Co-financing Community-driven Development through Informal Taxation: Experimental Evidence from South-Central Somalia - Summary

Community-driven development (CDD) has long been embraced by international development partners as a means of delivering public goods and strengthening social capital and cohesion, particularly in fragile contexts. To receive external support, CDD projects often require co-financing from communities through informal taxes – non-market payments that are not required or defined by state law and are enforced outside the state legal system. Co-financing is often incentivised through CDD grants, with the requirement for informal taxes largely justified based on the belief that they will create a greater sense of ownership over projects and increase their sustainability. However, despite being widely embraced by development partners and donors and being incorporated into CDD programmes, there is limited evidence about the impact of co- financing requirements. First, it is unclear whether CDD programmes can incentivise informal revenue generation and local collective action. Second, though it is often assumed that matching grant programmes requiring community contributions will lead to more positive public goods outcomes than external aid alone, there is little evidence of this outcome in practice. Meanwhile, reviews of CDD programmes highlight the risk of elite capture of programmes, while it is plausible that local revenue requirements lead to coercive revenue-raising tactics, with revenue used primarily to benefit local elites. Third, little is known about the impact of requiring co-financing through informal community contributions for state and non-state governance actors. It is not clear whether co-financing requirements serve to ‘crowd out’ other forms of formal and informal revenue-raising, and whether working with informal taxing institutions outside the state negatively affects state legitimacy.