Revenue administration and corruption:

4. Many failed donor supported reforms and modernisation programmes

Reforms - more than institutional re-engineering

Much of the present policy debate on anti-corruption strategies in the revenue administration has at its roots the principal-agent theory of corruption. Robert Klitgaard's popularisation of this approach has been widely promoted and applied in a number of developing countries during the last decade, as reflected in the World Bank's 'Customs Modernization Handbook' from 2005.

Klitgaard's work has also been used extensively in the development of the World Customs Organization (WCO)'s Revised Arusha Declaration on Integrity in Customs, as well as in a range of the WCO's integrity-related tools.

Despite extensive resources spent on capacity building and training of tax officers, recent years have experienced substantial setbacks in the fight against corruption in revenue administrations, as exemplified by experiences from Ecuador, Guatemala, Peru, and Uganda. Several factors have contributed to the disappointing results, and it is difficult to distinguish among these and to determine their appropriate weights.

Some observers argue that a main cause is that low levels of human capital are responsible for the organisational failure. However, why should the revenue administrations perform less well over time, despite the extensive resources spent on capacity building? Another view is that the informational environment in tax administration is constrained in many ways, for instance by a political environment which favours control over competition, and incentive systems that have failed to function.

Others argue that civil servants fail to perform because they do not identify themselves with their countries, with national aims, or with the government elite. Finally, there is the view that kinship and tribal networks put an emphasis on social obligations and re-distribution that mitigate against the development of a Weberian bureaucracy.

Without passing a verdict on these and other explanations, this section explores the limitations of some of the 'technocratic' approaches to institutional reforms taken by donors:

CONTENT ON THIS PAGE:

• Robert Klitgaard's approach to controlling corruption
  
  
• The Revised Arusha Declaration on Integrity in Customs
  
  
• Re-engineering public institutions
  
  
• Tax administration is tax policy
  
  
• Institutional 'culture' and patronage
  
  
• Impacts of monetary incentives
  
  
• Corruption networks
  
  
• The 'power of the purse'
  
  
• Accountability between the government and taxpayers
  

Robert Klitgaard's approach to controlling corruption

Following Klitgaard, corruption is most likely to occur when agents (tax officers) enjoy monopoly power over clients (taxpayers), when agents enjoy discretionary decision power over provision of services (for instance, tax assessments), and when the level of accountability is low. At the theoretical level, this approach explains how public officials almost by necessity have a number of incentives and opportunities for engaging in corrupt transactions. At the more practical policy level, the approach indicates that policy instruments may be divided into those which influence the number of corrupt opportunities, and those influencing the incentives. This includes policy instruments which affect the expected (gross) gain of the corrupt act, the probability of being caught, and the size of the penalty if detected. If expected gains of corruption are higher than expected costs, the agent will, according to the theory, choose to be corrupt. For example, the expected gain for public officials is higher when they have wide discretionary powers and considerable monopoly power in their jobs. The expected probability if detected is reduced by decreased accountability.

For more information see Klitgaard, Robert (1997): Cleaning up and Invigorating the Civil Service. Public Administration and Development, Vol. 17, pp. 487-509.

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The Revised Arusha Declaration on Integrity in Customs

The customs administration is often cited as one of the most corrupt sectors of government. The international customs community - through the World Customs Organization (WCO) - commenced work in the mid to late 1980s to formulate a comprehensive integrity/anti-corruption strategy. In 1992 this work resulted in the unanimous adoption by WCO members of the Arusha Declaration on Integrity in Customs. Since that time, this declaration has become the principal anti-corruption framework for the WCO's 162 Member Customs administrations. However, progress with stemming corruption in Customs was slow. In reaction, the WCO called for a comprehensive review of the Declaration and its practical implementation in Member administrations, which led to the preparation of the Revised Arusha Declaration - unanimously endorsed by the WCO Council in June 2003.

The Revised Arusha Declaration on Integrity in Customs consists of ten distinct but interrelated elements considered essential for the development and implementation of a comprehensive and sustainable anti-corruption and integrity enhancement program. It is designed to strike an appropriate balance between the positive strategies (reform and modernisation, leadership, progressive human resources management policies, etc.) and the repressive strategies (sanctions, controls, investigation and prosecution etc) - i.e. the carrot and stick approach. The ten elements of the Revised Declaration are as follows:

1. Leadership and Commitment
2. Regulatory Framework
3. Transparency
4. Automation
5. Reform and Modernisation
6. Audit and Investigation
7. Code of Conduct
8. Human Resources Management
9. Morale and Organisational Culture
10. Relationship with the Private Sector
    
    

Collectively, the ten key elements are designed to reduce monopoly power and the inappropriate use of official discretion, while at the same time increasing the level of practical accountability. In developing the Revised Arusha Declaration the WCO was conscious of the different social, political, and economic circumstances faced by its Member administrations. It therefore deliberately designed the Declaration to be non-prescriptive in nature. In other words, the Declaration provides a comprehensive conceptual framework - but the actual implementation of each key element is up to individual customs administrations.

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Re-engineering public institutions

A major factor contributing to the failure of many tax administrative reforms, which is also the case for many other types of public sector reforms, has been the 'technocratic' approach taken by reformers and donors. Tax administrative reforms in poor countries have often been treated as an 'engineering problem' - and as such a phenomenon to be addressed through 'blueprint' or 'textbook' solutions. There seems to be an assumption that tax administrative problems and their solutions can be fully specified in advance, and that the required measures can be wholly defined at the outset, and implemented on a predictable timetable over a fixed period.

This accounts for the prescribed and mechanical approach usually favoured by donors, featuring quantitative performance targets, redrawing of organisational charts, rewriting job descriptions, training courses for tax officers, installation of new systems for human resources and financial management systems, etc. Robert Klitgaard refers to this as the 'more approach' (or the supply side approach) - i.e. more training, more equipment, more technical assistance, etc. Such strategies may be necessary, but if the demand side of administrative reforms is being overlooked, this may lead to distorted incentives through technical assistance, and also to undermining the government's commitment to civil service reforms. Mark Schacter provides an insightful discussion on why many donor initiated civil service reforms have failed in developing countries (see Capacity Building: A New Way of Doing Business for Development Assistance Organizations)

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Tax administration is tax policy

Experiences from several countries which have introduced the revenue authority model, including Peru, Tanzania, and Uganda, show that the establishment of a proclaimed autonomous authority with comparatively generous remuneration packages and substantial budgets has not protected them from political interference. To the contrary, it has made the revenue administration a more attractive target because the authority offers both relatively well paid jobs and considerable rent-seeking opportunities. Consequently, a revenue authority is vulnerable to political interference - especially in personnel matters. The empirical evidence supporting this finding can be summarised as follows:

• Politics dominates over law: Legal provisions for organisational autonomy of revenue authorities have limited importance in contexts where political elites do not respect them.
  
  
• Autonomy may contain seeds of its own destruction: Revenue authorities have become attractive targets of political interference due to both comparatively favourable remuneration packages and to rent-seeking opportunities.
  
  
• Success may help to protect autonomy: Respect for organisational autonomy established by law depends to some extent on the success of the tax administration. The undermining of, for instance, the Uganda Revenue Authority's autonomy became increasingly open once it did not meet its revenue collection targets after 1996.
  
  
• Inflated expectations may help undermine autonomy: Donors and the Ministry of Finance, by pushing for high revenue targets (tax-to-GDP ratios), help to undermine the revenue authority's credibility in the eyes of state elites and the public, because such targets create expectations that cannot be met.
  
  
• Autonomous organisations often become easy targets for political blaming: In Uganda, for instance, the public denunciation of the Uganda Revenue Authority by high level political figures, the President included, has helped to undermine the credibility of the tax administration, and hence its capacity to enforce tax laws.

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'Institutional 'culture' and patronage

The technocratic approach has often overlooked the fact that reforming a tax administration - though it has important technical aspects - is also a social and political phenomenon driven by human behaviour and local circumstances. It is a long and difficult process that requires tax officers to change the way they regard their jobs, their tasks, and their interaction with taxpayers. The technocratic remedies supported by donors have underplayed the degree to which progress in [tax] administration depends upon thorough 'culture change' in the public service.

The motives of individual actors are often inextricably tied to the interest of the social groups to which they belong. In many African tax administrations patronage runs through networks grounded on ties of kinship and community origin. As such, people recognise the benefits of large extended families and strong kinship ties, even as their social and economic aspirations may be unambiguously modern. This implies that such social relations may rule out the formal bureaucratic structures and positions. Fiscal corruption must therefore, at least to some extent, be understood in the context of a political economy in which access to social resources depends on patron clientilism.

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Impacts of monetary incentives - often exaggerated

Recent economic research on human behaviour indicates that reformers and economists have an inclination to exaggerate the impact of monetary incentives because of a too narrow understanding of intrinsic motivation and group dynamics. However, the failure of reforms in poor countries that apply monetary rewards and incentives may have a more straightforward explanation. Because of the importance of family networks, increased pay rates may imply more extensive social obligations, and in some cases actually result in a net loss to the individual. This state of affairs can develop into a vicious circle with higher wages leading to more corruption because the tax officer has to make up for the loss caused by such obligations. An outsider might conclude that officials lack intrinsic motivation to perform well and do not respond to incentives. However, a more careful study of the situation is likely to instead conclude that the tax officers are responding very well to monetary incentives in a situation where higher nominal pay actually makes the official poorer. This might be a reason for the popularity of in-kind benefits among civil servants, which may be harder to share with one's kin.

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Corruption networks

Hiring and firing procedures may lead to more corruption. Corrupt revenue officers often operate in networks composed of both internal and external actors. In major anti-corruption shape-ups, many of those dismissed are recruited to the private sector due to their knowledge of the workings of the tax system and their inside contacts. This may further strengthen the corruption networks. Hence, a major challenge facing reformers of tax administrations is to crack down on corruption networks and the inherent trust that appears to prevail between members of such networks.

One suggestion is to introduce rotation systems for staff in tax administrations, where tax collectors remain only for shorter periods in the same post. But a danger of the rotation system is that the uncertainty which is thereby created for employees may result in increased corruption as collectors may use the opportunity to enrich themselves quickly while they are stationed in the most 'lucrative' posts. The rotation of officials may also give corrupt superiors undue power. For instance, they might 'sell' assignments to attractive positions or reassign officials to remote stations as a punishment for honesty. The scarcity of qualified personnel such as auditors and accountants, available housing for staff, etc. further reduces the potential of rotation schemes in the poorest countries.

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The 'power of the purse'

The 'power of the purse', added with quite definite ideas regarding what sort of institutional reforms are desirable, has led donor agencies to take the centre stage in the tax administrative reforms in a number of the poorest countries. In theory, donors respond to needs identified by client governments, but in practice they often identify clients' needs for them. This was the case when the Uganda Revenue Authority (URA) was set up by external consultants who arrived with a pre-fabricated 'blue-print' for tax administrative reforms. Although the reforms were supported by the political leadership and senior officials in the Ministry of Finance for a number of years, this support eroded over time. It is therefore reasonable to ask whether the political support to establish a new revenue administration, as well as the support from the local bureaucracy, was genuine from the outset, or whether it merely reflected the bargaining power of donors.

The assumption that donors can build state capacity despite the lack of effective internal demand for a more effective tax administration is highly questionable. Furthermore, donors may exacerbate the problems when there are several of them involved in the same field. This was observed in the Tax Administration Project (TAP) in the Tanzania Revenue Authority (TRA), in which several donors were involved, including Danida, USAID, GTZ, EU and the World Bank. Representatives from both the donor community and advisors to the TRA complained that initially there was no clear focus in the TAP. Moreover, the many donors involved contributed to overloading the capacity of the TRA and slowing down the implementation of the administrative reform. Accordingly, Ales Bulir and Soojin Moon from the IMF, in a recent review of the experiences with IMF-supported programmes to fiscal adjustment, concluded that '…revenue enhancing measures, and perhaps also technical assistance provided to program countries, failed to provide a sustainable increase in the revenue-to-GDP ratio' (see Do IMF-programs Help Make Fiscal Adjustment More Durable?)

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Accountability between the government and taxpayers

The point about 'internal demand' for capable tax administration opens the door to an additional insight about the poor record of many revenue administrations in developing countries. A key problem is that accountability has failed in the relationship between government and taxpayers. The channels through which governments hold themselves accountable to citizens, and citizens communicate their demands for better government, are still highly dysfunctional in many countries. For taxation to have a positive effect on democratic accountability, taxation must be 'felt' by a majority of citizens in order to trigger a response in the form of demands for greater accountability. But the tax reforms during the last decade in many developing countries have only to a limited degree succeeded in widening the tax base. It has proven difficult or even undesirable to apply the tax law with full force to informal operators. With food commodities often zero-rated and most agricultural inputs exempted, VAT has not included many new groups into the tax net. Often only formal business corporations appear to be visibly affected by the central government tax reforms.

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