Facing domestic resource crunch, many least developed countries (LDCs) are unable to step up expenditure to meet their targets as set out in the United Nations Millennium Development Goals (MDGs) agreed to by the international community in 2000. These countries were banking on financial assistance from the developed world to meet their resource shortfalls. But post-downturn, developed countries have become reluctant in providing financial help to the LDCs. As the 2015 deadline for meeting the MDGs nears, an estimated $636 billion shortfall threatens to derail LDCs? programmes to meet the MDGs. UN body, Economic and Social Commission for Asia and the Pacific (ESCAP), has suggested imposing a small global tax on FII flows to raise the required resources to help LDCs fund their MDGs. Nagesh Kumar, chief economist and director, macroeconomic policy and development division, ESCAP, was recently in Delhi to attend a media workshop held by the UN Information Centre in the run-up to the UN conference on LDCs in Istanbul, Turkey on May 9-13. In an interview to FE?s Noor Mohammad, Kumar discussed ESCAP?s idea behind. Excerpts:
What has prompted you to come out with this proposal?
There is a huge transaction of over trillion dollars a day in short-term foreign investment flows because of easy liquidity policy in developed countries. This money comes into emerging countries like India and China for better returns. The FII inflows and their withdrawal cause a lot of financial volatility in the receiving countries. When money comes in, stock prices go up and currency appreciates. When the investment is withdrawn, an opposite impact is seen in the stock and currency markets.
Countries like Brazil and Indonesia have imposed a tax on FII inflows to moderate their impact on their national financial system. We have proposed imposing an international tax on FII flows in addition to what is being levied by national governments.
How much money can be raised through this route?
By our estimate, up to $350 billion a year can be easily mobilised in revenue by imposing just a small tax on foreign institutional investor flows.
How feasible will be collecting such a tax?
Since these investment flows go through electronic channels, an international banking body like the Bank for International Settlement can easily monitor these transactions and collect tax.
How will this help global economic growth?
The revenue would be used for funding MDGs and poverty alleviation programmes in developing countries. That will help boost purchasing power in these countries and create additional demand. It will be a win-win proposal not just for the industry, but for the governments and their people too.