See below for a guest post from Andrew Wainer, Director of Policy Research at Save the Children.
This week, thousands of policymakers are meeting in Washington for the World Bank and International Monetary Fund (IMF) Spring Meetings. This year’s Spring Meetings include discussions on a vast range of issues: Recovering from the recent Ebola outbreak, global infrastructure development, and migration and remittances are just some of the topics that will be discussed.
While many focus on international foreign assistance and global finance when they think of the World Bank and IMF, this year there is a strong emphasis on domestic resource mobilization (DRM). DRM has several definitions, but one way to think about it is, “The generation of savings from [developing nations own] domestic resources and their allocation to economically and socially productive investments.” Basically it’s about developing nations’ generating their own resources to fund poverty reduction, economic growth, and other social sectors like health and education.
In fact, foreign assistance (ODA) is dwarfed by the potential resources that can be generated by developing countries themselves through raising funds through their own domestic mechanisms, including taxation.
Given the massive financing demands of the Sustainable Development Goals (SDGs) which will be adopted by the United Nations General Assembly in September, there is now widespread consensus that ODA is not enough to eliminate poverty, and that these goals will primarily need to be reached through developing nations’ generating their own resources.
In middle-income countries, tax revenues already provide more financing than ODA. For lower-income nations to meet the SDGs, they must improve their collection and spending of domestic revenue.
Many nations have a long way to go on this front.
Half of the countries in sub-Saharan Africa collect less than 17 percent of their GDP in taxes while in upper-income countries the percentage is 35 percent.
Research by Save the Children finds that if developing nations could mobilize a minimum of 20 percent of their GDP in tax revenue it would have a major impact on reducing child deaths and contributing to countries’ health and education systems.
This prioritization of DRM in nations’ development strategies also facilitates the strengthening of a country-driven development agenda. As countries generate more of their own resources for development, they are less dependent on external funding. Liberian President Ellen Johnson-Sirleaf states that many nations now seek to, “Reorient the development paradigm away from externally driven initiatives towards domestically inspired and funded initiatives.”
But the potential for nations to mobilize domestic resources is mixed, and particularly for lower developed nations, building the capacity to generate more revenue, requires initial international assistance.
In some cases, ODA and DRM can be complementary. For example, international donors can provide assistance to a developing nation’s tax gathering and administering agencies to build their revenue collection skills.
The U.S. Agency for International Development (USAID) has had an extensive program of DRM assistance in Georgia. This program focused on reducing corruption and revising its tax and customs codes. As a result of the program Georgia’s tax revenue increased.
Developing nations also need international cooperation and assistance when it comes to combatting illicit financial outflows (IFFs) which also steal potential tax revenue for potential use on poverty reduction programs and projects. IFFs can occur through tax evasion, tax avoidance, or theft. Globally, IFFs represent as much as 4 percent of lost GDP.
Finally, donors can support advocacy efforts of local civil society to empower citizens to voice their priorities to their governments, and to hold their governments accountable for delivering results.
Happily, these issues will be front-and-center during the Spring meeting with civil society sessions on cracking down on shell companies and several World Bank and IMF sessions focused on fiscal management and tax evasion.
It may be counter-intuitive, but developing nations – both governments and civil society — need initial international assistance to build up their own revenue-generating capacity. With some international help, over the long run developing nations’ will be better able to direct and fund their own development priorities.