DEVELOPMENT: OECD Urges Donors To Help Fragile States

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Credit: fragilestates.orgBy Richard Johnson

PARIS (IDN) - A new report finds that international donors are not doing enough to help fragile states increase their domestic revenue though they had pledged as far back as 2002 to make it a priority to help poor countries mobilise more internal revenues.

Subsequently, fragile states still collect less than 14% of their gross domestic product in taxes on average, well below the 20% UN benchmark viewed as the minimum needed to meet development goals and ameliorate poverty. Afghanistan, Ethiopia and Pakistan have tax collection rates below 10% of GDP, says the Organisation for Economic Co-operation and Development (OECD) in a report titled Fragile States 2014: Domestic Revenue Mobilisation.


The significance of the report is also underlined by the fact that by 2018, most of the world’s poor will be living in fragile states marked by conflict, instability and poor governance.

The report reveals that aid remains the largest source of development finance for fragile least-developed countries. Yet a mere 0.07% of official development assistance (ODA) to fragile states is directed towards building accountable tax systems. Smarter use of aid to support tax revenues and remittances would help countries to become gradually less aid-dependent. This is particularly relevant for fragile states -- those marked by conflict, instability and weak institutions – which struggle to attract foreign investment.

“Donors are not fulfilling their promises to focus more on domestic revenues,” said Jon Lomøy, Director of the OECD’s Development Co-operation Directorate. “We are missing out on a vital opportunity to invest in smart aid.”

Accountable tax systems are crucial to state-building, but the amount of aid assigned to building them is near to negligible next to the 18% of ODA that goes towards economic infrastructure like transport, communications and energy systems, the 12% spent on health or the 7% spent on education. In Côte d’Ivoire, Ethiopia and South Sudan, just a few thousand dollars of aid money a year are spent on domestic revenue mobilisation.

Rising share of world’s poor

Poverty experts are increasingly concerned about fragile states as they are home to a steadily rising share of the world’s poor and yet they are seeing aid levels taper off, according to the report.

Over a third of those living on less than 1.25 USD per day are in the 51 countries the OECD views as fragile and the share is set to rise to a half by 2018. ODA to fragile states fell by 2.4% in 2011, by 0.3% in 2012 and is likely to shrink further. Remittances equate to double the level of aid going to fragile states. Foreign direct investment is only half of the size of aid.

The 2014 Fragile States report suggests ways to direct more aid into projects that can expand tax collection while also helping to build accountability and create a social contract between states and citizens. A related OECD initiative, Tax Inspectors Without Borders, will be launched in 2014 to help poor countries combat tax evasion.

The 51 countries on the OECD’s monitoring list of fragile states include the Central African Republic, Haiti, North Korea and South Sudan. Countries added to the list in 2014 include Egypt, Libya, Syria and Mali. Iran and Rwanda were among those removed. 

The Rationale

The rationale behind the report is that reducing poverty worldwide is a top priority for the international community as the deadline for the Millennium Development Goals (MDGs) approaches and they turn their attention to designing a poverty eradication agenda for post-2015.

“This is a crucial time for fragile states,” says the report adding: “They are the ones furthest away from the Millennium Development Goals. They will be home to more than half of the world’s poor after 2018. Yet, the aid they receive is shrinking, and they have limited access to alternatives for financing development such as remittances and foreign direct investment. The domestic revenues they raise are not enough.”

Progress on the MDGs has been much slower in fragile states than in other developing countries. Of the seven countries that are unlikely to meet a single MDG, six are fragile. Despite this, aid to fragile states is falling. It declined by 2.4% in just one year (2011) and is expected to shrink further, especially in least developed fragile states, says the report.

Remittances

Remittances from migrants are the largest financial inflow in fragile states (56%), compared to aid (29%) and foreign direct investment (15%). The international community has yet to harness remittances as a development resource - for instance by facilitating their transfer, supporting their use to secure access to financial capital and matching them with aid where they are used to finance development.

In fragile least developed countries, aid remains the largest financial inflow (45%). Several depend heavily on aid and have few alternatives: in Tuvalu, the Solomon Islands, Afghanistan, Liberia, Sao Tome and Principe, Kiribati and Burundi, aid represents between 20% and 56% of GNI (gross national income).

The report sums up: In short, aid is declining in fragile states, foreign direct investment is volatile and difficult to access, and remittances are insufficiently used as a resource to finance development. This is why securing other sources of financing has become ever more important for fragile states. [IDN-InDepthNews – February 12, 2014]

Image: http://www.indepthnews.info/images/Fragile-States-poster-image_2.jpg | Credit: fragilestates.org

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