American Enterprise Institute

February 14, 2008

[Edited transcript from audio tapes]

11:45 a.m.	Registration and Luncheon
12:00 p.m.	Introduction:	Mauro De Lorenzo, AEI
12:15	Panelists:	Robert Bates, Harvard University
		Nancy Birdsall, Center for Global Development
		Deborah Bräutigam, American University
		Mick Moore, Institute of Development Studies
	Moderator:	Mauro De Lorenzo, AEI
1:45	Adjournment

Proceedings:

Mauro de Lorenzo:  Hello everybody, Happy Valentine’s Day.  Welcome to the American Enterprise Institute.  I am Mauro de Lorenzo, a resident fellow here.  Title of our event today is “Taxation, Representation and Growth: Is Foreign Aid Similar to the Resource Curse?”  Let me say a few words of introduction and then, hand it over to our four panelists. 

I just want to say a few words first though about the rationale behind this event and some of the other events in AEI’s series on New Approaches to Entrepreneurship, Development and Aid.  The approach, to the extent that it’s new, consist in highlighting some shifts that I think are underway and how we think about these three topics and about the U.S. role in them.  The first is the return to prominence of economic growth and private sector development as the key objective of foreign aid.  The UN millennium development goals, which were unveiled in 2000, make few explicit references to growth and entrepreneurship. 

Now however, growth, trade, commerce are increasingly at the forefront of development initiatives, whether at the G8 investment climate facility for Africa and Dar-es-Salaam, not to mention in the priorities of some the leading philanthropists and anti-poverty campaigners.  Most importantly also in the priorities of the leaders of some developing countries themselves, notably Ghana, Georgia, Rwanda, El Salvador, amongst several others. 

And in 2003, the U.S. itself re-emphasized the contribution that aid can make to growth with the creation of the Millennium Challenge Account and the MCC.  Many critics of foreign aid speak of trillions of dollars of foreign aid that have been wasted and resulted in no growth or negative growth, without however, specifying that most of that money was not intended to do so, not intended to produce growth.  It’s like expecting domestic spending on health to result in increases in GDP on its own. 

But given that the growth of business and entrepreneurship is the most reliable known method for an Asian to escape from poverty, as East Asia teaches us, it’s fair to ask why creating the conditions for private sector development, both in terms of physical infrastructure and legal framework, has not been — and despite the shifts and emphasis I’ve just mentioned, still is not, the central purpose of aid. 

The second shift is the re-focusing of our attention on the governments of poor countries, rather than on ourselves and on our own aid agencies.  We expect, I think too much, from agencies, whose power to solve, mount the monumental development challenges the world faces is fairly small, both financially and politically in comparison with the magnitude of the task.  More and more observers recognize that what is actually most important in the long term - what sticks and really causes things to change, is what Africa, just to take the most pressing example, can do for itself, even if it, that is, in some cases or in some sense, less than what we as sort of international collective could do for Africa, if we ran it. 

 This shift, I think doesn’t necessarily or by any means exclude the many ways in which aid, both public and private and philanthropic can play an important catalytic role.  This implies to me that the aid effectiveness debate, while important is not in fact the central drama of development policy; in particular when that debate becomes a personalized game of one-up-manship between two brilliant and iconoclastic American economists.  Its relationship to the really urgent development channel, challenges becomes I think even less clear.  Ritually re-enacting that debate I think can in fact harmfully obscure the real issues of the central challenges.  It also, is another method to keep the debate focus on Westerners and Western institutions instead of the key actors in developing countries themselves. 

A third shift, that I would identify is on the political pre-conditions for development in poor countries in the ways which Western modes of helping can distort or cramp them or facilitate them.  Development is I think fundamentally about politics.  And the countries which succeed are the ones which somehow manage to cobble together some kind of domestic political consensus that promotes and sustains the sorts of reforms and modes of governing that cause growth.  Another word for this, that’s sometimes used I think is “ownership” because even the best solutions will be resisted if they’re seen to be imposed from outside. 

A final shift, which is admittedly not of equal interest to everyone, concerns the way that conservatives talk about aid.  For many years, the conservative critique of foreign aid, first articulated by Friedman and Bauer and many others, focused on its wasteful aspects and on the philosophical reasons why it was unlikely to achieve its declared aim.  This critique was, I think, fundamentally accurate but over time, and unbeknownst to I think most conservatives themselves, the main currents of our critique seeped outside of the right and became part of most mainstream development debates. 

It is important, therefore to me, I think that conservative critiques of foreign aid going forward - focus on how to re-design aid mechanisms and aid objectives around principles such as transparency, economic freedom, accountability, incentives and so forth, rather than trying to kill off the whole beast, once and for all.  The idea of aid is politically popular and will remain so, so long as the U.S. has a need to give expression to its values through overseas spending.  Conservatives should be at the forefront of ensuring that aid is not as only as effective as possible, given that it’s going to continue to exist anyway.  But also, that it does as little harm as possible to the political institutions of the recipients. 

The topic of today’s conference provides a window on the number of these themes.  Even though it’s largely absent from both the academic literature on state building in poor countries, and from the year-to-year concern of development professionals - taxation is historically and conceptually at the very center of the functioning of government.  The topic focuses our attention on the quality of institutions in poor countries, particularly, the quality as opposed to merely enacting the motions of representative democracy.  And it’s also a window on sometimes subtle ways in which our efforts to help can do harm to the institutions we’re aiming to build up. 

On the analogy of the Resource Curse, natural resource runs, we’ll explore that in the panel whether that analogy is apt or not.  Since taxation also normally comes from business activity, countries that need to increase their tax revenues have an incentive to make their economies more friendly to commerce, in that sense it bundles up in the number of the themes I just discussed.  My remarks of course don’t reflect the views of the distinguished panelists, who’ve joined us here today, each of whom has a long career of intellectual leadership on questions of development and aid.  With that, I am going to introduce each speaker before their presentation. 

Beginning with Mick Moore, to the far right, professorial fellow at the Institute of Development Studies in the University of Sussex in Brighton, a specialist of Asia mix-work, has focused on the political and institutional aspects of economic development and he’s the co-editor with our third panelist, Deborah Brautigam and Odd-Helge Fjeldstad, who is not here, of Taxation and State-Building in Developing Countries which I am pleased to advertise before you now, which is published this month by Cambridge University Press.  Mick, thanks very much.

Mick Moore:  Okay, thank you very much, Mauro and thank you to the AEI for inviting me and for you, the audience for being here.  My role is really to make some introductory points and set the context from my own perspective.  And I want to start with the point but I am going to call theory but it’s not very heavy theory.  I think there is a sort of theory that in my mind unites the kind of concerns that people have on this panel with Taxation, with Aid and with Resource Curse issues.  And that’s the theory of resource dependence, and essentially resource dependents of theory from actually organization theory, in its simplest form, suggests that the sources and the character of the key resources significantly shape the way in which organizations structure themselves, on the way they relate to the rest of the world, especially, to their actual or potential sources of revenue or resources.  In other words, resources really matter to organizations; that’s actually all it’s saying. 

Now this I think is actually quite a powerful general way of thinking, which unites these issues we’re talking about.  And I am just going to deviate slightly and point out that there’s a very interesting book recently published on the character of rural insurgencies in developing countries by a student of Bob’s called Jeremy Weinstein that actually uses a variant of this resource dependent, dependence approach to tell us something very interesting about insurgencies. 

Jeremy’s problem, that he wants to explain is that some rural insurgent armies behave atrociously towards civilian population, some see Sierra Leone as the classic case - - and kill and maim and rape and loot and really behave very badly.  Others are relatively disciplined that if they use violence, they use it on a strategic fashion to advance their own aims.  How do we explain why some insurgency groups are like this and some are like that?  And the core of Jeremy’s argument actually is to do with the resource availability. 

He suggests that in a typical poor rural environment, anyone, who wants to build up an insurgency army, has to do it the long and slow way.  They have to find some kind of ideological points of commitment.  They have to recruit really committed soldiers, who are willing to accept they’ll probably die; they have to fashion an army around the cause.  And you have to get really committed people-- very hard, most fail, but the advantage of that is, that if you are successful to build up gradually, you can end up in most cases with a rather disciplined army and you can exert discipline. 

If by contrast, you set up an insurgent army in a situation where there are a large number of narcotics and narcotic trading around, or another resource rich environment where some wealthy people from some other country who want to fund you to cause problems for their own government.  You start in a very difficult and different situation.  Difficult because while you have a lot of money, you find it almost inevitable, that you start recruiting a whole lot of opportunistic people, who are really in it for what they can get in the short-term. 

And in fact, under circumstances it is very hard to ever build up a disciplined army, and when you get very generous external resources or drug money or something like that you tend to end up with these abusive insurgent armies.  I am not going to say anymore about Jeremy’s work except to say, that I think that’s a very good example of a mode of argument that is very similar to the mode of arguments that many of us on this panel would use about rents and tax and natural resources. 

 It’s to me very important to start from the position that we have not for several hundred years, been in a situation like that at present, in that a large number of governments in the world do not fund themselves almost exclusively from broad general taxation.  We have a lot of governments in the world that get a lot of their resources and sometimes the majority of their resources, not from broad general taxation but from two other main kinds of resources -- the one is natural resource rents of various kind oil, gas, minerals, diamonds and the other sometimes called “strategic rents” which is aid. 

That fact, that we have so many governments funded in a non-tax fashion has -- I’m very surprised that the study of development and I’ve been part of study for too many decades now, I’m surprised that we never took this very seriously until quite recently.  But that situation is changing a great deal now.  We have become very aware of the Resource Curse recently, partly because of the increase in the price of oil, but partly also because I think we have in a sense caught up with history.  The Resource Curse only became significant in most of the world in the early 1970s after the first oil price rise.  There were very few countries that had very large resource rents before that, so it’s a relatively very recent phenomenon.  Not surprising that it took us sometime to catch up, but we’ve caught up.

 The whole question of whether aid is a curse, is not new on the agenda it’s actually much more contentious and we are very lucky to have here Deborah who with Steve Nach produced some of the early cross country statistical analysis on this some years ago that suggests that aid, is indeed a kind of Resource Curse.  But other people are going to talk about that and you’ll see the issue is still are somewhat contested.

 Taxation, I am just -- I am very surprised that the aid business has paid very little attention to Taxation -- that is also changing.  We’re very privileged here both Deborah and Bob who’ve made very significant early contributions to this.  Certainly my alertness to this comes from something Deborah wrote in 1992, which is way back.  But the lack of attention to this is now changing, both from the academic perspective, more and more people are writing on this including that wonderful book which was just waved in front of you minutes ago, but a number of other works. 

But also, the aid business and the aid donors themselves are now becoming concerned about this.  And the OEC Development Assistance Committee, which is the formal Western aid donors club, has now, as of this year accepted that they could no longer close their eyes to the fact that they are providing a great deal of aid and that there maybe some perverse effects of this aid that they should really be looking at; and I regard quite significant shift in attitudes.

 So I’ve been really working on the tax business for about ten years and I have a feeling that we’ve got a few things moving both in terms of ideas and some action.  But I actually have very mixed feelings about this; I am pleased that, I think more and more people are paying attention to this.  But, I am also aware and I think that-- we are possibly slightly guilty.  And I am certainly guilty of taking quite strong views on this in a situation where we actually have a great deal of ignorance.  I don’t think we actually know enough about the different sources of revenue on governments. 

I mean, I tend to argue the view that taxation is a good thing and that non-tax sources of revenues in large quantities are bad things in ways I will mention briefly in a minute.  And I, like many other people, use a range of sources of information for that, most of our inspirations, is actually history, especially the history of state formation in Western Europe, history from the U.S.  We use history, we use a few cases, we use a great deal of deductive logic on the grounds of how do you expect an organization like a State to be terribly responsive to its taxpayers or citizens if it’s getting most of its revenues from some other sources.  What we don’t have is very good research, and especially research that compares significant numbers of countries or smaller number of countries over time, that really, actually proves that our concerns are valid. 

I am not surprised we don’t have that because doing that research is a very difficult enterprise.  It’s difficult partly because it’s quite difficult to obtain the data and especially if you are interested in poor countries.  Almost one of the defining features of poverty is the quality of the public fiscal statistics tend to be very bad, so the poorer the country, the worse the data.  It’s difficult to do the research. 

But it is also difficult to do the research for another reason, which is, that while we have quite a lot of intuitions and ideas about what the connection between sources of government revenue and the quality of governments may be, we don’t actually have any very well grounded, reliable research that we can cite.  When I am challenged on this I can cite a little bit of research that compares different sub-national governments within countries.  I can’t really cite anything very robust that compares countries. 

Now, when I talk about this, I often find that people’s first intuition when you talk about the positive benefits of taxation is to talk about the effect on taxpayers.  This is something fairly concrete and they talk in terms of “Yes, well if taxpayers are-- if people are expected to pay taxes and they pay, they expect to get something in return”.  And then they will get mobilized and then they will, you know, oversee government, put pressure on government, become politically active et cetera. 

I think this is an important issue, but the way I think about the connection between taxation and good government does not initially start by looking at the effect of taxation on citizens.  But it starts by looking at the effect of the taxation on governments as organizations.  A little bit of what I am going to say is summarized in a, it’s called a working paper, “Does Taxation Affect the Quality of Governance.”  I put a few copies outside, if they’re gone, I am very happy to provide people copies of that later. 

But what I will do now very briefly, is to pray that this works.  Okay, fine.  I want to conclude by just suggesting three types of causal sequences that might link dependence on broad taxation with good government, high quality government.  And the first one, starting as it were, from the perspective of states rather than from the perspective of citizens, and deductively is you see, the first point is simply, it’s a deductive point, that if governments are largely dependent for their financial resources on taxpayers, then presumably, they actually have an interest in the prosperity of those taxpayers and they are more likely to pay attention to doing their best to increase the prosperity of those taxpayers, rather than worrying more narrowly about their relations with aid donors or more narrowly with providing the conditions under which oil or gas can still be extracted and exported.  So, that is one line of argument and others say in brackets that they have a caveat of course and this requires governments to have fairly long-term perspectives, if they don’t have long-term perspectives then it doesn’t matter. 

The second line of argument is to do with the motives to extend what we call the apparatus of bureaucratic rule - formal government organizations to capture more potential taxpayers.  I think this is an important -- and it is an argument that is very important to much of our current debates about security, and indeed about terrorism, so-called war on terror et cetera.  The fact is in many parts of the world, governments do not rule large sectors of their territories and populations. 

There is a range of reasons they don’t rule them.  There is no simple explanation, but the greater the capacity of governments to obtain their revenues either from aid donors or from a small number of oil wells or gas wells or mines etc., the less the incentive they actually have to extend their bureaucratic apparatus to take account for the whole population.  And governments that do not have a bureaucratic apparatus that counts and labels their people, knows where they are, has some sense of their income, their source of income, how taxable they are, are potentially governments quite vulnerable to insurgencies. 

And I am just going to conclude very briefly on that point by quoting, its probably my favorite quotation from 1992 from a previous hero of counter-insurgency specialism, a gentleman called Odam and he said: “In the course of an internal war, economic assistance tends to become an alternative source of revenue for the local regime allowing it to neglect its domestic tax base and thus, leave it to the insurgents to exploit.  This is not to suggest that regimes facing an internal war ought to tax their population more heavily, but it is to say, that in order to tax the countryside and the urban sectors they have to rule those sectors.  If they rule them, the insurgents do not.”  I think that summarizes my core view on that issue. 

The third line of argument here is a set of arguments about the connection between taxation and accountable representative, democratic government.  And it’s in- sorry, I just realized, I’ll go back to the previous point, there’s of course, a caveat about this point about extending the bureaucratic apparatus of rule is that, and this is certainly true of contemporary poor countries, the tax collectors find it much easier to focus on a rather small number of registered formal sector enterprises and squeeze them harder rather than actually extend the tax net that bring more small informal enterprises into the tax net.  And I think that is practically one of the big obstacles to more effective taxation in poor countries.

 Sorry, to go back, the third point is that there are a set of arguments about the linkage between being taxed, citizens’ responses and citizens then beginning to organize and bargain with government and exchanging, as some people put it “taxes for institutions.”  There are many variants of the story, we in this business like to re-tell the classic story of Britain particularly during the Civil War and the subsequent change of regime in 1688, which were essentially fought in terms of this discourse or later interpreted as being fought in terms of this discourse, if we pay taxes, then we expect a role in governance. 

And there are all kinds of particular reasons why that particular kind of debate and discourse happen to work very well and very prominently in Britain, in the 17th Century.  It is not clear for a range of reasons that those mechanisms were quite so directly and observably, as it were without more noise in contemporary poor countries.  But it seems to me that there is a very important issue there.  And I want to finish with that except, once again with the caveat of saying that, we do find in many developing countries in particular a great deal of taxation as what I broadly call coercive.  And taxing coercively is an alternative to taxing co-consensually. 

But there is -- I want to end on a point of good news because I think there is good news here.  Many of us have a view; we associate taxation with extraction, coercion and rebellion.  And there are people who in a sense write about the United States in particular in terms of a history of conflict between citizens and state over taxation.  And to some degree, you know, celebrate the spirit of rebelliousness of the American people who are refusing to buckle down and pay taxes. 

Well, there is a great deal of validity in that view, especially if we are dealing with low-income, rural economies, because it is very difficult to tax non-coercively in low-income rural economies for a range of reasons.  But essentially because you end up with the same person who collects the taxes, also assesses the taxes and the taxes tend to be collected directly and personally with face-to-face interaction between taxpayers and tax collectors.  Those situations are set up for corruption and extortion. 

But the more “modern” commercial the economy and the more the economic transactions are formalized, and done with written records, and now electronic records, the easier it is to separate out tax assessment from tax collection; and to avoid face-to-face interactions between taxpayers and tax collectors.  And I think many of our concerns about coercive taxation are most relevant to the poor rural environments, which is certainly plenty in developing countries, but it is a problem we hope of the past rather than the future. 

So, my concluding point on this is you know, I think we have a lot of interesting intuitions.  I think there is a very real policy issue but there is an awful lot more research to do here before we can say very firmly that we know very clearly that a certain kind of taxation is good or bad for governments.

 Mauro de Lorenzo:  Many thanks.  We are going to turn now to Robert Bates, who is the Eaton Professor of the Science of Government at Harvard, one of the leading political scientists of Africa or indeed of any region.  He has devoted particular attention to the political economy of development particularly in Zambia and Kenya where he has conducted extensive fieldwork.  I’ll also reveal that in an anecdote he wrote about the relationship between parliament and the executive in Kenya, some years ago is what got me interested in the topic for the first time, so I am particularly pleased you’ve come to join us here today, thanks.

Robert Bates:  Thank you and thank you for not telling the anecdote because this is going to be my punch line [laughter].  As I understood, what we were -- there are two sides of me, there’s the academic side of me, which says, “Yes, this is the most important undeveloped portion of political economy of development”.  It’s out there and shame on the public finance people for being normative welfare economist instead of positive researchers.  We could have cracked this one a long time ago and should have, but it has been left to us.  I think we will enjoy doing it. 

But there’s the other side, which is the policy dialogue side, which is really more about aid.  And you know, it’s Valentine’s Day so I don’t want to knock aid, but there is a positive side, obviously.  Green revolution, what’s happening now at diseases in Africa, could not have been done I think, without massive transfers of resources from aid programs. 

But I am going to focus on the negative side today, and I am not going to argue that it’s bigger than the positive side or not.  That not what’s on the table, it’s what – what is the problem with aid - what are some of the problems with the aid?  And one of the most obvious of these, or one of the major ones Mick has already mentioned which is the Dutch disease problem which I see more as a macro-economic problem which is an enormous transfer of foreign currencies into the country resulting in depreciation of the exchange rate.  I have seen that in Mozambique, we’ve seen it in other places, but I don’t think it’s that big of a problem. 

What I think is the problem is, it’s enormously inefficient.  “Duh”, and we know it, let me deepen that point.  In the first place, from the Africans, and I’m an Africanist point of view, Africans learned to hate SUVs before I did and that’s because of this Buy American problems.  And all these Americans go around cosseted with Chevrolets, buying large Caravans, and there’s this Buy American side to it, so there is a large part of the aid program that it doesn’t go into aid; it goes into administering and transferring resources. 

Now, what they don’t see of course is that, this is an important way of getting congress to pass a bill.  I mean, I’m sure some of you have seen the aid budget broken down by each congressman’s constituency.  Like any good program that tries to show that there are reasons, the congressman might be for re-election reasons concerned with the aid budget and support it.  But it is the fact that you do have to do those kinds of buying of political coalitions within the United States to get the program going is one of the major reasons for why it is inefficient.  But let’s focus on the recipient side and here is where I think things get very interesting where Deborah and Mick’s work becomes very insightful. 

One of those scarcest things within the developing part of the world that I worked on, are what I call world class elites; and world class elites are those who can wine and dine in DC on the 12th floor, the 8th floor if you are in the State Department or what not, and be effective spokesmen, for the interest of their country and have a mastery over finance and public finance and what not, sufficient to convince potential donors that their money would be well spent if we’re to go there.  These people are rare, they are therefore precious and therefore they are enormously expensive. 

Now the question is how much of this resource is being used to secure transfers, as opposed to increase productive activity in their own country; that is to create wealth, as well as to redistribute wealth at high cost; their salaries and their opportunity cost being a large part of that high cost.  And so I think the fact that a large percentage of these very scarce talents spends its time on airplanes between Paris, London and Rome going to enumerable conferences negotiating relatively small amounts of money, you can get more money by selling your local telephone company than you can by getting-- going to the World Bank and privatizing and doing it right.  It just strikes me as very wasteful.  And a lot of people involved in it know they are. 

What would they -- could they be doing well?  If you read for example, de Tocqueville on the role of the intendant in France, in the L’Ancien Regime in France, these guys are working on improvements.  They were working on building roads, building canals, experimenting with new agricultural technologies, trying to increase the value of the tax base for the payment of taxes to the King.  And if talent is not being used in developmental way, it is being used, a large part of talent is being used in a non-productive way, if viewed at the global level. 

 Now, not only the diversion of very scarce resource into this bargaining channel but it is also the impact of aid as the fragmentation of institutions.  And one of the most vivid examples I have ever witnessed of this was Kenya in the 1970s, when there became an enormous crisis in the public treasury.  Basically, the public treasury didn’t know how much money was in the country and how is it being spent by its departments.  And the reason was that many units in the country had affiliated with aid programs.  And we’re mounting programs with aid donors and not going through the central budgeting process. 

A large part of the government’s activities were off budget and these were going to create, obviously, demands on treasury when the aid donors left in terms of programs, in terms of personnel and in terms of development schemes and what not.  And furthermore, many of these schemes did not reflect the priorities of the central government.  Government was not governing use of its own resources or public resources. 

For example, the Swedes and the Norwegians, I guess maybe the Swedes, fell in love with cooperatives and they were building cooperatives all throughout the central province.  But what the government was really interested in at that time was not adding more resources to the coffee and cattle and milk producing areas, which have rich peasantry already, but trying to develop the semi-arid zones.  But that was what the Swedes had to offer cooperative societies, and they went into the central province. 

And so this lack of control of your resources, the lack of control of the direction and the use of these resources and their allocation becomes a real problem for these countries and aid is part of the problem.  It’s may be part of the solution for some things, but it is part of the problem for keeping your institutions coherent and accountable to their leaders -- we’ll get to masses in a minute. 

 Now, the last problem here is I think is better phrased in a way I’m about to do it as opposed to the way I have done it in the past.  And that is, is aid crowding out or substituting for local resource mobilization?  Now, in principle there’s no reason why it should be, if governments want money they’ll do both.  And so, they’ll go for local mobilization as well as, for transfers, I mean, the French have their intendants but they also borrowed money from the Medici [phonetic], so you know, you go for it, go for money anywhere you can get it. 

So it doesn’t have to be a trade-off but if the personnel and the time are scarce, in practice, there is a trade-off between the two and I would say that the allocation, from looking at time and motion studies of how technically and financially skilled elites, but at the time in Africa they don’t spend much time in local development activities at the elite levels compared to raising money from abroad.  So I would say there is an element of crowding out putting on this. 

I once — Smither Singh [phonetic] is good friend of mine and I decided once to pitch to Nancy Birdsall, a project called – “What is the amount of money that it takes to raise a dollar of aid?”  I haven’t heard back from Nancy, maybe Smither didn’t get to her, but you can understand why I am concerned with this.  Now, why if there is this -- why is the world behaving this way?  Why are these people not doing the French developmental state model as opposed to the kind of international begging model, if you will put a harsh phrase on it.  A part of it is this because they are pushed into taking aid, that is, there is still a strong element of show us that you love us, accept our Peace Corps, let us build this project instead of the Chinese, stuff like that. 

So, part of the blame comes from the donors who want signs of goodwill and commitment and alliance from local elites.  But I think another reason is that they want to avoid the cost of imposing taxes.  First place, say that the taxes are for a good thing, that everybody in the country wants, when we are talking about public finance, we are talking about creating public goods.  And it’s a dominant strategy for people to undervalue public goods and to protest having to pay the cost of them because they could potentially get the benefits for free and getting somebody else to pay for them, given for the public good.  So, even in a beneficial welfare maximizing kind of use of the resources there’s still going to be a lot of political protest when we are talking about public finance, about tax and finance on public goods. 

But there is additional problem from the point of view of government and this gets close to what Mick was talking about.  The governments may find that in order to get people to pay their taxes and to be willing to pay taxes that they have to give them something that the people want and that the government doesn’t want.  Part of it may be a re-allocation of the rents, than instead of the gull crude elite [sounds like] share more with the people.  Part of it may be kinds of public policies that the government would prefer and the people will oppose and the governments know that if they start to bargain for resources locally with the people, they have to make policy concessions that they are unwilling to make. 

So, if the values policy preferences of the elites and the masses are misaligned then getting the elites to bargain for pubic revenues is going to be hard to do because they may have to make concessions that they really do not want to make.  And they’ll continue to depend on aid to get those resources.  They would also have to have an arena for bargaining, and this really means that when you are raising money locally, you’re going to have to probably empower your parliaments and a lot of these governments do not want to empower their parliaments.  They don’t want to create an institution, which has the power to bargain effectively with them and make them do things they don’t want.  That’s a change in the political structure that many of them would not want to countenance. 

This is Princess de Kenyatta’s story.  I am glad Mauro reminded me this or the Kenya story.  What happened in Kenya?  I go to Kenya to teach twice a year and one time I was there, in the same hotel with me was Anne Krueger who would come from the IMF and she and I have done a book together, we knew each other well.  And so we schmoozed, and the reason she was there was to pat the Kibaki government on the head, and anointed as having been purged the souls of the sins of Mwai’s predecessor and therefore, to be eligible for IMF programs and once again, all the private bilateral deals that follow on the wake of that giving the imprimatur.  And ruler Kenyatta, who is just launching his political career at the time stood up in parliament, he said, “This is awful!”  He said, “We had the President right where we wanted him.  And now he is going to have to start accommodating the preferences of people in Washington instead of us in Parliament and the people we represent.”  And I could not say he was wrong. 

And so, that I think, is one of the things about aid, is that it snips the bond of political accountability in ways.  And if the people want their government to behave at developmental fashion and to grow the economy and generate prosperity and get things going that will allow them to be more productive; then that political impetus for development is lost, if the government could get its resources in other ways.

 Mauro de Lorenzo:  Many thanks.  I turn now to Deborah Brautigam, who I might add is the co-editor of this book which some of you may have heard of, Taxation and State-Building in Developing Countries.  She is also the Associate Professor of International Development at American University as Mick indicated, one of the first people to explore the conceptual links between rents and aid and their impact on institutions.  She has conducted extensive fieldwork in Mauritius, Liberia, and Sierra Leone and some other countries.  She is also one of the first American scholars to research the relationship between China and Africa long before it became fashionable.  And subsequently, she has already published one book and has two more in the pipeline.  How are we doing?  Good?  Okay, and with that Deborah.  Thank you.

Deborah Brautigam:  Thank you very much for that nice introduction and thanks for inviting us here.  And I know this is not supposed to be a marketing event, as we are not supposed to really tell you that the book is on sale - discount until April first, and that’s not a joke.  So, thank you for inviting us also on February 14th.  I did think that maybe April 15th would be a more appropriate date to have our Taxation Event. 

I am troubled along with Robert Bates about wanting -- I don’t want, what we say here today to sound as we though don’t think foreign aid is a good thing, or that foreign aid should be eliminated, or even drastically reduced.  I think in many ways foreign aid has been very helpful contribution to development, but I am worried about the way that foreign aid is delivered.  And the way that it can mimic natural resource rents and many, the ways that have already been alluded to, so, I am not going to a great deal of detail on that, just to highlight a few points here. 

As foreign aid relies on rents, it can lead to stunted institutions in developing country governments and it lowers the need, as already been said, to bargain, to organize producers, or bargain with taxpayers and establish fiscal accountabilities so that you have a quid pro quo with your taxpayers.  And also, it lessens the need to really build the capacity of the government to deliver services because taxpayers demand something in exchange for what they’re paying.  That’s what natural resource rents do in general and aid can have some of the same effects.  And in addition, aid can also lead to the weakening of institutions directly to the kind of high transaction cost, the poaching of government officials to serve on aid projects.

 Many of these aspects are being addressed now by the Paris Declaration on Aid Effectiveness.  A consensus has been developed amongst the major donors to reduce these kinds of practices.  Although, actually implementing that has been somewhat problematic.  But there are also-- is the element of the-- which no one ever seems to mention but the tax-free benefits for aid personnel, and when aid personnel make up $200,000,000 chunk as opposed to the total government personnel of some countries of a $100,000,000, that’s a big tax-free aspect of aid that no one really looks at. 

And then there’s some moral hazard effort or the moral hazard aspect that if you are getting these resources, thus, these then reduce your incentive to mobilize your own domestic resources.  All right, so, I think economists have been looking at these a little more closely.  And they do it in part through this idea of tax effort.  And the idea of tax effort is that taxation is not something that is just governed by economic factors, and the amount of revenues that you can raise, but there are political factors. 

So, how does aid fit in there?  Well, in my own work with Steve Nach and many others who have looked at this we found a troubling evidence that aid does tend to lower tax effort.  And these are just a bunch of academic studies that anyone can Google and find.  But in each one of these, in various different cuts controlling for all sorts of different things with like defects, et cetera, we found out that aid was correlated and associated with lower tax effort. 

Now, I want to give you some concreteness here.  And I am going to talk to you about the case of Mauritius, which some of you know is one of my favorite places, not only because it’s a wonderful vacation spot, but because it is a very interesting example of a lot of these things in action.  Now, Mauritius is a country that’s had a very positive and strong and sustained record of growth and one of the things we’re suppose to talk about here today is Aids and Resource Curse and Growth.  So, I’ve thought Mauritius was appropriate there.  You can see, Mauritius compared to the rest of Sub-Saharan Africa, now the first thing would be, the first area of protest might be that Mauritius isn’t really African, I agree completely but nevertheless that’s the region that it is in. 

Now, what are the reasons for this good growth?  Well, one thing that we talked about these days is institution, so, does Mauritius have good institutions?  Well, yes, it does.  This is a collection of data on different kinds of institutions.  These are the top ten developing countries leaving out former communist countries in Eastern Europe.  And Mauritius in this ranking was number three in terms of the quality of its institutions. 

Now, I am going to throw another slide up here which is historic.  This is from the 19th Century and what you could see here are the top ten countries that issued bonds on the London Stock Market.  These are countries and colonies at the time.  And as you can see colonies had the ability to issue bonds on the London Stock Market and they weren’t all at same rates so that suggest that colonies had different levels of credibility in terms of their ability to finance this issuance of bonds.  And Mauritius does fairly well in this general collection of the top ten, what we would call developing countries. 

So what’s tax got to do with that?  Well, some expected and some unexpected things, and just to highlight what they are, taxation fits in to the representation story in Mauritius a very early development of representative government.  I won’t talk much about that, but it also fits into the capacity building of the state narrative and I can mention something about that later.  But taxation also helped in building partners for the state to negotiate with, and to collaborate with about growth, and that’s with the producers in Mauritius.  And then finally, taxation ended up enabling Mauritius to have earned aid and this enabled-- some of the aid that went to Mauritius to avoid the negative effects that we have already alluded to. 

So, to tell you briefly, Mauritius is a sugar producer and what I am going to talk about is mainly about the sugar sector.  That very large, small number of large plantations about fifty percent of the area and a very large number of small plantations another fifty percent.  And sugar’s also a very vulnerable crop.  It’s subject to drought, it’s subject to hurricanes et cetera; these are some salient facts.  The export taxes on sugar began long time ago during the colonial period.  They first of all stimulated the sugar producers to organize themselves, so they organized, at first to try to effect government policy on the export tax.  They organized themselves in a chamber of agriculture. 

This gave the government a partner to talk to, and to try to collaborate with, about the building up the productive capacity of the sugar sector.  The second thing they did underpin calls from representative government, so it was a sugar tax that the people mobilized around along with some other kinds of stimulus, which affected their property rights.  But that was how Mauritius got a representative government, as early as 1885, they had elected a legislative council.  So, it’s quite early and it has of course remained a very strong democracy since then. 

In addition, does tax allow the private producers to organize?  And they organized, it allowed them to join together to solve what we call-collective action problems, which are associated with growth.  Now, what are some of these collective action problems?  One area is innovation, if you are in an agricultural sector, and you are private company, and you’re trying to invest in new kinds of sugar varieties, well, it’s very easy for other farmers to steal your innovations.  And to start planting the new crops that you have spent a lot of money and time developing.  So, it’s very hard for you to hold on to all those benefits yourself. 

So, this kind of investment and also training, if you train people that are very skilled at producing sugar they can be poached away from you, if you’re private producer; so these kinds of things are efficient to do as a sort of collective endeavor.  In our country and many other countries, our governments provide these kinds of facilities.  But in developing countries in general, when governments provide these, there can be problems.  For example, if governments tax producers and then, are they supposed to provide these kinds of benefits?  They have incentives to take those taxes away or they have incentives to use those kinds of institutions to put cronies, or to use them for political patronage et cetera. 

So, if the private sector can hold on to, and control those kinds of institutions but get collaboration with the government to support them, it can work out better for producing growth, and that’s what happened in this instance.  The agronomy research, the training in the college of agriculture and the marketing, which again developed good relationships, so you can market your crop or market whatever it is you’re producing, this is something that other people can benefit from.  If you as a private producer make those contacts, other people can steal them.

 So they do it in a collective way, where everybody pays the costs of these and everyone gets the benefits, can be very efficient for growth.  And the tax, what they did in Mauritius is they used a dedicated export tax to pay for these kinds of things, so people agreed.  They could produce these kinds of benefits and they could grow these kinds of institutions. 

The tax also allowed revenue deepening, because as I showed you, with those bonds it enabled the government to build its credible capacity to repay those bonds.  So, it reduced the rate of which they had to pay interest on those bonds and it enabled them to establish this kind of credibility.  This then, reinforced the democracy, surprisingly, because the taxpayers who of them were re-elected to parliament said, “Because we are paying this taxes, you then can issue these government bonds on the London Bond Markets.  But you have to let us have a voice on taxation.  And you have to give us more of a voice.” 

And it deepened the democracy over time.  And I have interesting debates on this from a legislative council in 19th Century, but I won’t go into that.  So, finally, after independence, the sugar export tax fostered institution building and re-distribution and in order to build a democracy you have to have a-- in some sense, that the general population is benefiting from those tax payments and what you get there is a drought insurance fund, which help with the vulnerability, the sugar industry rehabilitation fund, which helped with reconstruction of the industry. 

And then these labor welfare funds and a progressive-- interesting progressive taxation in which the larger producers paid a higher percentage of the export tax and the smaller producers paid the smaller percentage.  So, even though all were benefiting from the training institution, the other investments that came out of the export tax, they paid for it at different rates, which was politically helped, reinforced the political viability of this in the democracy. 

So, finally, the last aspect on how this relates to aid?  Is that Mauritius was one of the beneficiaries of something, that’s now become very outmoded, which is preferential access to European markets to get essentially what becomes a rent.  Now, in many instances, we would say this is going to be negative, this is a rent that just comes to these countries.  It is a form of foreign aid that comes from consumers in Europe rather than from governments. 

But in Mauritius it was three to seven percent of GDP, came through this extra benefit they got from these preferential tariffs.  And this, and the more they produce, and the more they efficiently produce, the more they could earn from this up to a certain maximum.  So this gave them incentives in order to keep getting this three to seven percent GDP coming in, they had to produce in order to get that.  So it has some interesting implications for aid. 

There are other examples of where these kinds of dynamics, it’s not just Mauritius, we could see this with Chilean nitrate producers, in which this tax enable them to enforce producer quotas, which regulated their markets and also help them facilitate marketing-- paid for many of the costs, you have collective marketing.  We can see it with Colombia, they’re famous for their coffee producers, their marketing and advertising of coffee overseas, it gave them a brand name who is that Juan Valdez or whatever, that coffee guy.  That’s paid for by the producers out of a dedicated export tax. 

And then a different kind of example, the Ghana private road transport union where the associational members, it’s very difficult to tax the informal sector but if we believe that taxation is important for building responsible citizens as well as effective states, then the informal sectors got to be taxed as well.  And how do you that efficiently when you have a lot of small people running around as Robert Bates has argued in the past? 

You have them tax themselves, and this creates incentives to build associations that can do this and then those associations can also bargain with the government about things that their members need, and get services from the government, that the taxes then paid for.  So this builds societal capacity, as well as, it builds capacity of the state. 

So, in conclusion, I just want to say four things.  One is that taxes should be used-- should be thought of a little bit differently.  They should be thought of as resource for building states, for capacity building in the states but also in societies as well.  The dedicated tax can do a lot to build that.  Delegating tax collection to groups can be effective in weak states and can have benefits for those groups.  Group taxes can be used to provide services to groups and then these can also enhance accountability of the government to those groups. 

And there are some possibilities for making aid through earned resources, something in which you can try to avoid some of the negative effects of aid as a Resource Curse.  And we ought to be thinking about more creative ways in which aid could be used, like a conditional cash transfer, conditional on production of some kind, rather than just as a transfer.  Okay, thank you.

Mauro de Lorenzo:  Thanks very much.  We turn now to Nancy Birdsall who is going to shift over to the computer so that she can look at what she is going to say.  She is the founding President of the Center for Global Development, which in its short life span has emerged I think as, probably the leading independent think tank in the world on development issues.  She is an economist by training.  Previously directed a major research project on Economic Reform at the Carnegie Endowment and served for five years as Executive Vice-President of the Inter-American Development Bank.  These things alone makes her exceptionally well placed to tie up some of the themes that have been put on the table this afternoon but given that we’re also interested in using the insights to change things or make them different or better.  She also, I know, has a number of innovative ideas to talk about.  I could go on and on about her. [cross-talking]

Nancy Birdsall:  It’s okay, I’ll start.  I will start when he finds it-- the document.

Mauro de Lorenzo:  -- but thank you for coming.

Nancy Birdsall:  Thank you very much, Mauro.  While, I get help, there we go.  I want to make a few introductory remarks as background before going into a very brief PowerPoint Presentation inspired by what I’ve heard from my three companions on the panel.  So, the first thing I want to say is that at the Center for Global Development, what we worked on is trying to improve the way the rich world deals with the poor world.  So, obviously among other issues like trade, migration, climate change, that are on our agenda-- is the question of making aid more effective.  Now, my own view reflects very closely to what you’ve already heard from my three colleagues.  And I’m going to summarize it briefly and in a sense try to summarize briefly what they said. 

And that is that we need to have a precautionary principle when we think about aid to aid-dependent countries and I am going to define aid-dependent countries in a moment.  And that precautionary principle has to do with “do no harm,” because aid has problems in the way it can affect countries, it can create Dutch disease and although Robert said he is not sure if it’s a problem, there’s a new research now a year or so ago of Arvin Subramanian, now colleague of mine at the Center, with the chief economist then at the IMF, that suggests there is a real-- a very potentially, a real effect, in terms of the risks Dutch disease, of large amounts of aid in aid-dependent countries. 

It can lead to poaching of skilled people into the aid business and therefore out of private entrepreneurial business building activities.  It can discourage revenue raising as we’ve heard, but fundamentally, the problem is that, what you might call the aid institutions’ paradox.  Aid creates a big risk of undermining local political institutions; that’s first point in summary - - precautionary principle.  Second point as background, aid is rising especially to Africa and other very poor economies.  It’s rising because for reasons that I don’t fully understand and I would guess very few people in this room fully understand.  People in Western Europe want their governments to spend more on aid. 

Third, aid dependent countries, I define in a paper called “Do No Harm”, it’s something like Africa aid and the middle class which talks about the problem of building in middle class when you’re not building local political institutions.  There are at least thirty countries in the world in which aid constitutes more than ten percent of GDP, which means in terms of what government budgets are, that aid is financing as much as thirty to forty to sometimes fifty percent of government spending.  That’s the background for concern about to whom our government’s accountable.  Is it to donors who are financing such a large part of a government’s budget or is it to citizens? 

Now, let me go from there to the challenge that in effect Deborah raised at the very end of her talk.  Is there a way to do aid better?  Is there a way to get around the aid institutions paradox?  That’s what we’ve been thinking about among other things at the Center.  And I’d like to ask my colleague Kate Vyborny, to stand up for a minute and thank her for the work she has done with me on what we call, “Progress Based Aid”.  We’ve been working with a number of donors and a number of potential recipients in Africa on how this might be done. 

In the case of education, we call it a proposal-- we call it the “Hand’s Off Approach”.  And I hope you’ll see why in a moment.  So, as already summarized there’s this problem of aid institutions.  In a functional system, taxes through citizens, purchase outcomes that citizens want.  In aid dependent countries instead, aid leads to limited outcomes.  I think this is PowerPoint version number two, but never mind, it’s okay.  And there is no citizens’ scrutiny or very limited citizens’ scrutiny of the process.  To be a little bit-- to repeat what I said before in a sense there are twenty three African countries that received more than ten percent of GDP in aid, and some even more- Malawi, Rwanda, Madagascar, so, we’re talking about a very real issue. 

Now, what happens in this context is that donors micro-manage and what they micro-manage is the inputs.  And that is the effort-- that constitutes an effort of donors to protect their own money, to make sure there isn’t waste in corruption, and so on, and in a sense it substitutes for citizens’ scrutiny of what the government itself is doing.  So, we have aid that focuses on inputs, build, in the case of education, build more teacher training institutes, buy more books, build more classrooms et cetera, et cetera, without any link to actual outcomes that people and citizens might care about. 

In a functional system, instead of micro-managing aid for inputs we proposed progress based aid, in which we make a connection between aid and the actual outcomes and in which we introduced indirectly citizens’ scrutiny.  So, I am going to summarize very quickly the idea of progress-based aid. 

The first point is that, there is a binding contract and I will explain that if anyone wants later, between a donor and a recipient country.  The donor in the case of education, as an example, would guarantee a specific additional payment for specific incremental progress.  For example, one hundred dollars for every additional child over some base line, who completes primary school and takes or passes a test.  The recipient each year reports on the progress, to the donor, the recipient government that is, and agrees to a third-party independent audit of its report. 

The contract, the fact, that this government can get a hundred dollars per child for every additional child who finishes primary school is public information and should -- and ideally is widely disseminated within the country.  Countries can choose to use the funds for anything they want.  They can use them for education supply, to buy textbooks, to purchase teacher training, for conditional cash transfers, which Deborah mentioned.  Here they would be buying or creating incentives for increased demand for education, not just increased supply. 

But countries can also choose to use the funds for something outside education, that doesn’t have anything to do with education, apparently, such as fixing the roads that are keeping children from getting to school or early nutrition programs that are affecting learning outcomes. 

So, going back for a moment to the way donors normally do aid what we call the hands-on instead of hands-off approach, we show you here the typical rounds, in for example the World Bank.  A mission goes out, identifies the project, there are some discussions about design.   Actually, there might be two or three missions over 18 months, before even comes negotiation then there’s-- the project is approved.  The project gets started, there is more missions to supervise, implementation of the project to ensure that certain conditions have been met.

There might be technical assistance programs by the single donor or by other donors, that are coordinated or not, effectively with first donor’s project.  There’s a whole system of monitoring and evaluation,, at least on paper, that may or may not be attended to very much and then when the project is finished, and in some cases it might be a five to seven-year project where you have had hundreds, well, dozens of missions over the years from the donor. 

There is a so-called evaluation, a kind of exposed review of what happened.  But actually, we put evaluation in quotation marks because there is no way, fundamentally to assess the impact of the donors’ resources because on outcomes because many other things have been going on.  So, you can’t really do attribution, unless it’s been planned from the very beginning, and for a large donor project, I don’t think we have really any examples outside of public health projects which are wonderfully summarized- the successful ones in the book, you can find at the Center for Global Development or at our website.  Then, after that maybe there’s some sort of measurement of the outcome. 

Okay, we illustrate this point with a lovely picture.  I think Kate found this on the World Bank website.  It’s a meeting of donors and ministers; missions for meetings to discuss the process for the disbursement of the funds for technical assistance, for improving the process to receive missions.  Under progress-based aid in the second column, you would have instead that the donor and the recipient agree on a measure of progress.  I used the example of each additional child finishing primary school, and taking a test.  And then sometime each year there would be validation of the outcomes by third-party, following a report of the government on how many children actually finished school additionally that year. 

What is the citizens’ role in making the government accountable under this process or how is that citizen role-- what are the vehicles for that citizen role?  The government publishes the contract, that’s one of the few agreements that has to be built in at sancti [phonetic].  The government could publish what inputs it considers or actually purchases that might be, for example, some agreement between the Minister of Finance and the Minister of Education at the cabinet level, whatever. 

The results need to be available, in our example, at the local or school level and need to be compared to other localities.  They do not need to be published for each and individual child.  So, testing results are also have to be disclosed.  So this goes to the point that I think Deborah or Mick or someone made about moving to more emphasis on transparency and disclosure. 

Now, there are number of issues and options that we’ve been discussing with various donors and recipients in the last few months.  One is establishing the actual outcome measure.  And the need to build in somehow quality, which is shown in the Northwest corner, versus the unintended consequence, if you didn’t have any quality measure of creating incentives for quantity without learning, which is shown to you in the Southeast corner. 

There are lots of questions and problems that we’re working out and thinking about, donor worries are corruption and waste; installing marble steps in the official’s new mansion with the money.  This is also of course, not really avoided as a problem with even project aid because all money is fungible.  And the project the donor might want to pay for, might pay for something the government would do anyway, releasing money for the government to buy jet airplanes or whatever.  And it’s certainly not really avoided with conventional budget support, which is increasing in aid dependent countries at least in Africa. 

Another donor worry is that recipient games this system here we see a little bit of cheating which might be, it happened in Bethesda, they could certainly happen in Malawi.  Another donor worry is that the donors have trouble with budgeting with their own parliaments and legislatures once money has been appropriated there’s often-- the need, or the sense of the need to spend it because of use it or lose it approaches to budgeting.

What about recipient worries?  One big worry is that the donor reneges, finds excuses when the results are in and finally audited or delays or has a new problem in its budget.  New war that it’s financing, new pressures because of the recession and so on and so on.  Another recipient worry is that the donor decreases other aid having signed this contract finds its ways to cut back on other aid.  So, instead of trying to answer all those questions, which we’re in the process of doing, I think we have good answers.  We refer you to our website where if you go to Initiatives, on that website and then Progress Based Aid for Education, you can learn even more about it. 

Let me just close by saying that I think, it was interesting to hear from all the panelists, who raised important concerns about the effects of aid, in what I would call aid dependent countries this is not -- the issues they’re raising are not a problem in India, for example.  They’re not a problem in Bangladesh which is receiving very small amounts of aid relative to their GDPs and their own government budgets.  There are other problems in those settings, but not these problems.  I think, that they all said their problems they all said, but there can still be benefits.  So, to us the issue is how to secure those benefits without creating the fundamental problem.  That if it’s done wrongly, aid really does undermine local institutions and particularly local political institutions.  Thank you very much.

Mauro de Lorenzo:  Many thanks.  Many thanks.  We have about thirty minutes for questions.  Actually, I want to start off with the question for whoever wants to answer.  And that is, are there mechanisms of delivering aid that have been tried in the past or that could be tried that involved parliaments that either involved them somehow in the negotiation and the control and the design of the programs or is that crazy?

Nancy Birdsall:  It’s just a matter of information, since I did spend some years at the multilateral institutions at the World Bank and Inter-American Development Bank.  Many countries have built into their legislation, that to take on debt, requires that they have the approval of parliament.  So, it’s very interesting that this, often is seen as a big problem within the institutions because it leads to long delays in getting on with the- can do, we’re going to get this project approved and spent, disbursed. 

Now, what’s-- I think interesting in this context, it’s a good question, is that for most of aid dependent countries, the shift has been dramatic in the last ten or fifteen years, from any lending or even concessional lending to grant phased financing.  And a lot of resources have gone to many of these countries in the form of debt relief.  So, in those cases you would have to add.  The donor would have to presumably add almost a condition that it’ll go to a parliament, which immediately becomes hands-on and starts to dictate to a country how to deal with its own institutional arrangements. 

Mauro de Lorenzo:  Questions, Roger you will take three at a time and if there’s any others [inaudible] and right here and then --

Roger Bates:  Thank you. I’m Roger Bates at the American Enterprise Institute.  I have small point and a larger point and anyone can comment on either.  Tariffs were mentioned.  And from my limited experience in some places to do with medical donations, tariffs and medical trade in pharmaceuticals, for example, tariffs are often collected separately from the national fiscals by customs and excise.  And it can cause local fiefdoms and even corruption at a localized level.  I wonder if someone could briefly address how you see customs and excise in these countries becoming improved as other source of income. 

The larger point is, Professor Moore at the beginning said,   that the debate is far from set as to whether aid is causing this undermining.  Whether it actually undermines local governance, if for a second, you could just assume that over the next two years, sixty papers are published which categorically established that it does.  Are we actually likely to see any changes anyway?  Because aid undeniably provides short run benefits to countries especially in terms of things like health and education Nancy just talked about.  Whereas the impacts, the negative impacts are almost certainly seen over a longer-term period, so, I just wonder if you could address that.

Mick Moore:  Comments on both of these, I think you are probably right Roger, that collecting import in particular and export duties is probably one of the most corrupt areas of taxation.  I mean customs, customs people are reckoned to be fairly corrupt in most countries.  Probably, because it does require, you know, the physical inspection of goods and therefore someone has to be right there.  So the possibility of corruption is very high and the fact that it’s been the conventional wisdom for sometime, that developing countries should reduce their trade tariffs and indeed, have considerably reduced their trade tariffs, has somewhat reduce the problem here.   They’re just collecting far less on trade tariffs now, than they were fifteen, twenty years ago. 

There are mechanisms for doing something about that with, you know, the employing companies to independently inspect batches of imports and exports to certify and so have less discretion on the hands of customs officers.  But it’s going to be a problem for a long time, I mean, it’s certainly a problem in Britain, I don’t know about the U.S., but not immediately soluble.  I just want to make one point about, you know, if the evidence came true, would there be any real changes?  I don’t know but I think the politics of this is quite interesting because -- let me simplify it. 

I think if you talk to people of my kind of age, who’d been in the aid business for a long time, I find it very hard to come across anyone who doesn’t accept that there are an awful lot of problems about aid, of the general nature we have been talking here on a face-to-face, one-to-one basis.  As indeed Nancy said earlier, a lot of the impetus for aid is in fact, not coming often from aid agencies and the institutions, it’s coming from voters of Western Europe.  But also at the same time, there is, the individuals who will accept there are problems face to face and if they then sat around the table and represented their organization, might give you a very different story. 

So, I think that there are a lot of open politics here that are not very clear, but to repeat what’s said earlier the aid at least the OECDAC aid donors club, have gone to take this issue on board and they now do say, “Yes we do have a problem”.  I don’t think there is going to be a major change but I think there’s a little bit of scope for some incremental shift in the right direction.

Robert Bates:  Yeah, I think the question you raised is a good one because it allows me to make a point that isn’t directly related to it but I think it’s a point that has been in the air.  And I think that the thing that has caught the attention of many of us they are the second order consequences not the first order of consequences.  I will give you an example, you take Kenya and Uganda, you draw a political boundary between the coffee industries in both countries; and in Uganda they tax the goods to farmer, they used to tax the goods the farmers grow, they still do to some degree, so the direct tax levied of the produce of coffee, they market it, they pocket the differential between world price and what they pay the farmers.  That’s a big part of where the government gets its money. 

In Kenya, they also tax the coffee industry but they tax not the goods that farmers produce, but the goods that farmers buy so it’s tariffs or other kinds of consumers’ taxes.  Now, if you’re talking in, I was on a couple of missions where we were talking this way to cabinet members what they ought to do for Ag-pricing is a big issue in agricultural countries which both of these are.  You have the Minister of Finance who is going to be a swing vote in the cabinet deliberations and what we are trying to do is we are trying to get a pass-through to the local farmers of a higher percentage of the world price and basically, by instituting an auction in Uganda similar to one that they had in Kenya. 

Now, when you talk about increasing the prices the farmers get and richer farmers, the Kenyan’s love it- Minister of Finance because he is going to get more tax money, but if you talk of high prices to the producers of coffee in Uganda then the Minister of Finance hates it because it means he is going to get less revenue.  So, the way you collect revenue affects these policy biases in conceptions of what’s good policy at the level of the state and that I think is the kind of thing that we are picking at. 

So, if I were to look at say, just tariffs I would want to look at it through that lens or through the lens of a bias towards import substitution.  They would be produced simply because you have a protected local economy or things like that not just the corruption of the tariff, of customs which is a major issue in some places but it’s not the kind of issue that I think is leading to the kinds of political incentives that we’re focusing on.

Deborah Brautigam:  Just a brief comment on that.  One of course, we have already alluded to the shift to more direct budget support, so I think, there has been a change in the way aid is delivered.  At least the way it’s intended to be delivered, although that has- I’m not sure how well that’s actually working out in countries where there’s still not a lot of accountability for that.  But I want to also say, that some of the work that has been done on the effects of aid on tax effort. 

One study in particular, that was done at IMF, showed that if you separate out loans and grants, grants are associated with lower revenues all other things being held constant; and loans are associated with higher revenues.  So again, there’s that incentive effect, that there does seem to be some sort of understanding somewhere within the government that the loans need to be re-paid despite that relief.  So, therefore, they’re associated with an increase in revenues.

 That, as far as I know is not yet being incorporated as to how aid is delivered because it is being delivered much more as grant. 

 Nancy Birdsall:  Just a quick word, that’s a great question on tariffs.  I tried to it sort out and it’s not easy to find, right now what percentage of revenues in aid dependent countries come from indirect taxes, including taxes on trade and the bottom line is that it’s probably, it’s close to-- as high as thirty percent compared to say, in the U.S.  I don’t know, you would know better, maybe five percent or less.  So, this rebounds back to the general problem of how you create incentives for adequate revenue raising.  This is in countries where total revenue raised is-- only, it’s hard to say “only” in the American Enterprise Institute, but anyway, only 15 to 20 percent of GDP. 

On your question, why expect any change even if we were to see and empirically verify the institutional problems.  I think that’s the fundamental question and after several years of working on this, I have to say, that it is really, really difficult to bring about changes in donors’ systems, in the way donors behave.  And that’s because their behavior, our behavior as donors is grounded on all the institutional realities in politics that you have heard about including accountability to citizens.  So, I’m not, in fact I have a paper also in our website called, “Seven Deadly Sins: Donor Failings - and what might be done about it” or some sort or such title. 

What we’re doing at the Center is trying to develop a measure, an Index or quasi index of the quality of aid that would compare different countries, and donors, and agencies on a number of dimensions and going well beyond, someone mentioned the Paris declaration which is a lot of good rhetoric and a lot of good ideas, but without any metrics that you could use as third-party observer to judge over time whether there actually were improvements.  And the reason for that I think, the only way to make donors more accountable is to have citizens’ scrutiny inside donor countries, about the way the tax resources being used for aid actually work.  And to have citizens’ scrutiny you need adequate measures that you can report from year to year.

 Mauro de Lorenzo:  This gentlemen here and then straight to Peter Delphan [phonetic], we’ll take both of those at once. 

 John Atlin [phonetic]:  Thank you.  I’m John Atlin.  I have written a lot on third World Development.  I lived from South America from their points.  And my question is- how far can you go, how far can aid agencies go in affecting the structure of governments in these countries?  The corruption et cetera and focus which AEI’s the only group I know, had a session on proportional representation and dysfunctional governments, which Hernando De Soto in his first books said, “The reason democracy works in the Anglo-Saxon countries is direct representation”.  And so many Third World countries have proportional representation.  That means party lists where the politicians decide who gets on the lists, and so, who gets into the Congress, and there’s no accountability by the government, whose subject your addressing as accountability. 

I noticed in all the languages of the Mediterranean, there’s no word apparently.  It’s translated in French, in Spanish, in Italian as responsibility, with the word accountability, which you’re so much is involved with, the governments for the aid you’re giving.  And I presume in Arabic, I don’t think there’s a word for it either.  So, how far can you go in pushing local governments in trying to control that the money is spent with some effect et cetera?

 Mauro de Lorenzo:  I’ll go to over to Peter first.  As a Mediterranean person I just observed that both accountability and responsibility are romance terms from Latin.

Peter Delphan:  My name is Peter Delphan with USAID.  I have also as been a liaison at Millennium Challenge Corporation for USAID.  I thank you, Mauro for organizing this fascinating discussion and panel and where to begin, I mean without being defensive.  But I would say just to throw it out to any one in the panel, I think you gave way to much credit to aid agencies.  Are we looking at all the factors that influence, what goes wrong in countries?  I will put aid in that list of course, obviously.  Some countries more than others, especially the countries that we call aid “junkies” more than ten percent say fifty percent, sixty percent, okay, their budget is influenced by that. 

But I really think you put too much on aid agencies.  I heard the phrase “Do No harm”, Nancy, we couldn’t agree with you more.  I first heard that in context with fragile states and what to do in fragile states.  In fact, there’s a book to that effect right?  I can’t remember the author.  But really, I think, what we’re talking about is fragile institutions.  And the fragility of these institutions is born over and over again by their inability to govern, their inability to deal with egregious rent-seeking behavior, with an inability to really serve their people. 

The example of Mauritius I think fascinating because the contrast is between plantations and all those other people trying to grow sugar.  And you have the excenosory [sounds like] from Kenya.  The Kenya Tea Development Authority dealing with the tea, board and broadly defining plate and letting small holders play a role in the government.  So there was an evolution that occurred.  Where did they get the idea of the statutory boards?  Where did they get the idea in Mauritius of the plantations organizing?  Those weren’t indigenous people doing that.  The know-how was not in the country.  So, I think that’s an excellent example. 

Another example, from your education, I’ll stop when I start to sound too defensive.  But another example from education is what shouldn’t a people pay for if you really ask the common person.  What do you want?  You want your children do better than you.  They’ll pay for that and they will be taxed for it.  They will pay school fees.  Wait a second.  We’ll do universal education and no more school fees and you can look very clearly down at that individual decision but you can also look at the institutions. 

In Kenya, for example, when Kenyatta was the President, his little school and his little sub-district of Kiambu was like a university in United States; with all that misallocation of funds that went to it.  So, the institutions are not only fragile but very vulnerable to manipulation and corruption and no amount transparency can solve that.  We tried very hard.  So, I would throw it out to anyone on the panel to respond to the problem I think it is, there is not just a lack of know-how in these countries.  There is not just a shortage of elites.  There is a shortage, tremendous shortage of middle managers to really staff an institution to play the roles that it wants to play. 

And a lot of times what the aid people are doing basically, maybe not overtly topping salaries but bringing in the expertise to help run programs; and so long as there is that shortage of literate people who can play a part, to really influence the electoral process and that shortage of people can actually work in institutions to make sure that they serve the people, then there will be a role for aid agencies and one hopes that they do no harm.

 Mauro de Lorenzo:  Any other question I can take right.  The gentlemen right here, go first.

 Vinod Bazjid [phonetic]:  Vinod Bazjid from the Embassy of Mauritius.  First, I would like to thank the panelists, especially Professor Brautigam, because it’s rare that Mauritius gets this kind of top billing in Washington, DC.  And I learned something with the colonial bond issues which I was not aware of.  Now, I will lead to my question by pointing out that Mauritius was not the only country that sort of signed the Lome Convention.  So, one needs to look at why is that other countries that was supposed to benefit from the Lome Convention did not.  And I would say in the case of Mauritius the private sector used the proceeds to invest in diversification.  So, we diversified away from sugar into textiles and tourism.  And the public sector, used the tax revenues to invest in education, substantially more so than elsewhere with the result that Mauritius has now a literacy rate which is close to hundred and a sort of new world generation.

 Mauro de Lorenzo:  Since our time is rapidly evaporating if I could invite you to come to the question as quickly [cross talking]

 Vinod Bazjid:  One word I did not hear is investment.  Which is, you know, today we are talking more and more public-private partnership.  So, how does the model that links taxation with governance, how is that model affected by more and more investments through public-private partnerships?

 Robert Bates:  Yes, a couple of things, on PR I tend to agree with you but I’d also put out that less than eight percent of people on many Latin American countries pay taxes. So, what do they care whether the government-- what the government’s doing?  And I think this tax this fiscal linkage does play a big part of this incentivizing of what people expect from their government and what governments feel they have to do in order to stay in power. 

Secondly, on investment, if I were at AEI and I want to come up with a nice little private mechanism, whereby the Europeans can feel a hell of a whole lot better and not push the governments to put out aid in effective ways, insofar as they are ineffective.  I would definitely promote this kind of social labeling.  You know, come up with ways which people can form warm and meaningful relationships with private economic agents in the developing world and use the market to transfer funds.  I think that would be an effective device from the results I’ve seen in the experiments on Ebay, that we’ve been running.  People are willing to pay a heck of a premium for commodities that have the ticket - bear the label. 

The last thing, I empathized with the gentleman from AID, but what I’m hearing is something about being trapped.  One of my favorite things out of Africa, and I’m not going to say that it’s representative because I love Africa, and I hate Charles Taylor.  But it was after Charles Taylor came to power, he brought in his quote cabinet thugs.  And they all put on suits and they sat down around the cabinet table, they were open for business, “Send us your aid”.  You know, it was, “We’re now in charge in the capital city we want to consume; we want to see our side of the rents bring them forward.  War-torn country; we need aid”. 

In that environment, can aid really do any good?  And I think of the - if the political incentives are to go out and mine the external rents by capturing the government and channeling the money into your private pockets by owning the government it’s a non-starter.

 Deborah Brautigam:  I also get worried when I hear somebody like Peter Delphan, I respect very much talking about how important it is to get-- to have aid continue in some of these same roles because I see that the very things you’re talking of aid does about substituting for the trained officials that aren’t in the government and partly they’re not in the government because they’re working for the aid agencies here in Washington for example.  So that’s-- and I wonder if state building is about building effective and responsive states and also addressing the gentleman over there. 

We don’t know how to do that.  I think we are showing that in Iraq but for also we’re showing that in a lot of ways.  We don’t know how to build states.  States are built by their own governments, their own people working together and to the extent that aid gets in there and gets between them and affects that process, it can do harm and that’s what worries me.  We’ll pick up on the Mauritius debates afterwards.

 Nancy Birdsall:  Quick comments on good questions, one on South America.  There actually is a fabulous report of the Inter-American Development Bank about a year or two ago that it goes into much more detail than I could try to repeat and represent here on proportional versus first-past-the-post on role of executive versus role of parliament.  I think you’d find it quite interesting but I think the bottom line for Latin America going back to the tax problem is frankly that the region is burdened by such a long history of such great inequality. 

You have a situation in which in a country like Argentina and even in Chile still the top ten percent of households in terms of income.  Well, just ask yourself, what do you think is their effective tax rate?  In this country it’s probably forty percent if you take into account federal, state, local taxes and so on.  And in those countries we’re talking usually eight percent, less than ten percent and this is from that portion of the population which is capturing fifty, sixty, seventy percent of all income. 

So, you know already historically the link between taxes and development of political institutions was broken or it was never developed.  I do think though, that donors can play a role in minimizing this problems in the “do no harm” sense which is get out when thing aren’t going well.  Nick Van Der Wal [phonetic], I’m sure our Africa specialists know, has a book published by the Center where he says, “In Africa the biggest problem is abuse of Executive Power and donors should get out when Presidents stay longer than they should.”  I think he suggests ten years or twelve years; that means we would have been out of Uganda when sometime ago and I think this idea of Moe Ibrahim [phonetic] who is I think an Egyptian, Tunisian too - Sudanist to give a prize, no to give a permanent pension to heads of state from Africa who leave, when there’s constitutionally supposed to leave is a great example of a different kind of aid that we should think about more.  

 Male voice:  We’re not going to have to pay very I think--

 Nancy Birdsall:  Has he got any candidate?  Yes, the President of Tanzania.

Male voices:  Will there be two or three [background noise]

 Nancy Birdsall:  Well, then we’ll see whether that incentive is sufficient.  But really, the idea of the incentive is much more I assume, to prevent bad behavior when you’re in office, which is, what often locks heads of state into staying in order to retain the impunity they have as long as they’re the head of state.  So, you know, this is where donors have I think in the past made mistakes that can be corrected. 

Another mistake that can be corrected is the idea that donors should be telling countries whether or not to charge school fees and whether or not to charge health fees.  I couldn’t agree with the point made by Peter, I think.  That is a decision that should be made locally not a decision that should be imposed from outside and there is plenty of evidence that the effects of user fees vary depending on all kinds of circumstances. 

I don’t agree with Peter that no amount of transparency can solve the problem.  I think there is a political awakening in much of the developing world including in aid dependent countries, there’s a lot more activity from civil society.  There’s a lot more access to the communications the internet provides.  There’s a lot more scope for building on transparency and disclosure and insistence if any, if donors are to insist on anything it should have to do with transparency and disclosure.  I agree with Vinod, there should be much more thinking about public, private investments particularly, in major infrastructure in Africa, we were talking about that at our own lunch table before the formal session started.

 Mauro de Lorenzo:  Thanks to everyone.  We have to [audio glitch] limit our time to final words from Deborah and Mick.

 Deborah Brautigam:  Following up on what Nancy said.  I was in Sierra Leone on December and one of the things that struck me in a big Ministerial building where I spent a lot of time, built by the Chinese, was a poster that was on every floor and it said: “No independence without paying taxes and aid dependence and gained independence”.  So, I was struck by that.  [audio glitch] I have a picture and I thought of having that on the front of my PowerPoint.

 Mick Moore:  Can I just-- I want to respond briefly to both John and Peter.  I interpret your comments maybe unfairly as typical of a kind of dissolution that happens if you work in the aid business for a long time, which is partly why we get fed up with the aid business, but a couple of comments on that, Peter, you know, I’m not sure of such a shortage of middle management.  You know, I happened to be reading today’s Economist that the Brazilians are now sending advisers as to Egypt to advice on the [indiscernible] program. 

More importantly, if you take BRAC in Bangladesh, originally an NGO, BRAC has thousands of people overseas in Afghanistan, Africa and elsewhere running programs because it is very efficient organization that’s been built for the grassroots level in Bangladesh and there are plenty of others in Bangladesh.  You know, I think there are a lot of good things there.  And just one final point John on your - what can we do?  Basically let’s just forget aid.  There’s a whole lot of things we can do.  The Foreign Corrupt Practices Act, you know, the U.S. is actually using this now more than it has in the past.  Good, you know, and it will show, you know, Britain should do more of that. 

The Kimberly process, Blood Diamonds, a real progress here we can support that.  The Extractive Industries Transparency Initiative yes, we can support that.  You know, boy did we mess up the third world with our policy on narcotics let’s do something about that to stop messing them up, more on money laundering.  In other words there’s a whole lot of things we can do without giving aid that will actually promote development and if we could think less about aid and more about those other things I think we will all be better off.

 Mauro de Lorenzo:  Ladies and Gentlemen, thank you for spending part of your Valentine’s Day here and please join me here in thanking the panel.  [Applause]

[End of file - Taxation, Representation, and Growth in Developing Countries.mp3]

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