Mobilizing Domestic Resources as a Way out of the Crisis

28/10/2010
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Domestic resource mobilization is key to sustained economic growth, development and transformation in all economies and this is even more so in Sub-Saharan Africa (SSA), say Eric Kehinde Ogunleye and Desire Adebimpe Fashina in a paper they presented at the ongoing African Economic Conference in Tunis.

The advent of the global financial and economic crisis has reinforced the need for African countries to intensify efforts aimed at developing strategic policies for mobilizing domestic resources for long term economic growth. It has revealed the “futility” of continued dependence on aid as a source of finance to sustained economic growth, they say.

The crisis caught almost all the developed countries off-guard as their economies sank into recession. Delivery on aid pledges were at risk as donor countries focused on rescuing their own economies, with limited attention to the plight of developing countries – the innocent victims of the crisis they did not create.

While foreign aid has its own place in financing economic growth in African countries, the authors say, it should not be relied upon as a means for sustained, long-term financing: it rather deepens the dependency of African countries on the aid-giving countries and institutions.

Furthermore foreign aid, as a means of financing sustained growth and development, blinds some African countries to their domestic wealth potentials that could be harnessed for financing long-term growth and transformation.

Domestic resource mobilization is advantageous on several grounds: It remains the biggest source of long-term financing for sustained growth, development and provision of public goods and services for the teeming population.

In addition, reliance on domestic resources strengthens governance, fiscal and capital market institutions and further fortifies the social and fiscal contract between the government and its citizens.

Improved domestic resource mobilization is not impossible in SSA countries, they said. SSA countries are making strenuous efforts to improve their domestic resource mobilization process. The recent global financial and economic crisis has demonstrated the need for African countries to look even more inwards for sustained economic growth financing.

However, challenges remain. These include weak fiscal and current account positions, too much reliance on commodities in most economies in the region; low revenue and tax base; uncertain and poor business environment; weak domestic capacities; poor revenue collection and management mechanisms; and weak financial institutions and undiversified financial instruments.

To help improve domestic resource mobilization, SSA countries should be more pragmatic by doing the following:

  • Be more vigorous in strengthening capacigy for revenue collection and management;
  • Work more on tax reforms that will ensure tax harmonization and a move away from tax exemptions, concessions and holidays;
  • Provide sufficient incentives for tax collecting agents and institutions to reward transparency and punish corrupt practices; reform the financial sector;
  • Leverage on IT to improve savings mobilization;
  • Work to improve global aid architecture to chart the course for SSA countries to exit aid dependency;
  • And improve business climate to promote private investment.

Concerted efforts are thus required to improve domestic resource mobilization in SSA countries. Success by SSA countries in their current efforts will be elusive if they are left to do it alone. Better results will be achieved through efforts at sub-regional and regional levels. Cooperation among SSA countries and the support of the international community are important.

The African Development Bank is solicited to facilitate and improve domestic resource mobilization in SSA. The expected improved resources from these efforts are aimed at helping SSA countries develop policy and fiscal space to take charge of implementing and managing policies that ensure quick recovery and sustained growth.

Positive Outcomes of Remittances

In another presentation, the author, Yéro Baldé, Université de Limoges, underscored that contrary to the pessimistic literature, remittances positively and significantly influence savings and investment in SSA.

Remittances are not entirely spent on basic consumption needs, but are also either saved or invested. Interestingly, although the volume of remittances is lower than foreign aid, the former influence more savings and investment in SSA.

The impact of remittances is about 7 times greater than that of foreign aid even though the amounts of aid to SSA represented more than 15 times the remittances for some years.

Remittances help relax liquidity constraints and when invested, they can keep family members busy in countries where unemployment is high. However, when foreign aid is efficiently used, it can be an important complement to remittances by allowing vulnerable households to have income above the threshold subsistence level so they can use larger share of remittances for savings and investment purposes. Even though remittances do not have direct effect on growth, they can have indirect positive effect on growth through saving and investment.