The EU and AFD, Combating Inequalities Together

Vulnerable populations have suffered the most from the Covid-19 pandemic. Unlike the 2008-2009 financial crisis, this time developing countries are most affected. "While the richest 40 percent of the world's people have recovered more than 45 percent of their average income losses between 2019 and 2021, the poorest 4 deciles have yet to recover their income losses", said Thomas Mélonio, Executive Director of Innovation, Research and Knowledge at AFD.

AFD Group and the European Union are working hand in hand to reduce inequalities between and within countries – Sustainable Development Goal (SDG) 10 of the 2030 Agenda. For Martin Seychell, Deputy Director General of International Partnerships at the European Commission, "reducing inequality can accelerate progress towards the other SDGs and it is essential to meeting the commitment to 'leave no one behind'.”

In 2017, AFD and the EU started an "Inequality Research Facility". The objective of this program is to conduct research on socio-economic inequalities in order to assist certain countries in implementing appropriate public policies. 

A productive first phase

The first phase of the program (2017-2020), funded with €4 million from the European Commission's Directorate General for International Partnerships (INTPA), has led to 22 projects in 32 countries and the publication of approximately 100 research papers. 

Three types of projects have been carried out: 

• Global projects studying the determining factors and dynamics of socio-economic inequalities, such as Understanding the role of taxation in reducing inequalities in the Ivory Coast, Mali, and Senegal
• City and country projects aimed at supporting partner countries in developing public policies - for example Inequalities in access to urban water services in La Paz, Bolivia
• Projects analyzing inequalities to be able to better respond to them (see the Distributional impact of development cooperation projects in Cameroon, Tunisia, and Colombia)

A second phase focused on four countries

"After three years of research at the global, national and local levels and in close cooperation with our partner countries," continued Thomas Mélonio, "we wish to extend our work through the Extension of this Facility, to make it more directly available to countries that have made combating inequality a central part of their political agenda.”

This new phase (2021-2025), funded with €3 million from the European Commission, will focus on four countries: South Africa, Colombia, Indonesia, and Mexico.

Colombia: working towards a more inclusive tax system

While many Colombians have been able to escape poverty in recent years thanks to growth rates of over 3% per year, their country remains one of the most unequal in Latin America. As part of the Extension process, particular emphasis will be placed on discussions around fiscal policy and public spending. 

This will be addressed using the tax impact analysis methodology developed by the Commitment to Equity (CEQ) Institute. Carried out in close collaboration with the Colombian Ministries of Finance and Planning, "this program will encourage spaces for discussion between the various stakeholders in Colombian society in order to raise awareness and facilitate the implementation of the reforms that the country needs to reduce inequalities," explained Rocco Busco, Head of Cooperation at the EU Delegation in Colombia.

Indonesia: Inequality and environmental sustainability 

As a country of islands, Indonesia depends heavily on the fishing industry and the quality of its marine ecosystem, which is seriously threatened by climate change. To address this issue, Indonesia has created a plan (2020-2024) to develop marine protected areas (MPAs) to promote the conservation of marine ecosystems in specific areas. 

Preliminary research and workshops organized in partnership with local research centers, AFD, and the EU Delegation in Indonesia have underscored the role of MPAs in reducing economic, access, gender, and health inequalities. Further studies and discussions will aim to identify possible policy options for supporting the Indonesian government in deploying MPAs that have an impact on reducing inequalities.

Mexico: labor market, healthcare, and environmental taxes

Mexico has seen positive growth in recent decades, but it has not been inclusive, as evidenced by the prevalence of extreme poverty and inequality in the country. Research conducted during the first phase of the Facility highlighted low wealth sharing and limited social mobility. 

In the coming months, the Extension will focus its research on the links between inequality, the human services system, and environmental taxation. The results of these studies will feed into the policy discussion with the Mexican government, in particular the Ministry of Finance, and will ultimately lead to the implementation of policies with a high potential for reducing inequality.

South Africa: Sustainable Recovery and Just Transition

Despite considerable efforts to improve the well-being of its citizens since its transition to democracy in the mid-1990s, South Africa remains one of the most unequal countries in the world. Research conducted as part of the first phase of the Facility confirmed the importance of spatial inequalities and the role played by the labor market in perpetuating the polarization of society. 

The Extension has two main objectives: to develop an interactive, online tool that will allow researchers, policy makers, and members of the community to better understand local welfare levels in South Africa, and to better understand the externalities of social grants and public employment programs implemented in response to the current crisis.

The role of taxation in reducing inequality in Africa

As the sixth African Union-European Union summit takes place on February 17 and 18 in Brussels (with a side-event organized by AFD on February 14), the challenges related to inequalities continue to be major in Africa. One of the research angles adopted by the Facility to initiate solutions involves taxation. Fiscal policies are indeed a key instrument for combating inequality through the tax component and public spending by governments.

The research project Understanding the role of taxation in reducing inequalities was part of the first phase of the Facility and studied the situation in three West African countries: Côte d’Ivoire, Mali and Senegal. Questions include: who pays taxes and who benefits from public transfers and expenditures? What types of tax instruments reduce inequality ("progressive taxes") or increase it ("regressive taxes")? 

The results of the different research papers show that the tax systems in Mali, Senegal, and the Ivory Coast have a slightly progressive impact on inequality. This comes from a combination of relatively progressive direct taxes, regressive indirect taxes, and progressive public spending on education. 

These findings led to recommendations for strengthening the redistributive power of existing systems, including: expanding the scope of the direct personal income tax; re-examining the impact of VAT and import tax exemptions; increasing the transparency of public spending to maintain willingness to pay taxes at high levels; improving the quality of household survey data; and promoting access to tax data.

The contents of this article are the sole responsibility of AFD and do not necessarily reflect the views of the European Union.