Regional and global leaders gathered for the World Economic Forum (WEF) in Kigali, Rwanda, last week to celebrate Africa’s decades-long progress in economic growth and poverty reduction – and to talk about the future. The gathering discussed key policy challenges of the continent that has been witnessing rapid economic development.
Africa has seen significant progress since the launch of the Millennium Development Goals (MDGs). But those gains could be at risk. Falling commodity prices, slowed economic growth, and global uncertainty have many governments grappling with how to mobilise the resources necessary to sustain and accelerate progress. But one message is being heard clearly: 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 ten times larger than the 51.9 billion dollars in Official Development Assistance (ODA) the continent received.
But tax systems in most African countries are underdeveloped. In many countries, tax as a share of gross domestic product (GDP) has been slow to rise, and in some cases has declined, over the past 15 years.
New revenue, raised equitably and spent efficiently, can enhance the lives of citizens by financing better health care, 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 50pc between 2001 and 2013. This was critical in increasing domestic resources for health: from 2008 to 2013, government spending on health rose from 3.2pc of GDP to 6.5pc and per capita health spending doubled from 32 dollars to 70 dollars – while external funding dropped by 15pc.
Using tax revenue to invest in human development is not 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 nine dollars to 20 dollars 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 is 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 to facilitate tax collection; ensure that social spending reaches the right people; and allow the poor to access services.
Innovation is not a panacea, however. 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 will not 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.
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