Tax in Developing Countries: Increasing Resources for Development

Written evidence submitted by Organisation for Economic Co-operation and Development Centre

Financing the MDGs

How much? Who Pays?

The looming 2015 deadline to reach the Millennium Development Goals has put a new global focus on the key question of how much it will cost and who will pay for one of the biggest social campaigns ever launched by the international community. United Nations members signed up to the Millennium Declaration in 2000 which set the 15 year deadline to: deadline to eradicate extreme poverty and hunger, to achieve universal primary education, to promote gender equality and empower women, to reduce child mortality, to improve maternal health, to combat disease pandemics such as AIDS and to develop a global partnership for development.

Demand for information about the cost of the Millennium goals is growing and OECD Development Centre Working Paper #306 [1] aims to contribute to the debate on the goals and initiatives that can be taken after 2015 by taking a new look at the costs. It estimates that about USD 120 billion will be needed to meet the six poverty, education, and health goals. It also provides an estimate of the scope for increased tax revenues.

What are the Policy Options?

1. Middle-income countries have to look more at inequality than the lack of resources. The goals are affordable domestically using targeted cash transfers and spending on the poor, education and health.

2. Institutional reforms take years to bear fruit. In low-income countries, momentum behind tax reforms should be sustained but enhanced tax collection should not be viewed as an instant solution.

3., Official Development Assistance is expected to remain, at current levels for the future. And that is the best case scenario. More than ever, aid will need to be complemented by private capital, development cooperation among countries of the South, remittances from migrants and private donations.

4. The main challenge is to ensure that all these resources contribute to sustainable, inclusive growth and to social development.

The Bottom Line

1. USD 121 billion (Figure 1) is needed to achieve six of the the key Millennium Development Goals. MDGs This is more than the size of the official development assistance that can be raised in the foreseeable future. Yet, it is not insurmountable if the whole range of development resources is fully mobilised.

Figure 1. Cost of MDGs 1-6

2. USD 62 billion is concentrated in 20 low-income countries- where income per inhabitant is lower than USD 1 005 annually (Figure 2 illustrates incomes categories). A surge in development financing is needed to sustainably lift thes countries out of poverty.
USD 59 billion is localized in 79 other low- and middle-income countries-where annual per capita income can be as high as USD 12 275 annually-and takes the form of targeted transfers and expenditures to address inequality.

Figure 2. Incomes Categories
(annual income per habitant - 2010)

n Upper-middle income: USD 3 976 – 12 275

n Lower-middle income: USD 1 006 – 3 975 

n Low income: USD 1 005 or less

Extreme Poverty

3. USD 4.9 billion is needed for targeted transfers to the poor in developing countries (Figure 3). The needs are heavily concentrated in Sub-Saharan Africa. MDG 1, fighting extreme poverty and hunger, will be achieved globally by 2015 as rapid poverty reduction in a few large countries will have reduced global poverty to less than half of its 1990 level. However, without action , about 35 countries will fall short of the goal of halving the number of people living in absolute poverty.

Figure 3. Cost of Targeted
Transfers to the Poor (MDG 1)

*Note: Poverty transfer is calculated for the 35 countries that are not on track to achieve MDG1 according to financing gap calculations (South-East Asia & Pacific excluded).


4. USD 8.8 billion is needed to achieve universal primary education by 2015, MDG 2 (Figure 4). School attendance has increased markedly over the past decade but overall education spending should increase by 7.4% for countries still to get all primary age children in school. In Sub-Saharan Africa, education spending needs to rise by a challenging 22.3%. Yet, USD 1.1 billion would be enough to send all children to primary school in countries where income per capita is lower than USD 1 005 per year (low-income countries).

Figure 4. Cost of Universal
Primary Education (MDG 2)

Source: OECD Development Centre


5. USD 60 billion is needed to cut mortality among children under five by two thirds, reduce the maternal mortality ratio by three quarters and halt AIDS, malaria and other major diseases, MDGs 4-6 (Figure 5). About USD 35 billion will be needed for health in South Asia and USD 20 billion in Sub-Saharan Africa . Upper-middle income countries-where per capita income is above USD 3 976 per year-already spend enough on average to meet the MDGs but the distribution of health expenditure is a key issue.

Figure 5. Cost of Equitable
Access to Health (MDGs 4-6)

Source: OECD Development Centre

Who Pays?


6. USD 64 billion, half of the sum needed to finance the Millennium goals, could come from more effective taxation in developing countries (Figure 6). However, there is a limit to how much can reasonably be raised based through domestic resource mobilisation. Many countries which can improve revenue collection are already well on their way to achieving the MDGs. There is a stark contrast between the ease with which upper-middle income countries should be able to finance their MDG needs and the challenge that the goals still represent for low- and lower-middle income countries.

Figure 6.Potential for Enhanced Tax Collection in Developing Countries

Source: OECD Development Centre

7. USD 60 billion could be mobilised by upper middle-income countries through domestic resources, more than enough to meet the cost of the Millennium goals for those countries. Indeed, in upper-middle income countries, in Latin America for instance, deep inequality is often the major cause of poverty. These countries need to make growth more inclusive.

8. For many low-income countries, more external help is still needed. OECD Development Assistance Committee (DAC) member countries need to deliver on aid commitments. Focusing the corresponding increases in development assistance on low-income countries would be most effective.

9. Private capital flows can help to fill the financing gap of low income countries. More can be done to attract these flows; and more should be done to manage their high volatility and to ensure they are fully exploited to promote MDG achievement, whether they originate from advanced or from emerging countries.

10. If the needs of poorest are to be met, all development resources-domestic taxes, aid, private donations, migrant remittances and private capital flows, from traditional as well as emerging partners-will have to rise. The main challenge is to ensure that together they contribute sustainably to social development.

Talking Points

So what’s next? Key questions for future steps

1. Is development "achieved" after overcoming extreme poverty?

2. What is the suitable balance between country-relevant objectives and internationally comparable goals?

3. Should enabling a growth environment be prioritised?

4. Should tackling inequality or improving the quality of public expenditure instead be the main focus of reform?

5. Or should it rather be aid effectiveness and capacity building?

The reader is invited to the discussion
on Christian Aid’s Poverty Matters blog   [1]
on ECPM’s Talking Points blog   [2]
and on Twitter using hash tag #MDGs.

The reader can pre-order our full Study [1] .

About this Project

This project was undertaken thanks to generous support from the Bill & Melinda Gates Foundation.

We have benefited from comments of participants to the workshop on "Costing MDGs’: Investing in Development at the horizon 2015 and beyond" jointly organized by the OECD Development Centre and its partners, the South African Institute of International Affairs, the South African Treasury and the UN Development Programme South African office, in Pretoria on 14 November 2011.

Further guidance will be sought from the members of the Development Centre’s DeFiNe network at its annual meeting on 27 February 2012.

About the Authors

This project was carried out by Vararat Atisophon, Jesus Bueren, Gregory De Paepe, Christopher Garroway and Carlos Sanchez. It was lead by Jean-Philippe Stijns a PhD in Economics (UC Berkeley). Stijns is as an economist for the OECD Development Centre’s Africa and Middle East Desk. He was the lead author of the African Economic Outlook theme chapters on "Domestic Resource Mobilisation and Aid" (2010) and on "Africa and its Emerging Partners" (2011).


Related Reading

Atisophon, V., J. Bueren, G. De Paepe, C. Garroway and J.-P. Stjns (2011). "Revisiting MDG Cost Estimates from a Domestic Resource Mobilisation Perspective", OECD Development Centre Working Paper N° 306, Paris.

AFDB, OECD, UNDP and UNECA (2011), African Economic Outlook – Africa and its Emerging Partners [2] , African Development Bank, Tunis and OECD, Paris.

AFDB, OECD and UNECA (2010), African Economic Outlook – Public Resource Mobilisation and Aid [3] , African Development Bank, Tunis and OECD, Paris.

OECD (2011), Perspectives on Global Development 2012: Social Cohesion in a Shifting World, OECD, Paris.

VANDEMOORTELE, J. and R. ROY (2005), "Making Sense of MDG Costing", in F. Cheru and C. Bradford (eds.), The Millennium Development Goals: Raising the Resources to Tackle World Poverty, Zed Books, London.

WORLD BANK and IMF (2011), Global Monitoring Report – Improving the Odds of Achieving the MDG’s – Heterogeneity, Gaps, and Challenges, World Bank and International Monetary Fund, Washington, DC.




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Prepared 1st March 2012