So far, I have focused mostly on what governments can do to foster development. However, when it comes to innovation, the real expertise lies with the private sector. And the private sector is the primary driver of economic growth. We must harness private investment so that it has greater development impact, and G20 governments can help establish conditions to encourage that.
Private capital is already a growing source of funds for development through many different channels. The philanthropic sector is getting larger in almost every country, and its reach is increasingly international. Through our work on the Giving Pledge, Melinda and I have talked with many philanthropists interested in applying their wealth to development problems.
There is also growing interest in generating development impact through private investments. Despite questions about how "impact investments" will work, evidence suggests that social enterprises such as private health clinics and schools have the potential to pay back the original capital invested—and sometimes provide market rates of return. It’s important to keep experimenting with new business models, as many organizations in India are doing, because impact investors could eventually bring a great deal of money into development.
One area where we know investment has the potential to generate both development impact and profits is infrastructure. A road is a fantastic thing—for the small farmer moving crops to market, the pregnant woman able to make it to the clinic for a safe delivery, and the landlocked country connecting to its neighbors and the world economy. But poor countries have too few roads, huge rivers but not enough power or irrigation, and fast-growing urban populations that are overwhelming municipal facilities and services.
Within the G20, the rapidly growing countries have a large source of funds that has yet to be tapped: sovereign wealth funds (SWFs). I join others in proposing that some of this capital be made available for infrastructure investments in poor countries. An infrastructure fund financed by just 1 percent of SWF assets would start at $40 billion or more, and could reach $100 billion or more with projected SWF growth over this decade. Given the scale of the infrastructure needs in poor countries (the African Development Bank estimates $93 billion per year in Sub-Saharan Africa), there is a compelling reason to mobilize this pool of savings for development.
An infrastructure fund needs to offer a market-related return while providing financing for poor countries on concessional terms. As a result, donors and multilateral development banks need to find creative ways, through guarantees, co-financing, and the like, to bridge the gap between the return sovereign investors expect and the lower interest rates and extended maturities borrowers need. I believe sovereign wealth funds can provide a core of financing to spur private investment in infrastructure, in line with the recommendations of the high-level panel that is reporting to this meeting of G20 leaders.
Another major source of private capital for development is diaspora communities, which already contribute in the form of remittances. Last year, remittances to developing countries were worth $325 billion. We must continue lowering the transaction costs of remittances, so that this growing pool of money has as big an impact as possible on the poorest. Reducing these costs to an average of 5 percent (compared to the current average, which is roughly twice that) would save $15 billion. This work dovetails with the mission of the G20’s Global Partnership on Financial Inclusion, which builds on the recent progress in countries like Mexico to increase access to financial services for the poor.
Diaspora communities can also invest in bonds that finance infrastructure projects. Israel and India have already issued tens of billions of dollars of these diaspora bonds, and now Nigeria, Kenya, and the Philippines are considering issuing their own. The African Diaspora alone is sitting on an estimated $50 billion in savings that could be invested in bonds. There may be ways for aid agencies and development finance institutions in migrants’ host countries to help make these bonds more attractive, such as by forming partnerships with banks from investors’ home countries.
Finally, there are ways to use public capital to incentivize research and development on new products. Several years ago, our foundation worked with partners to help create something called an Advance Market Commitment for a pneumonia vaccine. The vaccine didn’t exist yet, but we guaranteed buyers for one as soon as it was developed. This commitment pulled in private sector expertise, allowing a vaccine to be available much earlier. It’s now being rolled out in 37 countries.
The theory behind the Advance Market Commitment—that the right incentives can speed the development of products where there has been a market failure—is not new. The Orteig Prize motivated Lindbergh’s flight across the Atlantic and kicked off a flurry of research on aviation. More recently, the creation of the first nongovernmental reusable space craft was a response to the Ansari X Prize. Both prizes led to private sector R&D spending far outweighing the value of the prize itself.
I believe this concept of pull mechanisms has real promise in the agricultural sector. At the last G20 summit, you agreed to explore pull mechanisms to encourage innovation in agricultural technologies. I understand that after a great deal of work, there will be an announcement on this effort in Cannes. I applaud Canada’s leadership on this initiative.
I am excited by the prospects for private sector investment in development, but I am convinced of the need for countries to keep investing in ODA. There are many ways to be creative about finding new sources of public funds. In this report, I consider three innovative tax recommendations: a tobacco tax, a financial transaction tax, and an aviation and bunker fuel tax.
Among the revenue proposals I have examined, tobacco taxes are especially attractive because they encourage smokers to quit and discourage people from starting to smoke, as well as generate significant revenues. It’s a win-win for global health.
Tobacco taxes are already ubiquitous. Ninety percent of countries have some form of them. And they work. In Thailand, as cigarette taxes rose from 1994 to 2007, revenues doubled even though the number of smokers went down significantly.
The World Health Organization (WHO) recommends tobacco excise taxes of at least 70 percent of the pack price. Although some countries have total tobacco taxes in excess of 70 percent, the average excise tax in G20 and European Union (EU) countries is approximately 55 percent.
WHO has developed the idea of a global Solidarity Tobacco Contribution (STC), under which countries would raise their tobacco excise taxes and allocate a portion of the increased revenues to global health.
High-income countries could allocate $0.10 per pack of cigarettes sold to global health, middle-income countries could allocate $0.06, and low-income countries could allocate $0.02.
If this tax is implemented by G20 countries and other members of the EU and allocated as outlined above, it would generate approximately $10.8 billion for global health. This would be in addition to the health benefits of reduced smoking that would result from increasing tobacco taxes.
There has been a lot of discussion lately about introducing new financial sector taxes to raise revenue for various purposes, as well as to discourage excessive risk-taking. Ideas include taxes on financial assets, combined profits and remuneration, and financial transactions. A financial transaction tax (FTT) has been widely advocated as a good way of raising additional resources for development.
FTTs already exist in many countries, where they generate significant revenue, so they are clearly technically feasible. According to the IMF, 15 G20 countries have some form of securities transaction tax. In the seven countries where the IMF estimates revenue, these taxes raise an estimated $15 billion per year.
The general recommendation for an efficient tax is a low rate on a large base. This broadly holds true for FTTs as well. Across different instruments, the tax could be sized to reduce potential economic distortions, so that the tax on equities would be slightly higher than the tax on long-dated bonds, short-dated bonds, swaps, and futures.
Some modeling suggests that even a small tax of 10 basis points on equities and two basis points on bonds would yield about $48 billion on a G20-wide basis, or $9 billion if it were confined to larger European economies. Other FTT proposals offer substantially larger estimates, in the $100 billion to $250 billion range, especially if derivatives are included.
The G20 countries will continue discussing the FTT. For those that choose to adopt it, I urge you not to use all of the proceeds as general revenue. It is critical that a portion of the money raised be reserved for investments in development.
I agree with the IMF and World Bank that over time, markets and governments should price carbon more explicitly through taxes or other means. This is important not just because it will raise money, but also because it will reduce climate impact in the long run. That impact will disproportionately affect poor people. We can use the carbon price differentials between rich and poor countries to help them adapt to harsher conditions.
In the meantime, the IMF and World Bank proposals to tax shipping and aviation fuels can help countries start making the necessary adjustments. To respond to the climate crisis, poor countries need to take decisive steps to adapt and expand basic investments in areas like food production, water management, and coastal protection. The World Bank and IMF indicate that this adaptation investment will cost around $17 billion a year each for South Asia and Sub-Saharan Africa.
Every year, such shipping and aviation fuel taxes could yield $37 billion and $27 billion, respectively. If a modest portion of these revenues were devoted to helping poor countries adapt to climate change, it would protect the livelihoods of millions of very poor people.
Development and climate change are closely related. The tools that will help small farmers cope with climate change will also help them be more productive in the short term. Drought resistant maize seeds and micro-irrigation technologies are good for farmers now, but they’re extra good for those farmers who will be facing climate-related constraints in the years to come. Especially when it comes to agriculture, there is no bright line separating the overarching development agenda and the climate change adaptation agenda.
In the long term, the key to solving the problem of climate change will be innovation. If there is one shortcoming in our current response, it would be the gross underinvestment in research and development on energy innovations. People often present two timeframes when they set goals for reducing CO2 emissions: a 30 percent reduction by 2020 and an 80 percent reduction by 2050. Since the 30 percent goal and 2020 deadline are easier for people to grasp, we have done a lot of thinking about how to increase efficiencies in the current system to reach shorter-term targets. But the 80 percent reduction by 2050 is the one that really matters for the future of the world, and to reach that one we’re going to have to create entirely new approaches to generating power.
Climate change has gradually shifted from a trend that only experts worried about to a very real issue for governments and their citizens. That’s a positive development. However, the world still hasn’t made the kinds of investments it is going to take to address climate change. We finally understand the problem, but we aren’t yet committed to the solution.
Innovation will be transformative when it comes to climate change and energy, but so far the world has been distracted from what counts on this issue in a dangerous way.