Good governance requires taxes, not foreign aid

New research provides more evidence that foreign aid undermines good governance.

By Brady Yauch for Probe International

Foreign aid, far from lifting developing countries out of poverty, is detrimental to good governance and inhibits citizens from holding elected officials to account, new research shows.

Lucy Martin, a professor at Yale University, and the author of a new paper on citizens’ toleration of bad behavior by government officials, argues that citizens are more likely to demand accountability from elected leaders when their tax dollars and not foreign aid are on the line. A recent article in the Economist on Martin’s findings, reports that when a government misuses funds generated through tax collection, the pushback from citizens is more pronounced than when money from foreign aid donors is stolen or misused.

In short, keeping taxes low and relying on foreign donors to fund basic amenities is a recipe for political apathy among citizens and corruption among leaders.

To prove her thesis, Martin conducted an experiment in Uganda using a game premise that divided players into either “citizens” or “leaders”, with each given instructions on how to split money allocated to them. In one case, the “leader” was given foreign donors as their source of financing which they were expected to distribute, while in another situation the “leader” raised funds through taxes on citizens’ income. That “leader” then had to distribute the money, while their “citizen” counterpart decided whether that distribution was fair. If the “citizen” deemed it unfair, they could punish the “leader”.

Martin’s results showed that “citizens” were more severe in their punishment of “leaders” when money was raised from taxes – enacting, on average, a fine 13% higher than fines issued to leaders who had derived their monies from foreign aid. If a “citizen” had more experience with paying taxes – some of those playing the game, such as women and teenagers tend to be exempt from paying taxes in Uganda – the punishment level increased.

“The results of the experiments strongly support the theory: taxation generates a significant increase in the level of accountability citizens demand from leaders, and this effect is strongest among those with more experience paying taxes,” Martin concluded.

Martin’s findings support an ever-growing body of evidence that foreign aid undermines the accountability of governments that rely on donor handouts and will, ultimately, hurt the very citizens it is supposed to help.

One recent study showed that foreign aid is now being used by democratically elected governments to buy votes and remain in power.

In Somaliland, the unrecognized, self-declared state that sits north of war-torn Somalia, officials say the lack of foreign aid dollars in the country is a “blessing in disguise” and has helped to foster functioning democracy, competitive markets and taxes to support its government and pay for basic services.

Following the publication of Odious Debts: Loose Lending, Corruption, and the Third World’s Environmental Legacy more than 20 years ago, Probe International has repeatedly argued that self-sufficient governments that rely on taxes to fund amenities are more accountable to citizens than those that survive on foreign aid handouts.

Brady Yauch is an economist for Probe International.

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