There is a growing consensus that increasing domestic resource mobilization can enhance accountability, particularly
if such efforts are explicitly linked to the provision of public goods. If ruling elites need to depend on broad-based taxation, they are more likely to include citizens and other elites in policy bargains. But does foreign aid undermine domestic resource mobilization—and thus accountability to citizens?
Studies testing that hypothesis initially showed a negative correlation between the two. More recently, these studies have been refuted by the adoption of different data sector different econometric techniques.
Although the behavioral effect of aid flows undermining accountability
has been tested and isolated in experimental settings, in reality the relationship is more complex and seems to depend on three factors: the type of aid (for example, whether grant or debt, budget support, or project-specific); the contemporaneous effects of conditional policies associated with the aid; and, more important, the governance setting specific to each country. Moreover, even if aid were to reduce incentives to mobilize domestic resources, the removal of aid may result in societal suboptimal taxation policies to raise revenues, leaving the poor worse off.
The effects of domestic resource mobilization on accountability depend on how domestic funds are mobilized.
Many available taxes may not have the capacity to enhance accountability, such as resource taxes, or may have strong distortionary effects, such as trade taxes.
International corporate tax competition and trade liberalization have also diminished states’ capacity for domestic resource mobilization (a race to the bottom). In settings with low savings rates or the potential for capital flight and tax evasion, consumption taxes are the most likely to be effective, but also the most likely to be regressive.
Frequently in these cases, domestic resources are mobilized in ways that may increase poverty—for example, by increasing consumption taxes—without enacting specific offsetting mechanisms of compensation for the poor.
Notwithstanding the importance of mobilizing domestic resources to expand responsiveness and accountability to citizens, many countries may be too poor to have the capacity to collect enough revenues to address important development goals; they may harm the poor in the process of collecting domestic resources; or they may be politically unable to pass reforms to increase revenues. In countries in which poverty rates are higher than 65 percent (mainly in Sub-Saharan Africa), for example, there is no feasible redistribution scheme that allows eradicating poverty only by transferring resources domestically from the rich to the poor.
Moreover, in many developing countries poor individuals are often impoverished by the fiscal system when both government taxation and spending are taken into account.
Finally, political power might be concentrated in the hands of a few rich individuals whose interests collide with those of the poor. In such instances, where there is need to mobilize a larger set of individuals to counterweigh the political influence in the hands of the few, domestic resource mobilization might be very difficult to achieve.