A tax on both your houses

16 July 2015

The world of development aid has changed dramatically in a decade. Ten years ago this month, at the Gleneagles G8 summit, the host leader – former British prime minister Tony Blair – persuaded his peers to double official development assistance (ODA) to Africa to US$50 billion a year by 2010.

The G8 leaders also agreed to cancel all the debts of the most indebted countries to the major international financial institutions. The aim was to help African countries reach the United Nations’ (UN) Millennium Development Goals (MDGs), at the core of which was halving dire poverty by the 2015 target date.  In his Commission for Africa report, which largely informed the Gleneagles agreement, Blair had argued that even if ODA had hitherto failed to solve Africa’s development problems, an exceptionally large infusion of aid was the way to jumpstart the continent’s stagnant development.

The first two UN conferences on Financing for Development, especially Monterrey in 2002 but also Doha in 2008, likewise put the focus of development financing on mobilising more aid from donors. That was the prevailing dogma.

The G8 countries as a whole did significantly increase ODA to Africa, but did not nearly double it by 2010. Most have also not met their Organisation for Economic Cooperation and Development (OECD) promise to spend 0.7% of their gross national income on ODA. African development has improved, and certainly some of that is attributable to increased ODA – and debt relief – but not dramatically.

Yet berating the developed countries for their broken promises was far from being the focus of the Third Financing for Development conference in Addis Ababa this week. The debate has moved on. Just as Monterrey, Doha and Gleneagles aimed to mobilise development funding to reach the MDGs, the Addis conference tried to find ways to finance the even more ambitious (though less clearly defined) post-2015 Sustainable Development Goals (SDGs – which are to be adopted at the UN in September) and adaption and mitigation objectives (to be agreed at the UN’s critical COP 17 climate change conference in Paris, in December).

The debate has moved on since Monterrey and Gleneagles mainly because the sources of development funding have fundamentally changed, as Conor Savoy of the Center for Strategic and International Studies (CSIS) in Washington recently pointed out.

Globally, ODA, as measured by the OECD, currently stands at approximately US$160 billion per year. Other resources, in contrast, far outstrip this amount. Foreign direct investment (FDI) flows to developing countries totalled some US$681 billion last year. Domestic resources, mainly tax revenues, have increased significantly as developing countries have grown richer (some because of the commodity boom) – reaching about US$7.7 trillion per year, of which US$530 billion per year is in sub-Saharan Africa. Remittances now total over US$340 billion per year, and local and international capital markets have also become a growing source of funding for developing countries.

In Africa, government tax revenues now provide US$520 billion a year; remittances, US$64 billion; sovereign wealth funds, US$157 billion; mineral earnings US$168 billion and market capitalisation US$1.2 trillion, the European Centre for Development Policy Management (ECDPM) has calculated. It lumps all of these together as Africa’s own sources of financing, totalling just over US$2 trillion a year. By comparison, FDI and ODA – which provide about $50 billion each – pale into relative insignificance.

The changed landscape of development finance means that ODA must henceforth play a largely catalytic role, unlocking greater financial resources, especially domestic resources – largely tax – plus foreign direct investment, and debt sustainability, Savoy said. Improving tax collection in particular, would serve the double purpose of boosting development financing but also strengthening the bond between citizens and their governments, ‘especially if the money is used in a transparent and accountable manner.’ This latter point is crucial.

In similar vein, the European Report on Development, issued by the European Commission and edited by Dr James Mackie of the ECDPM, argued that the key to development success is implementing the right policies to ensure money is spent correctly, rather than mobilising more money.

A key point was that Africa has the potential to fund up to 70% of its own development agendas through several untapped resources. The constraining factor to achieving a transformative post-2015 agenda will not be a shortage of funds, it will be in the way finance is mobilised and used, Mackie says.

The Addis Ababa Action Agenda, which was agreed yesterday, did indeed embrace this new thinking – though not to everyone’s satisfaction. The focus of this ‘global framework for financing development post-2015’ was on ways to widen revenue bases, improve tax collection and combat tax evasion and illicit financial flows. This will include an Addis Initiative by OECD countries to help developing countries boost their tax collection capabilities.

The outcome of the conference was strongly influenced by former South African President Thabo Mbeki’s recent report on illicit financial flows, which calculated that Africa loses at least US$50 to US$60 billion a year thorough such outflows. These include dodgy – but not necessarily illegal – tax practices by multinationals, such as registering their operations in offshore tax havens.

To combat this, developing countries and development activists had pushed at Addis Ababa for a firm decision to create an intergovernmental tax body under the UN to give all countries an equal say in how global tax rules are designed. But the most they could extract from the rich countries was an incremental increase in the powers of the existing UN Tax Committee of Experts, Oxfam lamented. It complained that developing countries had been asked – and had agreed – to increase their own tax revenues without being given all the tools to do so.

Oxfam is right and the fight to stem the flow of dirty money from Africa must continue. Nevertheless, the thrust of the Addis agreement was surely correct. Ultimately the continent’s destiny lies in the hands of its own people and governments, and this is where reform must start and finish.

Of the many factoids disseminated at the conference, one of the most revealing was that by the NGO One.org, which said that only one in 10 Africans live in a country where government spending is made public. (‘That is why we need a data revolution,’ the NGO concluded.) The implications of that statement are, of course, astounding. 

If the countries in which 90% of Africans live do not publish budgets, then not only government spending, but obviously also government income – including foreign aid – is opaque. This suggests that the real problem with foreign development assistance, and other sources of revenue, is that much – possibly most – of it has disappeared down sinkholes at the receiving end, or in offshore tax havens.

Perhaps the most surprising aspect of the Addis conference was just how long it has taken the development community to stumble on the obvious fact that failing to collect taxes lies at the heart of the continent’s development dilemma.

In the end, the solution must be greater democracy. Publishing national budgets and holding governments accountable for how revenue is spent, are essential elements of democracy. The elephant in the room at the Financing for Development Conference – as it so often is at such conferences – was the democracy deficit. Including that of the host country, which tolerates very little dissent.

Peter Fabricius is an ISS Consultant

This article first appeared in ISS Weekly, the online newsletter of the Institute for Security Studies.