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Transitioning from Aid to Domestic Resource Mobilization

Transitioning from Aid to Domestic Resource Mobilization
They say that the only certainties in life are death and taxes. However, for developing countries, the latter might not be such a sure thing. In fact, effective tax policies, often referred to as domestic resource mobilization (DRM), are one of the biggest development issues facing poorer nations.

Without it, they may remain dependent on aid and unable to adequately meet the needs of their citizens, trapped in a cycle of poorly funded, haphazard social programs partially administrated by foreign donors. If the goal of aid is to create a world in which no one needs it, domestic resource mobilization may represent poor countries’ golden ticket to financial independence.

Domestic resource mobilization is essentially both a strategy and development outcome, in which a country becomes capable of funding its own social programs. Aid strategies variously focus on different indicators of development, such as improved health, education, or business opportunity. However, the purpose of domestic resource mobilization is to empower a developing country to improve these indicators using its own financial and administrative resources.

Obviously, this can be a huge challenge. Taxes in some countries can be unenforceable, insupportable, poorly allocated, or dissipated due to corruption. In much of sub-Saharan Africa, for example, simply reaching a large rural population is a barrier in and of itself, not to mention negotiating a socially sustainable level of taxation for those living off the grid in poverty.

In countries such as Nigeria, which has one of the worst levels of inequality and corruption, a great deal of tax income is squandered by shady officials, rather than redistributed to those living in extreme poverty.

According to the 2011 report by African Economic Outlook, revenue sources in sub-Saharan Africa grew from $100 billion in 2000 to about $513 billion in 2011. To put those numbers in perspective, official development assistance (ODA) grew from only $20 billion to $60 billion in the same time period.

Simply put, the amount of potential tax revenue far outweighs foreign funding of development programs. And those figures represent only known sources; many businesses and potential revenue streams lie outside the formal economy.

A lack of domestic resource mobilization fosters dependency on aid, which is why this technique has been acquiring greater importance for international donors in recent years. In April of 2014, developing countries and international policy-makers met in Mexico City to address, among other things, effective domestic resource mobilization.

There was a general consensus on the importance of DRM, with developing countries’ ministers calling for an increase in support from aid donors towards that end. For those at the conference, DRM represented a win-win; aid donors benefit from a potential scale-down of funding, while developing countries increase their governance capabilities while independently enhancing their own development goals.

More recently, at the Financing for Development conference in the Ethiopian capital of Addis Ababa, DRM was clearly a priority. Around 120 of 151 speeches by the foreign ministers in attendance at least mentioned domestic resource mobilization.

The United States Agency for International Development (USAID), as well as their foreign counterparts from Germany, the U.K. and elsewhere, even composed a policy initiative to advance the goal of achieving domestic resource mobilization in aid-recipient countries.

The initiative, dubbed Addis Tax Initiative, initially drew 30 members which agreed to a set of policy outcomes. Among those outcomes was a commitment that aid donors would double financial support to develop DRM, that members would compose a set of key DRM goals, and that countries would institute DRM policies which are harmonious with those of other developing countries.

The potential for DRM to transform a developing country’s condition can be neatly illustrated by the relationship between USAID and the country of Georgia. USAID began, in the early 2000s, to target border and customs tax compliance practices in the country.

The program was designed to increase a legitimate tax base, cut down on corruption, and improve collection efficiency. Over the nine-year duration of the program, the country managed to increase its tax base to 12 percent of its GDP, as well as reduce the rate of corruption (in the form of collected bribes) by about 30 percent.

While improving domestic resource mobilization is not the be-all, end-all of development and poverty reduction, it certainly should be the focus of a comprehensive development portfolio. Enhancing aid recipients’ ability to manage its own financial resources as well as improve the strength of its governance is essential to reducing the need for aid and lifting people out of poverty finally and sustainably.

Derek Marion

Sources: CSIS, Devex, African Economic Outlook
Photo: Flickr