Friday, June 11, 2010

OECD report calls for radical tax reform across Africa

Stephen Marks - 2010-06-10, Issue 485

The OECD’s latest annual report on African economic development presents its findings on the economic performance and prospects of growth on the continent. Stephen Marks reflects on the report’s call for taxation reforms, and suggests a need for more 'effective, efficient and fair taxation in Africa’, to alleviate aid dependence and vulnerability to global financial downturns.

A call for a crackdown on tax abuses and loopholes across Africa, with an end to tax preferences for big corporations, a crackdown on transfer pricing rackets by multinationals and fair and transparent taxation on extractive industries – not an agenda many would expect to come from major global economic institutions in the Global North.

But these are all among the main action points recommended in the Organisation for Economic Co-operation and Development’s (OECD) African Economic Outlook (AEO) 2010, launched this week in Abidjan at the Annual Meetings of the Boards of Governors of the African Development Bank (AfDB) and the African Development Fund (ADF).

The AEO finds that the global crisis has brought a period of relatively high economic growth in Africa to a sudden end: Africa’s GDP growth was slashed from an average of about 6 per cent in 2006–2008 to 2.5 per cent in 2009. Given the pace of population growth this means that growth of per capita GDP came to a near standstill. Average growth is expected to rebound to 4.5 per cent in 2010 and 5.2 per cent in 2011, although the recession will leave its mark.

Yet, according to the report most African countries were able to absorb the shock and, in some cases, to pursue expansionary fiscal and monetary policies, due largely to past fiscal prudence and disinflation. The report also finds that Africa’s strengthening economic ties with Asia helped cushion the impact of the economic slowdown on the region. It also credits the fact that Africa was able to count on timely support from the African Development Bank and the International Monetary Fund (IMF), as well as from OECD countries in the form of Official Development Assistance (ODA).

The report includes detailed regional and country-by-country breakdowns of the impact of the global slowdown. It finds that southern Africa, which was hardest hit in 2009, will recover more slowly than other regions with an average growth of almost 4 per cent in 2010/2011. East Africa, which best weathered the global crisis, is projected to again achieve the highest growth with an average of more than 6 per cent in 2010/2011. North and West Africa should both grow at around 5 per cent and central Africa at 4 per cent during the same period.

In 2009, Africa’s export volumes declined by 2.5 per cent and import volumes by about 8 per cent. Sectors such as mining and manufacturing were particularly hit by the fall of commodity prices and global trade in goods and services. Other sectors, notably non-tourism services and agriculture, were more resilient. In fact, in most African countries the agricultural sector benefited from good harvests due to favourable weather, although in some countries bad harvests worsened the effect of the global crisis.

All this, the report concludes, reinforces the need for Africa to reduce its dependence on external flows, and rely more on mobilising domestic resources for development. Here, it argues, taxation is key. And there is a wide variation in the ability of different African states to raise tax revenue.

In 2008, annual taxes per capita ranged from between US$20–40, in Burundi, Guinea-Bissau, Democratic Republic of the Congo, Sierra Leone and Ethiopia, to US$4,866 in Equatorial Guinea, and US$11,725 in Libya. Some countries collect as little as half of what would be expected, given their living standards and economic structures, while others collect two to three times what is expected. In particular, resource-rich countries have made little effort to broaden their tax base. By contrast Kenya, Morocco, Ghana and Cape Verde have shown that it is possible to collect taxes effectively from diversified sources.

Low income countries in Africa still collect less than 15 per cent of GDP in taxes while upper-middle income countries collect 35 per cent, almost on par with OECD countries. Resource-related taxes have increased from 5 per cent to 15 per cent of GDP over the last 15 years. In Equatorial Guinea alone, over 95 per cent of taxes collected come from natural resources.

More effective, efficient and fair taxation in Africa, through broadening the existing tax base, would help reduce aid dependence and help insulate Africa from future shocks in the global economy. And this is where the radical tax agenda comes in. Policy options recommended include cracking down on fraud and evasion, removing tax preferences, particularly for large corporations and traders, dealing with abuses of transfer pricing techniques by multinationals and taxing extractive industries more fairly and more transparently.

As the report also notes, this agenda would require cooperation from the wider OECD membership – surely something of an understatement.

The 2010 AEO findings will be debated by African ministers and CEOs of companies investing in the region at the 10th annual International Economic Forum on Africa, held on 11 June at the French Ministry of Economy, Industry and Employment.

The 2010 AEO covers economic, social and political development in 50 of the continent’s 53 countries. It is published jointly by the African Development Bank (AfDB), the OECD Development Centre and the United Nations Economic Commission for Africa (UNECA), with financial support from the European Commission and the Committee of African, Caribbean and Pacific Group of States (ACP).

The whole report, including specific country performance, can be found online at African Economic Outlook.