Aid dependency vs growing tax dollars

One of the shortcomings of international aid is that growing economies still receive money long after they need it. China and India still receive some dollars from other nations even though their own tax dollars can now fully fund their governments.

Jonathan Glennie from the Guardian attended a presentation from the lead tax collector for Uganda. Allen Kagina talked about how international aid money should be used to help the recipient country become self-sufficient instead of dependent.

Allen Kagina, commissioner general at the Uganda Revenue Authority, came to the Overseas Development Institute (ODI) this month to give a presentation on the need to transform tax collection to, in her words, "wean Uganda off aid". Her message was clear: we need to use aid to support processes of improved tax collection, rather than allow it to substitute for the mobilising of domestic resources.

As an economy grows, as Uganda's is, a country will gradually rely less on aid as a proportion of gross national income. But that doesn't necessarily mean the government sector will reduce its dependency on aid. Some countries receive little aid as a proportion of GNI, but maintain heavy reliance on aid inputs in social and other sectors because tough political decisions on tax are not made.

The challenges in Uganda (and elsewhere) are many, and include, in Kagina's analysis: the difficulty of taxing the informal sector; the limited capacity of fiscal administrations; the slow pace of adoption of better IT; a low tax base coupled with tax evasion and fraud; the disproportional representation of some stakeholders in the tax base through the use of incentives; and a low savings ratio relative to investment requirements. So there are no easy answers.

Nevertheless, according to Kagina (who says she would welcome independent research to verify this, if anyone is interested), tax revenue has increased as a proportion of government expenditure from 55.2% in 2005 to 67.9% in 2010. Some successful reforms have included the introduction of one-stop border posts that harmonise immigration procedures, reduce transaction costs and duplication of efforts, enhance border security and increase revenue.

Kagina argues that domestic resource mobilisation is "potentially the biggest source of long-term financing for sustainable development and it is the lifeblood of all state governance, such as the provision of public goods and services". Aid still fills a gap, so rather than calling for an abrupt end to it, she asks: Is foreign aid to Africa promoting the strengthening of tax administration or simply having a substitution effect?