royal Institute of
International Affairs, 5 and 6 December 1996.
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