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GREAT insights Magazine

Domestic Resource Mobilisation: From Taxes to Spending

May 2012

Pezzini and J. Lomoy. 2012. Domestic Resource Mobilisation: From Taxes to Spending. GREAT Insights, Volume 1, Issue 3. May 2012. Maastricht: ECDPM

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The 2010 OECD Global Forum on Development discussed the challenges of domestic resource mobilization in developing countries and aimed to reverse an era of neglect of tax as a development catalyst. In 2012, the focus of the Global Forum shifts towards the critical linkages between revenues, expenditures and service delivery. 

There is a tendency for the revenue and expenditure sides of the public finance equation to be treated as separate silos. But creating a virtuous circle of effective public service and tax compliance is a fundamental challenge for all countries.

The role of tax revenues 

At the national level, moving towards simpler, more equitable and more transparent tax systems and a broadening of the tax base is not easy but would reap benefits over time. At the international level, striking the right balance between an attractive tax regime for local and foreign investment and securing the necessary revenues for public spending, is a key policy dilemma. Globalisation and competition between developing countries for investors can trigger a race to the bottom. 

After the 2010 Global Forum, the OECD established a Tax and Development Programme supported by a Task Force on Tax and Development, whose role has also been acknowledged by the G20.(1) The Task Force brings together representatives from the tax and aid communities from OECD and developing countries, business, international organisations and civil society. 

Linking tax reforms with other public financial management reforms, making public accounts transparent, assessing the pros and cons of taxes earmarked for particular expenditures and calculating the costs and benefits of tax expenditures and exemptions, and embarking on taxpayer education programmes, are all actions gaining currency with governments in developing countries. International and regional bodies can reinforce the role of supreme audit institutions, help bolster parliamentary scrutiny over both revenue and expenditures, and support non-state actors to monitor the use of public revenues. Improving the availability and quality of tax revenue statistics is also extremely important for informed policy making and better accountability. As a first step, the OECD, jointly with UN-ECLAC and CIAT, has developed a Revenue Statistics in Latin America database and web platform to facilitate fiscal policy dialogue and support the assessment of alternative fiscal reforms supportive to economic growth and income distribution.(2)

Enhancing the effectiveness of government expenditures 

Effective and transparent budgets are essential for sustainable economic management and public service delivery, thus contributing to broader development outcomes. According to recent evaluations, the main challenges of public expenditure in developing countries include the following:

  • Budget planning and preparation is often considered more efficient than its execution and oversight.
  • Whilst de jure improvements have often emerged, there are fewer de facto successes.
  • Reforms have often overly focused on capacities, the number and quality of staff and systems, rather than the capabilities to use these capacities in the political and bureaucratic environment.
  • There is often a high-degree of informality in budget execution systems- which often hinder sustainable reform efforts.
  • Whilst the political nature of reforms are well known, there is little practical guidance on how to take politics into account both in the design and implementation of reforms.
  • Evaluations of public expenditure systems have often concentrated on areas that are important to donor agencies rather than on the impact or sustainability of reforms.
  • Many donors continue to provide aid off budget, undermining the sustainability and transparency of countries’ budget systems.
  • Support to domestic accountability institutions tends to be fragmented and ad-hoc. 

On the positive side, interest in strengthening the performance of public expenditure systems continues to grow. At a regional level, Senior Budget Officials networks are increasingly active in sharing good practice on and helping to identify priorities. At the international level, there is increasing awareness of the ways in which donors themselves must reform their practices in order to ensure their support leads to more effective budget institutions. In this respect, the Busan Partnership for Effective Development Co-operation recognizes the importance of strengthening institutions linked to public expenditure for development effectiveness.(3) 

Effective Public spending: the case of infrastructure 

Infrastructure is a key ingredient to foster economic growth and to improve the competitiveness of economies. Greater availability and quality of infrastructure services typically leads to higher productivity of factors and lower production costs for producers. Current infrastructure gaps constrain both production development and competitiveness in developing countries. For this reason, infrastructure is a crucial component in the G20 Multi-Year Action Plan on Development endorsed by G20 Leaders in Seoul in 2010.

Important elements that need to be addressed to tackle infrastructure include:

1. Improving coherence and co-ordination among stakeholders. Co-ordination failures in infrastructure are often associated with the complexity of the institutional framework. It is essential to have an effective definition and application of responsibilities both at the horizontal level between ministries and at the vertical level between central and sub-national governments. 

2. Assessing the whole cycle of the policy-making process. In each stage of this process – spanning prioritisation and planning; execution; operations and maintenance; and monitoring and evaluation – governments have to consider assessments, accountability mechanisms and oversight to correctly evaluate the progress of the project. Appropriate allocation of responsibilities at each stage and adequate integration of policies throughout the whole project cycle both contribute to increasing the effectiveness of public infrastructure policies. Designing national systems of public investment helps governments improve the selection and evaluation of projects.

3. Involving the private sector. Despite their wide use, contractual arrangements between public and private sectors have revealed systemic failures in public policies. Exploiting the benefits of concessions requires above all strong regulatory capacity in terms of evaluating, tendering and managing the contracts. Faced with weak contract management, concessionaires may offer tendering prices below what they would offer in the absence of renegotiations and match or improve the initially expected revenues during the renegotiation. 

Tackling infrastructure gaps requires better public intervention not only in terms of increased investment but also of adoption of better policies and greater coordination:

  • Governments should conduct a thorough assessment of their infrastructure policy cycle, engaging the relevant stakeholders, to identify the most significant binding constraints. On the basis of such a diagnosis, they could improve the weaker phases in the infrastructure policy-making process as well as enhancing the overall co-ordination between the agents participating to this cycle;
  • The analysis can help policy makers identifying the most adequate institutions to manage infrastructure expenditures and to guarantee an effective and efficient functioning;
  • A regulatory framework that includes a system of checks and balances and clearly defines transparency and accountability mechanisms is paramount;
  • Regular dialogues to share experiences among governments facing similar challenges have proved to be a cost-effective way for benchmarking performance and addressing the shortcomings. 

A new conceptual framework to shape the future OECD Strategy on Development

Ever since the OECD was established in 1961, development has been at the core of its mandate and work. As the global landscape has evolved, the Organisation has begun to adapt its approach to development. Hence, at the 2011 Ministerial Council Meeting, OECD ministers endorsed a Framework for an OECD Strategy on Development. 

New poles of growth are emerging along with increasing economic and social interconnections between countries and regions. Worldwide, extreme poverty has decreased substantially and today a large number of poor people live in middle-income countries and urban areas. At the same time, the new “middle class” is showing increasing expectations for higher quality public services whilst many still remain vulnerable to falling back into poverty. 

Today’s global economic landscape has created both new opportunities and challenges for development. Additionally the international development architecture and agenda is rapidly evolving with new actors and new challenges associated with greater interdependence. These elements underline the importance of the need of broadening our approach to development, beyond development assistance. The OECD’s unique way of working on policy issues, based on evidence-based policy dialogue and knowledge sharing, makes the Organisation well placed to respond to the need for dialogue. 

A new comprehensive and inclusive approach to development needs an appropriate conceptual framework recognising that:

  • “Development” is no longer a policy challenge for developing countries only – major trends and externalities concerning inequality, climate change and conflict make development a global objective with implications for both developed and developing countries;
  • There is a need to go beyond the “North-South” and “donors-recipient” approaches;
  • There is no “one-size-fits-all” approach. A new “economic thinking” necessarily demands a change in emphasis, from prescriptive to more diagnostic approaches;
  • The progress made in many developing and emerging economies – and in many OECD economies – has been based on a diversity of policy solutions and has highlighted the co-existence of different development trajectories;
  • Approaches that cut across multiple disciplines and perspectives are required; along with better co-ordination and sequencing of policies to adapt to the multidimensionality and interconnectedness of development challenges.

In this respect, the Strategy on Development will build upon the Organisation’s accumulated experience on development, on promoting effectiveness and impact of international development co-operation, and better leverage its broad inter-disciplinary expertise in public policy making. 

A key component of the Strategy will be to support OECD Member countries to promote development in a more coherent manner (i.e. policy coherence for development). In addition, the Strategy will promote an effective OECD participation in international efforts to seek effective solutions to global issues and development challenges, as well as engagement with developing countries on a demand basis (e.g. by providing platforms for knowledge sharing and mutual learning). 

Mario Pezzini is the Director of the OECD Development Centre. Jon Lomoy is Director of the Development Co-operation Directorate at the OECD. 

This article was published in GREAT Insights Volume 1, Issue 3 (May 2012)

Footnotes
1. http://www.oecd.org/document/51/0,3746,en_2649_34565_45958051_1_1_1_1,00.html
2. http://www.latameconomy.org/en/lac-fiscal-initiative/revenue-statistics-in-latin-america/#c18188 
3. http://www.aideffectiveness.org/busanhlf4/fr/themes/building-blocks/558.html

Economic Transformation and TradeBusiness and DevelopmentDevelopment Finance and TaxationDomestic resource mobilisationInfrastructurePublic expenditureTax

External authors

Jon Lomoy

Mario Pezzini