Two billion people live in countries where development outcomes are affected by conflict and violence. By 2030, up to two-thirds of the world’s extreme poor could live in these fragile regions. Because of the security risks and the weakness of state institutions, it is challenging to provide essential services, such as water and education.
The citizens of volatile regions often play an outsize role in directly financing essential public goods and services. Little is known, however, about how informal revenue generation works in practice and the implications it may have for both development and state building.
To better understand informal public finance in fragile contexts, we conducted two pieces of research in Gedo in southern Somalia, where the state taxation system is extremely weak.
We found that most households step in to fund public services through community-based informal taxes. Our evidence also suggests that external actors can build on this informal financing to improve public goods provision, without necessarily undermining the state’s authority.
Working directly with citizens and community leaders can be an effective way of delivering services in difficult contexts. It can also help to strengthen and build government capacity at the local level.
At the very least, the informal contributions of citizens need to be appreciated. Otherwise, it is easy to underestimate the tax burden faced by households and overestimate the overall fairness of the tax system.
Understanding informal systems of public finance helps us to see the possibilities for service provision and governance in conflict-affected contexts.
Financing public goods outside the state
We first undertook qualitative research and conducted surveys with over 2,300 households and 117 community leaders in Gedo region. Gedo borders both Ethiopia and Kenya. Its economy is dependent on livestock and farming.
We found that citizens pay little tax to the state. However, they play a significant role in financing development and service provision outside of the state. Over 70% of households pay informal taxes and fees. This represents an average of 9.5% of annual household income.
Taxpayers found these informal payments to be fairer than those levied by the state. Overall, informal taxing authorities are more effective tax collectors than the state.
Building on this baseline research, we then undertook a randomised controlled trial to explore the ways in which international organisations, non-governmental organisations and local leaders can build on this strong foundation of informal taxation and local collective action.
Under a recent community-driven development programme, known as the DIALOGUE project, two NGOs partnered to provide grants to communities. The NGOs – the Danish Refugee Council and Shaqodoon – matched revenues raised by communities through informal taxes.
The programme enabled communities to better finance public goods and improved the quality of those goods. Communities built schools, restored roads, and even constructed a local airport terminal.
Informal taxes and the ‘legitimacy’ question
While being able to deliver essential public goods is undoubtedly a positive outcome, it is also important to consider the impacts of bypassing the state and normal channels of taxation.
For one, there is a question of whether citizens who pay directly for public goods will ever view the state as legitimate. This is particularly important in the context of Somalia. The government and its partners are trying to extend the state’s reach and authority across the country.
In Gedo region and Jubbaland state, the issue of legitimacy is even more important. Al-Shabaab is present in the area and levies its own taxes. The region also has a history of tension with the federal government.
In this context, financing public goods outside the state could further undermine its authority.
Somewhat surprisingly, however, we find a different outcome. The direct financing of public goods through informal taxes actually strengthened citizens’ perceptions of the local state and its legitimacy.
This may in part be because citizens in fragile contexts have relatively low expectations about what the government should do. Instead of expecting government to deliver services directly, citizens may see the role of government as facilitating or lobbying for development.
Exclusive groups, heavy burden on the poor
These findings suggest that informal institutions and local governments can complement each other. However, important risks remain when relying upon informal taxes to finance essential goods. For example, the local leadership responsible for raising informal revenues may not be inclusive and accountable to local citizens.
Accordingly, such initiatives risk excluding minorities and sub-populations, including women. This is a particular concern in Gedo region. Minority clan groups are marginalised from political and economic opportunities, while women often lack meaningful political voice.
Meanwhile, informal taxes have been shown in many contexts, including southern Somalia, to be inequitable. Informal taxes represent a greater proportional burden on poor households relative to the wealthy.
Of course, where state taxation is weak or nonexistent, formal channels of revenue generation and redistribution may not be more equitable.
Nevertheless, it is important to recognise the uneven burden that informal taxes can have on citizens. They can also reinforce an inequitable distribution of power and encourage a non-universal conception of citizenship and rights.
Opportunity for donor collaboration
Despite these persistent risks, the results of this community-driven development programme in Somalia have important implications. The findings boost our understanding of the possibilities for service provision and citizen-state relations in conflict-affected contexts.
Our experience in Gedo region suggests that international donors can support provision of public goods in fragile states. This can be achieved through collaboration with local communities without necessarily undermining state legitimacy.
Working directly with citizens and community leaders may be an effective way of delivering services in difficult contexts. It may also help to strengthen and build government capacity at the local level.