A home grown approach to development: Fiscal implications of EPAs and domestic resource mobilisation

Trade Negotiations Insights In the recent international economic context, marked by global crises and instability, budgetary and fiscal matters have gained greater prominence on the economic recovery and growth agenda. In the developing world, greater attention has been given to domestic resilience to external shocks, the type of integration to the global economy and the pursuit of sound macroeconomic and sustainable budgetary policies conducive to equitable growth and development.

An important dimension is the need for governments to focus on generating revenue at home more effectively. For one, the contract it forms between taxpayer and state can make governments more accountable to its citizens, thus contributing to improved economic and political domestic governance. It can also free governments from the strings attached to donor aid, or the self-interest of foreign investors.

It is not surprising then, that domestic resource mobilisation has been receiving increased attention. In recent months, for instance, the African Development Bank, together with the OECD, launched their African Economic Outlook 2010, with a focus on “Public resource mobilization and aid in Africa”. Even more recently the EU Council adopted a communication on “Tax and Development – Cooperating with Developing Countries on Promoting Good Governance in Tax Matters”.

In this context, the fiscal impact of EPAs and the adjustment measures that may be required in some countries have also gained greater prominence in EPA negotiations, notably in West Africa, and in policy circles in some ACP countries and among some donors.

In this special issue of Trade Negotiations Insights, we focus on two highly topical questions: what degree of fiscal revenue loss do the African, Caribbean and Pacific (ACP) countries face due to the Economic Partnership Agreements (EPAs) with the European Union; and second, how can ACP governments compensate such losses through adjustment measures, engage in fiscal reforms and ensure a better mobilisation of their domestic resources?

Neither question is straightforward. Estimating revenue loss from trade liberalisation is an inexact science, given the multiple variables and the poor data in many ACP countries. Yet the estimates are getting closer to the mark. This is partly because the methodologies are improving. It is also because a number of countries have now signed up to tariff cuts in the EPAs (or interim agreements), and so economic modellers can base their estimates on actual agreements rather than assumptions.

So how drastic is the revenue loss faced by the ACP?  In the words of David Laborde, who studied the situation in West Africa, “the shock does not represent the disaster criticized by some, but on the other hand, it cannot be overlooked.” In fact, it appears that while for some countries the fiscal consequences of an EPA are not very significant, for some others they can be a major cause for concerns, either because of their economic impact or because of the political sensitivity of the issue or the capacity and institutional constraints.  More fundamentally, the capacity and willingness of countries to engage in fiscal reforms, as well as the accompanying support they receive to do so, can play a much more critical role in ensuring fiscal stability.

Against this backdrop, we have asked experts (i) to highlight strategies for African governments to improve domestic resource mobilisation, as well as the role the international community should play in this regard, and (ii) to assess the possible fiscal implications of EPA.

It is our intention that this special issue launches an ongoing discussion in the pages of TNI on both of these important issues.

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