The dazzle of the private sector

Police forces often use violence to counter civil society protest. Demonstration in Geneva against Cameroon's President Paul Biya.
Article as analysis
The privatization of development funding could completely overshadow vital tax and financial policy issues. For Switzerland, not changing course would mean the end of the implementation of Agenda 2030 in terms of development policy.

There is an illusion abroad in the international development community. It is the idea that it is possible to serve the profit-making interests of capital donors and the interests of the general public at one and the same time. This illusion is nothing new. In the rich OECD countries of the North not least of all, it has proven to be one-sidedly productive since the rise of neoliberalism as of the mid-1970s: not only has there been strong GDP growth, but inequality between rich and poor has also worsened considerably. New low-wage sectors have arisen and social security systems and public services have been weakened. Increasingly aimless politics and extreme economic volatility are eliciting ever more pressing questions regarding their societal raison d'être.

Despite these lurking pitfalls, attempts are under way at several levels to press forward with the privatization of funding for the UN 2030 Agenda (see page X). Switzerland is a case in point. No sooner had he assumed office as Foreign Minister than Ignacio Cassis together with his SVP colleagues in the Federal Council began promoting a foreign economic policy that threatens to reduce a development policy coherent in human rights and economic terms to a tool for promoting Swiss exports and discouraging immigration. That policy seems to overlook the fact that the private sector is just one development funding instrument among many. This at any rate is what was decided in 2015 in the Addis Ababa Action Agenda (AAAA) adopted by UN Member States attending the third UN Conference on Development Financing. Mobilizing tax revenue to support robust public services, and funding for official development assistance are no less crucial.

Foreign investment overrated

Furthermore, the impact of foreign direct investment on economic growth in developing countries – according to World Bank categories – is generally massively overrated in the current debate. Private investment generates 25 per cent of GDP in countries in the South. This is stated in a 2018 report (Financing for Development and the SDGs) by Eurodad, the European Network on Debt and Development. Of this 25 per cent however, 3 per cent at most is attributable to foreign direct investment, while the remaining 22 per cent comes from the domestic economy and official development banks. Should Switzerland's development funding boil down to the most efficient possible mobilization of foreign direct investment, the UN Sustainable Development Goals (SDGs) of the 2030 Agenda would remain unattainable. This is first and foremost because such an approach would mean extracting funds from Swiss official development assistance and injecting them into the private sector. Second, local enterprises in the countries in the South would risk finding themselves in competition with Swiss companies. It is a proven fact however, that in order to generate good employment and welfare in those economies, jobs created locally and rooted in the local economy are much more crucial than those that depend on foreign direct investment.

The present emphasis on the idea of integrating private economic interests into development funding is also displacing systemic issues relating to the economic policy conditions for sustainable development. According to a 2018 Report by the United Nations Inter-Agency Task Force on Financing for Development, tax revenue is indispensable to providing essential public services and at least minimal social protection; it also accounts for three-quarters of all infrastructure investment in developing countries. There is one simple reason for this, which is that many infrastructure investments cannot be profitable. Hence, the share of private investment in China’s much-lauded new infrastructure – China being the undisputed champion of development of the past 30 years – is almost zero. It is well-known however, that good and reliable infrastructure for traffic, energy and communications is indispensable if companies are to operate productively. Without the financial strength and determination of public authorities, however, they would never come into their own. Although private investments are undoubtedly crucial to development, it is illusory to think that the private sector can replace the State as the key driver development. On the contrary, the private sector is highly dependent on the public sector.

It is all the more catastrophic that in its new Dispatch on International Cooperation (2021-2024), the Federal Council shows virtually no interest in the dysfunctionalities in the international tax and financial system – and least of all in the origin of the economic value creation from which Switzerland derives a substantial part of its prosperity. This country is still the world's biggest offshore financial centre, it uses its low-tax strategy to attract multinational corporations, and is still not resolute enough in combating money-laundering. Recent estimates by economists around the Frenchman Gabriel Zucman were that 28 per cent of Switzerland's corporate tax take comes from profits generated elsewhere. This means that Switzerland is depriving the world of at least 73 billion dollars in taxable corporate profits. There was no mention of tax avoidance by private individuals from poor developing countries who conceal their money in transnational offshore structures that are very often managed from Switzerland. The figures are in the billions.

Growing worldwide protests

The mass protests in many emerging and developing countries around the globe in recent years show that sustainable development that is also rooted in democracy is not possible without financially robust constitutional States. The Arab Spring was triggered in 2011 in Tunisia by hopelessness and the threat of a food crisis among rural workers. Poor Tunisians could barely afford essential items as a result of constant VAT hikes. Through repeated consumption tax increases, the Tunisian Government was attempting to offset corporate tax revenue shortfalls and ensure its capacity to service its debt to the International Monetary Fund. In 2014 in Brazil, massive social unrest was triggered by an increase in ticket prices for public transport. The same thing is now happening in Chile. In Lebanon and Iraq people are also protesting against mismanagement and kleptocracy by the privileged classes – often risking their own lives in the process.

What this shows is that if Switzerland wants to promote the local economy in its partner countries and buttress efforts to build peaceful and democratic societies, that task must begin here at home. It must move beyond the business model practised by its financial and corporate centre, which is based on the acquisition of wealth that has been generated elsewhere. This means developing a policy that diminishes the social damage to other countries caused by the creation of our prosperity. Time is running out – the year 2030 is only 10 years away.