Domestic Resource Mobilization Flashcards
What is the relationship between capital accumulation, DRM and economic development?
Arthur Lewis
- Development occurs wen countries save 12% GDP
- Many determinants of Growth, but level of investment is greatest determinant
What are resources for financing development?
Domestic Private - Domestic Saving, household or corporate
Domestic Public - taxation, public borrowing
External Private - remittances, philanthropy, portfolio investment
External Public - Foreign Aid, Public Borrowing
Why is DRM important?
- most development is locally funded
- most important source of investible funds come from DRM
Timeline of GDS Gross Domestic Savings?
1960-1980 - high savings and investment
- Africa is under-saving compared to these numbers
- gap between savings and investments have increased
- this indicates states are borrowing
- borrowing is related to capital flight
What is Capital Flight?
Reading: Ndikumana and Boyce
- external borrowing is positively + significantly linked to capital flight
- capital flight is debt fuelled
- for every 1$ of foreign inflow, 80c goes back overseas
- debt relief must be combined with sustainable practices
What is the role of aid?
- Aid is unreliable, changes in quality and quantity
- unstable because donors must approve grants
- easy liquidity leads to high consumption
- negative effect on domestic saving
What is relationship between DRM and FDI?
- Foreign Direct Investment is volatile, gaps between investment and savings hurts development
- self financing strengthens bargaining power of states
- states with higher savings seem less risky, attract investment
- more savings = more accountability = more taxes
What is Lucas Paradox?
- Water flowing uphill, capital flows from capital poor to capital rich countries
What is Africa’s international position on finance?
- Africa is marginalized from global finance
- treated like a ‘bad neighbourhood’
- FDI demand high returns to do business (risk premium)
Why is taxation politically important?
- central to state building and funding public goods
- main nexus binding states to citizens
- increases incentives for public partiicpation
- state power determined by ability to extract tax
What is public saving?
- Government Revenue minus government consumption = Public saving
- SAPs focused on debt repayment, reduced public expenditure on infrastructure, removed easily collectible trade taxes
- SAPs focused on balancing budget but no investment
What are determinants of taxation?
Supply
- income level, economic structure (informal economy hard to tax, small industrial sector, high tax evasion rates), government capacity for bureaucracy
Demand
- demographics
- urbanization
- development strategies
How do taxing capacity vary among African countries?
- taxation is affected by initial conditions
- Cash crop economies: (Nigeria, Ghana, Senegal), traditionally small civil service governed by indirect rule. State had limited role, and low taxation. Narrow tax base, taxing from trade
- Labour Reserve Economies: (Angola, Zambia, Botswana, SA): collect more taxes, had strong white welfare state and strong state to repress blacks
What are different reasons why taxation is constrained?
Argument 1: ‘Too poor to save/viscous cycle’ - low income = low savings
doesn’t make sense because east asian countries have low incomes higher savings
- also need to consider that ‘savings’ looks different, may be camels
Argument 2: Dependency ration - best argument, people have to share their money
What is financial interventionism/repression?
- Based on gov. idea that ppl were bad savers, so they introduced measures to restrain financial markets
- Strategies: state ownership to capture profit, restriction luxury consumption
- voluntary contribution - you build school we bring teachers, failed on states end
- must be allocated responsibly, pensions going to shopping malls
What was role of development financial institutions in financial repression?
- closed down under SAPs, poor performance, so no no development banks for invesment
Arguments against financial repression
1) neoliberal argument against state intervention in private sector
- says high deficits because of state parastatals and misallocated funds
Critiques of Africa’s banking system
Short-termism, 60% of loans are less than year, credit not inclusive
What is case for/against stock markets?
- Facilitate privatization where state could sell assets through these markets
- global standards give access to African market
BUT countries don’t industrialize through SM - local firms don’t qualify, less domestic investment, so less public saving
How do these financial changes impact taxes?
- goal to transform from trade tax to VAT value added tax
- trade liberalization = reduction in trade tax
- but new VAT taxes only compensate for 45-56% of revenue lost
- low tax revenue = low public investment
What impact has financial liberalization had on private savings?
- no significant impact on public savings
- has only led to consumption booms
-idea is liberalization = high interest rates = high savings
(But this hasn’t happened) - high interest has led to consumption booms
What is role of natural resources in development?
- can potentially centralize revenues (OIL in NIGERIA)
- idea of resource curse (dutch disease)
- easy come easy go, no value added to natural resources
-higher volatility for prices than manufactured goods
lack of need = economic collapse - Zambia liberalized and lost out on mining sector
- East Asian countries are benchmarks of development through bureaucracy
What are FDI flows?
4 phases -
1) Post CO years = declining FDI
2) Import substitution years = unstable increases
3) increases in privatization
4) recovery increases
How have tax incentives changed?
- more tax incentives today than 1980s
- highest form is corporate tax holiday
Good news about DRM
- resource nationalism - countries making taxes higher and renegotiating bad deals
- pensions introduced in countries
- Africa’s capitalists must feel safe in Africa
- development banking returning - will fund long term investment
What does Di John Argue?
- Tax collection most effective way to determine state power and legitimacy
- Douglass North - defines state by its taxation powers
- taxation central to state-building (Social contract, binding nexus) - excessive coercion is defeating
- Trade tax represents 1/3 of tax revenues in SSA economies
What does Moore Argue about Sierra Leone?
- Taxes in Sierra Leone Mean different things to different folks
- in cities - formal income and corporate and VAT taxes
- outside cities - smaller informal tax collection
- people more confident in taxes of informal system helping public services
- angry they aren’t collecting from mining firms
- significant share doesn’t make it to gov.t accounts
- colonial impact: govt. of Freetown would extract tax from rural areas without investing or consulting ‘hut tax’ costs
What does Moore argue about significance of taxes?
- Tax system has redistributive role, only get rich ppl through direct income taxes, if taxes unfair its illegitimate
- individual govt. can’t reform tax system alone, collective regional action
- need improved audits and third parties
Taxes and state-building
Moore
- a govt. relying on taxes as opposed to capital income is more likely to build institutions to collect
‘tax bargaining’ ‘fiscal social contracts’ - tax payers expecting benefit from taxation
Reading: Saunders + Caramento
- focus on Zimbabwe + Zambia
- mining reliant countries
- mining key component of both national economies and target of FDI
- both countries targets of SAP restructuring, elite rent-seeking in 2000s and not targets of resource nationalist politics + policy making
- large - scale mining dominated by foreign firms
- developmental patrimonialism didn’t help, corruption occurred
- can’t duplicate EA experience, because bureaucracy was weak
- commodity super cycle of 2000s had little impact despite state intervention
Zambia
- economy dependent on copper extraction for 5 decades, very volatile
- collapse of copper prices in 70s = economic decline
- SAPs in 80s led to development + debt agreements for foreign investment, stopped funding training uni
- investors given too sweet deals, paying part time to not give benefits
- PF party capitalized on popular dissatisfaction and won 2011 election
- sought to help local contractors
- dependence on foreign mining investments gave foreign firms leverage, threatened to lay off mine workers, boycott investments
- they contested by resource nationalism fuelled by debt relief, lower debt = positive foreign credit ratings = access to international bond markets
Zimbabwe
- mining important before independence
- inherited from white colonial rhodesia
- 2008 IEE act: Shifted Zanu PF development vision, rapid transfer of 51% equity stake to domestic companies, to boost economic growth
- mining sector hurt by elite corruption and IEE funding shortfalls
Why were East Asians successful
Saunders + Caramento
- bureaucratic practices shaped state success
- coordinated markets
- bureaucratic autonomy shielded institutions from partisan rent-seeking behaviour
- state business collabs important, state harness private sector capacity to reach national goals
