It’s all about timing, and in my case the time may have arrived for an idea that I first mooted 25 years ago. In 2018 it was shortlisted for a prize in honour of the late Paddy Ashdown.
It if won first prize the idea might have progressed. But instead it has sat on my computer hard drive waiting for the right moment to be pulled out.
The idea concerns foreign aid. Trump has slashed US aid by 80 percent, Britain by 40 percent, France by a third and Germany and Japan by a to-be-announced amount. On top of that, the liberal bastion “The Economist” this week sounded “The Death of Foreign Aid.”
The result will be that literally billions of people will suffer. They will have less money for education, military protection, health and investment in infrastructure projects that can lift their countries out of poverty and create markets for the developed world. Many will die. Many already have.
The Economist argues that the cuts could be silver-lined clouds. That many developing countries have become aid-dependent and the dramatic cutbacks could force governments in the developing world to reorganize and pull themselves up by their bootstraps.
If so, development bonds, might be worth considering by both the developed and developing world. The concept of development bonds had its genesis in Renaissance Italy where bonds were sold to wealthy merchants to fund local building projects. The idea was unearthed by New York to finance the Erie Canal and over the years has become a financial pillar for America’s infrastructure finance. In 2023, $456 billion was raised in municipal bonds. It is estimated that $4.5 trillion is currently outstanding.
The structure is simple. Wealthy individuals invest in a bond issued by a state or local authority. The bondholders receive regular interest payments which they can deduct from federal income tax. When the bond matures they receive the principal which they invested. This also is untaxed.
My development bond proposal would extend the US system to the developing world. Wealthy individuals, banks, pension funds and others would invest in bonds to build infrastructure projects in the developing world. The investors would deduct the interest payments from taxes due in their country of residence.
There are of course problems. Corruption is an obvious issue. What happens if the president of country X runs off with the bond holders money and country X defaults. No investment has guarantee and there have been a small number of defaults in US municipal bonds. To protect development bonds there would need to be a number of safeguards.
For a start, the investment project would need to approved by the developed country which is losing the tax revenue. There would be a further check by the financial institution that is organising the issue. There would need to be a system of ongoing scrutiny; possibly involving the media to insure the maximum transparency. And as final guarantee, the bonds can be insured.
Bond issues are already used by a number of developing countries. Kenya, South Africa and India have issued successful “Green Bonds” to help finance environmental projects. Bonds are also issued by the World Bank and the International Finance Corporation.
There are also limited cases of tax incentives for investments in developing countries. These “Blended Finance” models provide tax credits or subsidies for investments that meet certain criteria but they do not allow for tax relief on the interest and principal.
Some development agencies, like the World Bank. Impact Investment Funds, America’s Overseas Private Investment Corporation and Social Impact Funds, have explored mechanisms that allow international investors to receive some form of tax credit or benefit for investing in these types of bonds, although these structures usually focus on social returns rather than tax deductions.
I must confess that international development bonds is not a wholly original idea. Other financial experts with a great deal more experience than my own have suggested financing developing world projects with a system that mirrors America’s municipal bond market.
They have failed to make it off the drawing board for several reasons. First is the problem of corruption as mentioned above. Then there is the risk of default. There is also the problem of international cooperation needed to align tax laws and ensure transparency. Finally, there is the fact that until this year the developing world was receiving quite a lot without– $256 billion last year. This negated the need for a development bond.
In 2025 developing world countries will be lucky to receive a quarter of the largesse of 2024. So, perhaps the time for development bonds has arrived. And perhaps they can, as “The Economist” insists they should, help developing world countries pull themselves up by their bootstraps. It is now clear that they can no longer count on being supported by much-needed aid from the developed world.
* Tom Arms is foreign editor of Liberal Democrat Voice and author of “The Encyclopaedia of the Cold War” and “America Made in Britain".
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14 Comments
There is an Organisation called ‘Lend with Care Org.’ where you can invest in an individual to get their business off the ground and when up and running the money is returned to the original investor. Cannot govnts lend to individuals and charities to fund developments and bypass possible corrupt govnts? Equally donkey health charities where the recipients get the money and the progress is monitored by the charity? By UK aid picking out individual organisations rather than lump sums to govnts who may have ‘other interests’ for the money, it is targeted. Is it not time for innovation and thinking out of the box and trying new ways to help people where the help is guarenteed to be used by the people who need the aid?
There are several such charities. I myself donated to one which built a school in Gambia for 300 children. It was organised by one person who basically built and ran the school. Such small charities do excellent work on a local basis and should be encouraged. My development bond structure is aimed at attracting capital for major infrastructure projects such as ports, railways, roads, bridges, etcetera which are designed to improve the economic prospects for a country or region. Both are needed. In fact, many different types of charities are needed. I should add that my proposal is to help fill the vacuum left by cuts in aid by the US, Britain, France, Germany….
The problem with your scheme is that the developing world has a nasty habit of not paying its debts.
Interesting idea. It would though effectively amount to loans, which would therefore place developing countries even more in debt – and there are still ongoing campaigns to cancel developing countries’ debts – which is obviously going to take a very different hue if that debt is owed to well-meaning individuals rather than to Governments and large banks. It could still work, but you’d have to be very sure the money is being used for investment projects that will more than pay for themselves over time. Also, if we’re relying on individuals to lend the money, the amounts raised are likely to be a tiny fraction of the likely reduction in aid this year.
Alan Jeffs, I don’t have an exhaustive, but out of the following countries: Kenya, Zambia, South Africa, Mozambique, Nigeria, Ghana, Botswana, Senegal, Tanzania, Lesotho, Swaziland, Cambodia, Laos, Nepal and Bhutan; only two Zambia and Mozambique have defaulted. Ghana is close to it and is going through a major restructuring. Several of the others have had severe difficulties but have always made their international loan payments. The reason? Because if they don’t they won’t get anymore.
Also, as part of the project the country (or countries) offering the tax relief would need to do a thorough investigation of a government’s creditworthiness before allowing its citizens to invest in a development bond.
Finally, it is possible to take out insurance against a default.
Something like International Development Bonds will be needed (with safeguards) to fill the vacuum left by cuts in foreign aid. Back in 2009, developed countries agreed to contribute $100 billion to help third world countries adapt to climate change. None of that money was forthcoming in the 15 years up to COP29 last November in Baku.
In the UK, the government could provide tax incentives for investment in appropriate manufacturing and production and tax penalties for investment in land. This would help the economy and also help to make land available for development, rather than sitting idle in speculative land banks.
In the above, it should have said $100 billion EACH YEAR from 2009.
I like the idea of development bonds, but can we not also put into the mix of ways of helping developing countries, Fair Trade (or what some supermarkets now call fairly traded goods)? I would love to find a way in which government could help expand the Fair Trade movement. It’s a dignified way of helping people through trade rather than aid. It includes a small element of what could be called aid but the basic principle is giving people a fairer price and income from the goods and services they provide.
Alongside that could be encouragement for people to donate to help individual projects, as Tom also mentions. Since last year I have started a monthly donation through the organisation called Transform Trade (taking over from Traidcraft) for a specific small group of producers to expand their business, thereby enabling economic development in their villages.
We should really start by asking if making these loans will do any good. They’ll temporarily push up the value of the local currency of the countries in question which will make their imports cheaper but their exports dearer.
Consequently their productive capacity may well not increase as intended. When the time comes to repay the loans they will be unable to do so.
If the right policies are followed then they won’t need too much in the way of foreign currency at first. They should take a look at the policies followed by Korea in the 60s and China in the 90s. Essentially they built up their economies behind a protectionist barrier and kept the value of their currencies low to boost their export trade.
@ Peter Martin, An excellent point and a detail which should be investigated for each application. I think it is important that the developing country applies to the developed country for bond approval and that each application is judged on its merits and a rigorous investigation of the country’s ability to repay and the benefits to the country receiving the loan. There is tons of experience at the IDC, World Bank, IMF and others to provide the necessary rigour.
Assume I am rich (45% tax payer) and lend £1000 to country X, and they pay interest of £50 a year. How much less money do I pay in tax? I have heard of tax free savings, but never a savings product that directly reduced your tax bill.
@Tim – A good point, as it would seem from Tom’s explanation, you should be able to use the entire £50 against your taxes and so have an after tax (in your pocket) gain of £100 = £50 (interest)+ £50 (tax rebate).
However, if the intent is to get the billionaires to invest, they are going to have to structure their finances so that they are paying sufficient tax in whichever country they wish to reside for tax purposes. Which like the 45% rate compared to the 50% rate, may actually result in wealthy people paying more tax.
You would also receive tax relief on repayments of the principal. The question then is there a holiday on principal payments or does the borrower start repaying principal and payment with their first payment. To be discussed.
@Tom ” You would also receive tax relief on repayments of the principal.”
Why?
The principle will have been made out of previously taxed monies and thus should not be liable for further tax, ie. It is a return of capital.
The more I think about this, the more it sounds like it will be hijacked into schemes whose primary purpose is tax fraud and further enriching the wealth, like we had back in the 1980s and 90s with many BIS and similar schemes having their tax status changed retrospectively by HMRC.