Financing development through better domestic resource mobilization
22 Dec 2015 by Gail Hurley, specialist on Development Finance and Nergis Gülasan, specialist on Strategic Policy
Over the last 15 years, developing countries have increased domestic revenues by on average 14% annually. The domestic revenues of developing economies amounted to USD 7.7 trillion in 2012; that’s USD 6 trillion more than in 2000. Domestic resources are the largest, most important and most stable source of finance for development. Can we expect these resources to keep on increasing in the coming years and mobilise them for development?
This was one of the core issues discussed at the UN’s conference on Financing for Development, which took place in Addis Ababa, Ethiopia in July 2015. There, governments committed to enhancing revenue collection, making tax systems fairer, more transparent and effective, and strengthening development aid for building the capacities of tax administrations.
But while there has been considerable progress, important challenges remain; in the Least Developed Countries, for instance, tax revenues amount to just 13% of GDP, on average. This is about half the level in many other developing countries.
There are many diverse reasons why countries may not be able to raise more domestic resources for development. These include :
- weak institutional capacities,
- a narrow tax base and pervasive tax avoidance and
- evasion by wealthy individuals and multinational corporations.
Tackling complex international tax arrangements requires skilled tax auditors. For this reason, UNDP and the OECD have come together to take forward the “Tax Inspectors Without Borders” Programme where tax audit experts – from both developed and developing countries – work alongside local officials of developing country tax administrations on tax audit related issues. It aims to transfer technical know-how and build local capacity. In Kenya for instance, tax audit advice and guidance helped the authorities to recover an additional USD 23.5 million in corporate tax revenues.
The programme does not however substitute for efforts to make discussions on international tax reform more inclusive and democratic, with the involvement of all countries.
It is also important to recognise that some countries experience considerable structural constraints in their efforts to mobilise more domestic resources.
Take Small Island Developing States (SIDS) for instance. Small populations thinly dispersed over many islands can make revenue collection difficult and expensive. Investments in major infrastructure may not seem especially expensive, but when measured as a proportion of national output the costs are extremely high. In many cases, private investment may not flow because there are low to no economic returns. Added to this are frequent and severe extreme weather events which can result in heavy relief and reconstruction costs. The recent cyclone in Vanuatu is a case in point.
International public finance will therefore remain indispensable in the future for many countries and donors must meet their commitments to increase aid.