Commentary

Since the adoption of the MDGs in 2000, how to pay for achieving these large-scale goals has been a central focus of the broader donor conversation. Finding ways to pay for development (whether official development assistance or private sources) took on new urgency in the wake of the global financial crisis of 2008–2009.

As many traditional donors struggled to deal with the after-effects of the financial crisis, aid to developing countries shrank. Further, even without reduced aid budgets, official development assistance (ODA) is increasingly a minority shareholder in international development. Most important since that time has been a developing country’s ability to raise revenue and expend it in a transparent and accountable manner as a central aspect of good state governance.

A report from the Organization for Economic Cooperation and Development (OECD) notes, “Tax is not the sole determinant of rapid development but it is one pillar of an effective state, and may also provide the basis for accountable and responsive democratic systems.” The ability of a state to mobilize its own resources to pay for vital social services is at the heart of a well- functioning government. But, a corollary is that developing countries can only grow wealthy when the business climate is booming with more and more people and companies engaged in productive economic activities that generate both incomes and taxes.

As the situation is, there are large challenges to overcome in generating greater domestic resources. The capacity of the government remains weak from a tax administration perspective: tax avoidance is rampant, tax systems are out of date, tax collectors lack the ability to gather data, and corruption is high.

Moreover, government lacks the basic ability to manage the resources they do generate, or there is a lack of oversight on how these resources are expended. All of this argues for a greater focus on Domestic Resource Mobilization (DRM) and Public Financial Management by the international development community.

Rhetorically, donors have endorsed the critical role that domestic resources should play in paying for development, but allocations of donors’ people, time, and money have not kept pace with this endorsement. In order to correct overall underinvestment in DRM, donors must do the following:

1. Place DRM and public financial management at the center of a renewed effort around good governance;
2. Increase commitments to DRM on a bilateral level and to multi-donor trust funds or multilateral initiatives; and
3. Donors should tie the use of local systems to a corresponding commitment to improve public financial management and tax systems in order to mobilize additional domestic resources.

Understanding what Domestic Resource Mobilization (DRM) means is central to this discussion. It is the resources, both public and private, that are available for a government to fund its operations.

Domestic resources consist of government revenue that is raised through taxes, fees, rent and commission on natural resource extraction, or other kinds of levies imposed on income or goods. DRM can include building the domestic financial system in order to foster greater domestic savings that can then be used to fund investments, etc.