Local Economic Development for the Price of a Macchiato?

Eons ago (ok, 10 years) when I was working in Kosovo (who wasn’t?), I was having lunch with a friend who had just returned from her first visit with municipal councils on tax compliance. She worked as an advisor on tax compliance, etc, and I oversaw a portfolio on local government. Until that day our work couldn’t have been further apart. She launched into what appeared to be a bit of a shell-shocked rehash of her trip*, and asked me if I was aware that municipal councils collected almost no property tax, despite being mandated to and sending notices to property owners. To which I replied ‘Yes.’ And then told a story about my first and only attempt to influence property tax compliance.

I’m not a finance person, so I normally kept my distance from local government finance discussions unless they focussed on policy, etc. But on the day in question, on a regular visit to one of the smallest municipalities in Kosovo, the mayor launched into a tirade questioning how he was supposed to finance the impending decentralized functions of local government that would add to the already burdensome functions mandated under the local government law. I confess I was prepared to answer with platitudes and an invitation to discuss this with our advisors working in central government ministries, but some sense of obligation to do more (even knowing I couldn’t) overcame me. So I dipped my toe in and said something to the effect of ‘well, the gap between your local revenue and your budget will likely mostly be covered by intergovernmental transfers and budget support from donors.’ His response? ‘What local revenue? No one pays their taxes.’  

I felt this might be a bit of an exaggeration and asked if we could go talk to people in town (at cafes, etc) to discuss why people weren’t paying taxes (property taxes, specifically). He obliged, and off we went with my translator in tow looking at me as though I was the dumbest person he’d encountered in the past year, at least. Our first stop, a local kiosk, set off a discussion that enlightened me a lot about local government finance (and not the budgets and expenditures, as you’d expect). There were three or four men standing around, drinking coffee and smoking. I asked them if they had paid their property tax this year. No, they had not. Why? Unemployment, so they couldn’t afford it. Fair enough. Then I asked how much they were supposed to pay per year. About 50 euros. Ok, substantial if you don’t have a regular income and rely heavily on remittances from abroad. And then I asked how many packs of cigarettes they smoked in a week. About 10, one man answered. Noting that one pack of cigarettes cost about one euro at the time, I asked if it was feasible to smoke one less pack per week and thus save that money to pay their annual property taxes. Looking at me as though I’d grown three heads, the answer was an empathic ‘Impossible.’

Ok. That was pretty enlightening. It occurred to me that the biggest challenge facing local governments wasn’t necessarily the technical or functional side of service delivery (basically, 99% of what capacity building programmes focus on) but convincing communities that while local government is there to provide essential public services, those services can only be delivered if communities understand their role in the ‘social contract’ of government. Governments can only deliver services if they have the money to do so, and much of that comes from taxes that people pay in their communities.

I thanked the men for their time, farewelled the mayor and picked the brain of my translator all the way back to Pristina – he was a wealth of knowledge. The problem with non-payment of taxes could be divided into three parts, he explained. First, unemployment and poverty really were inhibiting. And in a post-conflict country that had experienced years of oppression, it’s nearly impossible to ask people to forgo small pleasures in life such as their cigarettes or machiatto (the local specialty), even one a week. Second, people had gone more than a decade without access to quality services, and so they were used to the status quo. Third, the general population didn’t understand how the taxes they paid the government translated into benefits for them. Kosovo had lived under socialism for so long as part of Yugoslavia that the give and take between community and local government that we generally take for granted in capitalist, democratic societies was relatively foreign.

I silently added a fourth reason: the demand for quality services by communities wasn’t sufficient to induce local government to take punitive action against property owners who failed to pay their taxes. Real action on the ground came down to demand, which could induce supply.

I should mention that even if property tax compliance was 100%, the local government would never have enough money to deliver services, even with intergovernmental transfers and donor budget support. The local tax system needed an complete overhaul, which is another topic entirely, well beyond my capacity (and, admittedly, interest) to discuss.

So, demand and supply. Beyond increasing the community’s awareness and understanding of what it is that taxes do and why it’s important to pay them (forgoing that one macchiato or pack of cigarettes a week to do so) in order to allow the local government to supply (reasonably) quality services and thus begin to increase the demand for them, this issue becomes even more relevant today. Why? Because donor budget support is a huge factor in the delivery of public services such as health care and education in least developed and lower-middle income countries. And, for many reasons, not least the migrant ‘crisis’ facing major donor countries, that source of support is drying up.

How are local governments to begin to fill that gap? Perhaps surprisingly, or maybe not to those who do this for a living, the answer (at least in part) is actual local economic development. What do I mean? I mean local governments using revenues from local business (ie: registration fees, income tax and property tax) to invest in the further development of the local economy. Normally, revenues from the business community go towards financing other services and are rarely used to develop the economy further. Over time (5-10 years), continued reinvestment will help to grow a sustainable local economy which in turn will increase revenue for local government to use for two things: part for continued investment in local economic development and the infrastructure needed to support it, and the improved provision of services.

This is by no means a magic pill – it’s a long game requiring patience and good planning. It requires understanding local economic demand, encouraging private sector growth through stimulus and incentives, and managIng local resources (such as natural or human resources) responsibly and sustainably.

Back in my Kosovo days, we took donor budget support for granted, and with hindsight I wish we had foreseen the days when budget support would dry up. Obviously the whole point of budget support was to build self-financing local governments not quite so reliant on intergovernmental transfers. The problem was that we failed to see the essential importance of reinvesting local revenues in the local economy, focussing instead on the need for service delivery such as health care, education and sanitation.

As the world of development assistance changes, this is a lesson we need to act on quickly or risk facing a stagnation in local development and fail our commitments to the SDGs.

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