December 6, 2017
Irrespective of the cause of conflict, an immediate effort to rebuild the nation remains the central focus of post-conflict countries. Meeting the social needs of the people, reinstating administrative capacity by rebuilding strong and resilient state institutions, as well having an effective public finance management system constitute key drivers towards state building.
Aid has been the largest and most reliable source of development finance for the least developed fragile states over the past decade, but is now showing a worrying downward trend. ODA to fragile states fell by 2.4% in 2011 and is expected to shrink further. In some States ODA can constitute up to 55% of GDP. Others, however, are neglected and under-aided. Thus, domestic revenue offers post-conflict states a promising and sustainable source of home-grown development finance.
Investing in the capacity of fragile states to mobilize their own revenue to support peace and state building is therefore critical as it reduces dependence on aid and helps finance human development and recovery. At the same time, it strengthens the contract between the State and its citizens, and can fortify intra-society relationships.
Several challenges confront the aid and resource mobilization of post-conflict states. Many fragile states rely heavily on only one or two types of domestic revenue, namely natural resources or customs revenues. Ensuring robust and transparent systems to capture, manage, and distribute these resources fairly remains thorny. Weak technical and institutional capacity can make it challenging to introduce direct taxation. It also fuels tax evasion and avoidance, capital flight, and criminal activities such as smuggling—with disastrous effects far beyond lost revenue.
The challenge of broadening the tax base of post-conflict states is exacerbated by weak technical, technological and statistical capacities, a real or perceived lack of legitimacy, and large informal and low productivity agricultural sectors. Moreover, over-generous tax exemptions awarded to multinational enterprises often deprive fragile states of potential revenues that could be used to fund their most pressing needs. This also undermines citizens’ tax morale and their confidence in the state.
Vast sums of potential domestic revenue are lost through illicit activities in fragile states. Steps must therefore be taken to comply with global standards on money laundering, tax evasion and bribery. The role of the donor community in providing support to post-conflict states to build their capacity to respond effectively to the challenges is crucial. According to the 2014 UN fragile states report, donors have made strong political commitments to helping developing countries raise revenue – in Monterrey, Busan and at the G-20. Yet despite evidence that this support pays dividends, only 0.07% of ODA to fragile states supports their tax systems. Prioritizing this support would ensure the use of countries’ own systems and better manage the risks involved.
Domestic revenue mobilization approaches which focus on giving citizens a voice, broadening the tax base, and developing simple and transparent revenue systems should be encouraged by development partners. They could also provide support by designing frameworks to secure fairer deals with multinational enterprises, particularly on proceeds from their natural resources and by being transparent about the tax exemptions that benefit them.
Dr. Edward K. Brown is ACET’s Director of Policy Advisory Services and Amanda Aniston is a research intern at ACET.
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 “Fragile States 2014: Domestic Revenue Mobilisation in Fragile States,” Organisation for Economic Co-operation and Development, February 6, 2014, http://www,gfintegrity.org/wp-content/uploads/2014/05/OECD-Fragile-States-Report-2014.pdf.
 “Monterrey Consensus of the International Conference on Financing for Development,” United Nations, 2002. http://www.un.org/esa/ffd/monterrey/MonterreyConsensus.pdf.
 “The Tunis Consensus: Targeting Effective Development From Aid Effectiveness to Development Effectiveness,” Tunis Consultations, November 4-5 2010, http://www.aideffectiveness.org/tunisconsultations.
 “G20 Declaration,” Russia G20, September 2013, http://www.g20.utoronto.ca/2013/Saint_Petersburg_Declaration_ENG.pdf.
Ministry of Finance and Economic Development of Ethiopia. Photo courtesy of the Ministry of Finance and Economic Development of Ethiopia via Facebook.