Last month in Mexico City, I joined development leaders spanning government, private sector, and civil society for the first High-Level Meeting of the Global Partnership for Effective Development Co-operation. As part of these meetings, I was honored to moderate a panel of distinguished civil society leaders on the issue of linking domestic resource mobilisation (DRM) to public expenditure needs—just one of three focus sessions, and a plenary session, dedicated to exploring issues around DRM at this landmark event.
While DRM lacks the “headline” appeal of reduced poverty or child mortality rates, the fact that it is at the center of discussions about the post-2015 development agenda is a welcome and important development.
The “business case” for stronger tax systems is already well known. Taxes provide governments with the funds needed to invest in development, alleviate poverty, and deliver the public services and infrastructure that are needed to promote growth. For developing countries, taxes also offer the pathway out of aid dependence and, more importantly, allow those countries to take ownership of their development strategies and meet the needs of their citizens. What’s more, sound and efficient revenue administration ensures that taxation imposes minimal costs on the private sector, and that the goods that vibrant and healthy economies depend on—from food to pharmaceuticals—are not needlessly held up at the border.
So, what is the state of DRM today?
Since adoption of the Millennium Development Goals (MDGs) in 2010, developing countries have seen noticeable gains in DRM that, in turn, have enabled similarly noticeable increases in government spending. These gains are due to underlying economic growth as well as, in some cases, improved collection efforts. Yet, half of sub-Saharan African countries, not to mention several Asian and Latin American countries, still mobilise less than 17% of their GDP in tax revenues. And in Africa, revenue growth has been driven more by exports of oil and other natural resources than by real improvements in national tax systems. Unfortunately, most of these countries have not yet found the antidote to small tax bases, large informal sectors, widespread evasion and abuse of tax rules. Tackling illicit financial flows and improving tax administration systems need to be high on everybody’s agendas.
What about the expenditure side?
Even accounting for official development assistance (ODA) already committed, developing countries face financing gaps of tremendous proportions. Many countries barely muster a third of the $60 per capita in health spending needed to achieve universal coverage with a basic package of health services. Globally, an additional $55 to $120 billion would be needed to cover the price tag for reaching the Millennium Development Goals for both water and sanitation. And to finance the construction, operation and maintenance of critically needed infrastructure, overall infrastructure spending in Africa would need to increase by more than $50 billion each year—equal to roughly 4 percent of these countries’ GDP.
Despite the best intentions, aid from all sectors is not going to fill these gaps, especially at a time when donor country governments are grappling with fiscal constraints and budget cuts at home. More and better DRM, therefore, is and must be central to discussions about development and graduation from lower income status.
So, what role does aid play in improving DRM?
Multilateral and bilateral donors help developing countries to grow their economies, which is essential to DRM. Donors directly promote both stronger DRM and more transparent, taxpayer-friendly business environments by providing technical assistance, capacity building, and commodities in the areas of tax and customs policy and administration. They can also help by bringing global experience and support to bear on addressing illicit flows and the international aspects of taxation and on improving the measurement of DRM gaps and results. These kinds of DRM assistance can have a major impact on revenue mobilisation, especially where countries demonstrate the political will to implement the necessary institutional and tax policy reforms. In fact, recent experience in a number of countries by USAID in Georgia and El Salvador, and DFID in Tanzania and Rwanda suggests that a relatively small but sustained commitment can help partner countries achieve a high level of impact. In El Salvador, for example, one USAID project raised government revenues by $40 million annually — roughly $200 million in additional tax receipts over the project’s five years — with an investment of just $5.8 million. This was accomplished by introducing a new IT platform and a “Case Selection and Management System” which automated both the taxpayer audit selection process and the assignment of audit personnel.
Unfortunately, USAID budgets have little flexibility to dramatically increase funding for this important topic, which is partly due to the fact that spending on a number of critical social services, such as education, water and health, generally do not include approaches to increase DRM for the very services we are trying to strengthen. At the Mexico High-Level Meeting, I initiated conversations about using some of those funds on DRM projects that can help mobilise domestic resources for education, water and health, both now and in the future.
This meeting provided a platform for tackling hard questions about where we go from here. Engaging my distinguished panelists in a vigorous conversation around DRM, we were able to discuss its connection to meeting expenditure needs, and the prospects for leveraging DRM enthusiasm to build a broad-based coalition for.
Eric G. Postel is USAID Assistant Administrator in the Bureau of Economic Growth, Education, and Environment. He also has more than 25 years of private sector experience working in emerging markets, during which he helped support economic development in more than 45 developing countries on four continents.