openEconomy

Developing states need full powers to tax

Some of West Africa's poorest countries observed from the vantage point of a Chinese import motorcycle: State competence cannot be built without the ability to tax; aid agencies' emphasis on bringing down tariff barriers and inward investment by tax-dodging multinationals predictably weakens states
Damian Rafferty
23 October 2011

I spent three months this spring travelling across francophone West Africa on a cheap Chinese motorbike I picked up in Bamako for a few hundred Euros. I traversed 7500 km across some of the economically poorest and culturally richest places on earth. 

All on your own for hours at a time going through countryside, small villages and towns gives you a lot of time to think. One topic that’s unavoidable are customs in both senses of the word.

In rural areas - and most of these countries are predominantly rural in terms of where people live and work - the economy is based on subsistence, barter, and to a small degree sales of cash for crops at local markets or on the roadside to passing travellers. None of this activity, quite naturally and properly, can be taxed.

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So you have to wonder how the government raises revenues. In the cities, large markets, both formal and informal, dominate but again these are mostly in the grey economy: money passes hands without much opportunity for government revenue raising. Income tax is practically non-existent, with many incomes only ever unofficial.

So what does that leave? It used to be the case that governments could raise revenue by operating nationalised industries. But there are not many that have survived the bonfire of structural adjustment programmes. One could argue that few governments ran them that well … But do their supposedly more efficient successors, one wonders, give anything back to the community in terms of decent wages or tax revenue? It’s legitimate to ask whom this efficiency has benefited. I’ll come onto that in a minute.

An administratively relatively simple source of revenues is to get money from import duties. For both the traveller and most Africans this is the most frequent and significant contact with officialdom. Some of the customs posts rank among the most impressive buildings in the region. Others are little more than concrete shacks. Having crossed borders around a dozen times, I can say that the much-vaunted corruption was rare and when it did occur was fairly trivial. 

At each custom crossing point, customs fees are paid by the thousands of lorries that make trade possible in West Africa. For some countries like Liberia and Sierra Leone, they make up around half their non-oil related taxable income. As countries get wealthier and more economically advanced this proportion of tax owed to customs falls dramatically and in South Africa represents a mere 1.2% according to the IMF.

So what happens to a poor country when it borrows money from multilaterals on the condition that it drop duties for imports from rich countries? The first obvious consequence is that its revenues collapse making it even more dependent on aid and loans to pay its civil servants, teachers, police, health workers and to maintain the roads that make wealth possible. The second is that it finds it needs to tax imports from its poorer neighbours more heavily; tit-for-tat retaliation usually means higher taxes for its exports … the regions’ poorest are always hardest hit.

As bad as that would be the other condition that institutions like the IMF and World Bank have traditionally insisted on is reductions to government expenditure. So the teachers  don’t get paid and go on strike all the time (bad for the kids, bad for the future and bad for parents trying to earn a living), the police set up by the roadside and ‘tax’ the lorries going through, the army mutinies as it did while I was in Burkina Faso and health services collapse.

It is monstrous to demand that a country drops tariffs on say cotton in order to protect its own farmers and raise revenue, while US farmers are being heavily subsidized to make their cotton dirt cheap for export. The same goes for food products from the Common Agricultural Policy or for that matter US corn or a thousand other products.

But the good news is that all this pain should and indeed has attracted multinationals to come in and buy up existing going concerns like the once nationally owned breweries; multinationals involved in mining and biofuel production have also benefited. Are they the silver lining in the adjustment programs?

Taking the last one first: while biofuel earns tidy off-set revenues in Europe, it does so at the cost of throwing the subsistence farmers off the land and forcing more people to drift towards cities that can’t cope as it is. Victory?

At least all those mulitnationals are paying corporation tax and contributing that way to state capacity, no? Sadly not. Take SABMiller a South African company that dominates drinks markets across Asia, Africa and Latin America. In Ghana, where it is hard to buy a beer not made by SABMiller, they haven’t paid tax in years. Laughably, they cite competition while ActionAid has accused them of using  a series of legal tax dodges. Or take Glencore, the mining conglomerate in Zambia, where two thirds of the population live in poverty: ActionAid estimates that the company avoided paying $76million of taxes in one year alone.  

In the DRC, corporate irresponsibility is taken to another and deeply sinister level. Those obscure minerals that power our phones and gadgets are extracted in unspeakable conditions. Control over the mines has fuelled excursions from foreign powers, mercenaries and murderous paramilitary groups. Of course the companies deny the claims made in a UN report in 2008, that they know perfectly well where the minerals are coming from and who is benefiting.  The recent passing of the Extractive Industry Transparency Law in the US Congress is welcome in so far as it demands that payments to governments are declared. However, it is still to be put in force and it is not clear how payments to non-government organisations will be handled. Nor is there any  provision for ensuring that the environmental and social costs of mining are addressed. So how hard will it be for the corrupt to circumvent that, one wonders...

The next time you hear someone bemoaning African governments, ask the speaker to explain how the governments of poor countries are supposed to function when the only money they can actually raise is in the form of loans or aid. Cutting aid would be perfectly justifiable but not before countries are in a position to raise their own taxes.

And if you are in any doubt why tax matters, have a look at this table http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP - It is hard to find a better indicator of poverty than low rates of tax as a proportion of GDP. Those countries with the lowest tax burden are generally the poorest and the converse is also true. 

So what should be done? Firstly tax avoidance has to be dealt with urgently and globally. Companies, especially multinationals, need to be held to far higher ethical standards. Secondly, poor countries need help rather than ideology in building a system to raise taxes from their own subjects. Thirdly trade agreements have to stop bullying poor countries into policies that work against them and take account of rich countries’ subsidies. And when that’s done and only then will it be time to talk about turning off the tap of aid.

 

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