Posted by Bryn Welham and Mark Miller [1]
ODI’s recent publication on ‘Fiscal Governance and Statebuilding’ summarises why the creation of the modern state is closely tied to its ability to effectively raise revenue.
While typically less gripping than an ODI research publication, the latest series of the HBO television series ‘Game of Thrones’ provides a good example of how this process works in practice. Cersei Lannister, one of the pretenders to the throne, has just seen her financial reserves destroyed in a surprise attack. With few peasants left to squeeze, she turns to a shadowy foreign bank for a usurious loan to hire mercenaries from overseas. But her arch-rival, Daenerys Targaryen, appears to have no fiscal problems despite moving several huge armies around the map like chess pieces. Daenerys is generally popular with her subjects; although not afraid to use her dragons to make an example of the unwilling when necessary.
Surely the question on most viewer’s lips is therefore: how does this illustrate the broader relationship between statebuilding and fiscal governance? Luckily, our recent research provides some clues on this issue.
War makes states and states make budgets
In Europe, it was state responses to the financial demands of interstate war that ultimately led to greater accountability and efficiency in public administration because of changes to revenue-raising strategies.
Inter-state warfare put greater demands on the national treasury, but increased arbitrary seizure of citizens’ wealth led to diminishing returns. Raising revenue with some form of voluntary compliance was far more efficient, and much easier to obtain, with clear and rules that were applied with reasonable fairness. Some form of partnership between government and citizen was established. But taxpayers increasingly demanded oversight of these rules, and some form of control over the use of their money. This ultimately resulted in the creation of Parliaments with formal powers over tax raising and expenditure management, and to greater accountability
Improvements in the tax-raising function to deliver higher yields in the context of state-citizen cooperation, in turn, provided a nucleus of effective public-sector management techniques. Weberian forms of rational bureaucracy began to emerge in professionalised tax authorities. From this starting point, modern bureaucratic techniques were able to spread throughout the public sector over time, resulting in a more capable state overall.
“All we are saying is give war a chance”
If that is the story of how the modern state was created in the past, what about the future? Can the pro-developmental results of statebuilding somehow be introduced, encouraged, and accelerated in developing countries? If so, what specifically can external advisers do to support this process?
One option could be to follow the European historical example and attempt to engineer an interlinked series of devastating long-term wars of attrition between fragile states. Out of the bloodied wreckage, a decent tax authority would (hopefully) emerge. But obviously this is not seen as a viable policy choice among development institutions.
If interstate war is off the table then, what might be possible in its place, particularly in low-capacity fragile states? Our latest research finds that there no single path or means by which fiscal governance can support statebuilding. Instead, there are a variety of approaches and options that might be available to fragile states and their supporters.
One familiar approach to institutional reform in challenging environments advocates a long-term approach, working within the constraints of each reform environment and supporting a country-led agenda.
Some argue that the focus of revenue raising should be on efficiency – how to raise the greatest amount of revenue as soon as possible at the lowest cost. This approach could mean focusing on large taxpayers, or on trade taxes. Others take a longer-term political view – how can revenue raising be structured to best reinforce a social contract by bringing more people into the formal taxation system, even if that may be quite costly in the short-term? The role of natural resources revenue in potentially undermining the statebuilding benefits of broad-based taxation that binds citizen and state more closely together is particularly relevant to this debate.
The issue also moves beyond aid. Donor support to tax authorities and tax policy can help fiscal governance directly, but a donor country’s behaviour also matters indirectly through broader issues of international financial regulation and global tax cooperation. Donors must therefore consider how their own ‘domestic’ financial and tax policies will interact with the realities of international financial flows to support, or inhibit, fiscal governance in developing countries.
Overall, there is no ‘standard’ package of revenue-raising reform methods in fragile environments. Instead, there is scope for policy experimentation and use of country-specific reforms to address areas of opportunity that are specific to each country. Such reforms should consider carefully how global financial governance can indirectly affect country-level behaviour.
As for Cersei and Daenerys, the fiscal governance future of their proto-states look set to take different paths. Based on the examples outlined in the report, Daenerys’s approach to fiscal governance - professionalising her civil service and perhaps turning her kingdom into a better governed state over time - looks to be a safer bet for generating reliable revenues over time. Guess we’ll have to wait and see.
[1] Bryn Welham is a Research Associate and Mark Miller a Research Fellow at the Overseas Development Institute in London, United Kingdom.
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy
