Common but Differentiated Responsibilities in Financing for Development

Manuel F Montes, Senior Advisor on Finance and Development of The South Centre, participated in the a side-event co-organized by the Permanent Mission of Brazil to the UN, CIDSE and Social Watch on Thursday, January 29, 2015 in the UN Conference Building, New York. Dealing with responsibilities in a financing sustainable development context, this event generated discussion on conceptual challenges such as an evenhanded approach to the three pillars of sustainable development, adapting a framework like the Financing for Development process to the universal agenda of the Sustainable Development Goals without denaturalizing and decontextualizing it and how to incorporate important principles agreed at the UN Conference on Sustainable Development.

Montes said that even when he does not know how long it took diplomats in 1992 to arrive at the CBDR formulation it is an accurate shorthand characterization of the balance of responsibilities in the climate change framework.  It is not true that developing countries do not have obligations in the climate change treaty. Developing countries have obligations under the convention but “[T] The extent to which developing country Parties will effectively implement their commitments under the Convention will depend on the effective implementation by developed country Parties of their commitments under the Convention related to financial resources and transfer of technology and will take fully into account that economic and social development and poverty eradication are the first and overriding priorities of the developing country Parties” (United Nations 1992, paragraph 4.7).

I would like to discuss the principle of common but differentiated responsibility (CBDR) as an organizing principle for international cooperation not in the context of magnanimity on the part of parties enjoying a relative power advantage but as a question of the feasibility and efficiency.  By feasibility I mean the manner in which all of the parties are able to discharge their obligations towards a shared objective. By efficiency I want to refer to minimizing the net economic cost (cost minus any direct economic benefits and excluding the economic benefits from the common goal itself which would normally be an order of magnitude larger) to participating parties of meeting a common goal. 

CBDR as a principle of international cooperation makes feasible universal obligation and action.  CBDR enables efficiency in international cooperation.  CBDR’s application can also avoid inefficiency-producing international cooperation.

Feasibility and efficiency are not based on enlightened self-interest.   Enlightened self-interest requires action mainly on the part of a party enjoying a relative power advantage and not necessarily by all other parties.  In contrast, international cooperation involves mutual obligations and action on the part of all parties. Feasibility and efficiency are appropriate when requiring actions on the part of all parties.

One can illustrate feasibility and efficiency in the case of external debt resolution.  The common responsibility is the maintenance of a thriving international financial system that can fund development projects.  There two kinds of parties – debtors and creditors – who have differential roles, even though a party could be a debtor in one instance and a creditor in another.  The feasibility criterion requires a differentiation of the two roles so that both parties can perform their respective obligations to realize the shared goal.  Feasibility is violated if debtors are assigned obligations for actions only creditors can perform and vice-versa. 

The efficiency criterion looks at the net cost to all participating parties.  In the case of external debt, disorderly and untimely resolution of debt servicing burdens can lead to violations of efficiency.  Many sovereign external debt problems start off as a loss of liquidity. The criterion of efficiency is violated when an untimely and inadequate debt resolution system converts a liquidity crisis into a solvency crisis; the costs created violate the efficiency criterion. Providing liquidity to troubled debtors is within the differentiated capability of creditors through renegotiation and/or reprofiling of their claims.

Another example of the violation of the efficiency criterion is the outbreak of vulture fund actions in the aftermath of sovereign debt restructuring exercises.  These actions undermine the integrity of voluntary, market-based, approaches and impose inefficiency costs. Without a comprehensive approach to debt restructuring, the current procedures for resolving external debt are inefficient.

In coercive regimes, such as historical colonialism, the criteria of feasibility and efficiency are treated trivial considerations. Coercive systems apply super differentiation and violate another commonly desired criterion – equity. In fact, the current external debt resolution system shares many of the elements of a coercive system.  It applies super differentiation by requiring adjustment obligations only on debtors, until their adjustment capability runs out.  A coercive system does not hesitate to sacrifice feasibility and efficiency in the defense of the common goal. In the case of the debt resolution system, the common goal is the integrity of capital lending across legal jurisdictions. 

In the 1980s developing debt crises (and the Eurozone crisis at present), it is well known that debtors were undertaking all the adjustment through reduction in domestic demand.  This reduced imports and thus imposed a less-than-potential economic rate of growth in the global economy, including creditor countries, called the “boomerang effect”.  The boomerang effect violates the efficiency criteria in imposing avoidable costs on everyone.

When the matter is not about coercive arrangements, but international cooperation, it is important to realize the criteria of feasibility and efficiency though CBDR.  However, one can detect an almost irrational fear on the part of developed country parties every time CBDR is invoked.  After the climate change conference of parties in Durban in December 2011, Harvard Professor Robert Stavins, who is a leading light in the IPCC, celebrated the disappearance of the CBDR in Durban in a New Year January 1, 2012 blog, as if to celebrate the dawn of a new era.  CBDR came back before too long in July 2012 in the Rio+20 outcome.

There also is the Byrd-Hagel United States senate resolution of 1997 which expresses the sense of the Senate that the US will not be a signatory to a protocol that does not require the emission reduction obligations on developing countries “in the same compliance period.” But even this resolution also does not say whether the quantitative obligations have to be same and thus not necessarily a rejection of CBDR.

I do not know how long it took diplomats in 1992 to arrive at the CBDR formulation but it is an accurate shorthand characterization of the balance of responsibilities in the climate change framework.  It is not true that developing countries do not have obligations in the climate change treaty. Developing countries have obligations under the convention but “[T] The extent to which developing country Parties will effectively implement their commitments under the Convention will depend on the effective implementation by developed country Parties of their commitments under the Convention related to financial resources and transfer of technology and will take fully into account that economic and social development and poverty eradication are the first and overriding priorities of the developing country Parties” (United Nations 1992, paragraph 4.7)

Feasibility and efficiency can also be illustrated in the area of international trade. Without the application of some version of common but differentiated responsibility, further progress in international cooperation in the multilateral trade regime is compromised.  The current impasse in the multilateral trade regime – for example in reforming the global agricultural subsidy regime – can be seen as the failure of international politics and negotiations to recognize feasibility and efficiency considerations which a CBDR approach can help realize. 

There are many kinds of CBDR applications in other international agreements.  The legally minded will insist that the principle is not stated exactly as Principle 7 in the 1992 Rio document in these other arena. However, an application of the principle of common but differentiated assignment of responsibility can be found, to cite a few cases, in 

-  the 1992 convention on biological diversity, which even though most biodiversity is located in developing countries recognizes sovereign rights over biological resources

- the 1992 convention to combat desertification which recognized desertification as a common threat, even though the threat is greatest in developing countries

- the 1987 Montreal Protocol on Substances that Deplete the Ozone Layer, which has a special fund for developing countries

Without CBDR-style approaches, these agreements would not be universal in application and action.  In these agreements, developing countries can commit to but be unable to discharge their obligations within the same compliance period to protect biological diversity, combat desertification, and eliminate their ozone depleting emissions unless there is a differentiation of responsibilities and action.

Even though the basic principle of the World Trade Organization is trade without discrimination, as early as 1964 under the GATT through the principle of non-reciprocity and special provisions for “less-developed” countries and, in 1979, through the adoption of the so-called Enabling Clause to permit developed countries to differentially treat developing countries and LDCs, the trade system has a version of CBDR.

Differentiated responsibilities are possible if parties to a common cause can be differentiated. FfD documents have recognized the UN’s wide variety of countries – LDCs, landlocked developing countries, small island developing states, Africa, small and vulnerable economies.  See for example paragraph 22 from the 2008 Doha follow up conference on financing for development which calls for international support and special attention to the needs of these groupings.

But the FfD itself has also other built-in differentiations not seen in other UN contexts:  aid donors and aid recipients, private actors and state actors, creditors and debtors, domestic and external interests.  FfD can lend itself to possibly other differentiations not yet included such as resident and non-resident investors, reserve-issuing and non-reserve issuing economies, and countries hosting and not hosting financial centres.

The CBDR principle continues to be valid even if the differentiations are not binary.  Instead of developing versus developed differentiations, for example, one could for example assign different responsibilities based on per capita income.  There is of course the problem of which indicator is most appropriate as a differentiator.  The LDC criterion uses three indicators, each compared against a benchmark boundary; it is thus a composite criterion.  Just like people, countries are different from each other in many dimensions.  For this reason, binary differentiations, which are composite and even with their defects, have proven to be an effective basis of differentiation. 

Countries are different qualitatively and quantitatively in the three dimensions of sustainable development.  Developed countries have an easier time raising financing for environmental objectives compared to developing countries.

In the case of the financing for development, binary differentiations can be authoritative in assigning differential responsibility because on many issues parties are clearly differentiated.

Paragraph 84 of the outcome document of the 2008 financing for development follow-up conference (United Nations 2009) explicitly mentions CBDR: “We acknowledge the recent volatility in energy markets and its impact on low and middle-income countries. We will strengthen cooperation to develop energy systems that can assist in meeting development needs and are consistent with the efforts to stabilize the global climate, in accordance with the principle of common but differentiated responsibilities and respective capabilities.” 

The outcome document of the 2008 financing for development follow up conference in Doha has many examples of differentiated treatment, while not using the CBDR phrase exactly.  Paragraph 23 in the outcome (United Nations 2009a) acknowledges “the need to particularly assist those countries that have been at a particular disadvantage in attracting such flows, including a number of African countries, least developed countries, landlocked developing countries, small island developing States and countries emerging from conflict or recovering from natural disasters.”  Paragraph 34 (United Nations 2009a) acknowledges that “least developed countries require special measures and international support to benefit fully from world trade, as well as in adjusting to and integrating beneficially into the global economy.” 

Analyses which sought to draw lessons from the 2007-08 economic crisis are notable for recognizing common but differentiated responsibilities among financing for development parties in the face of a globally shared crisis.  In United Nations (2009b, paragraph 53), the UN Secretary-General called for “reforms . . . reshaping regulatory systems to identify and take account of macroprudential risks; expanding the perimeter of regulation and oversight to all systemically important financial institutions, instruments and markets; mitigating procyclicality in prudential regulation; strengthening capital and risk management; reorienting principles on executive remuneration to minimize reckless risk-taking; and improving standards on valuation and provisioning. In a financially integrated world with competing national financial centres in which financial companies can choose to locate specific activities in order to exploit regulatory advantage, these reforms will be successful only if coordinated internationally.” These tasks are the common responsibility of all financing for development parties. 

The next paragraph (United Nations 2009b, paragraph 54) encompasses the differentiated responsibility:  “More advanced markets should bear a relatively greater burden in oversight and regulatory activities, especially over the risk-sharing features of internationally traded financial assets, so that smaller and less sophisticated markets do not have to overregulate to protect the soundness of their own financial and currency markets, thereby sacrificing stronger access to international finance.” 

Financial regulation requires the application of the principles of CBDR even though the exact phrase is not used.  The example also illustrates the incoherence of insisting only on common responsibilities without differentiation.  Financial regulation of complex international financial instruments is not within any feasibility possibility as an obligation that can be performed by governments in developing countries, particularly if these do not yet exist in their economies. All countries connected to the international financial system have suffered the consequences of the inadequate regulatory approaches in advanced market economies; the lack of CBDR imposes efficiency costs.

Another financing for development differentiation that is important is that between reserve-issuing and non-reserve issuing countries.  Reserve transactions are an indispensable element in an orderly global payments system.  However, some countries issue reserves, and others do not, thus CBDR can apply. Reserve issuing countries must bear greater responsibility for the functioning of the global payments system and need to accept disciplines not applicable to countries whose currencies are not used as reserve assets. Feasibility requires that reserve-issuing countries be subject to special disciplines. The absence of disciplines on reserve-issuing countries can sustain global payments imbalances over long periods, such as that which led to the 2007-08 crisis and thus inefficient. 

The last example is private sector development.  In numerous places, such as in paragraphs 12, 18, and 24, the Monterrey Consensus highlighted building a domestic private sector.  If the private sector is a permanent site of increases in capabilities and productivity, building a domestic private sector through financing for development interventions is critical.  There are however large imbalances in capabilities between the indigenous private sector and the external private sector.  Privileging this indigenous development as opposed to giving national treatment to the external private sector will be necessary.  Otherwise domestic markets will be quickly monopolized by external private companies.  Giving local companies advantages in serving domestic markets would conflict with standard approaches to competition policy applied in Western countries, but it would be consistent with a common responsibility toward private sector development. 

The use of the principle of CBDR is unavoidable in many critical financing for development issues. CBDR can be “in the details.”  The use of the phrase can be “avoided” but in many instances international cooperation under financing for development only be undertaken feasibly and efficiently through common but differential responsibilities.

References

Eckersley, R. (2009) Understanding the interplay between the climate and trade regimes, in: United Nations Environment Programme (ed.), Climate and trade policies in a post-2012 world, Geneva, pp. 11–18.

United Nations (2003) The Monterrey Consensus.  The final text of agreements and commitments adopted at the International Conference on Financing for Development, Monterrey, Mexico, 18-22 March 2002.  Available at http://www.un.org/esa/ffd/monterrey/MonterreyConsensus.pdf, accessed 28 November 2014.   

_____________ (2009a) Doha Declaration on Financing for Development: Outcome document of the Follow-up International Conference on Financing for Development to Review the Implementation of the Monterrey Consensus, 29 November to 2 December 2008 (available at http://www.un.org/esa/ffd/doha/documents/Doha_Declaration_FFD.pdf, accessed 28 November 2014). 

___________ (2009b) Follow-up to and implementation of the Monterrey Consensus and Doha Declaration on Financing for Development: Report of the Secretary-General. A/64/322. New York. 25 August 2009. Manuel F Montesis Senior Advisor on Finance and Development, The South Centre. Speech notes for the side event entitled “Applying Common but Differentiated Responsibilities in a Financing Sustainable Development Context,” New York, 27 January 2015. I am solely responsible for all errors, opinions and analyses.  Email: montes at southcentre.org.  

Manuel F Montesis is Senior Advisor on Finance and Development, The South Centre. Speech notes for the side event entitled “Applying Common but Differentiated Responsibilities in a Financing Sustainable Development Context,” New York, 27 January 2015. I am solely responsible for all errors, opinions and analyses.  Email: montes at southcentre.org.  

See here the invitation.