On Taxation, Political Accountability and Foreign Aid: Empirics to a Celebrated Literature

• Published date: 01 June 2015
• Date: 01 June 2015
• DOI: http://doi.org/10.1111/saje.12064

ON TAXATION, POLITICAL ACCOUNTABILITY AND

FOREIGN AID: EMPIRICS TO A CELEBRATED LITERATURE

SIMPLICE ASONGU

*

Abstract

The Eubank findings on taxation, political accountability and foreign aid have had an important

influence on academic and policymaking debates. Eubank has warned that his findings should not

be generalised across Africa until they are backed by robust empirical evidence. This paper puts

some empirical structure to the celebrated literature. The empirical evidence which is based on

data from 53 African countries for the period 1996-2010 broadly confirms the Somaliland-based

Eubank hypothesis that in the absence of foreign aid, the dependence of government on local tax

revenues provides the leverage for better political governance.

JEL Classification: B20, F35, F50, O10, O55

Keywords: Foreign aid, political economy, development, Africa

1. INTRODUCTION

One of the root causes of Africa’s poverty has been attributed to the poor quality of

institutions: political instability, hostile regulatory environment for investment, high

corruption, lack of property rights, weak courts and contract enforcements (Easterly,

2005). Consistent with this narrative, for poverty to be eradicated in the continent,

developed nations need to promote credible political governance and institutions (Alesina

and Dollar, 2000; Knack, 2001; Alesina and Weder, 2002; Dixit, 2004; Djankov et al.,

2005; Jellal and Bouzahzah, 2012; Asongu, 2012a,b, 2013a; Asongu and Jellal, 2013).

For over half a century, the foreign aid literature has centered around three main themes.

First, there is a concern of whether development assistance is allocated more to

undeveloped countries with better institutions. Second, there is the issue of how

institutional quality is affected by foreign aid. Third, there is another concern of the

instrumentality of foreign aid in the quality of government. In other words, how aid can

be used by Donors to improve institutions in recipient countries.

The nexus between taxation and political governance which has been substantially

debated in the foreign aid literature falls within the second strand of the literature.

Accordingly, concerns have been consistently raised as to whether foreign aid improves

institutions in Africa. Given that foreign aid in certain African countries far exceeds

government expenditure and that the former mitigates government dependency on tax

revenues, the role of foreign aid in the quality of institutions (especially political

governance) has been an important concern in academic and policymaking circles

(Eubank, 2012). While the positive nexus between tax dependency and political

* Corresponding author: Lead Economist, African Governance and Development Institute, P.O.

Box 18 SOA/1365, Yaoundé, Cameroon. E-mail: asongusimplice@yahoo.com

The author is highly indebted to the editor and referees for useful comments.

bs_bs_banner South African Journal

of Economics

South African Journal of Economics Vol. 83:2 June 2015

© 2014 Economic Society of South Africa. doi: 10.1111/saje.12064

180

accountability has been established (Jensen and Wantchekon, 2004), the effect of foreign

aid on institutional quality has been an object of heated debate (Brautigam and Knack,

2004) especially in recent African aid literature (Jellal and Asongu, 2013). This paper

focuses on the second strand in light of the celebrated Eubank (2012) hypothesis.1It also

complements an extensive literature on the theoretical and empirical underpinnings of

the hypothesis (Morton, 1994; Mahon, 2004; Timmons, 2005; Bernstein and Lu, 2008;

Moore, 2008; Prichard, 2009).

The theoretical underpinnings of the debate are deeply rooted in the history of

economic thought. The underlying hypothesis resulted from negotiations between

autocratic governments who needed tax revenues as means of surviving inter-state

conflicts and citizens who were willing to consent to taxation if and only if tax paid was

in exchange for greater government accountability and more public service delivery

(Moore, 2008; Eubank, 2012). Accordingly, the dependence of government on local

financial resources provides taxpayers with significant leverage on the government for the

request of more representative and accountable political institutions. Eubank’s findings

have significant policy implications for Africa because Somaliland which is not ineligible

for development assistance has a high rate of political accountability and very little or no

inter-state conflict. The case of this country has recently consolidated the argument that

understanding the nexus between accountability and taxation is an important policy

debate in contemporary African development.

The present study has a threefold contribution to existing literature. First, we assess if

the findings of the underpinning paper are relevant to the entire African continent.

Eubank’s (2012) finding on taxation, political accountability and foreign aid has had an

important influence in academic and policymaking debates. This paper puts some

empirical structure to the celebrated literature by assessing the hypothesis of a positive

nexus between tax revenues and political governance in the absence of foreign aid.2In

essence, it assesses whether the Somaliland-based findings are reflected across Africa. This

is specifically because a caveat to the paper is that the findings should not be extended to

the entire African continent without empirical evidence. Hence, the paper steers clear of

existing studies like “Aid and taxation: Is Sub-Saharan Africa different?” (Bhushan and

Samy, 2012).

Second, the intuition of government dependence on local tax revenues producing an

income channel of accountability has not been substantially covered in recent

1The Eubank (2012) paper has received the 2013 Best Paper Award from the Journal of

Development Studies.

2“For years, studies of state formation in early and medieval Europe have argued that the modern,

representative state emerged as the result of negotiations between autocratic governments in need

of tax revenues and citizens who were only willing to consent to taxation in exchange for greater

government accountability. This article presents evidence that similar dynamics shaped the

formation of Somaliland’s democratic government. In particular, it shows that government

dependency on local tax revenues – which resulted from its ineligibility for foreign assistance –

provided those outside the government with the leverage needed to force the development of

inclusive, representative and accountable political institutions’ (Eubank, 2012:1). It should be

noted that lots of work have been done on the taxation–accountability nexus before 2012, and

Eubank has not actually proposed the existence of a taxation–accountability link – he has simply

provided textual substantiation for its relevance in a modern African state. The Eubank’s

substantiation will be used interchangeably with the Eubank hypothesis throughout the paper.

181South African Journal of Economics Vol. 83:2 June 2015

© 2014 Economic Society of South Africa.