From Taxes to Illicit Flows: Mobilising Domestic Resources through Development Cooperation

Ngozi Okonjo-Iweala, Nigeria's Finance Minister, speaking at the United Nations. Credit: UN Photo/Devra Berkowitz

Ngozi Okonjo-Iweala, Nigeria’s Finance Minister, argues that African countries need to build capacity to get more from their domestic resources.

By Ngozi Okonjo-Iweala

Ngozi Okonjo-Iweala, Nigeria’s Finance Minister, speaking at the United Nations. Credit: UN Photo/Devra Berkowitz

The time is right for concerted international action on domestic resource mobilisation in the developing world. Recent high performance on collecting taxes and other domestic resources in developing countries shows that if properly harnessed and managed, domestic revenue can be a very important and sustainable source of long-term finance for economic development and reducing poverty.

Increasing income from domestic resources makes countries less dependent on aid, which can be highly unpredictable. Recently, aid volatility has been exacerbated by frequent fiscal challenges faced by many donor countries. More domestic financial flows would also make low and middle income countries less exposed to donor conditionality, allowing them to choose their own development priorities to meet their citizens’ needs. What is more, mobilising domestic resources demands good governance and prudent resource management in order to meet taxpayers’ aspirations.

In other words, if governments want people to appreciate the need to pay taxes, they must use the extra revenue on high-impact and result-oriented interventions to significantly reduce poverty, inequality, and unemployment and meet other social needs.

According to a recent African Development Bank report, tax revenue collection has improved in many African countries since the 1990s. Overall tax receipts in Africa increased from about 22% of GDP in 1990, to about 27% of GDP in 2007. However there was some variation across countries. Tax revenue in low-income African countries, for example, was still below 15% of GDP – the conventional IMF threshold for satisfactory tax performance, and a level deemed by the United Nations to be insufficient to achieve the Millennium Development Goals.

Illicit financial flows

Some problems in developing countries are illicit financial outflows, mostly due to looting by corrupt leaders and government officials, tax base erosion and profit-shifting by multinationals, multiple tax incentives, informal activities not being included in the revenue base, and illicit domestic flows.

Embezzlement of public funds by corrupt officials has become disturbingly pervasive, especially in mineral resource-rich countries in Africa. Also, over-dependence on aid or on abnormal profits from natural resources can make governments oblivious to their potential to raise revenue from other sources. All involved in the Global Partnership should coordinate their efforts to resolve these problems.

Effective development co-operation can boost countries’ own revenue-raising efforts by scaling up donor assistance, as well as sharing knowledge and expertise. It can help develop existing country revenue collection institutions, support reforms and improve accountability mechanisms. It should also help to track progress on institutional and capacity developments using country frameworks. More expertise is needed for tax officials in developing countries conducting tax policy analyses and designing tax policies appropriate to local country conditions. Investing development aid in building tax systems can yield impressive returns but only limited funds have been targeted towards this sector so far.

Country ownership

With donor support, developing countries’ governments can invest more in building their own technical capacities, in researching international best practices and in improving their negotiation skills to help them receive maximum benefit from new natural resource contracts. Above all, development frameworks for increasing domestic resource mobilisation should be home-driven and tailored to each country’s specific needs and circumstances, in line with the Busan Partnership Agreement’s first principle of country ownership.

Domestic resource mobilisation is one of the Global Partnership for Effective Development Co-operation’s top priorities for action at its first High-level meeting, to be held in Mexico City in April 2014. As we prepare, I call on all Global Partnership stakeholders including development co-operation providers and recipients, civil society, parliamentarians, and private businesses, to reflect on these issues. With their input, we can have fruitful dialogue to determine how the challenges of domestic resource mobilisation can be properly integrated to the post-2015 development agenda.

It is also imperative that the meeting addresses development co-operation providers’ accountability for timely delivery on their commitments to support these efforts. I believe strongly that the Mexico meeting can better position development co-operation to address the challenges of domestic resource mobilisation in low and middle-income countries.

This article was originally featured on the Effective Development Co-operation Blog hosted by the Global Partnership for Effective Development Co-operation to foster constructive comment to help nations, business and organisations work better together to end poverty.

Written by Think Africa

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