Option 1: Reallocating current public expenditures

42

6.5 Option 5: Curtailing illicit financial flows

Curtailing illicit financial flows IFFs also has the potential to generate large amounts of additional resources for socio-economic investments, including social protection. IFFs involve capital that is illegally earned, transferred or used and include, inter alia, traded goods that are mispriced to avoid higher tariffs, wealth funnelled to offshore accounts to evade income taxes and unreported movements of cash UNDP, 2011. It is estimated that in 2009 US1.3 trillion in IFFs moved out of developing countries, mostly through trade mispricing, of which nearly two-thirds ended up in high- income countries; this amounts to more than ten times the total amount of aid received by developing countries figure 21. Figure 21. Illicit financial flows IFF versus official development assistance ODA, 2000-09 current US billions Sources: Kar and Curcio, 2011; World Bank, World Development Indicators, 2011. Link: http:www.social-protection.orggimigessRessourceDownload.action?ressource.ressourceId=43517 .

6.6 Option 6: Drawing on increased aid and transfers

This requires either engaging with different donor governments in order to increase North –South or South–South transfers, or reducing South–North transfers, such as IFFs, which are significantly larger see above. As a result of the fiscal consolidation policies adopted in most donor countries, development aid fell by 4 per cent in real terms in 2012, following a 2 per cent fall in 2011 OECD, 2013b. In 2012, the United Nations Special Rapporteurs for the Right to Food, and for Extreme Poverty and Human Rights, called for a global fund for social protection to redress the balance De Schutter and Sepúlveda, 2012.

6.7 Option 7: Using fiscal and central bank foreign exchange reserves

This includes drawing down fiscal savings and other state revenues stored in special funds, such as sovereign wealth funds, andor using excess foreign exchange reserves in the central bank for domestic and regional development. A more detailed discussion of this option can be found in Ortiz and Cummins, 2012; here there is space only to highlight the 43 case of sovereign wealth funds SWFs, which can potentially be used for national socio- economic development and social protection. The logic behind SWFs – such as the Abu Dhabi Investment Authority, Norway’s Government Pension Fund Global, and Singapore’s Temasek Holdings and Government of Singapore Investment Corporation – is to maximize financial returns on investment, usually in international capital markets. While creating an SWF is an option available to most governments, many have questioned the logic of investing earned public income for capital market growth when those resources could be invested in social and economic goods and services urgently needed at home. The Bolivarian Republic of Venezuela, for example, has used its fiscal reserves to finance a number of development objectives both domestically and regionally. On the other hand, Timor-Leste, a country with very low scores on human indicators of development and a high proportion of people living in poverty 50 per cent in 2007, up from 36 per cent in 2001, has an estimated US6.3 billion stored in an SWF investing overseas. The key point is that governments have multiple options in how to use their reserves for socio-economic development, and the alternatives should be carefully evaluated see box 8.

6.8 Option 8: Adopting a more accommodating macroeconomic framework

This entails allowing for higher budget deficits and higher levels of inflation without jeopardizing macroeconomic stability e.g. through quantitative easing in the United States. The goals of macroeconomic policy are multiple, from supporting growth, price stabilization or inflation control to smoothing economic cycles, reducing unemployment and poverty, and promoting equity. In recent decades, macroeconomic frameworks have placed strong emphasis on short-term stabilization measures, such as controlling inflation and fiscal deficits, as part of broader efforts aimed at liberalizing economies, integrating them into global markets and attracting investment. While these macroeconomic objectives are not necessarily unsound, there is an increasing risk in many developing countries that other important objectives, such as employment-generating growth and social protection, lose priority and come to be underemphasized. It is important to underscore that there are diverse views on what constitutes an “acceptable” level of inflation or fiscal deficits, and that, as part of the crisis response, there has been a growing recognition of the need to ease budget constraints and allow for an increasing degree of deficit spending, especially to support socially relevant investments and employment-generating economic growth IMF, 2009; Epstein, 2009; Pollin, Epstein and Heintz, 2008; Islam and Chowdhury, 2010a; Islam and Chowdhury, 2010b; UNCTAD, 2011; UNCTAD, 2012; UNCTAD, 2013. In summary, there are ample opportunities for countries to increase fiscal space for social protection through a combination of tailored strategies. Usually it is appropriate for governments to consider a mix of the different strategies, as in the examples presented in table 5. Each country is unique, and the full range of available fiscal space options should be carefully examined – with close attention to the potential risks and trade-offs associated with each opportunity – at the national level through an inclusive dialogue to ensure a socially responsive recovery. All of the fiscal space options described in this report are supported by policy statements of the United Nations and international financial institutions. ILO Recommendation No. 202 emphasizes the responsibility of national governments in financing national social protection floors, and in mobilizing the necessary resources to ensure the financial, fiscal and economic sustainability of these arrangements. The Recommendation also notes explicitly that national resource mobilization strategies may include the effective enforcement of tax and contribution obligations, reprioritizing expenditure, andor a broader and sufficiently progressive revenue base. The Recommendation further states that countries whose economic and fiscal capacities are insufficient to implement the guarantees may seek international cooperation and support to complement their own efforts Paras 11 –12; see also ILO, 2012a.