Breaking the vicious circles of illicit financial flows, conflict and insecurity

Cobham, A. 2016. Breaking the vicious circles of illicit financial flows, conflict and insecurity. GREAT Insights Magazine, Volume 5, Issue 1. February 2016. Republished with permission of the European Centre for Development Policy Management (ECDPM). 

Illicit financial flows (IFF) not only thrive on conflict and insecurity but exacerbate both, by undermining the financial and political prospects for effective states to deliver and support development progress. Policies to meet the Sustainable Development Goals’ target of curtailing IFF will also promote peace and security. 


In 2014, the Tana High-Level Forum on Security in Africa took as its theme the impact on peace and security of illicit financial flows (IFF). Leading figures from across the region, including a range of current and former heads of state, discussed the nature and scale of illicit flows and the policy options available.

The subsequent report of the High Level Panel on Illicit Financial Flows out of Africa, chaired by Thabo Mbeki, cited the Tana Forum background study (Cobham, 2014) and reiterated its analysis of the linkages with security; and so it was no surprise that the IFF target in the Sustainable Development Goals (SDGs) appeared under Goal 16: ‘Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels’:

16.4 By 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime…

The linkages between IFF and insecurity are not necessarily well understood, however. Assessing how the two issues interact can help to identify the range of policy responses that will support powerful progress.


Illicit financial flows


There is no single, agreed definition of IFF. The Oxford dictionary definition of ‘illicit’ is: “forbidden by law, rules or custom.” The first three words alone would define ‘illegal’, and this highlights an important feature of any definition: illicit financial flows are not necessarily illegal. Flows forbidden by “rules or custom” may encompass those which are socially and/or morally unacceptable, and not necessarily legally so. Multinational tax avoidance (as opposed to illegal tax evasion) might come under this category.

This particular example also shows why a legalistic approach may introduce an unhelpful bias. Commercial tax evasion affecting a low-income country where the tax and authorities have limited administrative capacity is much less likely either to be uncovered or successfully challenged in a court of law, than would be the same exact behaviour in a high-income country with the same laws but with relatively empowered authorities. A strictly legal definition of IFF is therefore likely to result in systematically – and wrongly – understating the scale of the problem in lower-income, lower-capacity states. For this reason above all, a narrow, legalistic definition of IFF should be rejected.

Figure 1: Main IFF types by nature of capital and transaction

GREAT_Insights_Vol5_iss1_Cobham_Fig1

The central feature of IFF – and incidentally a major reason their measurement is so difficult – is that they are deliberately hidden: financial secrecy is key, in order to obscure either the illicit origin of capital or the illicit nature of transactions undertaken (or both). As illustrated in Figure 1, four main types of behaviour are captured: 1) market/regulatory abuse (e.g. using anonymous companies to conceal political conflicts of interest, or breaches of antitrust law); 2) tax abuse; 3) abuse of power, including the theft of state funds and assets; and 4) laundering of the proceeds of crime. Figure 1 also highlights that there is a broader distinction between ‘legal capital IFF’ (tax abuse and market abuse, types 1 and 2) and ‘illegal capital IFF’ (the abuse of power and laundering of criminal proceeds, types 3 and 4).


Security and state ‘fragility’


There is growing agreement that the concept of fragile states – as a binary division against all other, ‘non-fragile’ states – is an unhelpful one for analysis. Instead, it is more useful to think of all states as occupying some position on a spectrum of (risk of) fragility. As the High Level Panel on Fragile States (2014) put it:

Fragility comes about where [pressures such as those stemming from inequality and social exclusion, or from new resource rents and resource scarcity] become too great for countries to manage within the political and institutional process, creating a risk that conflict spills over into violence – whether interstate or civil war, ethnic or tribal conflict, widespread criminality or violence within the family. Countries that lack robust institutions, diversified economies and inclusive political systems are the most vulnerable. In the most acute cases, violence has the effect both of magnifying the underlying pressures and eroding the institutions needed to manage them, creating a fragility trap from which it is very difficult to escape.

The risk of fragility is then closely related to a state’s ability to provide citizens with ‘negative’ security (to prevent personal, community, political and environmental insecurity) and with ‘positive’ security (to provide the conditions for economic, food and health security and progress). These two forms of security exhibit potentially mutually reinforcing relationships with particular types of IFF.


Two vicious circles


Figure 2 shows a vicious circle linking illegal capital IFF and problems of negative security. Where IFF derive from abuse of power – say, for example, the extreme behaviour of a kleptocratic leader – the cycle follows almost tautologically. The nature of the IFF itself undermines state legitimacy and both the capacity and interest to provide security, or indeed to act to curtail IFF.

When the rise in IFF reflects laundering of the proceeds of crime, it is the underlying crimes where the linkages are likely to emerge. Most dramatically, Cockayne (2011) finds that drug and human trafficking has led to little less than the criminalisation of governance itself in West Africa and the Sahel. He identifies two hubs that grew strongly after Caribbean counter-narcotics efforts in the 1990s pushed the trade elsewhere: one around Gambia, Guinea and Guinea-Bissau, and the other around Benin, Ghana and Togo. In addition, Cockayne highlights important services provided in other states – namely money laundering in Senegal, and transit in Mali, Mauritania and Niger. The growing involvement of the state in criminal activity (including IFF), and the growing power of criminality over the state, make the vicious circle somewhat inevitable again.

Figure 2: The vicious cycle of negative security and illegal capital IFF

GREAT_Insights_Vol5_iss1_Cobham_Fig2

Much of the problems of conflict and negative security arise in countries characterised by low levels of institutionalisation of authority, a heavy reliance on patronage politics and an accordingly high level of allocation of state rents to unproductive activities (patronage, to maintain the political machine). For a rent-seeking patronage order to function, it must resist or evade the pressures to institutionalise state finance – through, for example, an incentive structure in which senior officials have a personal interest in financial opacity and the misuse of public funds, and fiscal policy is subordinated to the ‘political budget’ (the state allocation for patronage purposes). Major sources of funds such as natural resource companies may be rewarded through the opportunities to evade tax with impunity, and may maximise net profits through bribery.

In turn this kind of state structure creates structural incentives for violence. Kleptocracy will tend to require violence to protect the position of privilege; those outside may resort to force to extort rents from those in power, or to challenge for the prize of (illegitimate) power itself.

All four IFF types shown in Figure 1 are likely to result in reductions in both state funds and institutional strength – that is, they undermine governance as well as domestic resource mobilisation. While little research has sought to quantify the governance impact, and some attention has been given to the theft of state assets, a growing body of literature seeks to assess the financial scale of flows and the revenue losses associated with particular elements. Consistently, the scale of IFF and of revenue losses from corporate profit-shifting and from individual evasion through undeclared offshore assets is greater in lower-income countries; and often material in respect of countries’ GDP. Indicative estimates of the resulting impacts on basic human development outcomes such as child mortality suggest these too are powerful indeed – potentially bringing African achievement of the Millennium Development Goal target forward from an estimated 2029 to 2016, for example (O’Hare et al., 2014).

Figure 3: The vicious cycle of positive security and legal capital IFF

GREAT_Insights_Vol5_iss1_Cobham_Fig3

Figure 3 illustrates the vicious circle that can arise between these largely legal capital IFF, and problems of positive security. Bluntly, revenues are undermined where they are most needed; and further institutional damage follows from the weakening of the state-citizen relationship that is built on effective taxation.


IFF and security: Policy implications


At the Tana Forum in 2014, President Salva Kiir of South Sudan told how the ‘vultures’ had circled the new state even before it came into existence, building relationships with soldiers and others, so that when the moment came they were poised to create a web of contracts that channelled away oil revenues into anonymity – without delivering on the contracts:

When peace was signed, the vultures that were hovering over Sudan landed. We have learned in our cultures that when you see vultures hovering around, there must be a dead animal – or something is going to die… They knew there would be a vacuum of administration there… That [oil] money was disappearing day by day to where you cannot trace it.

The central feature of IFF is that they are hidden, typically by the financial secrecy provided by other jurisdictions. The secrecy in question relates primarily to the provision of vehicles for anonymous ownership such as shell companies; to the refusal to provide information on foreigners’ assets and income streams to their countries of tax residence; and to the type of corporate opacity that obscures the worst excesses of multinationals’ profit-shifting. As shown by the Tax Justice Network ranking of tax havens, the Financial Secrecy Index, this includes many of the leading economies – not least the USA, ranked third.

States can protect themselves to a degree, by ensuring greater transparency of public contracts for example, and public country-by-country reporting by multinationals; and by engaging fully in the multilateral process for automatic exchange of tax information. But while other states insist on selling secrecy, major obstacles will remain.

Success in the Sustainable Development Goals target of curtailing illicit financial flows would contribute to reducing risks of state fragility across the board – and to achieving many human development targets too. But such progress depends on international progress against financial secrecy. A significant step would be the adoption of indicators for target 16.4 that will ensure individual states are held accountable for the secrecy they provide globally – and the IFF they stimulate as a result.

The following indicators (Cobham, 2015) draw from the agreed policy positions in the Sustainable Development Goals and the Financing for Development declaration from Addis, July 2015:

  • For each country and jurisdiction, on what proportion of foreign-owned assets and to the states of what proportion of the world’s population, are they providing tax information bilaterally to others?
  • For each country and jurisdiction, from which countries and jurisdictions are they receiving tax information bilaterally?
  • For each country and jurisdiction receiving information, what proportion and volume of revealed assets were already declared by the taxpayer, and what resolution has reached each year in respect of the remainder?
  • For each country and jurisdiction, for multinationals making up what proportion of the declared multinational tax base is country-by-country reporting publicly available?

The harder it is for vultures to hide, the fewer may be the unnecessary deaths suffered.

Figure 4: Overview of IFF and security linkages

tana overview fig

 


References


Cobham, A., 2014, ‘The impact of illicit financial flows on peace and security in Africa’, Tana High-Level Forum on Security in Africa Discussion Paper.

Cobham, A., 2015, ‘Uncounted: Power, inequalities and the post-2015 data revolution’, Development 57:3/4, pp.320-337.

Cockayne, J., 2011, ‘Transnational threats: The criminalization of West Africa and the Sahel’, Center on Global Counterterrorism Cooperation Policy Brief (December).

High Level Panel on Fragile States, 2014, Ending Conflict & Building Peace in Africa: A call to action, African Development Bank: Tunis.

High Level Panel on Illicit Financial Flows out of Africa, 2015, final report.

O’Hare, B., I. Makuta, N. Bar-Zeev, L. Chiwaula & A. Cobham, 2014, ‘The effect of illicit financial flows on time to reach the fourth Millennium Development Goal in Sub-Saharan Africa: a quantitative analysis’, Journal of the Royal Society of Medicine 107(4), pp.148-156.

 

Time for a global compact on financial transparency?

Apologies for the recent absence of the Tax Justice Research Bulletin. The TJRB will be back soon, and in the meantime here’s a review of the major research contribution from the second half of 2015. This longish post is based on my remarks at the book’s launch in Oslo in December (and includes a couple of the authors’ slides), where the idea of a global compact ended up being discussed at some length…

Challenging narratives: Illicit flows, corruption, Africa and the world

Ndikumana coverIbi Ajayi & Léonce Ndikumana (eds.), 2015, Capital flight from Africa: Causes, effects and policy issues, Oxford University Press.

This new volume from the AERC (African Economic Research Consortium) is a very welcome milestone in scholarship on the complex and contested areas of capital flight and illicit financial flows (IFF). It is more than that however. It is a powerful book in terms of what it represents; what it contributes; and above all, of what it challenges. These are discussed in turn below, before consideration of a major policy opportunity that now beckons.

Context

Capital flight is defined as consisting of (predominantly illicit) unrecorded movements of capital across borders, made up of discrepancies between the recorded sources and uses of foreign exchange, combined with the movements hidden through trade mispricing. The larger set of IFF will also include recorded flows of illicit capital, for example through money laundering.

This is only the second major volume to address IFF directly, and it is no coincidence that the Norwegian government has provided support to both. This issue, now firmly on the global policy agenda, was nowhere when Norway first began to promote it. Has any donor managed such powerful impact on any issue, through targeted, strategic interventions? And yes, full disclosure: the Tax Justice Network, too, has benefited from Norwegian funding.

The first IFF volume, Draining Development, was published by the World Bank in 2012 following a 2009 conference. Despite initial agreement, the Bank backed out of providing a full study itself and instead brought together external researchers (myself included). The resulting work remains a milestone, but is inevitably somewhat patchy given the quite disparate nature of the group.

Ajayi & Ndikumana, in contrast, have produced a volume with a good degree of coherence across the individual chapters and above all in terms of the overall arc, presumably reflecting the authors’ common AERC involvement as well as the editors’ guiding hand.

The report of the African Union and Economic Commission for Africa’s High Level Panel (HLP) on Illicit Financial Flows out of Africa, chaired by H.E. Thabo Mbeki, has already brought significant policymaker focus to the issues – including outside the continent. The HLP report was itself preceded by an IFF focus for the 2014 Tana High Level Forum on Peace and Security in Africa; and over many years, the development of a strong civil society engagement spearheaded by Tax Justice Network – Africa.

And so the new volume represents further evidence of African leadership on these issues, in the research sphere also. But its contribution is greater than this.

Major findings

First, the book provides updated (Ndikumana & Boyce) estimates of the scale of capital flight from the continent over four decades. In the context of inevitable difficulties of estimating from data anomalies, things which are deliberately hidden – as well as general weaknesses of data quality and/or availability – these are the leading time-series estimates available (more on the question of estimates below).

Ndikumana slide1 The book’s major contributions lie in the analysis of the determinants, and as importantly the non-determinants, of capital flight. The non-determinants include:

  • risk-adjusted returns (chapter 2: Ndikumana, Boyce & Ndiaye);
  • ‘orthodox’ monetary policy (high interest rates in particular – chapter 6: Fofack & Ndikumana);
  • capital account liberalisation (results for domestic financial liberalisation are less clear – chapter 7: Lensink & Hermes); and
  • ‘macro fundamentals’ (especially the pursuit of inflation control and balance of payments sustainability – chapter 9: Weeks).

Weeks’ sharp statement of findings arguably applies across the wider set of results too:

“the orthodox narrative that capital flight results from unsound macro policies [is reversed]. On the contrary, capital flight may force governments into policies that work against the majority of the population”

Evidence is also found for the following determinants of capital flight:

  • external debt (much of which has historically left again through the ‘revolving door’ – chapters 2, 3: Ajayi, and 5: Murinde, Ocheng & Meng);
  • weak rules and/or capacity (throughout, but most clearly in chapter 10: Arezki, Rota-Graciozi & Senbet, which addresses the impact of thin capitalisation rules in resource-rich countries);
  • habit, and the impact of continuing impunity – including social determinants of tax compliance and the possibility of vicious circles of IFF and governance (chapters 5, 11: Ayogu & Gbadebo-Smith, and 12: Kedir); and far from least
  • international financial secrecy (chapters 8: Massa, 9, 13: Barry, 14, and 15: Moshi).

Taken together, these findings provide a base of new evidence sufficiently broad that it has implications not only for national policymakers, but also for the wider narrative.

A new challenge to sticky narratives

There are a number of sticky narratives in development. As in other fields, these are stories which seem to have a staying power in popular and policy discourse that far outlives any basis they may have in technical research. Two of these come together in the issues explored here.

Perhaps the stickiest of narratives, and certainly one of the most pernicious, is the persistent association of corruption with poverty. This narrative has its roots in self-justifying colonial discourse of fitness to rule (and to be ruled), and its persistence reflects the decades-long promulgation in the media (and by some NGOs) of images of kleptocratic elites in post-independence regimes. The largely (though far from exclusively) African identity of those states (i.e. those that most recently gained independence) often provides an additionally unpleasant (and sticky) racist element.

The Corruption Perceptions Index, which aggregates multiple surveys (largely of international elites), is highly correlated with per capita GDP: so respondents tend to perceive poorer countries as more corrupt. But the consistent presence of Somalia, for example, near the bottom; or of Switzerland near the top; may reveal more about those whose perceptions are surveyed, than those who are perceived.

One of the motivations for the creation of the Tax Justice Network’s Financial Secrecy Index was precisely to challenge this view, by using objectively verifiable criteria to rank jurisdictions according to their provision of financial secrecy to non-residents: if you will, the selling of corruption services.  Top ranking – that is, the biggest global provider of financial secrecy – is Switzerland. The United States comes in third place, Mauritius 23rd and Ghana 48th.

The second sticky narrative holds that capital flight is, in effect, a punishment on (especially African?) governments for bad policy. This can act in combination with the first to produce the story that African capital flight is the result of African corruption.

The findings of the AERC volume provide a powerful challenge to this story. First, they offer some support to the old challenge: that it takes ‘two to tango’. Or as Mobutu Sese Seko is quoted: “It takes two to corrupt – the corrupter and the corrupted” (p.406, citing Bob Geldof). In this view, African elites may be culpable but so too are their ‘partners’.

More importantly, the findings support a new challenge: What if most of the blame lies elsewhere? While governments have tended to pursue the policies shown to be ineffective in reducing capital flight, many of the real levers of power have lain outside the continent. In each of the following cases, for example, who is the corrupter and who the corrupted?

  • An anonymous BVI company is awarded a cheap Zambian mining concession, then flips it to a UK-listed plc
  • A Swiss bank holds a Nigerian resident’s overseas assets through a Jersey trust; nothing is reported to the Nigerian authorities
  • A US-headquartered multinational shifts profit from Ghana to Luxembourg

We could go on; and indeed the book offers many examples. We should also consider other examples, such as that of a South African multinational shifting Uganda profits to Mauritius. We might perhaps settle on a view that the blame is very well shared indeed around the world. We might also wonder if poverty is not associated with corruption, so much as with exploitation by the corrupt.

At a minimum, the evidence presented by the AERC authors should serve to unstick the casual elision of corruption and poverty, and of capital flight and African policies.

As Nkurunziza (chapter 2) shows, the potential gains in poverty reduction from reversing capital flight are substantial.

Ndikumana slide2

Policy opportunities

The Sustainable Development Goals’ target to reduce illicit financial flows is a golden opportunity to catalyse improved quantitative methodologies; to ensure more and better data is available; and to introduce indicators that drive accountability for progress. But the SDGs will not fill the policy gap.

Although the ‘crazy ideas’ generated by civil society in the early 2000s now dominate the global policy agenda, there is a failure across the board – most obviously in terms of country-by-country reporting, and automatic exchange of tax information – to ensure that the benefits flow to developing countries as well as OECD members.

It seems that political power, rather than genuine commitment to transparency principles, still determines who is able to benefit. The Mbeki panel has called for greater progress in these areas. But is there an opportunity to sidestep, or indeed to leapfrog, much of the current issues by taking a more direct approach?

The final chapters of this important volume (15; and 16 – Boyce & Ndikumana in particular) detail a wide range of policy responses to the various findings, from capital controls and debt audits to some of the fundamental challenges to financial secrecy that the Tax Justice Network exists to champion – not least, fully public country-by-country reporting for multinational companies.

A global compact on financial transparency

The most striking proposal, however, is one not currently on the international policy agenda: a global compact among governments, CSOs and international institutions, covering strategies at the national, continental and global levels. Boyce & Ndikumana highlight the importance of:

  • National governments integrating the various mechanisms and agencies that are relevant for each type of illicit flow;
  • Continental conventions to provide a framework for harmonisation and coordination of national initiatives;
  • Global civil society networks working more closely with local civil society organisations, with greater speed of communication, greater coordination and institutionalised collaboration.; and
  • Global initiatives that have ‘adequate enforcement capacity. At the moment, global conventions do not have the legal capacity to hold individual governments accountable for the implementation of relevant dispositions; their rules are not binding at the national level’ (p.413)

The proposal, and the last point above all, carries an echo of an earlier proposal for an international financial transparency convention. In 2009, the Norwegian Government Commission on Capital Flight from Poor Countries (section 9.2.3) proposed such a convention, which would apply to all countries and include two main elements relating to transparency:

First, it must bind states not to introduce legal structures that, together with more specifically defined instruments, are particularly likely to undermine the rule of law in other states. Second, states which suffer loss and damage from such structures must have the right and duty to adopt effective countermeasures which will prevent structures in tax havens from causing loss and damage to public and private interests both within and outside of their own jurisdiction.

The commonalities with the proposed global compact are the recognition that states have responsibilities towards each other in respect of financial transparency; and that these are sufficiently serious, and their abnegation sufficiently damaging for other states and citizens, that practical enforcement is necessary.

The authors and others in the AERC network are now working on a range of country studies which will provide detailed further evidence of the issues in question. Meanwhile the ‘Stop the Bleeding’ consortium that brings together a wide range of African actors to carry forward the agenda of the Mbeki panel is increasingly active.

Part of the reason this book is a milestone is that it sheds new light on what is known about the causes of illicit capital flows; offering supporting to the narrative that corruption and IFF should be seen not as the result of poverty, but rather as its exploitation – often led by external actors and always facilitated by financial secrecy elsewhere.

It will take on a new significance altogether if it also marks the starting point for an African-led process, perhaps backed by Norway and others, to develop an international agreement establishing the basic transparency expected – nay, required – from states toward one another; and making enforceable for the first time, claims against states for the damage caused by their financial secrecy.

[Talking of counter-measures – look out for a new TJN proposal launching tomorrow…]

Uncounted: Power, inequalities and the post-2015 data revolution

Data: Facts and statistics collected together for reference or analysis

Revolution: A forcible overthrow of a government or social order, in favour of a new system

– Oxford English Dictionary

Just published: a special double issue of the journal Development on African inequalities, including my (open access) guest editorial setting out the thesis of ‘Uncounted’ – how power and inequality are intimately related to who and what go uncounted, from tax evasion in the 1% to the systematic exclusion of women and girls, from the corrupting influence of illicit financial flows to the marginalisation of people living with learning disabilities…

Guest Editorial: Uncounted: Power, inequalities and the post-2015 data revolution

Development (2014) 57(3–4), 320–337. doi:10.1057/dev.2015.28

People and groups go uncounted for reasons of power: those without power are further marginalized by their exclusion from statistics, while elites and criminals resist the counting of their incomes and wealth. As a result, the pattern of counting can both reflect and exacerbate existing inequalities. The global framework set by the Sustainable Development Goals will be more ambitious, in terms of both the counting and the challenging of inequalities, than anything that has gone before. This article explores the likely obstacles, and the unaddressed weaknesses in the agreed framework, and suggests a number of measures to strengthen the eventual challenge to inequalities, including by the promotion of tax justice measures.

Keywords: inequality; data; household surveys; SDGs; tax; uncounted

 

While the whole edition just came out, it is technically the 2014 volume. The majority of the papers are drawn from the Pan-African Conference on Tackling Inequalities in the Context of Structural Transformation held in Accra that year, and include some cracking contributions – not least important papers on gender inequality, sustainability and disabilities, as well as broader pieces on the economics and politics of inequality. Check out the full table of contents.

Power in the darkness, uncounted

An African civil society perspective on FfD

The African regional consultation on Financing for Development (FfD) took place at the start of the week (like the European one). The submission from TJN-Africa puts particular emphasis on inequality, including women’s rights, and on global data issues.

Summary of CSO Recommendations to African governments

  1. African countries should push for the centrality of taxation as both the most important source of financing for development needs and the key lever to fight inequality.
  2. African countries should call for the establishment of a new intergovernmental body on tax matters with a clear mandate.
  3. African countries should stand together to ensure that FfD process not only recognises the importance of measures to increase transparency and accountability within the private sector as it does in Article 25 of the Zero draft but also that it commits the countries to act.
  4. African countries should implement the recommendations contained in the AU/UNECA high level panel (HLP) on IFF report.
  5. African countries should push for the integration of women’s rights into the FfD agenda as an  important issue which has relevance for tax policy.
  6. African countries should push for commitment  to the principle of redistribution via taxation and ensure the global data collection effort envisaged within the SDGs includes tracking the equity implications of tax policy
  7. African countries should call for the recognition of international cooperation on tax as a key priority related to financing within the new global partnership for sustainable development.
  8. African countries should make an explicit statement that MNCs paying their share of tax will be a major means of financing the SDGs.

The full document (with thanks to Savior Mwamba) can be found here.

Property tax potential

Republished from the Tax Justice Research Bulletin – find it all there, with added blues. 

In a new article for the Africa Research Institute, ‘How Property Tax Would Benefit Africa’, Nara Monkam (ATAF) and Mick Moore (ICTD) provide a useful overview of the current state of play, while making the case for a greater role for property tax – not least because of its potential in respect of accountability. Unsurprisingly, the continent contains a ‘spaghetti soup’ of different approaches to property tax, operated by various tiers of government, and with widely varying revenue importance. The ‘soup’ includes specifically land value taxes (LVT), as well as those focused on buildings, and many combinations thereof.Property tax potential

Two complementary avenues for improvement are identified. Investment in administrative capacity, most obviously through (re)building cadastres, digitising ownership records and harmonising with other databases such as utility company records, is vital. (And far from being a low-income country problem only – see for example Andy Wightman’s sweeping work on Scottish land, The Poor Had No Lawyers.) But also necessary is a hefty dose of political will. The authors compare 3 Sierra Leone city councils to illustrate the point:

In Bo, 93% of business owners surveyed in 2012 were able to produce a property tax receipt and 87.5% believed that local elites were successfully prosecuted for non-compliance. In Makeni and Kenema, however, only around 40% were able to produce a receipt, and just 30% were confident of successful prosecution. All three cities had demonstrated rapid revenue gains, but in Makeni and Kenema annual increases stagnated as elites proved resistant to the tax, while the municipal authorities in Bo made further progress due to sustained political will.

Monkam and Moore conclude: “The future of African national and municipal governments will depend on institutions and tax policy that are equitable, improve local service delivery and encourage compliance through establishing a social contract between taxpayers and the state. Property tax is one of the more effective means of realising these goals.”

I tend to agree, though I think we’re still short of definitive evidence for that last statement. In some ways this article highlights the dearth of rigorous research on which to draw – but it’s certainly building, and the case for greater research focus (at least) on property tax is clear. One area of particular caution: there is evidence that property taxes at sub-national levels are often regressive (see e.g. ITEP’s report this month on the US), albeit less than consumption taxes. Issues of political commitment therefore go beyond whether elites comply or not, to whether a progressive design (quite possibly LVT) can be put in place and maintained.