Finding the Money for South Asia's Development

By Pravina Rudra (Project Intern, IPS)

Whilst Albert Einstein is probably more famous for his theory of general relativity than for advising South Asia on how to raise finances, one of his lesser-known admissions is of great pertinence for leaders at the South Asia Economic Summit: “The hardest thing to understand in the world is the income tax”. His confession that even geniuses like him were baffled by tax systems is particularly relevant for a region which is in desperate need of taxpayers’ money to fund a plethora of government projects.

Naturally, this brings us onto the question of what government projects need to be funded. Firstly, initiatives to narrow the problems of urban-rural disparity and gender inequality (which will be discussed in sessions 3A and 3B of the summit respectively) need considerable bankrolling. Moreover, is estimated that a 7.5 % growth in regional GDP requires investment in infrastructure worth 5% of regional GDP in order to be met, such that annually the region is US$ 60 billion short.

As the South Asia Economic Summit returns to its inaugural state of Sri Lanka this September, one of the themes topping the agenda is the challenges governments face in raising finances, and how to overcome them. This will be discussed in Parallel Session 3C ‘“Finding the Money” Mobilising Finances to Address Disparities’

So why taxes? Taxation is generally considered the primary way of boosting domestic revenue – the 2002 Monterrey Consensus showed that it is responsible for up to 90% of domestic revenue. Unfortunately, South Asia collects less revenue than other countries in the world, and not just in absolute terms. Indeed, tax collected by countries such as Denmark can near 50% of their GDP, and even in other developing countries tax revenue makes up 20% of GDP. In sharp contrast, South Asia tends to collect 10-15% of their GDP in taxes.

Of course, alternatives to taxes merit consideration. Public Private Partnerships and obtaining funding from multilateral sources are two important ways of overcoming the shortfall in funds. PPPs are proven to be an excellent way of overcoming infrastructure shortfalls, but sector policies and regulatory framework in South Asia, according to a recent ADB report, discourage firms from engaging in such deals. Moreover, the market does not have the capacity or instruments to buy shares or to lend in order to finance such partnerships.

Multilateral sources such as the Asian Development Bank (ADB) fund significant projects, such as the $180 billion new expressway in Sri Lanka which cut the journey time between fishing port Galle and its capital Colombo from three hours to just one. Aid is not, however, a sustainable solution – as countries such as India move from the low income bracket into the middle income bracket, donations from abroad dwindle. Going back to Einstein’s advice (!),it is clear that many countries at the summit are right to simplify their tax codes (along with reaching into the informal sector and auditing to search out tax evasion) – developing countries such as Rwanda and Burundi drastically reduced their dependence on international development assistance by reforming and increasing the transparency of their tax systems. For example, through tax reforms in Burundi; revenue take doubled from $247 million in 2009 to $434 million in 2012.

Taxation is clearly one of many important techniques in tackling underfinancing, but how do you think we should raise funds in South Asia? Let us know in the run up to the 6th South Asia Economic Summit 2013!