The arithmetics and politics of domestic resource mobilization for poverty eradication

Abstract

The Addis Ababa Action Agenda stresses the importance of effective resource mobilization and use of domestic resources to pursue sustainable development. The first Sustainable Development Goal is to eradicate extreme poverty for all people everywhere by 2030. This paper explores how feasible it would be for developing countries to achieve the goal of eradicating poverty using only domestic resources, given their current tax base and political equilibrium. To answer this question, we propose two new metrics: a Poverty Eradication Capacity Index and a Political Influence Concentration Index. The first metric looks at the “arithmetics” of the issue, and uses an accounting approach to assess whether the existing tax base is rich enough to end poverty through monetary redistribution. The second metric looks at the “politics” of the issue, and approximates the degree to which political power is concentrated among the rich—following the notion that a high concentration of power would likely hinder the effective implementation of fiscal policies (in terms of both revenue collection and social spending). We calculate these two metrics using data for over 120 developing countries, and find that: (i) a large proportion of countries simply do not have an affluent enough tax base to finance their own poverty eradication through redistribution; (ii) countries with the same arithmetic capacity to mobilize resources for poverty eradication differ widely in terms of the political feasibility of such policies; and (iii) a higher capacity for poverty eradication and a lower concentration of political influence is associated with a higher collection of tax revenue as a share of GDP. These results suggest that countries facing binding arithmetic and/or political constraints may need to complement domestic resources with foreign aid in the short-term. Such financial flows, however, should be designed to support the reduction of these constraints in the long-term.