Podcast Summary: IGC Growth Week 2010 – Domestic Resource Mobilisation and Growth

Podcast: LSE: Public lectures and events
Date: September 22, 2010
Host: Tim Besley, LSE & IGC Steering Group
Panelists: Michael Keen (IMF), Rama Sithanen (Former Finance Minister, Mauritius), Mashur Rahman (Economic Affairs Advisor, Bangladesh), Joel Slemrod (University of Michigan)

Main Theme

This episode explores the challenges and strategies around domestic resource mobilisation (DRM) and its role in promoting economic growth, particularly in developing countries. Four expert panelists provide perspectives from international policy, national experience, and cutting-edge research, touching on tax policy, administrative challenges, political economy considerations, and broader strategies for sustainable, equitable growth.

Key Discussion Points and Insights

1. The State of Domestic Resource Mobilisation

Michael Keen (IMF) [01:51]

• Current Picture: Non-resource tax revenue as a share of GDP in low-income countries has stagnated over many years, despite ongoing reforms. Upper middle-income countries show volatility due to natural resource revenues.
• Key Takeaway: “...a general picture of stagnation, despite many efforts in advising and in countries themselves trying to reform tax systems over these years.” [02:30]

The “Dangers of Generalization” and Big Ideas

• Country circumstances vary greatly—Syria isn’t the same as a Caribbean island; resources, history, and conflict matter profoundly.
  • Notable Quote: “To think we can say things that apply to both Syria and a small Caribbean island... is slightly delusory.” [04:00]
• Big policy ideas (global income tax, revenue authorities, VAT, state-building) often under-deliver; progress is often in less glamorous, technical reforms.
• Informality as bugbear: “Informality isn’t really the issue… it’s a problem of non-compliance of various different kinds.” [07:19]

2. Policy & Administrative Challenges

• Trade Reform & Revenue Losses: Many low-income countries still rely heavily on tariff revenues (25%); replacing this is slow and complex.
• Improving VAT: Evidence of efficiency gains from VAT adoption is weak in Sub-Saharan and especially Francophone Africa—reasons unclear.
• Corporate Taxation: Corporate taxes matter more in developing than developed countries; incentives and compliance are major challenges.
  • Memorable Point: “In developing countries, corporate tax revenue is a more important source... than in OECD countries.” [10:08]
• Coordination & State-building: The link between taxation, government legitimacy, and state-building is critical but complex.
• Resource Taxation: Complexities revolve around timing, sunk costs, political pressure, and contract design for resource-rich countries.

3. The Practitioner’s Perspective (Mauritius Case Study)

Rama Sithanen (ex-Finance Minister, Mauritius) [14:53]

• Balancing act: As a policymaker, DRM is vital for infrastructure, growth, and poverty reduction, but over-reliance on external funding is volatile.
• Reform Strategy: Mauritius combined revenue authority reform with drastic simplification:
  • Collapsed tax bands to a flat 15% rate, minimized exemptions, and prioritized compliance.
  • “People said, ‘We don’t mind paying 15%, but we’re employing chartered accountants... when it is 30 or 35%.’” [21:16]
• Broader Growth Story: Diversification beyond sugar/textiles (into real estate, ICT, financial services) crucially expanded tax base and FDI.
  • FDI soared (40x in two years post-reform).
• Fiscal Policy as Transformation Tool: Used taxation to climb supply chains (e.g., sugar to ethanol, electricity, high-end products).
• Political Economy: Recognized importance of sequencing reforms, managing vested interests, and quick “low-hanging fruit” to build trust.
  • Notable Quote: “You need to have a story to tell... we’ve used fiscal policy in order to change the architecture of the Mauritian economy.” [16:22]

4. The Bangladesh Experience

Mashur Rahman (Advisor, Bangladesh) [26:28]

• Stuck Ratios: Despite robust growth in collections, the tax-to-GDP ratio is stagnating (~11% overall, ~9% for main taxes).
• Reform History: 1980s-1990s push shifted toward VAT and income tax, but heavy use of “supplementary” and “regulatory” duties undermined neutrality.
  • VAT often acts as a variable excise, oscillating between intended function and protectionism.
• Corporate and Income Tax: Simpler personal tax; complex, fragmented corporate regime with widespread exemptions—difficult to track and prone to rent-seeking.
• Social Trust & Compliance: Compliance is hampered by taxpayer distrust (“low confidence in the government, deriving from colonial experience and current neoliberal rhetoric that ‘government is bad’”).
• Savings & Remittances: Small savings and remittance mobilization are critical, but preferences for land (as status as well as security) complicate solutions.
• Wisdom: “Law is best enforced, which is obeyed willingly and with least coercion.” —Harold J. Rusky [37:17]

5. The Research Perspective

Joel Slemrod (University of Michigan) [38:20]

• Conventional wisdom in taxation:

  1. Avoid taxing mobile factors.
  2. Strive for neutrality and efficiency.
  3. Use simple taxes to conserve administrative resources.
  4. Allocate enough to enforcement.

  “...these reasonable nuggets of wisdom often conflict.” [40:24]

• Firms as Tax Collectors: In advanced countries, firms remit >80% of all taxes. Likely higher in developing countries, and so inefficiencies here have major economic consequences.

  • Key Question: “What is the pattern of tax remittance by firms versus individuals, and by firm size?” [42:46]

• Enforcement & Legitimacy: Debate between deterrence (audit/penalty) vs. tax morale/legitimacy. Lack of robust evidence outside the lab for morale-based strategies.

• Multinational Corporations: Taxing multinationals is crucial but complicated by mobility and shifting strategies (“...the optimal size of firms... is affected by the need to raise revenue” [43:38]).

• VAT in Practice: Many developing countries violate VAT neutrality via border collection and exemptions.

• Informal Economy: Ignoring small firms economizes resources but distorts production (missing “middle”). Question is how to coax them into formality.

• The Information Challenge: Technology can help (examples from China), but requires good underlying administration and can’t substitute for basic controls and audits.

Notable Quotes & Memorable Moments

• Michael Keen: “Informality isn’t really the issue… it’s a problem of non-compliance.” [07:19]
• Rama Sithanen: “We’ve used fiscal policy in order to change the architecture of the Mauritian economy.” [16:22]
• Mashur Rahman: “No one in the board of revenue is able to keep track of who is getting what and who is paying what.” [32:53]
• Joel Slemrod: “...firms end up writing the checks for the great bulk of taxes” [42:11]
• Tim Besley (Host): “I’m reminded of Ronald Reagan — the scariest things you could hear is ‘I’m from the government and I’m here to help.’ If you paraphrase that, ‘I’m from the IMF and I’m here to help...’” [50:45]
• Rama Sithanen: “My wife... fought with me because at that time we had two kids studying abroad... She told me, go and explain that to the electorate.” [58:29]
• Joel Slemrod (on bank accounts and the unbanked): “Part of the problem of the unbanked is because people are worried that once they deal with the financial system they’ll be more easily tracked.” [80:06]
• Michael Keen: “Often, the most difficult and immediately relevant politics you have to deal with are actually within the government, because governments aren’t unitary things that speak with the same voice.” [68:07]

Timestamps for Landmark Topics

| Timestamp | Segment/Topic | |-----------|-----------------------------------------------------------| | 00:00 | Host introduction & overview of session | | 01:51 | Michael Keen: Big-picture trends, country variation | | 03:56 | The limits of generalization, resource dependence | | 09:49 | Policy issues: trade reform, VAT, corporate tax, compliance| | 12:55 | Taxation & state-building | | 14:53 | Rama Sithanen: Mauritius’s bold tax reforms | | 22:12 | Removing ministerial discretion, impact on FDI | | 26:28 | Mashur Rahman: Bangladesh’s episodic reforms | | 32:53 | Exemptions & “no one can keep track” problem | | 38:20 | Joel Slemrod: Research challenges, firm role in taxes | | 44:46 | Enforcement vs. legitimacy (“tax morale”) | | 50:35 | Host transitions to open discussion | | 52:47 | IMF’s role in political economy (Keen) | | 55:39 | Rama Sithanen on Mauritius reform politics | | 62:37 | Audience Q&A begins | | 64:45 | Local vs. central taxation, aid’s impact on DRM | | 69:38 | Panelists on decentralization, property tax | | 73:42 | Is technology the solution for DRM? (Slemrod, Keen) | | 76:30 | Informality, the unbanked, and DRM (audience) | | 78:42 | Multinationals & country-by-country reporting (audience) | | 79:29 | Windfall/resource taxation (audience) | | 83:06 | Rama: Using fiscal incentives for structural change | | 86:17 | Keen: On information, transparency, resource taxation | | 89:56 | Session wrap-up |

Panel Q&A and Open Discussion Highlights

• Political economy is central. Ownership matters deeply; reforms should deliver “quick wins” and build constituencies.
• Decentralization’s limits: Property taxes at local level often underperform; expenditure decentralization may be more promising than revenue.
• ICT and innovation: Helps, but not a panacea—quality/trust in data entry and basic admin are crucial.
• Multinationals require global transparency: (Advocacy for country-by-country reporting; panel agrees it would help, but challenges remain.)
• Windfall/resource tax caution: Unexpected taxes can damage future investment credibility; contract design is key.

Summary Takeaways

• DRM is foundational for sustainable growth, but technical fixes without political will, administrative capability, and trust are doomed to underperform.
• Country context trumps generic solutions: “Big ideas” can help but can’t substitute careful, sometimes uncomfortable detailed work (administrative reform, political navigation, tailored incentives).
• Simplicity, transparency, and credibility drive compliance and growth—even at the cost of flattening tax progressivity, if offset by other redistributive tools.
• State-building, compliance, and broadening the base: Enduring, inclusive systems depend on voluntary compliance built on perceived fairness, efficiency, and visible public benefit.
• The next agenda: Empirical research, especially on technology’s role, VAT effectiveness, multinational taxation, and compliance incentives in developing country contexts, is crucial—and will shape the next phase of global development policy.

For listeners and policymakers alike, this session captures the complexity and urgency of mobilizing domestic resources for growth: it’s as much about governance, incentives, and political credibility as about rates and revenues.