The international environment has changed. The global economic crisis has changed the way we must think about financing our development. The challenges of domestic resource mobilization and, more fundamentally, the governance of domestic revenues have acquired renewed traction.
Because the international development assistance environment will continue to change, I advocate a vision of a Fiscal-Self-Reliant Continent through a sustained growth process and stronger tax administration for effective domestic resources mobilization.
I personally believe that an effective domestic resource mobilization is essentially the Cornerstone of Broad - Based Development. I would like to share three key messages if the continent is to become fiscal-self-reliant.
First key message: Promoting sustained growth in Africa to broaden the fiscal base. Historical records show a broad range of outcomes in countries achieving sustained economic growth. Economic studies have emphasized this trend in some countries, particularly in East Asia countries, which have recorded very rapid rates of growth, capital accumulation and remarkable domestic resources mobilization and are catching up already with industrialized countries.
The lesson I draw from Asia is that there is a need to develop a sound Private Sector to fuel the process of Sustained growth and higher income. In Africa the dual challenge lies in generating an increasing stream of domestic resources, and efficiently channeling them to development ends for increased productive capacity and to lessen the supply-side constraint. Such a scenario requires an environment conducive to private savings, efficient mechanisms for allocation of public expenditure and adequate room for private initiative.
In Sub-Saharan Africa, the mobilization of domestic resources has been constantly much lower than in the newly industrialized Asian countries (Hong Kong, Indonesia, Korea, Malaysia, Singapore, Taiwan and Thailand), during the past decades, and the trend has been persistent. Moreover, savings rate in the developing Asian region is even higher, about double that of Sub-Saharan Africa countries. Asian countries have remarkably increased their savings rates and at the same time experienced astonishingly high growth rates.
It is therefore fundamental to promote and catalyze the process of sustained growth to generate sustainable higher income, which broadens the fiscal space and creates predictable revenue flows for Governments, indispensable for effective service delivery to the citizens.
Second key message: building capable states. Mobilization of domestic resources is the foundation for self-sustaining development. Domestic resources play the main role in financing gross domestic product and social programs. This also leads to greater predictability in Budget Management and Public Investment Programs (PIP).
Taxes are without a doubt the foundation for the making of capable states. Improving tax administration and domestic revenues are therefore means to build a path towards fiscal-Self-reliance, hence effective socioeconomic service delivery.
Aid and mutual accountability will remain inextricable though, notwithstanding, taxes are more reliable than donor aid and the current volatility of aid flows underlines the fact that long term predictable finance is best achieved through domestic revenues.
While Africa’s resource mobilization has improved over the last decade, it remains insufficient to address the daunting challenges and below potential of the region’s taxable capacity. Most African countries do not raise sufficient domestic resources to finance their own development.
Third and lastly: Taxes, citizens and institutions. Because Taxation is essential to sustainable development, all sectors of society should work together to promote fair and efficient tax systems and administrations that will ensure that each citizen receives and contributes to the fruits of economic achievement and, at the same time, demands greater accountability.
Effective institutions and conscious citizenship institutions, however, must also grow from within and be adapted to the challenges of each country. Building institutions to increase domestic revenues of governments is a defining challenge. Nevertheless, there is still room among other things for simplified tax systems that improve predictability of tax revenues.
By Dr. Kamal Elkheshen
OSVP Vice-President, The African Development Bank Group
Excerpted from his presentation at the Joint ATAF-KOREA and ADB Conference on Domestic Resource Mobilization Challenges to African Tax Policy and Administration.