What financial resources are available to fragile states – internationally and domestically – to fund their development? What role does aid play? What can be done to close the gaps in resources for development? This report looks at these questions, highlighting the need to focus more on domestic revenue generation as a source of state revenue, and also as a cornerstone of statebuilding.
The report reveals that aid remains the largest source of development finance for fragile least-developed countries, while remittances from migrants have outpaced aid in other fragile states. The report also finds that fragile states still only collect 14% of their GDP in taxes on average, well below the 20% UN benchmark viewed as the minimum needed to meet development goals. Yet a mere 0.07% of official development assistance to fragile states is directed towards building accountable tax systems. The report therefore asks how donors can use their aid to support fragile states in mobilising more domestic revenue, and provides many recent country examples.
This 2014 Fragile States Report zooms in on domestic revenue (in particular taxation) as a key nexus between the state and citizens and within society. This report asks, and answers, ten key questions concerning development finance and other sources of revenue for fragile states and the role of the international community. A pertinent question is what is holding donors back from helping fragile states mobilise their own revenue?
The report sheds light on some of the key debates around domestic resource mobilisation and explores fundamental questions donors need to address to support this vital statebuilding goal. How to deal with risk and corruption? How to use country systems in fragile states? How to support domestic resource mobilisation in a way that strengthen statebuilding, enhances government credibility and engages citizens? The report concludes by listing some steps donors can take, illustrated by examples of how they, and fragile states themselves, are putting some of these principles into practice.
- The poorest fragile states often depend on ODA. In some of them it can constitute up to 55% of their GDP. Others, however, are neglected: in 2011, 44 fragile states each received on average less than half a percentage of global ODA.
- Fragile states tap into sources of external finance other than aid, in particular middle-income fragile countries, where remittances have outpaced aid. Foreign direct investment (FDI) is another source of external finance. Yet the least-developed fragile states have little access to FDI, as they are often considered less credit-worthy than middle-income countries.
- Domestic revenue offers fragile states a promising and sustainable source of development finance. The UN estimates that to achieve the MDGs, domestic revenue should represent at least 20% of GDP. Yet only two fragile states have reached that target; on average, domestic revenue represents only 14% of the GDP of fragile states.
- Fragile states face several challenges in raising domestic revenue, such as reliance on natural resources, growing the tax base, and low capacity.
- Much revenue is lost through illicit activities.
- Encourage a broader tax base by focusing on approaches that give citizens a voice.
- Support fragile states in designing frameworks to secure fairer deals with multinational enterprises, in particular on proceeds from their natural resources; providers of development co-operation can lead by example by being transparent about the tax exemptions that benefit them.
- Boost citizens’ tax morale by establishing clear links between tax revenue and local benefits.