Taxation, foreign aid and political governance in Africa.

• Author: Asongu, Simplice A.

1. Introduction

   This research investigates linkages between taxation, foreign aid and political governance in Africa within the framework of the Eubank (2012) hypothesis which has increased the confidence of the Somaliland government and reignited the heated debate on aid and political governance. According to the Eubank hypothesis, in the absence of foreign aid, political accountability is likely to increase because taxpayers are only willing to pay their taxes in exchange for it. This Eubank hypothesis which is based on Somaliland, may fail in other African countries because of over-reliance on foreign aid. In theory, domestic governments that substantially depend on foreign aid for income may also be associated with a culture in which citizens are prone to paying less tax. Given that 'old habits die hard', less dependence on aid or threats of foreign aid withdrawal may only result in the deterioration of political rights (see Asongu & Nwachukwu, 2017). It is also important to note that the political accountability in Somaliland did not come overnight. Hence, governments need to be consistently accountable to citizens before they can win their confidence and have them pay more tax to support government expenditure. Whereas foreign aid significantly contributes to the composition of total revenue within African countries (Cai et al., 2018; Diakite et al., 2019), Somaliland is not eligible for Official Development Assistance because it is not recognised by the International Community as a sovereign nation. Hence, unable to access foreign aid, the government of the country has had to negotiate with business leaders and citizens for financial support and in return provide better democracy, accountability and political stability.

   Recently, Somaliland's minister of energy and minerals (Hussein Abdi Dualeh) openly professed during an African mining conference that Somaliland was better without foreign aid and did not even need it: "That is a blessing in disguise. Aid never developed anything ... Aid is not a panacea, we'd rather not have it.... How many African countries do you know that developed because of a lot of aid? It's a curse. The ones that get the most aid are the ones with the problems.... We've been left to our own devices. We are our own people and our own guys. We pull ourselves up by our own bootstraps. We owe absolutely nothing to anybody. We would not change hands with Greece today. We have zero debt" (Stoddard, 2014). Before Eubank, the 'Bottom Billion' and 'Dead Aid' by Collier (2007) and Moyo (2009) respectively had also received tremendous feedbacks from policy making and academic circles.

   Collier has postulated that because most aid-recipient countries are fragile, weak in governance, inter alia, aid handled through the Official Development Assistance (ODA) Program has not had the desired effect. According to this narrative, aid-disbursement mechanisms have not been effective because of four main traps: (i) landlocked with bad neighbors, (ii) conflicts, (iii) management and dependence on natural resource, and (iv) weak governance in small countries. The thesis further sustains that the Bottom Billion in poverty are benefiting less on development strategies based on adapting ODAs to a certain benchmark of donor Gross National Income (GNI). The narrative is also broadly in accordance with the position that foreign aid promotes a 'regional public bad' and there appears to be no 'regional public good' effect offsetting the 'public bad' emanating from arms race scenarios in neighboring states (Collier & Hoeffler, 2007).

   Moyo's 'Dead Aid' is another accomplished representation that has reignited polemics on the appealing effects of development assistance. Her book, which emphasizes that aid has augmented dependency, corruption and poverty in Africa has also received many reactions from policy makers and scholars. Whereas, her thesis has been partially supported by a plethora of recent literature using updated data (Banuri, 2013; Marglin, 2013; Wamboye et al., 2013; Asongu, 2012a; Asongu & Jellal, 2013; Ghosh, 2013; Krause, 2013; Asongu, 2014a; Titumir & Kamal, 2013; Monni & Spaventa, 2013), there is also some moderate consensus on the unsoundness of some of her positions. Accordingly, the classic questions she addresses (for example, the relationship between aid and accountability) and some of her criticisms of the way she uses aid to support her arguments (e.g. the rate at which the coincidence between low growth rate and high flows are juxtaposed for evidence that the former is most likely the origin of the latter). These have been used by her opponents and/or defenders of foreign aid. Whereas this narrative does not concern humanitarian and emergency relief assistance, there have been spates of responses among which the two arguments merit some emphasis. First, Sachs (2009) has argued that foreign aid is necessary at the tender stage of development and has presented two emotional anti-theses. First, in his opinion, Moyo does not have the moral values to advocate her position because she was awarded scholarships to study at the top world universities (Oxford and Harvard) and later in life thinks it is wrong to give a $10 aid to an African child for an anti-malaria bed net. Second, the book substantially fails to consider stark realities like, the universal need of help at one point in life in one way or another. Second, Bill Gates (an American business magnate now philanthropist) has taken the anti-thesis a stride further by qualifying 'Dead Aid' as a 'promotion of evil'. According to him, Moyo's position is morally repugnant because she appears neither to know what aid is doing nor much about development assistance.

   The Eubank (2012) Somaliland-based hypothesis has also been celebrated with the award of the best paper from the Journal of Development Studies in 2013. According to him, the dependence of the state on local tax revenues provides taxpayers with a substantial leverage to demand from government more accountable political institutions and better representation. This thesis has crucial policy relevance in Africa because Somaliland is ineligible for development assistance, but has relatively less interstate conflict and more political accountability. It is interesting to note that the hypothesis is based on literature without any empirical assessment. Hence, putting some figures to the facts as this paper aims to do, would take the debate to a further height and enhance policy guidance on the validity of the hypothesis in the African continent. Indeed, the theoretical foundations of the debate are profoundly engrained in the history of economic thought. According to the narrative, the hypothesis originated from negotiations between autocratic governments who were in need of tax revenues (to survive inter-state wars) and citizens who were only willing to consent to taxation in exchange for greater public service delivery and more government accountability (Moore, 2008; Eubank, 2012).

   The principal contribution of this study to the literature is to investigate the Eubank Somaliland-based hypothesis in the context of Africa. The research assesses the validity of the postulation that in the absence of foreign aid, there is a more appealing or positive relationship between tax revenues and political governance (1). The paper is organized as follows. Section 2 discusses the connections among aid, institutions and development that are relevant to the context of the paper. In Section 3, the study discusses the data and outlines the methodology. Section 4 covers the empirical analysis. The research concludes with Section 5.

2. Aid, institutions and development

   The interesting literature on aid and development in Africa has substantially documented the poor quality of institutions to be one of the main causes of poverty. Notably, high corruption, political instability, the absence of property rights, regulatory environments unfriendly to investment, unappealing conditions for contract enforcement, and weak courts (Easterly, 2005). According to Easterly, in order for poverty to be mitigated, more advanced countries have to promote credible institutions and political governance (Alesina & Dollar, 2000; Knack, 2001; Alesina & Weder, 2002; Dixit, 2004; Djankov et al., 2005; Jellal & Bouzahzah, 2012; Asongu, 2012b, 2013a; Asongu & Jellal, 2013). The extensive literature on the interconnection between aid and institutions has centered around three main themes for over half a century. First, many have assessed the interesting concern as to whether or not more aid is granted to countries with better institutions. Second some investigations apply to the anxiety of how foreign aid affects the quality of institutions in recipient countries. Third other examinations look at the challenging preoccupation of how aid can be used as an instrument for the improvement of institutions in recipient countries.

   The positioning of the paper on the Eubank hypothesis is consistent with the second strand above. As we have already highlighted, much scholarly attention has been devoted to investigating how aid affects the quality of institutions essentially because government expenditure originating from local taxes is far below foreign aid and the latter decreases government dependence on local tax revenues and weakens the quality of institutions (Asongu, 2013a). The latter effect converges with the Eubank hypothesis on political governance. Whereas there is already a solid consensus on the appealing relationship between tax dependency and political governance (Jensen & Wantchekon, 2004), the incidence of development assistance on the quality of institutions has been subject to intense debate (Brautigam & Knack, 2004; Asongu & Jellal, 2013). Hence, by extending the underlying hypothesis, this paper also complements an extensive literature that has already documented the theoretical and empirical foundations of...