Nancy Birdsall

Developing countries have made considerable progress in raising taxes in recent years. Between 2002-2014, average tax ratios rose by 2.8 percent of GDP in sub-Saharan Africa, and by 3.6 percent in the Western Hemisphere and emerging and developing Asia (see Figure 1). The IMF has long argued that there is potential for generating additional tax revenues in these regions, and since the Addis Ababa 2016 Financing for Development Conference, the World Bank, UN, OECD, and bilateral donors have  joined the IMF in support of increased “DRM,” that is, domestic resource mobilization, by developing country governments.

A large proportion of revenue gains over the last two decades has come from countries’ efforts to improve the design and compliance of consumption and other indirect taxes, particularly the VAT (value-added tax); in doing so, the objective has been to  minimize VAT’s regressive effects by exempting sales of small businesses below a threshold (where the poor typically tend to buy) as well as imposing zero tax on certain food and other products which take up a large proportion of consumption of poor households.

Less attention has gone to expanding the coverage of potentially more progressive taxes, such as personal income and property taxes. The challenge of these more equity-friendly taxes is that they have far more demanding requirements on government administration, data and systems than indirect taxes, and therefore are likely to yield less revenue in the short run. In advanced economies, the personal income tax generates somewhat more than the VAT on average; in developing countries the VAT generates more than twice the income tax.

We believe it is now time for countries to begin in earnest investing in the systems that support these more equity-friendly taxes.

Property taxes consist mostly of annual taxes on immovable property (houses, commercial buildings) and the sale of that property. The OECD countries on average generate around 2 percent of GDP in property taxes (or 5.5 percent of total taxes). The average tax-take is lower in emerging markets, at 0.6 percent of GDP (but still 3.4 percent of total taxes—reflecting their relatively lower overall tax/GDP ratios). It is even lower for low-income developing countries at 0.3 percent of GDP (or 1.8 percent of total taxes) (See Figure 2). Over 120 countries have property taxes in place with different tax bases and rates.

  It’s not surprising that property taxes have been neglected. In most countries, property taxes are collected by local governments—although higher level governments may play a role in their design and operation—where administrative capacity to record ownership titles and collect revenue is not well developed. Good information on property ownership and on the base for valuing property is hard to obtain in developing countries’ thin markets for property transactions. In low-income countries, agricultural activities take up a relatively large share of land area and income derived from agriculture is relatively low. In many developing and emerging countries, urban middle-class property owners naturally resist paying property taxes; that may lie behind governments’ often providing extensive tax exemptions to different classes of property owners (for example, Kenya, South Africa, and Tanzania exempt different classes of land and give the minister and local authorities a wide latitude in granting exemptions). In Kampala, Uganda, the exercise to revise property valuations started last year and will continue until 2019—the last property valuation was carried out in 2005.

Against this background, conventional wisdom has been for developing countries to focus on revenue sources with substantially larger potential—at least until administrative capacity, particularly of local governments improved.

We urge a revisit of property tax potential, for at least six reasons (and for IMF endorsement, see page 12 of this book).

First and perhaps most important: Property taxes are inherently progressive—as Marx observed, it is the rich that own property, and as is the case everywhere, the rich own more and more valuable property. Where income is concentrated at the top of the distribution, property taxes will reduce post-tax income inequality. Income distribution in many developing countries has worsened since the 1980s, though less so than in the US and UK, among other advanced economies. In fact, in all countries wealth inequality is twice as high as income inequality.

The sense of fairness matters—including for ensuring tax compliance. There is global consensus that developing countries must raise more revenues domestically to finance priority spending on Sustainable Development Goals, as set forth in the Addis Financing for Development agenda. But tax compliance is a challenge everywhere; the middle classes will accept a rising tax burden, including on their own modest properties, only if they see that the visibly wealthy are contributing a fair share.

Second, property taxes can reduce corruption when adequately enforced—adding to the sense of fairness in  many developing countries in which the majority of citizens believe their government is corrupt. With rapid urbanization in Asia and Africa in the next several decades, governments will be investing in more roads, mass transit, power and sanitation projects, and public housing. That will raise land values. In the past it is wealthy land developers and political insiders that have too often reaped the resulting enormous rents; a system that imposes property taxes will discourage rent seeking and related inefficient land use as well.

Third, property taxes are less distortive; they do not have the bad incentive effects of taxes on labor, and they do not reduce investment. The supply of urban land is fixed and its taxation does not negatively affect urban investment. Rather it creates incentives for land owners to use their land more productively.

Fourth, more urbanized cities attract more educated and productive middle-class workers who capture a share of unpriced benefits of urban life, including the rising value of their urban property. From the perspective of fairness, these workers (or their landlords) should pay property taxes (and be subject to progressive income taxation as well).

Fifth, property taxes have the advantage of creating accountability to the local citizenry—a political benefit in terms of good governance.

And finally, the advent of new technologies means that it is possible to do things now that we could not do as well before. Technological innovation can help overcome the capacity constraints that developing countries currently face in levying property taxes. Property registers can now be digitized, and use of satellite data and computer-aided mass valuation systems can make valuation of property and updates of values cheaper and quicker. Many Indian municipalities are complementing property surveys with satellite imaging to value property with significant increases in revenues. The computer systems are now being used to appraise property values in Slovenia and Tanzania.

Of course, we have to be realistic. More equity-friendly taxes face even greater political and technical obstacles to effective implementation as the more tried-and-true VAT (and excise taxes and the corporate income tax). The process of implementing property taxation will have to be gradual, the rates will have to be reasonable—not 10 to 30 percent as in Egypt and Kenya which has resulted in poor compliance—and exemptions from the tax will have to be minimal.

But the time for action is now. The IMF, World Bank, and bilateral donors have committed to scaling up their support for building tax capacity of developing countries as part of the Addis agenda. We urge them to ramp up support for strengthening the systems and infrastructure critical to collecting equity-friendly property (and potentially progressive personal income) taxes. Though in some countries it will take many years, the returns (in revenue, a sense of fairness, reduced corruption, greater compliance, and better local governance) can be substantial—contributing directly and indirectly to measurable progress on the SDGs by 2030.

(If you are an insider on the mandate of the G20 Eminent Persons Group regarding the international financial institutions, or you are an insider on the World Bank and the other multilateral development banks, you may want to skip this Background section. If you are not an insider, do keep reading!)

The G20 EPG (on global economic governance—do keep reading!) was created in the spring of 2017 to recommend practical reforms to improve the functioning of the international financial institutions (IFIs), and to ensure the IFIs are fit for purpose in a rapidly changing global system. The group focuses on the World Bank and other multilateral development banks (MDBs), my concern in this blog, as well as the International Monetary Fund and other IFIs focused on global financial stability.

It has been a relatively obscure and quiet group, perhaps by intention (its members are mostly apolitical experts).

Why is the EPG’s work important? After all, the World Bank and other multilateral development banks (MDBs)—the development financing arms of the multilateral system—appear well-insulated from the recent assaults on the open, liberal international order (Brexit, Trump-Bolton, nationalist and populist parties on the rise in Europe). The MDBs, for example, have substantial financial resources and solid AAA ratings—which allow them to borrow on capital markets at low cost, and on-lend to developing countries to support public and private investments with long-run social and economic returns. And the MDB model has been amply vindicated after all, by the creation of more and more of them, in the latest round by China.

On the other hand, the challenge for the MDBs, particularly the World Bank and its regional counterparts founded in the twentieth century, may be that very resilience. The risk is not a sudden withdrawal of support by major country shareholders (The United States and Europe especially), but a slow slide into irrelevance without adaptation and adjustments to the reality of this century’s challenges. Those challenges include the troubling infrastructure gap in most developing countries despite their growing access to private capital; political instability and conflict in low-income “fragile” states unable to borrow; and a critical set of collective action challenges: climate change, antibiotic resistance, unmanaged surges of cross-border migration, the risk of world-wide pandemics, inadequate increases in agricultural productivity to ensure long-run food security across Africa.

The group has just publicly released an update of its discussions in the last year, in anticipation of the G20 meeting of finance ministers later this month. Its final report is due in the fall, for discussion (presumably) at the G20 Summit in Buenos Aires—set for late November.

I’m disappointed by the update—but still hopeful. In the case of the MDBs, the EPG may miss an opportunity to put some fundamental changes on the agenda—at least for discussion if not for full resolution. Even assuming differences of view on specific issues among EPG members, that should not amount to an insiders’ game; the members can use their knowledge and even their differences to propose an agenda with potential, as a colleague said well, to “shake the system rather than sculpt it.”

But I’m also hopeful. Here are three concrete issues that the group could raise regarding the MDBs. 

In late 2016, we at CGD issued Multilateral Development Banking for This Century’s Development Challenges, a report of a high-level panel (not of an “eminent persons group” though our panel members were all eminent too—see the link!). The first of five recommendations to MDB shareholders was for an explicit new mandate for the World Bank to promote global public goods (GPGs) critical to development “through the creation of a new financing window…with a target of deploying $10 billion a year.”

The EPG update does refer to growing threats to the global commons, including on the development side climate change and pandemic risks. These along with other collective action problems such as global food security and refugee issues, are challenges on which the MDBs could provide robust financing and related expertise that would complement the work of WHO, the Green Climate Fund and other UN agencies.

What is disappointing is that the update makes no reference to the hidden limits on the MDBs’ current ability to do so at sufficient scale and scope and effectiveness. (They all try to “green” their lending and the World Bank hosts and manages various trust funds and other special initiatives in health and climate—but these are ad hoc, and their financing is not secure over the long term.) That limit is the MDBs’ reliance, intrinsic to their business model, on the country-based loan to generate sufficient net income to cover the long-run cost of their operations.

The simplest approach would be for all MDBs to have a mandate from shareholders to secure grant financing dedicated to subsidizing their standard loan rates to encourage countries to borrow for investments that have positive global “spillover” benefits. These could be in renewable energy where it is not currently “least cost” compared to coal, for example; in mass transit and data-based efficient bus systems in Bangkok and Lagos that would reduce the commuting time of struggling low-income workers; in disease surveillance systems in the Congo and Cambodia; in deforestation programs in Indonesia and Brazil. The current limit to more lending of these kinds is the reasonable unwillingness of borrowers to pay standard (yes, partly subsidized compared to the private market) rates to finance investments that have substantial co-benefits for other countries. The example exists already in the case of donor-funded subsidies that are reducing the cost to Jordan and Lebanon of borrowing to provide social and other services to Syrian refugees in those countries.

The possibility of subsidizing loan rates would turn a constraint the banks face—the reliance on the country-based loan—to an advantage that builds on their comparative advantage.

This is a concrete idea that could be put on an agenda for broad discussion: Should the MDBs have a mandate to seek capital and other financing to address GPGs and other collective action problems beyond the current ad hoc, often unsustained approach of relying on one or another donor to one or another trust fund? This approach is hard to realize without a collective decision by all the shareholders of the MDBs, because it has no champion among any group of shareholders—low-income, middle-income or high-income countries. (See the 2016 CGD MBD report, last paragraph on page 9 for more information).

Moreover It raises a host of related questions. Where would this grant financing to cover subsidies come from? How much should loans be subsidized? Should the mandate to raise financing from its members be concentrated initially at the “global” World Bank? If so, should the World Bank be told to share resulting funds to other MDBs and lenders such as the Green Climate Fund (as recommended in our 2016 report)? And if such subsidies were available at any of the MDBs, how should member countries ensure and monitor adequate partnership with WHO on disease surveillance and emergency pandemic response, and with other UN agencies with expertise in other areas?

The clear reference in the update to threats to the global commons opens the door to putting some concrete ideas on the table for a more robust role for the MDBs on development-relevant GPGs. My hope resides in an allusion in the EPG update to the possibility of more flexibility in the pricing of loans. It’s only a footnote, but it hints at the idea of more flexible pricing, for one reason or another. Footnote 3 notes that “MDB engagements need to ensure access to…provision of global public goods in MICs.” and in that context suggests that “pricing policies should reflect declining subsidy components, as per capita income grows.” This reference to differential pricing by country, with presumably somewhat higher prices (lower subsidies relative to private markets) for middle-income countries; it opens the door to more flexible pricing in general, which in turn invites new thinking about lower prices (greater subsidies) when countries borrow for programs with global benefits.

The EPG update calls for more collaboration across the MDBs on “principles, procedures, and country platforms”. But calls for collaboration in these (vaguely defined) areas are not new call and not likely to inspire any serious change. In fact, the banks do already cooperate where it is win-win for them, including co-financing large programs (e.g. the Asian Development Bank and the Asian Infrastructure Investment Bank), and spend a lot of time at the field level on cooperation with bilateral donors in low-income countries. Otherwise, the natural tendency is for the banks to compete (e.g. the Inter-American Development Bank and the World Bank in Latin America) for projects and programs to finance, and in their analytic work too. And competition is not always a bad thing. It invites innovation and and useful debate, and in the case of loans creates healthy pressure on the banks to reduce burdensome transactions costs and delays, from which their “consumer-borrowers” can benefit. It also gives borrowing countries “ownership” of their own investment strategies.

More disappointing is the lack of any concrete suggestion that would have shareholders consider different roles for different institutions in the “system” (“different strokes for different folks”). The 2016 CGD report was shaped by the notion that the World Bank, as the sole “global bank,” could take leadership on “global” challenges including global public goods, including in the context of continued country lending, but with a greater mandate to do more lending with positive global spillovers; and that any need for increased capital in the MDB system, including to finance basic infrastructure, should be concentrated at the regional banks, with their greater proximity, sense of ownership and trust on the part of the borrowers. That is one specific and concrete idea that could be on an agenda for shareholder discussion. 

In one area, the update is clear and concrete: the potential for “joined-up” initiatives across the MDBs that could bring more private sector capital to developing countries. These include pooling and insuring risks (the banks already trade their risk exposures to offset their otherwise region-specific concentrations) and system-wide securitization of pooled loans to bring institutional investors’ huge resources to the development table, as in this proposal from my CGD colleague Nancy Lee (and see this big idea too). On insuring political risk, there is a concrete proposal for the banks to jointly help increase the financial capacity of MIGA, the World Bank Group insurance arm; what is worthy of discussion is why the banks have not been willing to “price” the current guarantee instrument they have in a way to make it more attractive, and whether a joined-up MIGA would be more likely to address that reluctance.

The EPG update is clear on the logic of common shareholders treating the MDBs as a group, or as a system in which the sum of their parts would be greater than the current whole. That is behind the call for more collaboration. It was the “system” point that gave rise to our recommendation in the 2016 CGD report for a cross-MDB review at the level of ministers every five years—what Caio Koch-Weser, one of our panel members, called a “mini-Bretton Woods” —and which influenced (we believe) the German hosts of the 2017 G20 to create the EPG in the first place.

On the agenda of such a review would be such fundamental questions as: Do the MDBs have enough capital as a group? Is shareholder capital reasonably allocated for the long run across the banks given different regional needs? Which of them might better optimize use of their balance sheets to stretch their existing capital? Should recapitalizations and replenishments be better coordinated, to help rationalize shareholder allocations? What’s needed to enable the World Bank to follow the Asian Development Bank’s lead? 

Are there imbalances across the banks in financial capacity, given their mandates and relative comparative advantages over the next decade? Is the shrinking relative size of the African Development Bank concessional window compared to the World Bank’s IDA window in Africa (the latter at least five times bigger now) the outcome of a strategic decision among member contributors? Is it sensible for the long run? Should the common shareholders of those two banks consider the logic of the “local” bank being much smaller in the region with most of the world’s failed and fragile states, the highest growth of job-seeking cohorts, and the greatest poverty? Should a new Asian Infrastructure Investment Bank focused on infrastructure in Asia and the huge potential financing role of the China Development Bank across Eurasia change or enhance the work of the Asian Development Bank in infrastructure? Should the EBRD, the World Bank, and the African Development Bank agree to some division of sectoral emphases in North Africa? And what about the Islamic Development Bank?

Also disappointing is the lack of any reference in the update to the corporate governance problem at the legacy MDBs. The problem is summarized well in the CGD MDB report: “The legacy MDBs have become overly bureaucratic, rigid, and rule-driven in large part because of shareholder governance that has failed to distinguish between appropriate strategic oversight (combined with accountability measures) and issues more appropriately within the purview of management.” Should governance issues—voice and votes, selection of heads and their roles as Chairs of the Board (except at AIIB), costs and benefits of resident boards—be on an agenda for periodic discussion by common shareholders across the banks?

Of all these questions, the most fundamental is whether the MDBs have sufficient resources for the coming decade and beyond—or as some might argue are too big given developing countries’ growing access to private capital. (On whether the IMF has sufficient resources, go here.)

On the other hand, there is time. The EPG can certainly put the idea of a periodic mini-Bretton Woods on the agenda for discussion in Buenos Aires (how often? what role for the G20?) and encourage the Argentines to take whatever next step is appropriate to ensure it “sticks.”

Imagine a G20 agenda that included: Should the MDBs have a “window” or consolidated “trust fund” with grant money, to subsidize loans with big positive global spillovers? Should MDB shareholders “assign” leadership to the World Bank on going green, and support concentrating additional capital to back traditional lending at the regional development banks? Should the shareholders debate the question: Are the MDBs as a group big enough for current development challenges? Should the shareholders consider a quinquennial mini-Bretton Woods meeting?

It is not too late. These kinds of questions need not be agreed or resolved by the EPG, only chosen, prioritized and organized—with sufficient factual background to enable a rich discussion grounded in shared facts at the common shareholder, ministerial level.

I remain hopeful that the EPG will propose a clear and compelling and necessarily controversial agenda of topics for discussion by the world’s sovereign shareholding members of the banks. I remain hopeful that a better system of “global economic governance” for development can be snatched from the jaws of insider obscurantism before the group finalizes its report this fall.

Globalization of the economic sort is often maligned. But then there is globalism: of norms, values, culture, and attitudes. Are norms and values, even “culture,” being globalized? Is the idea, for example, that women have equal rights, as in the Sustainable Development Goals (SDGs), gaining ground as a universal norm? And might changing norms and values affect legal regimes and behavior (sometimes, maybe)?

The charts below show the results of questions posed to men and women in the (nationally representative) Demographic and Health Surveys starting in the early 2000s, which asked about what circumstances respondents believe might justify a husband beating his wife: when the wife burns the food? Argues with her husband? Goes out without telling him? Neglects the children? Refuses to have sex with him? Is too tired?

The first set of charts indicates the percentage of urban women interviewed who agreed that one or more of the reasons posed justifies wife-beating, for each of five regions and separately for Anglophone and francophone Africa. (We include only countries in which the questions were posed in at least two years. For rural women, the percentages are slightly higher and the trends very much the same, country by country.)

In many countries surveyed, the absolute percentages of women are disturbingly high—except in Peru and Colombia, both upper middle income countries of Latin America where less than 5 percent of women see some justification for wife-beating. For the most recent survey years in other countries outside Latin America, levels range between 9.5 percent (the Philippines) and 89.5 percent (Guinea). In India and Bangladesh, it is hard to see a “good” downward trend from relatively high levels (see the chapter on meta-preference for sons in this latest economic report on the Indian economy). On the other hand, the trend is downward in Egypt and Jordan, in many countries of francophone Africa, and in most countries of Anglophone Africa.

There are anomalies (why is the percentage rising in Cambodia and Indonesia, while falling to a low level in low-income Benin? (Is it Benin’s democracy?) Why so high in Guinea (recent war? Ebola?) and why is it failing to fall in Sierra Leone (Ebola?), but falling in Liberia (Africa’s first female president for a decade?) Why is the percentage lower and more likely to be falling in Anglophone compared to francophone Africa? Is the difference real—something about colonial history or “culture”—or were the relevant questions framed or understood differently?

The next chart illustrates the difference between the percentage of urban women and men who said that there are one or more justifications for wife-beating (in the most recent year for each country and including countries with only one survey year with these questions). Except in the Dominican Republic, Colombia, Mozambique, Lesotho, and Kenya, the percentage of men who endorse at least one reason is lower. Why? Perhaps because some wives who are survivors of partner violence suffer confirmation bias. Perhaps men more than women try to answer the way they assume they ought to? (See Rachel Glennerster on the challenge of attitude and other questions meant to measure women’s agency or empowerment.)

These questions, and additional ones on domestic violence, were only introduced into the DHS after the turn of the century. Why then?  In 1979, the UN General Assembly adopted the Convention on the Elimination of All Forms of Discrimination against Women (CEDAW)—and there is evidence of a subsequent positive and statistically robust (though uneven across countries) “CEDAW Effect” on women’s rights around the world. The Beijing Women's Conference (more formally known as The Fourth World Conference on Women: Action for Equality, Development, and Peace) was in 1995. Did global “jawing” in the late 20th century help inspire, with some lag, the introduction of these questions into the DHS system?  

The questions are about attitudes, not behavior. But surely in the long run attitudes matter. Might the universal values reflected in CEDAW, discussed in Beijing, and codified in the Sustainable Development Goals explain some of the downward trend the charts show in many countries? Is recent news of sexual assaults on women—in Delhi on a public bus, by UN peacekeepers in the Congo, in Hollywood, USA—a sign that at the global level the norm is changing? Let us hope there is in fact a phenomenon we could call globalism of norms, and that changing norms are changing behavior. That would mean that sometimes-maligned globalism has been good for women in the most intimate and private part of their lives—and thus good for all of us.