New CSIS Report Looks at Incorporating Political Economy Considerations into DRM Strategies

June 11, 2019

Helping developing countries put their finances in order has shown to be cost-effective development assistance. For example, the government of El Salvador has generated $2.4 billion of additional state revenue through a decade of tax system reform assistance by the U.S. Agency for International Development (USAID).

Speaking at a recent Center for Strategic and International Studies panel on the connections between political economy analysis and domestic resource mobilization (DRM), USAID’s Kimberly Rosen—Deputy Assistant Administrator, Bureau for Economic Growth, Education, and Environment—said USAID DRM programs stress six tenets: local leadership and ownership; benchmarking against international standards; flexibility to country needs; inclusion of the private sector and civil society; long-term commitment to DRM processes; and integrity of expenditures once governments realize increased revenues.

“There is something to be said about political will generated here in donor countries. [USAID has] conservatively estimated that, when successful, our programs, for every dollar we have invested in DRM assistance programs, have raised another $20 in new revenues. That is the real value for money that helps us gain the political support we need to sustain our budgets in this space.” —Kimberly Rosen

USAID considers DRM central to governments’ journeys from aid dependence to greater self-sufficiency—so they can increase funding for their schools, healthcare, roads, and other needs. But what if power brokers and bureaucrats in a poor country see fiscal reform as threatening to their status quo?

“Rethinking Taxes and Development: Incorporating Political Economy Considerations into DRM Strategies,” a 54-page report launched with a panel discussion on May 31, describes how to overcome the political pushback encountered by many countries undertaking fiscal reforms and potentially unpopular changes to legislation, which might be reflected in:

• Lack of parliamentary support;
• Outsized influence of the elite;
• Entrenched bureaucracies;
• Resistance from vested interests; and
• General distrust of government by civil society.

The research for the report was conducted by CSIS, in partnership with DAI, in Uganda and Liberia—low-income countries aiming to expand their tax bases—to assess the political and economic conditions affecting DRM reform efforts.

Panelists cited the example of Liberia in 2016, before the launch of USAID’s Revenue Generation for Governance and Growth (RG3) project, where political and economic leaders acknowledged that the government needed more revenues to pay for services such as clinics and schools. The RG3 team worked with Liberia’s civil society and others to keep the tax-paying populace educated and informed.

“We were able to engage the government and build consensus on the most important reforms,” said DAI’s Alexander Kitain, the RG3 Chief of Party. “In the end, what was important was that [Liberia’s leaders] were prepared for the change, and they knew what they signed up for.”

Liberia’s government, supported by RG3, passed an excise tax bill and implemented e-tax filing, mobile tax payments, tax payments through commercial banks, and a data processing center to gather and collate the incoming tax information electronically. After three years of reforms, the Liberian government is realizing greater revenues and seeing improved taxpayer compliance.

Kitain and Rosen were joined on the panel by moderator Daniel Runde of CSIS; George Guess of George Mason University’s School of Policy, Government and International Affairs; and Muyangwa Muyangwa, Technical Assistance Advisor at the International Monetary Fund, which sponsors DRM capacity building programs.

“Aid cannot be a long-term development strategy,” said Muyangwa, adding that countries must develop their own capacity to deliver what development plans they have. “That is what this report is talking about—how we deliver transformational DRM capabilities in low-income countries.”

Authored by CSIS’ Runde, Christopher Metzger, Conor Savoy, and Erol Yayboke, the report makes three broad recommendations: to create an Agency-wide USAID DRM strategy, identify and seize political opportunities at home and abroad, and incorporate DRM into policy dialogues. To read the full report and more details on its recommendations, click here.