Is taxation better than aid for state-building? The case of Somaliland

June 30, 2011 8 By admin

Domestic taxation is one of those absolutely crucial development issues that too often drop through the cracks. It’s important not just because, at a time of huge pressure on aid budgets, it is a vital source of ‘financing for development’, but also because taxation has been at the heart of politics and state-building, ever since the creation of nation states in Europe and the ‘no taxation without representation’ cry of the American Revolution.

That neglect seems to be ending– increasing numbers of development actors are picking up on taxation (see this recent report of a meeting at ODI); DFID has funded one of its big five year development research centres on Tax and Development, led by the excellent Mick Moore; NGOs are campaigning on international tax issues like multinational tax evasion, tax havens and the Robin Hood Tax, but are also starting to think through the potential of domestic tax campaigning in developing countries.

So I’m sure the day will come when NGOs are lining up with their partners to campaign in favour of progressive taxation, denouncing domestic tax evaders etc etc (OK, this may not work in the US…). Weird that it isn’t already happening (do tell me if it is, and where, and whether it’s just about bashing transnationals or something more comprehensive).

If you want to understand why this matters, a good place to start is a fascinating recent paper by Nicholas Eubank, a PhD student at Somaliland mapStanford, about the role of taxation in an unsung development success story – Somaliland. Eubank’s thesis is controversial – that Somaliland’s ineligibility for aid forced the fledgling government to rely on local tax revenues, especially from customs and business. That in turn forced it into ‘revenue bargaining’, accepting a series of checks and balances that laid the basis for political stability and democracy.

Somaliland was formed out of northern Somalia, seceding from the Somali state that collapsed in 1991. As international bodies dislike secession (it encourages the others), that means Somaliland never got official aid (although it receives a fair bit of aid through non-government channels). After secession, several years of struggle and conflict ensued that could easily have led to a typical fragile/failed state result with a vicious circle of political instability, conflict and suffering. Instead, Somaliland’s rulers got their act together, and through a series of negotiations and national conferences, developed a stable set of institutions combining modern (presidential and parliamentary systems) and traditional (a council of clan elders as the second chamber). A new constitution was agreed in 2001 with broad public support. Since then there have been multiple peaceful turnovers of power.

The place is still poor, and health and education are patchy, but the country is progressing, opening up an ever wider gap with the dire situation across the border in Somalia. Human Rights Watch sums up its achievements as ‘both improbable and deeply impressive.’

How did this happen? According to Eubank, the absence of aid flows played a crucial role. It meant the government had to rely on local sources of finance, and to gain access to them, had to negotiate with those (other clans, businesses, an extensive diaspora that generates more dollars than all the country’s exports) who controlled the main areas of economic activity, like the ports. The result of this revenue bargaining was an inclusive political contract and enduring stability.

So is this an anti-aid argument? Eubank says not (or not totally, anyway):

‘This exploration is not meant as advocacy against foreign assistance. Recent studies have shown that foreign assistance has both costs and benefits, and if the international community wishes to best serve the countries it is aiming to help, it is imperative that it strive to understand the possible negative effects of its efforts so that it can design better policies that minimise these effects, and properly balance aid’s benefits against any unavoidable downsides.’

Somaliland 2Aid has to be aware of its impact on the social contract between citizens and states. It can undermine that, by freeing a government from having to listen to its citizens. But it can also strengthen it, as with the current UK government’s commitment to allocate 5% of any direct funding to governments for accountability exercises by parliaments, civil society organizations etc. It’s also worth mentioning some striking counterexamples – good pro-aid stories such as its central role in the take-off of Africa’s other unsung success story, Botswana.

I’ve never been to Somaliland, and the paper appears to have been written entirely from secondary sources, so I am fully prepared to hear that things aren’t as rosy as Eubank paints them. For example, the paper only discusses intra-elite bargains and gives no impression of the extent to which poor Somalilanders (men and women) have benefited (beyond the important gain of not having to live in the middle of a civil war). Nor the costs in the shape of the foregone public services that aid might have paid for. Over to you to fill in the gaps.