It’s not about the money

"$93,000. That's all I want. Not more."

Talking to Matt recently, he made the point that the ‘more aid for development’ lobby is bigger than it has ever been. Advocacy organisations like One, the 0.7% promise, and the Robin Hood tax are all pushing in this direction. The media are pushing it, too, though sometimes through negative reinforcement, for example when the Guardian complains about the reduction of the US Government’s aid budget. It’s something that is easy to advocate for, easy to measure, and easy to promise (if not always easy to deliver). Unfortunately, there are a few significant problems with this lobby that I want to address. These are that it promotes a skewed conception of what development is, that it reduces incentives for domestic revenue generation, and that it can lead to economically unsound approaches to development funding.

The first, and biggest, problem is the conception of development that it pushes. As Matt’s recent post explained development is more than improved outcomes. It is improved outcomes that can be sustained in the absence of aid. The more money for development lobby says things like ‘$50,000,000 will get ARVs to every person who needs them in Africa’. Now, it would be ludicrous for me to argue that getting ARVs to everyone who needs them is a bad thing. However, the statement is incredibly misleading. To give a good picture of the developmental impact of that $50,000,000, the statement really should read: “$50,000,000 will get ARVs to everyone in Africa who needs them for a period of 18 months. After this, we will need to find another $50,000,000 or perhaps only $40,000,000 since some networks will have been built and norms changed, but we’ll still need a lot more money to actually purchase and distribute the ARVs. We’ll continue to need all of this money from aid sources until we come up with an internal revenue generation scheme or we solve the problem of HIV prevalence rates.”

The first statement promotes the idea that the problems with ARV distribution are purely monetary, and if only we had the cash, we could solve the problem once and for all. This is nonsense. Anyone who works in development will recognise it as such. There are big institutional and management barriers to better distribution, and sometimes these are complicated by things like a lack of political will, or ethnic/regional/identity tensions that lead to some groups being under-served and others over-served. There may be confounding issues of corruption, as drugs and central medical stores are a brilliant source of illicit income. What all of these ancillary problems have in common is that their solutions are not primarily monetary. Having more money may help, but it depends on where you spend it, and how you change the incentives at work.

Either the money-for-development lobby needs to accept that it’s essentially making the case for sustained humanitarian aid, which may not be a bad thing though it’s not going to be very developmental, or it needs to show some evidence that lack of money is the primary constraint to building sustainable systems for service delivery.

Secondly, constantly increasing the volume of aid available to developing countries provides terrible incentives for the establishment of a viable taxation regime. I’ve blogged before on why a working tax regime is so important, so I’ll just summarise here. Taxation revenue is infinitely superior to aid because: the line of accountability runs from Government to citizens, not Government to donors; it is fungible on the budget, so that it can be used wherever it is needed in response to changing circumstances; it is contestable, so that every distinct group with electoral representation (different ethnic groups, different political parties, different classes) has a say in where it gets spent. Taxation can also help incorporate the informal sector into the legal system, which can greatly enhance its economic potential. What’s more, unless we want aid to be permanent, taxation has to ultimately finance everything that aid is currently financing.

The problem is, taxation is unpopular. It might have long term good effects, but nobody goes into the streets celebrating higher or more widespread taxes, especially when there’s the possibility of funding things through ‘free’ aid, or concessional loans instead. This unpopularity, coupled with the prospect of increasing aid receipts, is a terrible incentive for aid-recipient countries to actually get their tax structures and regimes right. Ultimately, it leads to the bad situation where VAT and indirect taxation becomes the most important source of tax revenue, which is hard on the poor.

Increasing tax revenues is only partly a problem of getting the tax structure right. Once you’ve done this, you still need a viable economy in order to provide the tax revenues that will eventually fund all the services and social safety nets that are required to protect the poorest and most vulnerable. This is another area where increasing money for development has little impact: all the biggest issues are either structural (such as trading regimes, tax/subsidy structures, asset ownership patterns) or bureaucratic (such as complex systems for registering a business).

Finally, the mechanisms being used to raise new funding need consideration. There’s an increasing lobby for a Financial Transactions Tax (FTT), or ‘Robin Hood Tax’ to be introduced to increase the amount of money available for financing climate change and development interventions – see this post by Duncan Green. I’m not a fan of this lumping of issues. The tax should be introduced if there are sound reasons for taxing the sector: i.e. if there is an economic benefit to taxing it in order to improve the performance of the sector. If we think too many financial transactions are made, then it makes sense to tax them to try and reduce the number of them. I’m not sure about whether this is the case – whether there is an economic net cost or net benefit to taxing the sector isn’t clear to me.

Financing for development is a completely separate issue. If the FTT is a good idea, it’s a good idea regardless of whether the money it raises goes to poverty reduction abroad or improved public services at home. If we need more money for development, this money should be raised from the whole pool of taxation revenue raised in each country, whether or not this includes an FTT. The need for funding is independent of the methods used to raise this funding; and it must be justified against the competing claims for tax revenue (such as health care, education and demand stimulus domestically, or military spending) on its own terms, regardless of the means used to raise the tax revenue in the first place. If it’s ‘better’ spending than military spending (and I would generally be inclined to say it is, though not always), then it should be financed at its expense regardless of how the financing is raised. If we decide we need more funding in order to spend on a range of important issues, and we independently decide that an FTT is a good idea, great – we get a windfall of new tax revenue, which should be distributed according to the relative merits of each funding area, until their marginal benefits are equalised. If however, we decide that the FTT is a bad idea, but we still need to spend more on certain areas, then we can raise taxes in other areas, if the benefits outweigh the costs.

I want to make it clear that I don’t think that more money is a bad thing. What I do think is that it’s far from being our constraining factor. There’s actually a huge amount of money available to developing countries each year that isn’t disbursed to them, or that is disbursed and not spent. I know – I do this kind of accounting on a country level and can see the difference between what we are promised and what we get, and what we get and what we spend. The biggest problems for development don’t just need more money; and even in the very few cases where they do, we must always be focused on the end result of being able to raise that money domestically in developing countries through a sound economy. This is where our greatest attention is needed, not in campaigning for extra cash when we’re not sure how it should be spent.

6 thoughts on “It’s not about the money

  1. Stanley

    April 15, 2011 at 1:50pm

    It is not about aid.

    China, South Korea, Singapore, Dubai… provide the evidence.

  2. Lee

    April 15, 2011 at 6:46pm

    Cash. Transfers. No disincentive to taxation.

    Good points though.

  3. Ranil Dissanayake

    April 16, 2011 at 8:42am

    Stanley – I think it’s quite possible to thrive without aid (though of your examples, South Korea actually received more aid in the 1950s than has ever gone to another country during a similar timeframe, primarily because of it’s geopolitical importance, and Dubai developed on the back of a massive boon of oil).

    However, I don’t think we can discount the role of aid altogether – it may be able to help, especially as part of wider development interventions. But I do agree with your basic point that that the biggest changes that need to occur are completely aid independent.

    Lee – I actually really like that aspect of cash transfers. But what I want to see is some evidence of long term structural impacts of cash transfers: do they actually stimulate the improvement of the overall education system? Do they stimulate the transformation of the economy?

    I don’t think the evidence is there to make any judgement on this yet, and in its absence I’m at best undecided on them, because I think these things are at the heart of what development should mean.

  4. Dave Algoso

    April 17, 2011 at 3:37pm

    Ranil, great post. I agree with 95% of what you wrote, especially your point about how money isn’t the primary constraint.

    My only point of difference is on lumping the FTT with financing for development. I agree that they are separate issues. But that said, there is precedent for dedicating a particular revenue stream to an unrelated expense. There may not be a rational/economic justification, but there is a political one: it binds two separate constituencies into a common goal. This can help both of them get implemented, and stay protected from future attacks.

    If the world needed both tax A and expense B, it might still be the case that neither had the political constituency to survive on their own. Together, perhaps they have a chance. This could backfire if A raises more money than B needs. I think that’s the case here, where A = FTT and B = development financing. It’s the same with the US gasoline tax, which is dedicated to road building; a lot of it could be better spent on mass transit. But I don’t think that linked unrelated taxes/expenses is a priori a bad idea.

    A final point: None of this would be necessary if our funding allocation decisions were economically rational, and our budgets actually equalized the marginal benefits each year. But lord knows that doesn’t happen.

    (PS – Regarding evidence for CCTs: Duncan Green had a recent post on this. In case you missed it:

  5. Ranil Dissanayake

    April 18, 2011 at 6:50am

    Hi Dave, thanks for the thoughtful comment (and the link to Duncan’s post. I did read it, and the evidence from DFID still leaves me wanting to know more).

    First off, I do agree that budgets are not done rationally, though some are better than others (across space and time), and I also do agree that the idea of a hypothecated tax is not new, and may have benefits from the political side. The problem is that we’re fighting a quite difficult battle (and I really do think it’s being fought very well, by Oxfam and others) for a pretty small gain. And frankly, if I was living in the UK right now and was in favour of the FTT (as I’ve intimated above, I’m unsure about the tax itself anyway), I’m not sure I would think that the fit between A and B is very good here – I would imagine that the cuts to healthcare would be a much better alliance. More political will to get the FTT through, if it’s needed, and much more support for the use of the financing, and one which is also very important.

  6. Sam Gardner

    April 18, 2011 at 1:20pm

    I support Ranil for 100 % on the Robin Hood tax. This kind of coalitions can only end up in tears.

    Do we want to diminish the number or amount of transactions or just raise some income with less externalities than income tax? If you are allied with the environmental lobby, maximizing the income (short-term or long-term) might be the goal. Short term, you just don’t care whether the economy survives, and you take them by surpriseThis would only by accident to an optimal tax rate.

    It is a very dangerous game we are playing, and sometimes I wonder whether the little apprentice sorcerers know what they are doing. Do we really want to have a tax system that is fragmented in a rather random way? Income tax paying for pensions, added value tax paying for Health care?
    What would be the political results of such a system?

    For empowerment, and accountable governance, transparency is important. The proposed tax would make a very haphazard system acceptable. Why not simply use it to fund the UN?

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