Wednesday, September 03, 2008

Should donors cap aid in Africa?

We've been writing a lot about this recently - how the right taxation improves governments and governance in developing countries - so we're pleased to see new ideas now coming thick and fast. Following the highly important Pretoria meeting discussed by Mick Moore, a new comment piece has just emerged in the Financial Times entitled How donors should cap aid in Africa.

"Some developing countries, most of them in Africa, have had high levels of aid dependence – in excess of 10 per cent of gross domestic product, or half of government spending – for decades. It is questionable whether this has been helpful."

The most worrying reason, it says, is the undermining of good governance by distortion of political accountability. And then it goes on to make a specific proposal.

"Donors collectively set an upper limit on the amount of aid they give to any developing country. This limit should be 50 per cent of the amount of tax revenue that the aid-receiving government raises from its own citizens, by non-coercive means and excluding revenue from oil and minerals. This would keep the governments of non-mineral countries dependent for revenue mainly on their citizens, and thus give them incentives to pay attention mainly to what citizens want, not donors. It would also encourage governments to raise more taxes from their citizens, since every extra dollar of tax raised would attract a matching increase of 50 cents of aid.

Higher taxes would help because there is strong evidence that the tax relationship is vital for accountable government. “No taxation without representation,” said the early Americans, and the converse also applies. Budget legislation is central to the political process, forcing governments to justify their actions in open debate. At the micro level, tax collection obliges governments to be in direct contact with most of their citizens and companies."

It's an interesting proposal, worth exploring further. Read more here. And let the debates begin.

Update, a few days later: the debates have indeed begun, in the FT Economists' Forum. Read more here.


Anonymous Anonymous said...

I agree with the thrust of the proposal to limit aid inflows. It needs refinement though (i.e. what about countries just emerging from civil war, perhaps temporary - really temporary - higher flows could be allowed until tax takes pick up). But would change the incentives/debate in an interesting way, as Adrian Wood suggests.

This proposal should certainly be debated among NGOs and policy makers. The aid dependency issue has not been discussed enough, but is coming up again in a big way. See eg 3 new or forthcoming books. See:

The lack of major results at the current Accra High Level Forum on Aid Effectiveness may yield increasing aid despondency among some activists, increasing the likelihood that more will shift to alternative agendas, including tax.

12:01 pm  

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