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Informal Taxation in Ungoverned Spaces

Consideration of taxation policies and practices in locations often identified as “ungoverned spaces” leads to an important conclusion: classically “ungoverned spaces” frequently contain forms of taxation—of varying degrees of formality—outside the official state apparatus. This article uses examples of informal taxation and tax-like practices, particularly in the case of Nepal, to critically evaluate the definition and framing of “ungoverned spaces” in the modern age. It argues that although empirical evidence of non-government taxation practices remains limited, the fact that they occur at all raises implications for conventional understandings of political order and state building.

Taxation is typically considered the domain of formal state governments. It is one of a series of core functions associated with still powerful Weberian notions of what it means to be, and act like, a state. But what happens in places where formal state governments do not exist, or where they have little to no control?

In recent years, the focus of national security agencies and counterterrorism experts has shifted slightly from failed states to ungoverned spaces.1 As the wording suggests, ungoverned spaces are not simply locations where state authority functions poorly by normative standards, but also where it is altogether absent. As such, ungoverned spaces are seen as lawless, uncontrolled territories where anything goes, and where processes and practices associated with the machinery of government are nowhere to be found.

Significantly, however, spaces understood to be ungoverned are also understood to be “governable.” Some experts suggest that (re)inserting state authority into ungoverned space, by expanding the reach and penetration of government, can control or “fix” the area. Part of that process involves making ungoverned populations “legible,” which can include generating and organizing data on individuals through censuses and forming compacts with societies by implementing tax systems.2 The idea of making ungoverned spaces legible assumes such areas are not already organized in any particular way and that the populations within them are not already paying taxes.

The purpose of this article is to critically examine the idea of ungoverned spaces by looking at informal taxation, defined by tax-like payments that (1) can be made to a range of actors, and (2) fall outside conventional legal definitions of what constitutes a tax. Informal taxation is an emerging subject within [End Page 39] development studies and political science. So far, it has received relatively little attention from both scholars and policymakers (although there are some signs that this is changing).3 But while empirical evidence remains limited, enough exists to suggest that many people around the world pay informal taxes to actors other than formal state governments.

The economic and political implications of informal taxation are not yet fully clear, but nonetheless raise important questions about state-building and political order, particularly in places where power and authority are violently contested. Given the knowledge gap, this essay asks: what does the phenomenon of informal taxation tell us about the everyday realities of governance in so-called “ungoverned spaces”? Drawing primarily on recent research by the Secure Livelihoods Research Consortium (SLRC), the paper argues that informal taxation challenges the notion that ungoverned spaces are blank slates. Rather, the reality of informal tax demonstrates that even where formal state governments lack authority or reach, other forms of political organization exist, often with significant implications for state development.

This article proceeds by exploring the idea of informal taxation in greater depth, drawing on examples of non-government taxation across a range of conflict-affected situations. It then highlights relevant findings from new empirical research in Nepal before offering concluding observations.

Taxation: Not Just for Governments

Established in 2011 by the UK Department for International Aid with the aim of improving understandings of service delivery and livelihoods in conflict-affected places, the SLRC is a six-year research program spanning eight countries.4 As part of the program’s work on livelihoods and economic recovery, researchers have examined taxation in fragile or predatory environments. This work finds motivation in a desire to learn more about the governance of economic activity in conflict-affected situations. In such settings—and particularly during phases of post-conflict reconstruction—standard recovery interventions typically attempt to increase human capital (for example, though vocational training and knowledge transfer) or boost productivity (through improving access to agricultural inputs or financial credit). However, the way in which people make a living, and the question of whether they successfully recover following crisis, depends not only upon the agency of the individual, but also the nature of their surrounding institutional environment.5 Thus, the practices of others within a community, particularly those in positions of relative power, shape processes of accumulation at the micro level.

These “others” are not necessarily actors associated with the formal state government, and their practices are not always officially sanctioned. In a literature review of the relationship between tax and livelihoods published jointly by SLRC and the International Centre for Tax and Development (ICTD), researchers found that non-government actors often informally enforce taxes or tax-like payments.6 Cases of this are evident worldwide, but particularly in low-income and conflict-affected environments that are also more likely to be considered “ungoverned.” [End Page 40]

Of course, not all cases look or function the same way.7 At one end of the spectrum are the brutal, extortive practices of insurgents and poorly disciplined government forces, as documented by Oxfam in the eastern region of the Democratic Republic of Congo (DRC).8 In the DRC, taxation takes the form of violent extraction in a fairly straightforward way. Impoverished communities become sources of revenue for armed groups, receiving very little, if anything, in return. These communities do not have much negotiating power or room for maneuver with those demanding payment. At the other end of the spectrum are quite well organized non-government regimes, such as Hamas in the Palestinian territories or Hezbollah in Lebanon. Such regimes may impose taxes on local populations and, in return, provide public services, sometimes alongside the formal state. In some cases, populations may view non-government regimes as more legitimate forms of authority relative to de jure government.

Somewhere in between these two extremes lies a wide range of cases, in which non-government actors provide some form of basic public goods in exchange for tax payments. Some of these actors demonstrate an explicit militant orientation, such as the Liberation Tigers of Tamil Eelam (LTTE) in Sri Lanka, the Taliban in Afghanistan, and Al-Shabaab in Somalia. Others may be more customary or community-based in nature, although the two dynamics are not mutually exclusive. Drawing on household data from eleven countries, Ben Olken and Monica Singhal have found that community-based informal tax systems, which are used to finance community goods such as schools or roads, tend to be widespread in rural areas where more formal systems of provision are lacking.9 The authors observe that population compliance is often secured through mechanisms of social sanction—including peer pressure, public shaming, and community ostracism—and estimate that informal tax burdens typically amount to approximately 15 percent of total household tax expenditure.

However, informal taxation does not always benefit local populations. For instance, in addition to imposing a 10 percent blanket tax rate on all economic activity, the Taliban have also attempted to co-opt zakat, an Islamic religious tax placed on relatively wealthy households (generally a voluntary payment in modern societies). Subsequently, resources are redirected away from local communities rather than redistributed among the poor;10 there is evidence ISIS has pursued similar methods in Syria.11 Furthermore, in some cases levied taxes fail to result in services delivered. In these cases, the link between taxation and public goods provision—regardless of the in/formality of the bargain—is neither automatic nor linear. Taxes may only produce public goods under certain circumstances, such as when the collecting agent is sufficiently incentivized to use tax revenue to fund service delivery.

A formal definition of taxes would not classify the above cases as examples of taxation, just as a state-centric view of governance would not see territories controlled by forces other than the government as governed. Many analysts would frame these payments simply as bribery or corruption. But, as the evidence suggests, payments to non-government actors tend to resemble taxes inasmuch as they form part of a fiscal compact between a principal and an agent. In many (but not all) cases they do not follow the logics of market exchange, defined by straightforward transactions of capital in exchange [End Page 41] for goods or services. These are payments made as a result of the exercise of political power, social sanction, or armed force, and they connect the paying individuals to local structures of governance regardless of whether the formal state is involved.

In short: the kinds of processes, functions, and relationships we might normatively associate with governments can also occur in spaces where there are no governments. This runs counter to mainstream ungoverned space narratives, which tend to see areas lacking government control as breeding grounds for terrorism that generate “all manner of security problems, such as civil conflict and humanitarian crises, arms and drug smuggling, piracy, and refugee flows.”12 The implication is that such problems arise because government is absent, and that there are subsequently (1) no formal rules, checks, or balances to limit the emergence of public “bads”; and (2) no structures in place to provide public goods. But governance is not just about governments, and in many of the world’s spaces labeled “ungoverned,” political orders of various spots and stripes exist.

Taxation and Governance Beyond the State in Nepal

Despite the examples listed above, there is relatively little known about informal taxation. Much of the evidence tends to be anecdotal or based on quite specific snapshots. Aside from learning that informal taxation happens across a range of different contexts, we lack an in-depth understanding of how this kind of taxation works, what it means for those making payments, and the ways in which the process shapes relationships between citizens, states, and other forms of authority.

Two new studies help address this knowledge gap. Undertaken as a joint project between SLRC and ICTD, researchers used mixed-method tools to generate empirical data on the full range of taxes people pay (including those which may be considered informal), the effects of tax expenditure on livelihoods, the services received in exchange for payment, and people’s relationships with the formal state. Although research was carried out separately in two post-conflict, low-income countries—Nepal and Sierra Leone—this section draws solely on the Nepal analysis and findings, which the SLRC published in January 2016.13

Nepal is not the archetypal ungoverned space as characterized by conventional policy discourse. It is rarely listed alongside more frequently identified ungoverned areas, such as the Pakistan-Afghanistan borderlands, the Sahel region, and parts of the Horn of Africa. Nonetheless, the country displays certain normative characteristics of ungoverned space, including: a large and remote rural population; porous external borders; and weak formal state penetration in many parts of the country. These aspects have proven sufficient for some scholars and policymakers to assign Nepal the ungoverned space moniker, particularly in relation to its long border with India.14

Yet, while many analysts do not view Nepal as a threat to the global community, another key criterion for designation of “ungoverned space” status, it is certainly true that the formal state government is largely absent from many [End Page 42] people’s lives. This disconnect reflects the fact that Nepali households typically pay very little in the way of formal taxes to the government. Survey data from more than one thousand households spread across seven sites in two districts, Sindhupalchok and Jhapa, reveal that formal taxation comprises, on average, less than one percent of total annual household expenditure.15 Additionally, households normally pay as much in informal tax to non-government actors as they do in formal tax to the government. The majority of informal taxes go to religious organizations, a practice which blurs the boundaries between taxes and donations. Indeed, while one might assume these payments are completely voluntary, in many cases they are the result of an institutionalized social obligation to contribute to community welfare. Survey data show that just under half of all those who made a religious donation reported that failure to do so would result in “coercive consequences,” such as social exclusion or peer pressure from others in the community. Thus, the threat of social sanction often secures compliance with donation demands, raising questions over the voluntary nature of such payments.

Weak levels of formal public goods provision also reflect the absence of the Nepali government. When asked about formal taxes paid to the government, fewer than 10 percent of those surveyed believed the revenue was used for the benefit of the community most of the time.16 The equivalent figure for taxes and tax-like payments made to non-government actors was around 45 percent. Qualitative research conducted as part of the same study supports the idea that formal tax payments do not necessarily convert into public goods. Instead, various forms of community-based or private provision have emerged, from the establishment of street lighting to out-of-pocket payments for electricity supply. In one of the research sites, for example, a community youth group had recently installed a row of street lamps. In order to finance the project, members solicited voluntary contributions from village residents and, by working through an influential community leader called Bondu, secured agreement from the local government office that it would pay half of the cost. The new lights would not exist without the youth group’s original initiative. Likewise, irregular supply of public electricity essentially forces households and businesses to invest in private generators, leading many to perceive the expenses required to do so as a form of taxation.17

The story of local taxation in Nepal highlights how the political economy of local governance actually works. This, in turn, reveals a stark disconnect between the formal state and communities across the country. Constituents often perceive local government as existing only in form rather than function. Although people can certainly see it, for many the formal state means little more than an office staffed by disconnected government officials, with whom interactions rarely take place.

Instead, to get things done—such as improving maintenance of public services or securing inclusion in livelihoods assistance programs—Nepali citizens often work through informal channels. Members of political parties, vying for control of state resources, are usually seen as those with the most powerful connections and highest political influence. As a result, individuals seek to forge connections with those actors, often bypassing formal local state [End Page 43] structures altogether. Research by The Asia Foundation confirms this picture, outlining a series of political economy factors that help explain why and how the Nepalese state is generally so dysfunctional at the local level.18 As their report notes, formal attempts to empower local government, such as the 1999 Local Self-Government Act (LSGA), have typically fallen short of promoting effective decentralization: “The LSGA [has become] a repository of unfunded mandates rather than an enabling instrument for local bodies to take control of their affairs.”19 At the root of this failure are: issues of chronic under-resourcing vis-à-vis local government budget and staffing; the subjugation of formal rules and procedures to informal practices and relationships; and a long history of state-society disconnection.20

Yet, despite limited capacity of the formal state government to regulate local, everyday affairs in Nepal, there very much is a system of local governance in operation. The parameters of this system stretch beyond the limits of the formal state, taking in various forms of non-government public goods provision, privatized service delivery, and influential community-based figures and actors. While these processes and organizations exist outside government, they nonetheless constitute elements of political order. Taxation creates a lens through which we can understand how that political order works, and what kind of shape public goods provision takes. More broadly, it is clear from this research that Nepal is far from being an ungoverned space, despite limited formal state control over everyday economic and political life.

What Informal Taxation Means for the Idea of Ungoverned Space

As mentioned in the introduction, the implications of informal taxation—a practice that takes place around the world—are not yet fully clear. But the fact that informal taxation is a reality at all raises questions about how to understand the formation and nature of political order. More specifically, informal taxation challenges the conventional Weberian idea that ungoverned spaces lack governance in their entirety. Rather, informal taxation demonstrates that where formal state governments lack authority or reach, other forms of political organization exist. Moreover, they often constitute places where the classic dynamics of state formation—including revenue generation, fiscal compliance, and public goods provision—continue to play out, albeit along slightly different tangents.

Ultimately, the idea of “ungoverned space” contains the same conceptual limitations previously leveled at certain aspects of the state-building policy agenda. Other SLRC research, for example, shows that dominant approaches to building state capacity in post-conflict situations are often rooted in a tendency to identify missing pieces of the (normative) puzzle and then transplant them.21 That is, conventional state-building policy is typically far more concerned with what is not there—in terms of organizations and institutions—than seeing, and working with, what is there in the first place. This is one of the central arguments made by the literatures on hybrid political orders and “working with the grain” approaches.22 The same tendency can be said of the ungoverned space [End Page 44] narrative, based as it is on the idea that particular formal structures and mechanisms are lacking, and that normalizing the situation demands their insertion.

Much of the time the same functions performed by formal state governments exist in places that lack formal state government control, even though their forms might appear different. Just because a given population pays little or nothing in the way of formal tax, for example, it does not necessarily follow that the population is untaxed. Understanding this differentiation brings the international community one step closer to a state-building agenda that reflects, rather than dismisses, local realities.

Richard Mallett

Richard Mallett is a Research Fellow at the Overseas Development Institute (ODI). He currently works on ODI’s Secure Livelihoods Research Consortium, which focuses on livelihoods, service delivery, and state-building in conflict-affected areas.


1. Morten Boas, “Crime, Coping, and Resistance in the Mali-Sahel Periphery,” African Security 8 (2015): 300; Richard Mallett, “Beyond Failed States and Ungoverned Spaces: Hybrid Political Orders in the Post-Conflict Landscape,” eSharp 15 (2010): 73.

2. James C. Scott, Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (New Haven: Yale University Press, 1998).

3. OECD, “Fragile States 2014: Domestic Revenue Mobilisation in Fragile States,” Organisation for Economic Cooperation and Development, 2014, 45.

4. These eight countries include: Afghanistan, the Democratic Republic of Congo (DRC), Nepal, Pakistan, Sierra Leone, Sri Lanka, South Sudan, and Uganda.

5. Edward Carr, “Between Structure and Agency: Livelihoods and Adaptation in Ghana’s Central Region,” Global Environmental Change 18 (2008): 689–99; Frank Ellis and Ntengua Mdoe, “Livelihoods and Rural Poverty Reduction in Tanzania,” World Development 31 (2003): 1367–84.

6. Oliver Lough, Richard Mallett, and Paul Harvey, “Taxation and Livelihoods: A Review of the Evidence from Fragile and Conflict-Affected Rural Areas,” Secure Livelihoods Research Consortium/International Centre for Tax and Development, 2013.

7. Parts of the discussion below draw on Lough, Mallett, and Harvey, “Taxation and Livelihoods.”

8. Steven Van Damme, “Commodities of War: Communities Speak Out on the True Cost of Conflict in Eastern DRC,” Oxfam, 2012.

9. Benjamin Olken and Monica Singhal, “Informal Taxation,” American Economic Journal: Applied Economics 3 (2011): 1–28.

10. Antonio Giustozzi, “Negotiating with the Taliban: Issues and Prospects,” The Century Foundation, 2010; Zarah Batul Nezami and Paula Kantor, “Afghanistan Livelihood Trajectories: Evidence from Faryab,” Afghanistan Research and Evaluation Unit (2010); Vanda Felbab-Brown, “Kicking the Opium Habit? Afghanistan’s Drug Economy and Politics since the 1980s,” Conflict, Security and Development 6 (2006): 127–49.

12. Angel Rabasa et al., Ungoverned Territories: Understanding and Reducing Terrorism Risks, RAND Corporation, 2007.

13. Richard Mallett et al., “Taxation, Livelihoods, Governance: Evidence from Nepal,” Secure Livelihoods Research Consortium, 2016.

14. David E. Thaler et al., “Improving the U.S. Military’s Understanding of Unstable Environments Vulnerable to Violent Extremist Groups: Insights from Social Science,” RAND Corporation, 2013, 44; Jeffrey Reeves, Chinese Foreign Relations with Weak Peripheral States: Asymmetrical Economic Power and Insecurity (Abingdon: Routledge, 2016), 12; US Department of State, “Country reports on Terrorism 2009,” United States Department of State Publication Office of the Coordinator for Counterterrorism, 2010, 156.

15. Mallett et al., “Taxation, Livelihoods, Governance,” 20.

16. Ibid., 23. [End Page 45]

17. Richard Mallett, “Tax, Electricity and the State,” World Bank Future Development, April 9, 2014, http://blogs.worldbank.org/futuredevelopment/tax-electricity-and-state.

18. The Asia Foundation, “Political Economy Analysis of Local Governance in Nepal with Special Reference to Education and Health Sectors,” The Asia Foundation, 2012.

19. The Asia Foundation, “Political Economy Analysis,” 1.

20. Mallett et al., “Taxation, Livelihoods, Governance,” 9–10.

21. Lisa Denney and Richard Mallett with Ramatu Jalloh, “After Ebola: Why and How Capacity Support to Sierra Leone’s Health Sector Needs to Change,” Secure Livelihoods Research Consortium, 2015.

22. On hybrid political orders: Volker Boege, Anne Brown, and Kevin Clements, “Hybrid Political Orders, Not Fragile States,” Peace Review 21 (2009): 13–21. The “working with the grain” approach suggests that, across all kinds of country contexts, development and governance practitioners should engage with the way things actually are on the ground, rather than in accordance with some normative idea of how they should be. For more, see Brian Levy, Working with the Grain: Integrating Governance and Growth in Development Strategies (Oxford: Oxford University, 2014); David Booth, “Introduction: Working with the Grain? The Africa Power and Politics Programme,” IDS Bulletin 42 (2011): 1–10. [End Page 46]