External Development Finance (EDF) remains a critical factor in fostering economic growth in Africa’s developing economies. Official Development Assistance (ODA) is declining and recipient countries are adapting to the changing development finance landscape by diversifying their aid sources and mechanisms. In addition to traditional aid from public sources, there are now many new sources of finance and financial instruments for countries to choose from. Private capital in the form of bonds, non-concessional loans, risk mitigation instruments (including guarantees) plus philanthropic funds from foundations and trusts are all now playing a greater role, and given the potential volumes, could be a transformative source of development finance in the future.
Africa’s history is replete with conflict. Examples include Sudan (1962-2005), Chad (1966-87), Angola (1974-2001), Liberia (1980-2002), Nigeria (1967-70), Somalia (1991-93), Burundi (1993-2006), Rwanda (1994) and Sierra Leone (1991-2001).
Numerous factors have triggered some of the continent’s most devastating conflicts. These factors include borders created arbitrarily by the colonial powers, political manipulation of ethnic differences within African states, inept political leadership, corruption and poverty.
The aftermath of these conflicts has left behind a trail of devastating footprints. In designing appropriate post-conflict reconstruction policies, it is vital to indicate ways conflict impacts the socio-economic development of the country and its economic structure. The unending political tensions, wars and conflicts on the continent have had lasting negative impact on socio-economic development, which cannot be sustained in an environment riddled with violence, instability and insecurity (Conteh, 1998).
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. Official development assistance (ODA) to fragile states fell by 2.4% in 2011 and is expected to shrink further1. In some states it can constitute up to 55% of GDP. Others, however, are neglected and underaided. 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 further enhanced by weak technical, technological and statistical capacities, a real or perceived lack of legitimacy, and large informal and 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 management the risks involved.
Domestic revenue mobilization approaches whereby the focus lies on giving citizens a voice, broadening the tax base and the presence of simple and transparent revenue systems should be encouraged by development actors. 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.