The Agenda

Nicholas Eubank on Somaliland

In light of a previous post on Somalia and Somaliland, I recommend a new paper by Nicholas Eubank, a PhD student at Stanford’s Graduate School of Business. He notes the parallels between theories of the role of taxation and political accountability in state formation in early modern Europe –

In these historic cases, government dependency on local sources of revenue provided those in control of economic assets with significant leverage over the government which they were able to use to demand the development of more accountable and representative political institutions though a process often referred to as ‘revenue bargaining.’

– with the experience of Somaliland over the past two decades. Much depends, Eubank suggests, on whether a country has abundant point-source natural resources that can be seized by a powerful state with relative ease or if its productive resources are more diffuse and mobile:

In these contexts, offering political concessions in exchange for voluntary taxation may be a far more efficient means of collecting revenues, which is particularly important during periods when a government is under financial stress.

This connection between taxation and political accountability also has potential implications forcurrent debates over appropriate levels of foreign assistance and concerns about consistently highlevel of foreign aid provided to countries in sub-Saharan Africa. Given the levels of foreign assistance provided to many developing countries today — assistance which reduces government dependency on tax revenues — this is more than an academic question. There are 16 sub-Saharan countries in which the ratio of foreign assistance to government expenditures is greater than 50%. In ten of those countries, foreign assistance is equal to at least 75% of government expenditures. Indeed, Brautigam and Knack (2004) find that high aid intensity is associated with deteriorating scores on the International Country Risk Guide index of expropriation risk,corruption, and bureaucratic quality as well as lower tax collection efforts.

Moreover, these ideas about tax dependency and political accountability are consistent with studies that find easy-to-control natural resource endowments (which reduce governmentdependency on taxation and thus decrease the bargaining power of citizens) — are associated with more autocratic governments and poor governance (Jensen and Wantchekon 2004, among others)

Because Somaliland has never received foreign assistance, its government has had to coax tax revenues from a population that is not easily dominated through force. Pastoral farming and animal husbandry, and not point-source natural resources, have long formed the backbone of the Somaliland economy. “Revenue bargaining” has thus been central to state formation in Somaliland, and the emergence of inclusive, represenative institutions.

The most provocative takeaway from Eubank’s paper is perhaps the following:

[T]his analysis does suggest that the volume of foreign aid that Somaliland would likely receive with international recognition could harm the relationships that have helped shape Somaliland’spolitical success to date. The time may come when Somaliland’s political institutions are strongenough to absorb some amount of foreign assistance, but for the time being, resisting the urge toreward Somaliland’s government with regular flows of foreign assistance is its best hope ofencouraging the country’s continued success.

This doesn’t mean that foreign assistance is always a bad idea, but it certainly suggests that it can disrupt a constructive process of “revenue bargaining” that can yield a more accountable and effective government. 

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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