Probe International

May 11, 2010

A number of African leaders are now saying that foreign aid is no longer the only answer to economic development of the continent. Instead, they are calling for reform of the tax system, pointing out that Africa currently has one of the lowest tax-to-GDP ratios in the world.

Speaking at a conference at the World Economic Forum on Africa, South African Finance Minister Pravin Gordhan, Mozambican President Armando Guebuza and African Development Bank President Donald Kaberuka, admitted that the African continent lagged behind most other parts of the world when it comes to tax collection [PDFver here].

The former Rwandan Finance Minister and now African Development Bank President Kaberuka stressed that, although the continent needs to find ways to attract more foreign investments, it must also learn to finance its own operations and development programmes through tax collection.

“Tax to GDP percentage in Africa is still the lowest at only 7 per cent,” he said.

Tax-to-GDP ratio is the ratio of tax revenues to gross domestic product, and is widely used as a measure of the state involvement in national economies. A very low tax-to-GDP makes it difficult for countries to raise funds internally to pay for government operations, forcing them to rely on outside financial assistance such as aid, which hampers public accountability and, ultimately, economic growth.

Reforming the tax system, said Mr. Guebuza, would help to ease the continent’s dependence on handouts from foreign donors.

“We know what we want…we know how to get it,” he said, stressing that a heavy reliance on foreign aid can no longer be the continent’s solution to development.

Other leaders in the developing world have made similar remarks. Late last year, Pakistan’s Federal Minister for Finance and Revenues Shaukat Tareen admitted that if the government fixed the nation’s broken tax system, it would not be forced to accept foreign aid from Western countries. His comments came in the wake of street protests by citizens and heated debates by lawmakers in the country against a $7.5-billion aid package from the US, known as the Kerry-Lugar bill.

Their remarks also echo those of Dambisa Moyo, the former Goldman Sachs economist and author of the last year’s best-selling book “Dead Aid”. Moyo argued that foreign aid is not only ineffective in promoting development, it is an impediment to it. In regards to taxation, she said that foreign aid displaces domestic revenue from taxation—and does so with terrible results.

“Foreign aid programmes, which tend to lack accountability and checks and balances, act as substitutes for tax revenues,” she wrote. “The tax receipts this releases are then diverted to unproductive and often wasteful purposes rather than productive public expenditure (education, health infrastructure) for which they were ostensibly intended.”

The breakdown of the tax system, Moyo wrote, can have serious political ramifications, as “the absence of taxation leads to a breakdown in natural checks and balances between the government and its people.”

Further Reading:

• The EU agrees: No representation without taxation
• Corruption biting the hand that feeds: food aid industry facing tough questions
• How best to help Haiti
• Foreign aid that hurts rather than helps
• Ethiopia aid diverted for rebel arms in 1980s: BBC
• Foreign aid takes another blow—this time in Australia
• Chinese investment good for Africans? Depends on who you ask
• Help Haiti build a real government
• Another foreign aid critic says there is a better way
• Thinking outside the foreign aid box
• Aid’s corrupting influence in Afghanistan should be considered
• Aid we give to the Third World is more harmful than helpful