Thursday, September 4, 2008

Wood proposes cap on aid to Africa

Adrian Wood, Professor of international development at the University of Oxford argues for cap on aid for development. He proposes aid equivalent to less than or equal to 50% of tax revenue because higher tax revenue forces African leaders to be accountable to its citizens rather than to donors. The real challenge would be how to coordinate donor agencies and their interests and determine how much aid a country should receive. Who would look at conflicting interests of donors in funding similar project, often leading to over funding in one sector and under-funding in other sectors that really matter to the citizens of the country. Whatever approach donors take, the feedback mechanism should be strong and leaders should be accountable to their citizens. Wood's proposal to cap aid in Africa might be a good place to start with!

...I therefore propose that donors collectively set an upper limit on the amount of aid they give to any developing country. This limit should be 50 per cent of the amount of tax revenue that the aid-receiving government raises from its own citizens, by non-coercive means and excluding revenue from oil and minerals.

This would keep the governments of non-mineral countries dependent for revenue mainly on their citizens, and thus give them incentives to pay attention mainly to what citizens want, not donors. It would also encourage governments to raise more taxes from their citizens, since every extra dollar of tax raised would attract a matching increase of 50 cents of aid.

Higher taxes would help because there is strong evidence that the tax relationship is vital for accountable government. “No taxation without representation,” said the early Americans, and the converse also applies. Budget legislation is central to the political process, forcing governments to justify their actions in open debate. At the micro level, tax collection obliges governments to be in direct contact with most of their citizens and companies.

...More challenging would be how to phase in this limit. About 30 countries with populations over 1m, of which more than 20 are in Africa, now get aid above this limit and in about half of them aid is more than 100 per cent of taxes. Instant cuts in aid or increases in taxes to get down to the limit of 50 per cent would be damaging, so implementation would need to be gradual, over a period of anything up to a decade. Much further ahead would be the issue of how to phase out the aid, as countries ceased to be poor.

Yet the idea is worth exploring. A lot of countries, including some in Africa, still get too little aid – well below my 50 per cent limit and below what they could put to good use – so part of the agenda should still be to increase aid. But the dangers to development of too much aid for too long are sufficiently serious that donors also need to think strategically about upper limits.