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New Study Reaffirms Investments Can Yield Convincing Development Returns

Last July, the Financing for Development Conference in Ethiopia saw more than 30 donor and developing nations come together to recognize domestic resource mobilization (DRM), and the role that it can play in making global development truly sustainable. Through the Addis Tax Initiative (ATI), key donors, including the United States, enthusiastically endorsed DRM and pledged to substantially increase assistance to partner nations.

As the ATI prepares to celebrate its one year anniversary, the timely role that the conference and DRM are playing in finding new solutions to development financing is becoming clearer.  DRM activities raise revenue that should allow countries to pay for their own development, but many have asked whether we are sure that increased revenue is used for this purpose?  Previous studies have not specifically addressed this question.  USAID commissioned a study by Nathan Associates to look at this question in the context of health spending.  The preliminary results show that an increase in the national tax revenue levels leads to a substantial increase in health spending, regardless of whether the country is poor or middle income.

This evidence further supports the growing consensus among international development thought leaders that DRM is an essential component of achieving the Sustainable Development Goals (SDGs). Organizations, including the Bill & Melinda Gates Foundation, the World Bank, the Organisation of Economic Co-operation and Development and others, are now espousing the importance of DRM and improved tax systems.  A recent Wall Street Journal opinion piece authored by Bill Gates points to Rwanda’s success at raising tax revenue as evidence of the critical role DRM can play in transforming societies.

While USAID has had some engagement on DRM assistance for several decades, the issue has recently gained significant momentum within the Agency.   At present, USAID has DRM activities in 14 countries, and a few examples are highlighted below:

  • In Liberia, USAID has helped increase government revenue through better, more transparent management of natural resources, establishment of revenue collection windows at high traffic areas, and IT applications to expedite reconciliation of tax and customs collections. A new, larger, more targeted project will support work at the Ministry of Finance and the Liberia Revenue Authority.
  • In Jordan, USAID helped the government identify and register 26,000 professionals, bringing an important segment of the economy into the tax system. More recently, the Agency helped the tax department complete a holistic assessment, applying the Tax Administration Diagnostic Assessment Tool to help identify priorities for improving the tax system.
  • In El Salvador, USAID is continuing to help the government expand the tax base, improve taxpayer services, improve collection of delinquent taxes and raise the level of taxpayer compliance. (Net tax revenues increased from 11.5 to 15.1 percent of GDP between 2004 and 2015).
  • In Afghanistan, where Customs collects almost half of domestic revenues, USAID has been helping to improve management of tax and custom valuation, while also streamlining the processes for import, export and transit to reduce the time and costs of cross-border trade.

Experiences like these help to confirm that DRM efforts can be very cost-effective – they return many times the investment by USAID or other donors. A large portion of the resulting tax revenue is then spent on social sector and infrastructure programs that improve the lives of citizens.

As the world begins working toward achieving the ambitious goals set out through the SDGs, DRM rightfully belongs front and center in our development toolbox for its essential function of supporting country-led, sustainable development.

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This is a guest post from Eric Postel, Associate Administrator of USAID. This is the second post on the topic of ownership of resources for MFAN’s ACCOUNTdown to 2017 Dialogue Series.

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