African Economic Conference explores impact of foreign aid on domestic tax collection

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African Economic Conference explores impact of foreign aid on domestic tax collection

The African Economic Conference, organized by the African Development Bank and partners, convened for its second day of deliberations on Tuesday, to explore the impact of foreign aid on domestic tax collection and the effective utilization of donor aid in Africa.

The discussions taking place at the UN Conference Centre in Addis Ababa have been convened by the AfDB, ECA and the UN Development Programme (UNDP) to examine policies and structures determining the pace of Africa’s economic transformation.

While presenting an academic research paper on the aid effectiveness and the quality of institutions managing foreign aid, Adamasu Maruta, a researcher at the University of South Australia, said foreign aid remains more relevant to the education, health and agriculture sectors compared to other sectors.

“Foreign donor organizations and agencies should apply conditions on the institutional quality before they transfer aid because research shows aid is more effective in Asian and South America regions because they have institutions which effectively utilize the aid,” Adamasu said.

The session on the “Role of the State and leadership in overcoming barriers to effective structural transformation” also focused on the economics and politics of foreign aid and how it impacts on the domestic revenue collection.

Abrams Mbu Enow Tagem, of the University of Nottingham, United Kingdom, argued that foreign aid perpetuated donor-aid dependence. It also weakens the State’s ability to collect its own domestic revenue, he said. In the worst-case scenario, countries with an over-reliance on foreign aid developed a habit of spending foreign aid on development programmes while embezzling locally collected taxes.

Tagem also reasoned that states relying mostly on foreign aid tended to focus on tax revenue from a few imported goods while the domestic taxes remained elusive because the governments in some regions lacked the capacity to effectively target taxes from the informal traders and the small industries.

“Aid plays a significant role in determining the tax policies,” Tagem argued. He said tax administration reforms and bureaucratic reforms are all required within the states which depend on foreign aid.

The session also examined the effects of policies pursued by several African countries to promote industrialization and the results obtained as a result of the policy interventions.

Malokele Nanivazo of the University of Kansas presented a paper on the impact of export promotion agencies and the Export Promotion Zones on accelerating the pace of industrialization in Africa. She said the financial incentives provided to exporters in the industrial zones equally affected tax collection.

While the Export Processing Zones provided an avenue for the industrialization, they also had negative impact on industrialization and provided a short-term solution to boosting economic growth, she argued.

According to the researcher, in 2011, 116 countries had export promotion agencies and EPZ parks, with at least 28 countries in Africa having operational export promotion agencies.

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