Sun, Jul 28, 2019 page7

• How developing countries can pay for sustainable development

  • By Tania Masi, Roberto Ricciuti, Antonio Savoia and Kunal Sen
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  With objectives as far-reaching as ending poverty in all its forms and delivering quality education to all by 2030, the Sustainable Development Goals (SDGs) are highly ambitious — much more ambitious than their predecessor, the Millennium Development Goals. Whether or not the world achieves them will depend crucially on money, and on government funding in particular.

  Traditionally, official development assistance (ODA) would play a pivotal role in financing an agenda such as the 2030 Sustainable Development Agenda, which lists the 17 SDGs, but at a time when nationalist rhetoric and isolationist policies are gaining traction in some of the world’s donor countries, beginning with the US, ODA will not be sufficient.

  Foreign aid has remained flat, at best, in the last few years, and there is no increase in sight. On the contrary, the specter of global recession — heightened by US President Donald Trump’s trade dispute — makes a reduction in donor governments’ revenues, together with increased domestic demand for public spending, a distinct possibility. None of this bodes well for foreign aid flows.

  This means that, to implement the SDGs, developing countries will need to rely increasingly on their own resources.

  The 2030 Agenda anticipates this imperative: one of SDG17’s main targets is to “strengthen domestic resource mobilization … to improve domestic capacity for tax and other revenue collection.”

  The question is how.

  Poor fiscal management means that developing countries — particularly in Africa, home to 27 of the world’s 28 poorest countries — are often plagued by debt crises and inflation, and many are at the mercy of commodity-price cycles.

  Tax collection is a major challenge for these economies: The tax revenues low-income countries collect amount to about 10 to 20 percent of GDP, on average, compared with about 40 percent of GDP in high-income countries.

  One major reason for the lack of tax revenues is that these countries tend to have large informal economies. Another reason is that they invest little in the infrastructure needed to implement personal taxation, relying instead on sales taxes, which are easier to administer but bring in less revenue.

  Add to that poor management of what is collected, and these countries fail to deliver needed public goods and services, let alone ensure fiscal sustainability.

  The effectiveness of tax collection and the strength of budgetary systems, our research shows, depend crucially on the extent to which political institutions place constraints on executive power. Governments with credible, institutionalized systems of checks and balances tend not only to collect more tax revenues, but also to have more transparent and predictable budgetary processes.

  A major reason for this is accountability. Giving a single executive virtually unchecked control over a government’s financial resources raises the risk of sudden changes in budgetary priorities and nurtures the temptation to spend on projects that enrich a few at the expense of the public good.

  However, when political leaders are unable to use state revenues freely — say, to enrich themselves or their cronies — they might be more likely to invest in strengthening the government’s fiscal capacity, including its ability to design, implement and monitor a budget.

  In a well-functioning parliamentary system, for example, the state budget is overseen by a group of elected authorities in a relatively transparent manner. No one person has the power to shape the process in self-serving ways. Instead, leaders are under pressure to respond to the voters’ needs and preferences.

  In such a context, taxation becomes an informed, consensual transaction between citizens and the state. This bolsters trust in official institutions, in turn boosting revenues and creating stability.

  According to our research, placing institutional constraints on the executive would, over about nine years, lead to a 2.4 percent increase in the GDP share of total revenues and income tax revenues. Such changes would also raise the quality of fiscal planning — the accuracy of revenue forecasts, the effectiveness of budget implementation and debt management — above the global average.

  These gains could translate into more textbooks in local schools, more vaccines for local health services and more resources for poverty-reduction programs.

  In other words, a taxation system overseen by institutions that ensure transparency and accountability could support progress toward achieving the SDGs.

  Of course, the effects would not be instantaneous. Institutional reform is a gradual process and legal changes do not immediately translate into behavioral ones, but embedding checks and balances into governance — particularly to limit the executive’s discretionary budgetary authority — is integral to accomplishing the kind of structural transformation developing countries need if they are to create more stable and prosperous futures beyond 2030.

  Tania Masi is a researcher at the University of Milano-Bicocca. Roberto Ricciuti is an associate professor at the University of Verona. Antonio Savoia is senior lecturer in Development Economics at the University of Manchester. Kunal Sen, a professor at the University of Manchester, is director of UN University World Institute for Development Economics Research.

  Copyright: Project Syndicate
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