Monday, September 17, 2007

Why Tax Justice: Development Finance


The Democratic Republic of Congo: a country with abounding natural resources, where the earth guards its immeasurable known and unknown riches, a fertile soil greets diverse crops and gives life to a rich fauna and plenteous flora, rivers and streams cover the whole territory, and rainfall observes regular patterns. Confronted with the question of development, the DRC requires financing at all costs. By Smalto Kabuya.

With just this brief outline of the DRC, it seems like somewhere one would live a good life. However, in development indexes, the DRC scores as one of the poorest countries in the world! Its GDP per capita (based on purchasing power parity) is estimated at $705. In the same category, Lesotho’s GDP per capita is $2,619, and in the middle-income category, South Africa’s is $11,192. The DRC’s external debt is valued at US$14 billion – servicing the debt alone costs about US$30-50 million per month – while life expectancy at birth remains around 43.5 years. The country’s human development index is estimated at 0.391, giving it a rank of 167th out of 177 countries with data and a place among the least developed countries in the world according to the UNDP’s Human Development Report. This is a situation to challenge the conscience of each and every one of us.

The Congo, a sleeping giant, needs to awaken. For a long time it has been in ruins, covered by the ashes left by international vultures and by governance that hasn’t responded to the aspirations of its people. The story of the existence of the Congolese State is, effectively, the story of the suffering of its people – deprived of enjoying the riches that lie no further than their fingertips, a destiny comparable to a pauper who does not know how to put into his mouth the piece of bread he holds in his hands. Indeed, in the eyes of any observer, the case of the DRC remains an enigma.

Whether the Congolese citizen can become what he should be, remains however, the measure of any enlightened plan for his society, and generally implies what the Congolese nation means in and of itself. Indeed, the question of the well-being of the population lies at the heart of the development of the economy and governmental politics. For this development to happen however, there has to be the necessary financing as well as a way to ensure that both the state and big commercial firms fulfil their responsibilities.

Development: Both the Will and the Means

The concept of development causes a lot of ink and saliva to flow in debates on all levels. At the international level it has attracted much attention from the United Nations, which attached to it certain areas judged as priorities, now used as the basis for the Millennium Development Goals. If we define development in a simple way, as a means of giving individuals access to a decent life, it is evident that poverty is the most formidable malady. And reducing poverty does in fact comprise the second goal set by the UN to be achieved by 2015: the duty to achieve it falls on each of us. Contributions are necessary as much from the international community as from individual states, public actors as well as private actors.

Faced with the immediate nature of the need for development, both the will and the means to achieve it are required. If the will stems from governmental policy, the means come from economic mechanisms judged most useful for these policy goals. Indeed, the government can only meet the expectations of the people by defining a framework able to bring about the development of these economic mechanisms. The framework of governmental action can thus be understood as the regulation necessary for development. Consequently, the real question one must ask is: what is the state of fiscal legislation in D. R. Congo – given that it is evidently public finances which provide the means for any governmental undertakings? Or to cite a common saying, “Whoever wishes to eat bread, must first cook it”.

Without getting into the details of the importance of an adequate fiscal system, in these paragraphs we’ll simply raise the issue, and maybe later, allow for a succinct analysis. However, as attested by the difficulties the government faced convincing parliament to adopt the annual budget, the DRC’s fiscal system functions very poorly. That budgetary process alone revealed the financial problems eating away at the country.

Refusing Handouts and Mobilising Domestic Resources

Faced with financial difficulties, the first reflex is to ask for handouts! Many believe that a fresh breath of air from abroad would alleviate the problems. Quite the contrary – without any complementary measures or controls, all such efforts would be self-destructive given the deficiencies described above, and the problems would only grow worse.

Instead, and indeed following the high-level dialogue on development financing, domestic financial resources should be the primary source for development financing. In this view, as well as rejecting reliance on external financing from international trade and overseas development aid, the government should play a leading role in the process of development as well as the strategies for poverty reduction, including policies for resource mobilisation. What development plan has the DRC adopted?

In the same flow of ideas, considering the limitations facing governments seeking innovative resource mobilisation policies, it is very important that the institutions that will determine the success of the chosen measures be reinforced. In other words, the quality of the state’s institutions is key with regard to all government actions, including resource mobilisation. Weak institutions will result in poor resource mobilisation and management, whereas strong institutions will allow strong resource mobilisation and management; in the first instance there is no hope for development.

This said, the DRC should embrace and put in place the principles that have been laid out by NEPAD partners in the African Peer Review Mechanism, which involve rules for good governance, healthy management of public affairs, sound macroeconomic policies and other key measures designed to create an environment conducive for the resource mobilisation and sustainable development. If good governance, sound macroeconomic policies, institutions designed to support a market-based economy, a skilled labour force, necessary infrastructure and juridical controls are the factors which determine the level of both domestic and international investments, the state lies at the heart of the creation of such an environment.

The Responsibility of the State

The state’s central role in creating an environment conducive for resource mobilisation and sustainable development demands that we analyse the responsibility of the state, which can be seen in different ways. Firstly, the state must work to calm situations that threaten law and order, and following our discussion focusing on resource mobilisation must in particular counter the loss of public funds through corruption, capital flight, fiscal fraud and other similar situations. Secondly, although creating an environment conducive to development involves the emergence of a private sector, the state remains responsible for providing the population with public services such as education, water, and healthcare. Access to safe drinking water remains a nightmare even for Congolese living in urban areas! Education is also in need of reform to meet the needs of the nation and remains a burden on the shoulders of the people. Furthermore, following the MDGs, primary and secondary education should be free; some countries in Africa have already achieved this. Faced with this challenge, where does DRC find itself? Are the means to meet the challenge missing?

However, most importantly, while carrying out these and other responsibilities, the state must be answerable to the people who consented to its existence and explain to them how it is governing public affairs. The people should be able to hold it accountable for all acts done on their behalf.

Contracts in a Troubled Time: Without the Will of the People

It is particularly important that the multitude of contracts signed with ‘the Congolese State’ be examined. It is no secret that especially in the more troubled times, many people who did not have the mandate of the people were involved in giving out mining and other types of public contracts.

However, if the current government’s initiative to revise certain public contracts is to be praised, it is important that the parliamentary commission in charge of the revision adopt a work methodology that would involve the public and consequently require the publication of all contracts suspected of illegality. Given that all contracts are required to conform to certain conditions of validity, those that wouldn’t fulfil such criteria would be annulled. The possibility of contract annulment would encourage interested parties to start such a procedure. In the case of the mining contracts mentioned above, the people would be the most interested party. Indeed, in opening public contracts to revision, every person having a point of view to express would be considered an interested party – including all Congolese citizens, being the taxpayers in the state.

Corporate Responsibility

Large corporations operating in a given population’s territory also have responsibilities; domestic or multinational companies must work to develop the environment in which they operate. This would imply, among other things, respect for environmental rights, infrastructure development, and encouragement for private initiatives that have a social or community involvement and benefit built into it in communities where they operate. There are many examples to illustrate such ideas, ranging from large corporations half extinct to those continuing to operate despite the difficulties including OKIMO (gold mining), SOMINKI (gold and other mining operations), MIBA (diamond mining), GECAMINE (copper and other mining operations), to cite a few cases. They have all generated millions in profits while the local people have been left to live in the dust and suffer the effects of environmental damage caused by the companies’ operations. The abuse is not limited to the mining companies either; the above could be said about both domestic and multinational companies in other industries, including agriculture and forestry.

It would therefore be in the best interests of the people it represents for the State to assume all its responsibilities. That is why, when it comes to signing or obtaining public contracts, the State must insert a clause stating that large corporations wanting to operate in the national territory must in some way go beyond their own aims to work for the greater social good. In addition, the state must ensure that such clauses are applied in practice. This would not only allow local host communities to hold these companies to account but also help preserve the environment and guarantee means of living for future generations.

Closing the Floodgates

However, no matter what, the problem will remain sizeable if the state does not work to close the gaps and holes through which the public treasury is depleted. It is of greatest importance that the state work with its people to struggle against all sorts of fiscal termites that eat up and divert public funds. Corruption, capital flight, fiscal fraud, and the use of tax havens constitute the largest holes through which national resources disappear. Closing them would allow the state to better channel its funds, as discussed in the Tax Justice Network’s study on this theme “Closing the Floodgates.”

The issue of financing the DRC's development remains a contributor to the State's capacity to create a social, juridical and economic environment that would be favourable to putting the country on the path to development. If overseas development aid is to be accepted, it could only be considered as a supplement to the large efforts that the state must generate for the development of the country. It is in this way that the state is expected to take charge of its responsibility, by putting the interests of its people at the centre of all its activities. Making the financial system healthier through fiscal legislation, the banking sector, credit unions, cooperative banks, and small and medium sized enterprises are the main challenges.

In the light of what needs to be in place, an efficient fiscal system is a key factor contributing to the mobilisation of national financial resources that can serve to finance the development of the country. It is in these terms that the Congolese State should respond to the aspirations of its people, and engage in the symphony of the nations with a role that would reflect its weight.

Kabuya B. Smalto has a Bachelor in Law from UNILAC-Nairobi. Thanks to Matti Kohonen and Nathalie Hanley for the translation from the original French.

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