The context for the study stemed from the observation that developing countries are increasingly exposed to external shocks as a result of deeper integration to global markets, as well as global economic and financial instability. While external sources of financing play an important role in absorbing shocks, reliance on externally financed shock absorbers cannot be the main instrument for developing countries to sustain autonomously development expenditures. Strengthening the resilience of tax revenues in the face of external shocks became therefore a priority of tax policy reforms in developing countries. Therefore, it is important to get a better understanding of how tax revenues react to external shocks and explore policy options to make them less sensitive and better predictable. This knowledge can be an input to (i) the modus operandi of any shock absorber mechanism to be adopted by the European Union as it will make more accurate the identification of vulnerable countries, (ii) to the policy dialogue with the partner countries on domestic revenue mobilisation and (iii) to the dialogue with major international partners in this area like the IMF or the OECD to promote converging views among international donors on policy reforms to be supported. The objective of the Study was thus to contribute to an evidence-based policy of the European Commission to strengthen the capacity of developing countries to absorb external shocks and therefore stabilise development expenditures. More specifically, the study aimed at enhancing the understanding of and collect evidence on the vulnerability to external shocks of tax revenues in developing countries and present evidence-based policy options to strengthen the resilience of these revenues. To this extent, the study paid particular attention to both the formal features of the tax systems, and the institutional context in which these systems operate, reflecting the consensus in the literature that tax systems were complex sets of institutions, whose analysis requires mixed approaches.

Governance and Human Development

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