Equip fragile and conflict-affected states to harness their tax potential

Mar 1, 2016
Mar 1, 2016

The proverb, “Give a man a fish and feed him for a day; teach him to fish and feed him for life” is old, but the emphasis on helping countries to help themselves, and fund their own development, has increased lately. Although I am not sure whether there have ever really been hungry people sat helplessly by well-stocked fisheries, many countries do have untapped tax potential.

The motive behind promoting “self-reliance” may be the current financial crisis (fewer fish?) or the acceptance that poverty eradication and public services are the ultimate responsibility of the domestic state; if others really want to help in the spirit of solidarity, they must support state capacity rather than establish parallel systems.

While the tax revenue mobilized by fragile states, relative to the size of their economies, is low, less than 15 percent of GDP in some countries, it plays a vital role in restoring peace and building resilience. Without domestic revenue, governments cannot provide the basic services that contribute to restoring citizens’ trust in the state, and strengthen the chances for durable peace. The New Deal for Engagement in Fragile States recognizes the peacebuilding and statebuilding role of domestic resource mobilization. Tax revenues give states the discretion to allocate resources in line with their own priorities, which less often find a place on donors’ lists of projects.

Governments in least developed and fragile countries have undertaken reforms that have led to increasing revenues, with the support of donors such as the United Kingdom’s Department for International Development, Germany’s GIZ, and international financial institutions like the World Bank and International Monetary Fund.

It’s a simple fact that public revenue in the form of taxes and customs duties come from the economic activity of citizens and business people, domestic and foreign. Where do they get taxable income? Are there enough jobs to generate taxable wage income and do investors see a prospect for profit and feel confident enough to invest?

Today much of the support offered by donors comes in the form of technical assistance to revenue authorities to help reform tax policy and administrative capacity. Of course it’s important that tax design is efficient and revenue departments have the capacity to collect them, but this narrow focus on taxation is not enough to help fragile states achieve fiscal self-reliance. Success will depend on improving the investment climate and stimulating job creation.

Support for domestic revenue mobilization must be organized around the following principles:

1. Self-reliance through increasing domestic revenue should be part of the broader political agenda. Tax reforms will flounder without political support — donors must think and work politically and support country priorities. Public administration reforms in countries such as Pakistan have failed because of a lack of understanding about the political context of the country.

2. Donors must focus productive investments on key sectors that contribute to fiscal stability such as infrastructure and agriculture, while keeping political economy in mind. Agriculture often employs the majority of citizens, and is the main source of foreign exchange. Infrastructure is the foundation of the economy: in difficult environments the costs are high but the returns are manyfold.

3. International cooperation is needed to stem losses at the border. Every year billions of dollars flow out of developing countries in the form of illicit flows. Investments are urgently needed in customs systems.

4. The impact on the local economy and the fiscal sustainability of the recipient should play a more prominent role in how donors evaluate and monitor aid projects. According to a study by Oxfam about 40 percent of aid to Afghanistan goes back to donor countries.

Doing development in fragile states is difficult, but they are fertile ground if managed and administered in right way. The citizens of these countries may have endured miseries but they are resilient in nature and seek prosperity. If equipped with right tools and opportunities, things will change fairly quickly.