Geographies in Depth

Why taxes will be central to Africa’s development

A view of the central business district is seen from a roof-top in Lagos, Nigeria February 10, 2016.

Image: REUTERS/Akintunde Akinleye

Gargee Ghosh
Director of Development Policy and Finance, Bill & Melinda Gates Foundation
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This article is part of: World Economic Forum on Africa

Regional and global leaders are gathered for the World Economic Forum in Kigali this week to celebrate Africa’s decades-long progress in economic growth and poverty reduction – and to talk about the future.

The continent has seen significant progress since the launch of the Millennium Development Goals. But those gains could be at risk. Falling commodity prices, slowed economic growth and global uncertainty has many governments grappling with how to mobilize the resources necessary to sustain and accelerate progress.

As a Foundation that is deeply invested in partnering with governments across the continent to help improve the lives of the poorest, we are hearing a clear message from countries: that equitably raising and efficiently spending domestic resources should be at the heart of efforts to reduce poverty.

Already, the large majority of financing for essential services such as health and education in Africa comes from countries themselves. In 2012, sub-Saharan Africa tax revenue was 10 times larger than the $51.9 billion in Official Development Assistance the continent received.

But tax systems in most African countries – as in other low-income countries – are underdeveloped. In many countries, tax as a share of GDP has been slow to rise, and in some cases has declined, over the past 15 years.

 Tax revenue to GDP ratio by region
Tax revenue to GDP ratio by region

New revenue, raised equitably and spent efficiently, can enhance the lives of citizens by financing better healthcare, schools, sanitation systems and social safety nets for the poorest. Rwanda is a great example. Through a combination of legislation, stronger administration and more effective taxpayer registration and compliance, Rwanda increased revenues by nearly 50% between 2001 and 2013. This was critical in increasing domestic resources for health: from 2008 to 2013, government spending on health rose from 3.2% of GDP to 6.5%, and per capita health spending doubled from $32 to $70 – while external funding dropped by 15%.

Using tax revenue to invest in human development isn’t only good for individuals and families; it also builds the human capital that fuels growth. Every dollar spent on high-impact health interventions like family planning and vaccines will return $9-$20 to low- and middle-income countries between 2015 and 2035.

Stronger tax systems also have benefits beyond the revenue they generate. Well-designed tax systems can strengthen the relationship between citizens and government – giving citizens a stronger stake in what their government does and a stronger incentive to demand accountability. For governments, taxes are a critical lever for delivering on the promise of social and economic equity.

Development partners should play a role. Efforts such as the Addis Tax Initiative, in which more than 30 countries agreed to double support to poor countries for effective public finance, are a good start. Of course it’s not just about doubling inputs but also about better understanding what works.

Technology may accelerate progress. India, for example, is linking biometrics – fingerprints and iris scans – to unique tax IDs. These technologies can help facilitate tax collection, ensure that social spending reaches the right people, and allow the poor to access services.

But innovation is not a panacea. Ultimately, countries and development partners must do the long-term, hard work of building the mundane institutions of effective taxation systems. How can countries best strengthen compliance among the hard to tax? How can countries strengthen revenue administrations, increase taxpayer morale, address corruption, and build strong internal audit functions? Answering these questions will require leadership and political will.

Effective public finance won’t happen overnight but it can be done. As countries and development partners continue to work together to build a better future, the question of how to equitably raise domestic resources to support human development and prosperity in Africa may be one of the most important we have to answer.

This article is part of our Africa series. You can read more here.

The World Economic Forum on Africa is taking place in Kigali, Rwanda from 11 to 13 May

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Related topics:
Geographies in DepthEconomic Growth
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