Monday, May 24, 2010

African Economic Outlook 2010: a mixture of hope and failure

By guest blogger Martin Hearson of Action Aid

The African Economic Outlook is an annual publication from the OECD, African Development Bank and United Nations, a bunch of organisation which do not always agree with tax justice campaigners, or indeed with each other! This year’s publication is extremely welcome, because it focuses on domestic revenue mobilisation – raising taxes in Africa – a subject rather dear to our hearts.

“The global crisis has brought poverty reduction to a halt.”

The report begins by exposing the impact of the financial crisis on Africa’s economic development. “Although in the three years before the 2009 global recession Africa had achieved an average annual growth of around 6%,” it says, “in 2009 the growth rate was slashed by 3.5 percentage points to 2.5.” By my reckoning, that means the crisis cost Africa $41 billion in 2009.

Although it predicts that growth in Africa will bounce back, there are stark warnings that “strong and immediate action” is needed “for both climate change mitigation and adaptation,” and that progress towards meeting the Millennium Development Goals is ‘sluggish’.

The report then moves on to its thematic section.

Public Resource Mobilisation and Aid: what’s good?

Although African governments raise 11 times more money from taxation than they receive in overseas aid, much of the tax revenues are concentrated in countries benefiting from oil or other natural resources. Aid income still exceeds taxation in a quarter of African countries, and in half of them it constitutes over a third of government revenue (see chart).


“Many African countries are still heavily dependent on aid,” argues the report. “In the past, donors have devoted little attention to public resource mobilisation. But if a larger share of aid were targeted at this goal, countries would become less dependent on aid in the long run, to the benefit of recipients and donors.”

A fantastic table shows how one dollar (or shilling, or rand, for that matter) spent on tax administration yields anything between 15 and 100 times as much in public revenue.

The report is strong in its analysis of how tax policy and administration could be improved, the need to diversify tax bases, and taking a tough line on the tax concessions offered to multinational companies. It’s worth reproducing in full the summary recommendations:

• Tax reform will bring long term results only if it is visibly linked to a growth strategy.

• Improving tax collection must be accompanied by a general discussion about governance, transparency and the eventual use of increased public resources by the government.

• Proper sequencing of policy reforms is essential. Administrative bottlenecks are such that in the short-run, deepening the current tax base is the only effective policy option. In particular, countries should consider retrenching tax preferences and negotiating fairer and more transparent concessions with multinational enterprises.

• However, developing administrative capacity today is a prerequisite to opening policy options for more progressive tax policies in the medium run.

• In the long run, African countries need to improve the balance between different taxes. Urban property taxes could yield a much higher return if decentralised, as local governments usually have a more direct access to the relevant information.

• Trade liberalisation needs to be purposively sequenced with domestic tax reform. The policy response to declining trade-related tax revenues has to be designed in the context of a broader reform agenda.

• Donors can do more to build capacity in support of public resource mobilisation in Africa. They also need to deliver on their pledges of policy coherence by putting pressure on their own conglomerates to strike decent deals with African nations.

What’s less satisfying?

Did you spot the glaring omission in the summary recommendations? The report contains a discussion of the impact of tax havens in the context of multinational companies, which begins like this:

MNEs may take advantage of the different tax regimes, including tax havens to maximise after-tax profits. One way in which multinational enterprises may try to benefit from their international presence is misuse of transfer pricing, e.g. by artificially shifting taxable profits from high tax jurisdictions to low tax jurisdictions. This happens when firms under- or over-invoice for goods, services, intangibles or financial transactions between entities situated in different tax jurisdictions.

Yet, having identified the use of tax havens for tax avoidance and evasion as a problem, it doesn’t propose any solid international policy solutions. This despite the fact that initiatives such as country-by-country reporting and tax information exchange are being developed by the OECD, one of the authors of the report.

And there is a deeper concern. Perhaps by mistake, the general section of the report devotes several pages to reproducing two indices that rank countries on various aspects of economic freedom – the World Bank’s Doing Business rankings, and the Heritage Foundation’s Index of Economic Freedom. Both these indices quite explicitly award better scores to countries with lower corporate tax rates, an extremely blunt and – in the case of developing countries – potentially damaging analysis of taxation policy. There should be no place for such a one-size-fits-all approach in a report as sophisticated as this. We hope that next year’s AEO will be a little more critical of these types of index.

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