It’s Time for an Explicit U.S. Plan on Domestic Financing for Development

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Written by Emily Foecke

Only 25 percent of births were registered in the Democratic Republic of the Congo (DRC) in 2014, which has led to high numbers of undocumented citizens. As of late 2015, many civil servants were being paid with cash from suitcases carried from Kinshasa. Yet, despite the country’s anemic administrative capacity, the DRC may be expected to dramatically increase its contribution to development financing. In the world’s poorest countries like the DRC, where “financing for development” means the provision of basic public services, the concept of increasing domestic financing for development (DF4D) can seem grossly disproportionate to reality.

DF4D has long been a talking point in international development, but doubts about the future of U.S. foreign aid have made increased DF4D all-too-plausible for developing countries absent prior strategic planning. Two critical steps should be taken in the face of the haphazard budget cuts to foreign assistance proposed by the Trump administration.

First, U.S. lawmakers and bureaucrats in various agencies—including the State Department, Department of Defense, and the U.S. Agency for International Development (USAID)—responsible for funding and implementing international development efforts should acknowledge the challenges to increasing DF4D from developing countries. They should be explicit in explaining why countries like the DRC are not ready to dramatically increase their financial contributions for development and emphasize the humanitarian disaster that would result from expecting increased DF4D too soon. Second, they should lay out a realistic timeline for the United States to work towards increased DF4D. They may find valuable traction with the Trump administration if they approach dialogue on U.S. funding for international development from this angle.

There are major differences in current levels of DF4D between developing countries. Most middle-income and emerging countries already self-finance most of their development. The capital for DF4D in developing countries comes from sources including tax revenues, non-concessional loans, bond markets, and private external financing like foreign direct investment. Some of the most common ways to increase DF4D are by improving tax collection, broadening the tax base, curbing excessive granting of tax exemptions, increasing national savings to improve creditworthiness, and stimulating private investment through public-private partnerships.

However, in many fragile and low-income countries in sub-Saharan Africa, foreign aid makes up over half of all external financial inflows. These countries also face the highest barriers to putting increased DF4D into practice because of low capacity in key institutions and problems including graft and weak enforcement mechanisms. In the DRC, for example, efforts to improve tax collection have been hamstrung by tax collector fraud, missing taxpayer data, and low confidence in how tax revenues will be spent.

The United States can develop a clear framework and plan to build up DF4D based on an understanding of these challenges. In countries that are already self-financing most of their development, U.S. official development assistance (ODA) should be primarily comprised of specialized aid to close the gap between domestic and foreign financing. Aid-for-tax administration, for example, currently receives only 1 percent of development funds. However, such specialized aid can drastically increase a country’s public finances by targeting its ability to collect, regulate, and spend taxes. Countries that fall into this category should be given a target date by which they would cease to be eligible for U.S. ODA. This would create a credible incentive for governments to commit to needed reforms to boost DF4D.

The building of institutional capability should be the top priority for U.S. international development efforts in fragile, low-income countries where a majority of financial inflows come from foreign aid. A U.S. plan to increase DF4D in such countries should boost the amount of ODA funneled to local actors and institutions rather than to projects run by foreign organizations that often create parallel administrative systems instead of building on government systems. While disbursing aid in such a way could risk exposure to corruption, it is one of the most effective ways to build institutional capability for DF4D. Focusing U.S. ODA on local actors and institutions is necessary to strengthen local capacity to autonomously carry out the administration of the state. This will allow countries to move towards self-financing more of their development.

Most developing countries have a full portfolio of donors, including the United States, that makes up the gap between DF4D and full financial needs. DF4D is therefore an issue for all donors of foreign assistance. For example, there remains a $2.8 trillion annual funding gap between necessary financing to achieve global development goals—notably the United Nation’s Sustainable Development Goals (SDGs)—and current levels of aid assistance provision. No donor countries have the political mandate or means to fill that gap with increased foreign assistance. Therefore, the international community faces the same need as the United States to responsibly shift the development paradigm to more DF4D. Rather than drastically slash budgets, it is time to explicitly communicate a responsible and realistic plan to eventually draw down foreign financing for development.

About the author: Emily Foecke is the International Development Fellow at Young Professionals in Foreign Policy (YPFP). She is also a Research Assistant with the Center for Global Development in Washington, DC. Emily earned her Master of International Affairs in 2016 from the University of California-San Diego, where she concentrated on international development policy.