Heads of states and governments, multilateral institutions and representatives of civil society and the private sector gathered in Addis Ababa from July 13 to 16 for the third international conference on Financing for Development (FfD3), to decide how the global community will finance the sustainable development goals (SDGs). Building on the 2008 Doha Declaration and the 2002 Monterrey Consensus, the conference ended with an outcome, the ‘’Addis Ababa Action Agenda’ (AAAA) which was recently adopted by a United Nations General Assembly.
Domestic resource mobilization (DRM) was a key issue of debate during the pre-FfD3 civil society forum, plenary and multi-stakeholder roundtable discussions throughout the four-day conference. There were also discussions on increased private sector involvement in the post-2015 development agenda, blended finance and shift in use of official development assistance (ODA). Through the action agenda, countries ‘’recognize that significant additional domestic public resources, supplemented by international assistance as appropriate, will be critical to realizing sustainable development and achieving the sustainable development goals’’ and thus ‘’commit to enhancing revenue administration through modernized, progressive tax systems, improved tax policy and more efficient tax collection.’’
Domestic revenue is a reliable and sustainable source of development finance. It is increasingly responsible for a large percentage of development finance. Raising more revenue from internal sources helps countries devote needed resources to reduce poverty and hunger, bridge infrastructure gaps and provide public services. DRM also fosters the social contract between the people and the government, facilitates a virtuous cycle of transparency, accountability and efficiency and strengthens democratic engagement and institutions.
A report launched by an international civil society coalition during FfD3 underscores the value of increasing DRM and ODA to achieve sustainable development: it shows Kenya could raise an additional $2.86 billion dollars annually if tax systems are strengthened and $4.9 billion if illicit financial flows are blocked. This represents huge additional revenue for a lower middle income country.
Despite evidence of the role of increased DRM, many developing countries, particularly in Africa, have weak tax systems to generate more revenue through taxes. Although the average tax revenue as a percent of Gross Domestic Product (GDP) in Africa has increased steadily since 1990, the current level is far too low to meet the financial demands of the sustainable development agenda and significant differences exist between countries. A large informal sector, weak tax administration capacity, excessive tax incentives for and tax evasion by multinational companies are key challenges that limit progress on domestic revenue generation. There is therefore an urgent need to build technical capacity in these areas.
Capacity Building Initiatives on Domestic Resource Mobilization
A number of initiatives have been announced recently to support developing countries to boost domestic revenue. A week before FfD3, the World Bank and International Monetary Foundation (IMF) launched a joint initiative to strengthen tax systems in developing countries.
World Bank Group President Jim Yong Kim acknowledged that the support will help these countries generate additional revenue through taxes and the result could be ‘’more children receiving a good education and more families having access to quality health care.”
In the same vein, the IMF Managing Director Christine Lagarde said a strong and robust fiscal space will enable developing countries fund public services. ‘’Experience shows that with well-targeted external technical support and sufficient political will, it can be done,” she said.
The Addis Tax Initiative was launched on July 14 during FfD3 as a platform for technical cooperation between developed and developing countries to enable developing countries ‘’collect more’’ through better tax systems that reduce domestic and cross-border tax evasion, and ‘’spend better’’ through efficient and effective public spending. Specific support will be provided on institutional strengthening, policy development, data management systems, tax accounting and auditing, and public financial management.
Initiated by the governments of Germany, the Netherlands, the United Kingdom, and the United States of America, the initiative now has more than 20 member countries including six African countries (Cameroun, Ethiopia, Malawi, Sierra Leone, Liberia and Malawi). The European Commission, African Tax Administration Forum (ATAF), Inter-American Centre of Tax Administrations (CIAT), IMF, OECD, World Bank and the Gates Foundation have also joined the initiative.
European Commissioner for International Cooperation and Development, Neven Mimica acknowledged at the launch of the initiative that ‘’effective domestic revenue mobilization is key, as a powerful driver and a prerequisite for good governance and economic growth’’, adding that, ‘’on average, developing countries raise less than 20% of their GDP in taxes, much lower than OECD countries. During the period 2003-2012, the ratio of illicit financial flows-to-GDP was on average 3.9% for developing countries overall and even higher for Sub-Saharan Africa, reaching 5.5%.’’
At the same conference, on July 13, the Organization for Economic Cooperation and Development (OECD), in conjunction with the United Nations Development Programme, launched the Tax Inspectors without Borders to enable tax administrators in developing countries build tax audit skills. Pilot projects are also already taking place in Albania, Ghana and Senegal.
Global Partnership for Effective Domestic Resource Mobilization
The UN 2015 Millennium Development Goals (MDGs) report shows we have made significant development progress. Globally since 1990 the number of people living in extreme poverty has dropped by more than half; global maternal mortality has dropped by 45% and global under-5 mortality has been cut by more than 50%. More than 13 million people are on life-saving antiretroviral therapy globally. In Sub-Saharan Africa, maternal mortality dropped by 49% between 1990 and 2013 in the region. Despite the achievements, huge gaps remain in Africa, though.
Although it is home to almost a fifth of the world’s population, the continent has 4% of global health workforce which constantly shrinks due to brain drain. Its countries’ weak health systems are inundated with a double disease burden. Sadly, less than ten African countries devote enough resources to health to meet the Abuja Declaration. Evidence shows that illicit financial flows cost Africa $1 trillion dollars in the last fifty years, and at least $50 billion dollars annually, depriving governments of much needed resources to fast track development. Without a radical change in the financing model on health, the gains of the MDG era may very well be lost, and the continent left behind in the post-2015 era.
The FfD3 conference showed clearly that the burden of financing health in the next fifteen years increasingly lies on the governments of the African nations who must look inwards to mobilize resources innovatively to meet health and other development challenges. While African leaders take up the responsibility to raise more revenues, developed nations must meet the landmark target of 0.7% of GNI as official development assistance. Although the negative impact of the global economic crisis persists in a number of countries, there is still a window of opportunity for donor countries to ensure aid gets to the least developed, low-income countries particularly in sub-Saharan Africa.
The African Development Bank recommends that tax reforms should be properly sequenced: strengthen tax administrative capacity, broaden the tax base in a progressive and fair way, tackle domestic and cross border tax evasion and ensure tax reforms align with economic growth and social development. Adoption of this proposal should be aligned with capacity building initiatives on DRM. This will maximize engagement with national officials and partners and achieve intended impact. African leaders and development partners can avoid the less effective path of implementing capacity building initiatives in silos by creating a multi-stakeholder, multi-sectoral platform to ensure policies, plans and implementation frameworks for DRM work hand-in-hand.
Sustained effective aid and increased domestic resource mobilization are crucial to sustainable development in Africa in the post-2015 era but this can only happen in an atmosphere of shared responsibility and global solidarity. Although the Commonwealth sees value in crowd-funding, the dominant paradigm at FfD3 focused on improving tax systems in developing countries alongside mobilizing private sector resources for development. We recommend a holistic approach to DRM from the start with due attention paid to public-private partnerships, philanthropy and channeling private sector expertise and innovation into the development arena. We therefore welcome the multiple initiatives to strengthen domestic revenue generation on the continent.