Mobilising domestic financial resources for development

Remarks by Angel Gurría, OECD Secretary-General at the International Conference on Financing for Development 

Doha, 29 November 2008

The Monterrey Consensus is more relevant than ever

We are all familiar with the six key areas identified in the Monterrey Consensus. Just to remind ourselves, they are:

• Mobilising domestic financial resources for development -- the focus of this afternoon’s Roundtable;
• Mobilising international resources for development;
• International trade;
• International financial and technical cooperation for development;
• External debt; and
• Enhancing the coherence and consistency of the international monetary, financial and trading systems.

The list has certain symmetry to it. On the one hand, there are the fundamental resources required to achieve critical development objectives, such as the Millennium Development Goals. On the other hand, this list also summarises the resources that risk being hardest hit by the economic crisis.

Consequently, this conference is much more than a review of the Monterrey Consensus – it is an emergency meeting on how to protect the vital resources identified in Monterrey so that the crisis doesn’t turn into a development catastrophe, with consequences lasting for decades, after the economic crisis is over.

One of the challenges we face relates precisely to the degree to which the world economy has become integrated. This makes it very difficult to talk about “mobilising domestic financial resources” without also talking about “international trade”, or about “international resources” without also discussing “coherence”. What I would therefore like to do during my presentation is to first provide you with an overview of some of the things the OECD has been working on that relate to the specific topic of this session -- “mobilising domestic financial resources for development” -- and then conclude with a more general overview of how the OECD has been supporting the Monterrey Consensus and what we are doing in response to the global economic crisis, especially as it threatens developing countries.

Mobilising domestic financial resources for development: the critical role of taxation

On the face of it, taxation and domestic resource mobilisation might be low on the list of priorities, given the current crisis. However, even in these difficult times I see three compelling reasons for putting taxation at the centre of the domestic financial resource agenda.

First, taxes provide the long term financial platform for sustainable development. Taxes are the lifeblood of state services.

Second, taxation matters for effective state-building. Bargaining between governments and taxpayers plays a central role in the emergence of democratic governance. Citizens want more responsive government. They want the state to be accountable for its actions or inaction and taxes are the vital link between governments and societies.  Improved tax relationships between state, businesses and society have provided a strong underpinning for broad-based growth and state accountability in East Asia, for example.

I am not arguing for tax hikes across the developing world. How and from whom tax is raised matters, not just how much. One can easily imagine that a broad-based but low rate tax system is effective in resource terms. And a simple, fair and transparent system that operates with broad social consensus is important for good governance and compliance.

Third, taxation combined with economic growth is the antidote to long term reliance on aid. As my friend Trevor Manuel has famously said, the correct spelling of the word ‘aid’ is ‘T-A-X’.

Challenges to achieving a more effective taxation

But we have to be realistic about the challenges. Poor countries often lack the resources and capacity to build effective tax collection systems. Developing the institutions and the human capacity to implement tax policy in a way which enables transparency and certainty is a key challenge.  And both have to be maintained in the face of the constant threat of corruption, or tax evasion and elusion.

It may also be difficult to collect taxes from low income, agrarian economies with large informal sectors, and to avoid coercion, especially at local level.  Moreover, the poor often already pay an equivalent of tax in the form of bribes and informal fees.

Citizens may be unwilling to pay tax, if they perceive unfairness in taxation through special exemptions (such ‘tax expenditures’ are very high in Latin America for example) and/or partial implementation.  They also have, or believe to have a clear perspective of use or misuse of public funds.  The degree of fiscal legitimacy directly reflects the confidence that the people show in their government’s performance in collecting and spending tax revenue. The credibility of the tax system suffers when expenditure is regressive and widens rather than narrows the gap between rich and poor.  The role of taxation as an agent of equality and fairness is critical.  There is a direct relationship between the quality of expenditure and the readiness of citizens to meet their tax obligations.  Hence, expenditure must be better targeted to improve access to services like water and sewerage, health care and education, for the broad population base.

And tax collection problems do not necessarily stay within borders. Tax havens deprive governments of revenues needed for hospitals, schools and roads, forcing bonafide taxpayers to pick up the tab. This applies as much for developing countries as for developed ones. If developing countries are to take firm action to stop this loss of revenue and make the most effective use of their domestic financial resources for development, then they must have the tools to protect their tax bases from capital flight and international tax evasion. (And let me commend the UN, with assistance from countries such as France, Germany, Norway and South Africa, for putting the issue at the centre of our discussion over the next two days)

Tax havens undermine the tax base of both developed and developing countries by offering secrecy and no-tax environments to would be evaders. Most estimates place the value of assets held in tax havens to be in the order of trillions of (U.S.) dollars, much of this from developing countries. If even a small percentage of these assets (and the income they generate) goes unreported to tax authorities in the taxpayer’s home jurisdiction, the problem amounts to many billions of dollars of tax revenue that may go uncollected.

The OECD has developed standards of transparency and exchange of information that have been universally accepted. The implementation of these standards will allow developing countries to improve taxation of their own residents’ income not only in respect of undeclared foreign assets but also of domestic assets, since they reduce the attraction of shifting assets abroad. At the same time, it will force offshore financial centres to compete on the basis of services provided rather than secrecy offered.

Reasons for optimism?

There are reasons for optimism. Simpler, more transparent tax systems and a widening of the tax net can encourage taxpayer mobilisation. More certain and transparent tax administration, and more consultation, can improve relations with taxpayers, and thus voluntary compliance.  Bringing people into the tax net brings other benefits too. Taxpayers, however small their contributions, become part of the formal economy, acquiring rights and entitlements to pensions or social security.  And taxpaying can provide a foothold into the credit system. In Malawi, for example, the banks use a certification scheme for proof of tax paid as a rating of credit worthiness. There are democratic dividends too. Taxpayers become registered voters able to participate in the democratic process. Fiscal legitimacy and democratic legitimacy are two sides of the same coin.  As taxpayers see the impact of expenditure on their lives, they are more likely to pay their share, thus acquiring a direct stake in the system and engaging in the political process itself. This enables a shared dialogue on common developmental goals agreed by business, civil society and government through a transparent political process based on public access to information. 

These issues are described in this factsheet: Taxation, State Building and Aid

Change in developing countries will only come when driven by people in developing countries. There is an example of a landmark initiative which deserves donor support. The African Tax Administration Forum is currently being developed by a Steering Group of African Tax Commissioners from Botswana, Cameroon, Ghana, Nigeria, Rwanda, South Africa, and Uganda. It is African led, based on African assessments of African needs. It arose out of a meeting of 30 African Tax Commissioners with OECD officials, sponsored by OECD donors and the African Development Bank, which took place in Pretoria last August.

The  objective of the African Tax Administration Forum is to make a difference through mutual co-operation: for governments to share experience on good practices in taxation, for the benchmarking and tracking of performance in tax administrations, for the development of diagnostic tools and for a focus on capacity development programs. The Forum will provide a focus to the work already going on in the region.  The results will be better service delivery and taxpayer education, strengthened audit and human resource management capability, and ultimately increased accountability of the state to its citizens.

So what must we do now?

We need to develop a renewed focus on enhancing domestic revenues through broadly-based taxation, alongside higher aid flows at least in the medium term. Experience shows that this will both increase and enable greater predictability of revenues. It will also help ensure that aid-funded investments are sustainable, and prepare for gradual exit from aid in the long term.

Promoting demands in civil society for fair and transparent tax services strengthens the practical relationship between state and society. Support by donors for the development of a new Taxpayers Association in Kenya has had promising results. 

We need to do more to support revenue raising efforts in partner countries. In 2006, only USD 88 million of the 103bn US dollars of Official Development Assistance (ODA) from OECD countries was dedicated to tax and revenue related tasks. Despite this low figure, there is strong evidence that aid targeted at capacity building in tax administrations in Africa is money well spent. In Rwanda, for example, donor support to the Rwanda Revenue Authority resulted in a dramatic 60% increase of domestic revenue: as a percentage of GDP from 9% in 1998 to 14.7% in 2005.

We need to help countries retain and tax the profits attributable to them from multinationals, to increase transparency and to implement internationally agreed standards on exchange of information to counter tax evasion and other abuses.

We need to expand co-operation between international organizations active in the tax area particularly the UN Committee of Tax Experts, the IMF, World Bank and the OECD itself to enable us to work together with developing countries to improve tax policy and revenue administration, which will diminish reliance on aid in an uncertain climate.

The broader OECD development agenda in support of the Monterrey Consensus

The OECD has been working hard to advance the implementation of the other sections of the Monterrey Consensus. I’ll just provide a few highlights.

Mobilising international resources for development

The Policy Framework for Investment (PFI) was developed at the OECD “to advance the implementation of the UN Monterrey Consensus” (PFI Preamble). Two years after Ministers endorsed the PFI during the annual  OECD Ministerial Meeting in 2006, it is now widely used by many countries. The PFI is one of the few intergovernmental initiatives specifically addressed to the private sector chapters of the Monterrey Consensus. The Task Force that developed the PFI was part of an open, inclusive process: 50% OECD, 50% non-OECD.

Enhancing coherence and international trade

The Monterrey Consensus underscored that international trade is “in many cases the single most important external source of development financing”, and that “meaningful trade liberalization can substantially stimulate development worldwide, benefiting countries at all stages of development.”  The OECD has established jointly with the WTO a monitoring system on Aid for Trade to improve its effectiveness. Putting a spotlight on Aid for Trade creates incentives to improve aid delivery and to foster coherence between trade and other economic policy areas. 

Conclusion

Tax, trade and investment policies are all keys to successful resource mobilisation.

To succeed, developing countries must create effective tax systems and, with the developed countries’ help, tackle the curse of corruption, tax havens and tax evasion. We must also be prepared to help create an environment for investment that will make the private sector an engine of growth and diversification in developing countries. And we must support wide-ranging strategies for transforming developing economies through engagement in regional and international trade, to pull hundreds of millions of people out of poverty.

Let us push the Monterrey agenda forward on all these fronts here in Doha. The OECD stands ready to do its part.

Further reading:

Please consult the documents listed below.