In today’s world, international aid is fickle, financial flows unstable, and many donor countries are facing domestic economic crises themselves, driving them to apply resources inward. In this environment, developing countries need inner strength. They need inner stability. And they deserve the right to chart their own futures.
This is within their grasp, and last week the launch of an unassuming-but-powerful tool marked an important step forward in this quiet independence movement. It’s called the TADAT, or Tax Administration Diagnostic Assessment Tool. At first glance, this tool may look inscrutable, technical, and disconnected from development. But listen.
Melissa Thomas, author of Govern like us, speaking at the World Bank recently raised a very interesting question: is our expectation that poor countries with limited resources can deliver high-quality governance unrealistic?
Can these countries provide the public goods and services that citizens demand and need, to be able to forge a strong social contract?
She compares the levels of revenue per capita in rich and poor countries and finds that in the poorest countries, levels of revenue per capita are so low that it would be years, or even decades, until they have enough to provide a decent level of public goods and services.
It is in that context that I thought of Sri Mulyani’s appeal during the Spring Meetings when she spoke of the need to clamp down on tax evasion and avoidance and boost the domestic resource mobilization (DRM) capacities of developing countries as a means of finding resources for financing development going forward.
If you could make one New Year’s wish for your country, what would it be?
For many Malaysians, Prime Minister Najib Razak’s wish for “a safer, more prosperous, and more equal society” likely resonated with their hopes for 2015.
Malaysians appear to be increasingly concerned about income inequality. According to a 2014 Pew Global survey, 77% of Malaysians think that the gap between the rich and poor is a big problem. The government has acknowledged that inequality remains high, and that tackling these disparities will be Malaysia’s “biggest challenge” in becoming a high-income nation.
How can Malaysia narrow the gap between the rich and poor? Global experience suggests two possible levers to achieve a more equitable income distribution.
The last few years have brought an uptick in the number of mining investments that have been the subject of disputes between investors and governments. This trend is of considerable concern to the players in the sector across the globe.
Yet, there is a wealth of wisdom to be—pardon the pun—mined from the literature over the past few decades in an attempt to distill what the main risk factors are in agreements that govern investments in the sector, with specific focus on taxation regimes.
Number of Expropriatory Acts by Sector – three-year rolling averages
Source: Chris Hajzler (2010), “Expropriation of Foreign Direct Investments: Sectoral Patterns from 1993 to 2006,” University of Otago in MIGA,World Investment and Political Risk 2011
Guest post from Jon Lomøy, Director of the OECD Development Co-operation Directorate (DCD)
Official development assistance – or aid – is under fire. In The Great Escape, Angus Deaton argues that, “far from being a prescription for eliminating poverty, the aid illusion is actually an obstacle to improving the lives of the poor.”
Yet used properly, “smart aid” can be very effective in improving lives and confronting the very issue that Deaton’s book focuses on, and which US President Obama has called the “defining challenge of our time”: rising inequalities.
As a recent UNDP report shows, more than three-quarters of the global population lives in countries where household income inequality has increased since the 1990s. In fact, today many countries face the highest inequality levels since the end of World War II.
There is clearly moral ground for arguing that it is unjust for the bottom half of the world’s population to own only as much as the world’s richest 85 people. Above and beyond this, however, academics, think tanks, and international organizations such as the OECD have found that rising inequalities threaten political stability, erode social cohesion and curb economic growth.
It is not surprising, then, that reduction of socio-economic inequality has moved to the centre of global discussions on the post-2015 goals. The OECD, responsible for monitoring official development assistance (ODA) and other financial flows for development, is complementing these discussions by exploring ways to better use existing financial resources – and mobilise additional ones – to promote inclusive and sustainable development. This includes redefining what we mean by ODA, as well as looking at the ways it can best be used to complement other forms of finance.
Taxing Labor versus Taxing Consumption?
Europe’s welfare systems face substantial demographic headwinds. Increasing life expectancy and the approaching retirement of “Baby Boomers” will increase public expenditures for years to come. Rightfully, much attention is focused on containing additional spending needs for pensions, health and long term care. But how is all this being paid for?
Currently, the majority of social spending, including most importantly pension benefits, in most countries in Europe and Central Asia is financed through social security contributions, which are essentially taxes on labor. This has two important implications. First, in terms of fiscal sustainability, the growth in spending is only a concern if expenditures grow faster than the corresponding revenues. Since labor taxes are the predominant source of financing for most welfare systems in both EU and transition countries, aging will not only increase spending, but simultaneously exert pressure on revenues. With the exception of countries in Central Asia and Turkey, the labor force, and hence the number of taxpayers that pay labor taxes will decline by about 20 percent on average across the region. Second, already today, labor taxes, including both personal income taxes and social security contributions account on average for about 40 percent of total gross labor costs in Europe and Central Asia (including EU member states), compared to an average of 34 percent in the OECD. This means that for every US$ 1 received in net earnings, employers on average incur a labor cost of US$ 1.67. And out of the 67 cents that are paid in labor taxes, 43 cents (or 65 percent) are directly used to finance social security benefits. By increasing the cost of labor, the high tax burden potentially harms competitiveness, job creation, and growth in countries in the region.
These are some of the views and reports relevant to our readers that caught our attention this week.
Financing progress independently: taxation and illicit flows
“With less than two years to go before the deadline for the achievement of the Millennium Development Goals (MDGs), it is time to take stock of what the goals have achieved and, just as importantly, what the goals have overlooked – including finance.
The debate on what follows the MDGs – the post-2015 framework – is a chance to focus on two major finance themes that are not reflected in the goals themselves. First, that taxation is the central source of development finance; and second, that illicit financial flows undermine effective taxation and require international action. If this chance is not to be wasted, we need a consensus – and soon – on targets in these interlinked areas.” READ MORE
Cards on the table, confronted with a closely argued 11 page exec sum, I am unlikely to then read the full report. But the short version of Meeting the Challenges of Crisis States, by James Putzel (LSE) and Jonathan Di John (SOAS), is a meal in itself. It summarizes 5 years of DFID-funded research by the Crisis States Research Centre, led by the London School of Economics, and is a great way to take the temperature of academic thinking on ‘states with adjectives’ – fragile, failing, crisis etc etc.
The key question it seeks to answer is why the daily and inevitable tensions of politics and ‘conflict as usual’, which exist in any society, tip some states over into a downward spiral of distintegration, grand theft and violence, while others, even poor ones, prove resilient. Key Findings?
Like most political scientists, Putzel and Di John believe that if you want to understand politics, you have to understand elites. And that means jettisoning preconceptions of ‘good governance’ (aka how much do the institutions resemble an idealized notion of American/European democracy) and thinking instead about the underlying political settlement. How do individuals and groups with different slices of power protect and negotiate over their pieces of the pie?
What leads to fragility? In the rather disturbing language of the report:
Yesterday, I discussed India’s incredible economic transformation over the last two decades and some of the challenges that the country is currently facing. So, what can India do to reduce the impact of global uncertainty and improve growth performance and boost investor confidence?
India’s firepower to respond to a crisis with traditional monetary and fiscal stimulus is much weaker now than prior to the 2008 crisis. Fiscal space for additional spending is severely constrained in light of continued high deficits. Room for monetary policy easing is modest in light of continued high inflation, and still low real interest rates. Moreover, when investor confidence is at a low ebb as it is in India, easing monetary policy would be tantamount to “pushing on a string.”