Global commodity prices have fallen sharply in the last 12 months; the capacity to raise domestic revenues in Africa is waning; donor financing to achieve the MDGs remains precarious; and the anticipated structural change that will diversify the continent's economies, expand employment and improve incomes is proving elusive. Revenue bargains may hold the key to breaking out of the vicious circle, argues Yusuf Bangura

REVENUE bargains in which states extract income from citizens in exchange for investments that have a positive impact on well-being are key to financing Africa development. They can substantially increase revenues, nurture effective state-citizens relations, force companies to pay correct taxes, push non-egalitarian and fragmented systems of service provision in the direction of universalism, improve policy space, and make aid more effective.

Africa has enjoyed a growth momentum since 2000 after the wasteful years of the 1980s and much of the 1990s. In 2014, seven of the 10 fastest growing economies were in Africa, and African leaders increasingly talk about structural transformation and lifting their populations out of poverty. This optimism is underpinned by more than 10 years of high global commodity prices, improvements in domestic revenue collection, and growing demands for better services in a context of expanding rights and democratic politics. Many countries have invested heavily in infrastructure and increased social expenditure.

Africa's change of fortune coincided with the emergence of target-setting strategies in international development policy. These strategies include calls on poor countries to mobilise an additional four per cent of their GDP to fight poverty; the social protection floor initiative, which requires governments to commit 4.5 per cent of their countries' GDP to basic social protection; the 20 per cent of government expenditure target for education; the MDG one per cent of GDP target for comprehensive access to water; and the African Union's targets in infrastructure and agriculture.

Meeting these targets requires huge resources, which existing funding strategies will be unable to generate. Global commodity prices have fallen sharply in the last 12 months; the capacity to raise domestic revenues is waning; donor financing to achieve the MDGs remains precarious; and the anticipated structural change that will diversify the continent's economies, expand and improve incomes is proving elusive. Revenue bargains may hold the key to breaking out of the vicious circle. 

African countries need to address two types of bargains: domestic and global with an emphasis on domestic bargains, which are necessary for global bargains to be effective. The Monterey Consensus of the 2002 Conference on Financing for Development represented a revenue bargain of sorts at the global level, in which donors pledged to increase aid in return for improved tax efforts by developing countries. More than 10 years after that conference there are no signs that aid will improve to a level where it can plug poor countries' financing gaps.

Although aid has increased by 66 per cent in real terms since 2000, reaching a record high of $135 million, many donors  have failed to honour their pledges, citing fiscal constraints induced by the global financial crisis. Furthermore, only five countries' aid meets the UN target of 0.7 per cent of gross national income, with the averrge stuck on 0;29 per cent of GNI.

Besides, critics of aid have become vocal, and sections of voters in donor publics are either weary of aid or insist on aid delivering results. A growing body of literature even sees aid as a curse that stifles development and democratic accountability of governments to citizens. From the perspective of African governments, even if aid improves substantially, it often comes with conditions, including ceding considerable space in the policy process to donors.

The second type of revenue bargains, involving mutual accountability of states and citizens in the mobilisation and use of revenues, may substantially increase revenues as well as help to overcome the problems of accountability and mutual suspicion that have plagued the aid relationship. The sources of revenues for constructing such bargains are taxes, savings, social insurance schemes and mineral rents.

With growing economies, the tax-to-GDP ratio of African countries has increased in the last 15 years, even though non-resource related taxes have stagnated. Indeed, the boom in global commodity prices and widening of the tax net through value added taxes contributed to a modest decline in aid dependency.

The savings rates of African countries have also risen even though in many countries they are yet to return to pre-structural adjustment levels. Governments have also launched social security schemes to provide old age, invalidity and survivors benefits to formal sector workers. Because of the youthful age structure of the African workforce and the period it for benefits to mature, these schemes have generated huge savings that can finance development.

Revenue bargains may be crucial in maximising yields from these various revenues sources. They were at the heart of state formation, extension of the franchise and improvements in welfare in Europe. In democratic contexts, they imply negotiation and less coercion in extracting resources fro citizens. In bargains over taxation and political representation, for instance, European governments wanted resources to finance wars and citizens wanted representative governments that could deliver public goods.

Similarly, East Asia's high savings rates that financed its development were based on a bargain: state pursuit of growth with jobs, security of tenure and social protection for the employed, universal provision of housing, especially in Singapore, and affordable quality education for all.

In Western Nigeria, in the 1950 and 1960s, the Action Group party's development programme was based on a policy of extracting surpluses from cocoa farmers in exchange for universal primary education, and extension and social services that benefited farmers and their children, giving that region the highest literacy rate in the country. The close party-state-citizen relationship that was a hallmark of that bargain ensured the party dominance in regional elections.

Following Eritrea's independence and resolve to finance its development  without depending on donors, a bargain was struck with its Diaspora citizens to pay two per cent of their income tax in exchange for state services. Although a laudable bargain, the persistence of authoritarian rule has undermined its maximisation as many Eritreans now question tis legitimacy.

Concern for environmental standards and pressure by mining communities for a fairer share of mineral rents has also produced a variety of bargains in mineral-rich countries. In Sierra Leone, Community Development Agreements allocate about three per cent of diamond export tax revenues to local mining companies for services and other benefits. However, most of the bargains are lopsided, and elites, especially traditional rulers, are the main beneficiaries.

Revenue bargains that are transparent, and in which citizens exercise influence, provide five potential benefits. First, they offer opportunities to build purposeful, mutually supportive and durable state-citizen relations that have been lacking since the structural adjustment period of the 1980s that eschewed planning and dialogue. Despite the spread of democracy, governments are hardly present in most people's lives in terms of jobs, social services and social security. People invariably fend for themselves and very often do not trust the word of government. The Ebola crisis in West Africa demonstrated this in bold relief as weak citizen-state ties and lack of trust in government made it difficult to curb the high rates of infection.

Revenue bargains work best when they are crafted around benefits that have a direct impact on well-being, such as social services and social protection. Unfortunately, trends in aid allocations that have prioritised social sectors because of the MDGs, and Africa's growing dependence on aid to finance its social services, may act as a constraint in building effective revenue bargains.

Aid should focus on infrastructure and the productive sectors and African governments should construct viable bargains with their citizens that will fund social programmes, as is the case in all countries that have grown out of poverty. In East Asia's industrialisation, aid supported agricultural technology, basic and economic infrastructure, not social programmes. Social programmes were the exclusive responsibilities of states and citizens and were central to the construction of effective state capacity in advancing the project of economic transformation.

Second, revenue bargains can deepen accountability by improving citizens' capacity to organise and make claims on public policy. Such activism may be driven by expansion of the tax net to most citizens in productive work, including  those in the informal sector. Tax yields are low in Africa partly because tax advocacy groups, such as the Tax Justice Network, are few, lack strong ties with taxpayers, and mostly address the extractive sector. When more citizens pay taxes and are brought into bargains with defined benefits, they are likely to develop interest in how revenues are spent, making it easier for more groups to be formed and for strong links to develop between advocacy groups and taxpayers.

Activism may also serve as pressure to upgrade the quality of institutions in social provision, which tend to be neglected in economic policies that emphasize tight spending. Since the 1980s, financial institutions, such as central banks and finance ministries, have been better capacitated than social sector institutions in advancing public policies. This needs to change if development is to impact positively on the poor.

Third, revenue bargains that are crafted around citizens’ taxes may help governments to increase yields from other revenue sources, such as those in the extractive sector and value added taxes paid by trading enterprises. African countries have been unable to capture a large share of resource rents because of generous concessions in the form of royalties, corporate taxes, value added taxes and import duties, given to mining companies. It has been estimated that Sierra Leone lost about $224 million in 2012 largely because of generous tax concessions given to the five largest mining companies.

In Guinea, an Israeli company, which bought iron ore mining rights for $160 million, sold those rights to a Brazilian company for $2.5 billion.  In Zambia, an Indian businessman was caught on video boasting that although he paid only $25 million for a Zambian copper mine, he makes $500 million every year on the mine. Mining companies get away with these kinds of deals because of lack of transparency in negotiating contracts, the limited number of groups that monitor the extractive sector, and lack of sufficient citizen engagement with revenue issues. 

Similarly, many trading companies do not fully pay value added taxes because of collusion between tax collectors and trading companies and consumers’ indifference to the culture of demanding receipts. In Sierra Leone, for instance, many trading companies circumvent or exploit value added taxes by issuing illegal receipts to buyers or none at all. As buyers do not often ask for receipts, let alone insist on the official ones, the companies appropriate the taxes that they should pay to the state. Increasing the stake of citizens in revenue bargains may encourage them to police companies’ behaviour in the payment of taxes. 

Fourth, revenue bargains may help to reverse the perniciously non-egalitarian and fragmented system of social provision that has emerged in much of Africa since the 1980s. In the field of education, even though enrolment rates have risen, the quality of education remains poor, and the public schools that offered opportunities for upward mobility to children from poor backgrounds have been seriously degraded. Now rich and middle class parents send their children to well-resourced private schools and children from poor backgrounds are condemned to very poor public schools or none at all.

By bringing more people with incomes into revenue bargains who may insist on quality services for their taxes, many in the middle class that have opted for private provision may be tempted to return to public provision, further enhancing demands for improved services based on the standards of the middle class.

Fifth, revenue bargains may improve state capacity to exercise relative autonomy vis-à-vis donors in policy making, avoid capture by powerful interest groups, and help policy elites to provide leadership in the development process. They may encourage citizens to play active roles in the monitoring of aid and ensuring that such aid reaches the right targets. This may raise the credibility of African governments in the aid relationship. It has been estimated that aid that is linked to domestic revenue mobilisation can lead to a 10-fold increase in revenue yields in Africa. In other words, if aid and domestic revenue mobilization work in tandem, African governments will be responsive to both citizens and donors, and over time may be weaned of aid dependency.

Constructing revenue bargains can be challenging but is doable. Success requires a focus on four issues. First, revenue bargains are always imperfect. Some citizens may want to evade taxes while still enjoying services that others have paid for; and governments may under-supply services if bargains are not institutionalized. Second, citizens may support revenue bargains when they are perceived as fair in terms of the level and progression of taxes, and when all tax payers honour their commitments.

Third, the credibility of governments to deliver their own part of the bargain is important, especially in countries where the track record of governments in supplying services has been poor. How governments signal credibility is crucial in understanding the politics of revenue bargains. Fourth, lessons from participatory budgeting in Brazil, which focuses on the expenditure side of bargains, suggest that revenue bargains may be effective in situations where governing elites are committed to changing power structures in favour of low-income groups and where there is a dense network of groups that can engage the state in bargaining.

Yusuf Bangura, who was a Research Coordinator at the UN Research Institute for Social Development from 1990 to 2012, is currently UNRISD Senior Research Associate. He wrote the above for UNRISD’s Think Pieces on Financing for Development: The Road to Addis, as part of its contribution to the Third International Conference on Financing for Development in Addis Ababa in July 2015.