Should donors cap aid in Africa?
"Some developing countries, most of them in Africa, have had high levels of aid dependence – in excess of 10 per cent of gross domestic product, or half of government spending – for decades. It is questionable whether this has been helpful."
The most worrying reason, it says, is the undermining of good governance by distortion of political accountability. And then it goes on to make a specific proposal.
"Donors collectively set an upper limit on the amount of aid they give to any developing country. This limit should be 50 per cent of the amount of tax revenue that the aid-receiving government raises from its own citizens, by non-coercive means and excluding revenue from oil and minerals. This would keep the governments of non-mineral countries dependent for revenue mainly on their citizens, and thus give them incentives to pay attention mainly to what citizens want, not donors. It would also encourage governments to raise more taxes from their citizens, since every extra dollar of tax raised would attract a matching increase of 50 cents of aid.
Higher taxes would help because there is strong evidence that the tax relationship is vital for accountable government. “No taxation without representation,” said the early Americans, and the converse also applies. Budget legislation is central to the political process, forcing governments to justify their actions in open debate. At the micro level, tax collection obliges governments to be in direct contact with most of their citizens and companies."
It's an interesting proposal, worth exploring further. Read more here. And let the debates begin.
Update, a few days later: the debates have indeed begun, in the FT Economists' Forum. Read more here.