As they are preparing to host their historic guest, President Barack Obama of the United States, the Revolutionary Democrats are faced with converging economic tides. Locally, they are finalising the second generation Growth & Transformation Plan (GTP), which is expected to be as ambitious as its predecessor. On the international front, the issue of financing the upcoming Sustainable Development Goals (SDGs) has thrown the resource ball back to developing countries, including Ethiopia. The latter has to do with the latest agreement on “going beyond aid”.
At the tangent point resides local resource mobilisation. Representing the resources that states generate from their own economy, the issue of domestic resource mobilisation has become the hotspot in the global development debate. It is debatable as it relates to the nature, structure, institutional arrangement, functions and adaptability of states. This, of course, is not to mention the considerable link that political scientists draw between taxation and democratic accountability.
In closely following the lines of arguments that the EPRDFites follow on the issue, one would realise that it is one of the points that they see as edges of poor performance. Even by the measure of Sub-Saharan Africa, the state, under the leadership of the Developmentalists has failed, time and again, to meet its tax generation targets. At 12.5pc, the tax to gross domestic product (GDP), an overused index within the varying clubs of the ruling elite, remains way lower than the regional average of 17.5pc. The plan to push the rate up to 15pc between 2010 and 2015 failed to succeed.
It partly is because of this poor performance that the EPRDFites were seen rather silent on the side events of the Third FfD (Financing for Development) Conference that discussed domestic resource mobilisation. Even when they spoke, they preferred to focus on what they have managed to do over the past two decades. It takes no extraordinary intelligence to see that this is their way of admitting that they have not done enough to stand confident.
This was glaringly evident from the facial expressions of the officials, both from the Ministry of Finance & Economic Development (MoFED) and the Prime Minister’s Office, on one of the side events, held at Elilly Hotel, where a Rwandan official shared his country’s experience with regards to online tax compliance – 100pc in case of the formal sector and 62pc when it comes to micro and small businesses. Certainly, there is so much for the EPRDFites to be disappointed about when it comes to their performance.
According to the World Bank’s Doing Business Index, tax compliance is a costly and time-consuming process in Ethiopia. Rated at the 112th place, out of 189 economies, Ethiopia is at 69.1pc range from the frontier score. On average, according to the 2015 Index Profile, firms make 30 tax payments. Compliance – including filing, preparing and paying – takes firms an average of 306 hours. And firms pay an average of 31.8pc of their profits as taxes.
The whole thing, however, could not be separated from the context. Historically, Ethiopia is a country where tax is considered as an imposition from the state. The culture of compliance has been very low, both under the monarchical regimes and the pseudo-socialist military dictatorship. In contrast, the tariff rate way alarmingly high.
Of course, partly, the whole issue has to do with the structure of the economy. With smallholder agriculture being the mainstay of the economy, the tax potential was also limited. Non-tax resources collected from land resources were very small. Complemented with the small size of the private sector, the whole issue of tax collection was contentious. Institutionally speaking, therefore, the tax regime was largely extractive.
It is this very system, and attitude, that the Revolutionary Democrats inherited as they overthrew the Dergue regime. And they seem to have rightly understood that the issue will remain to be an uphill battle for a long-time.
What followed, then, was an effort to reduce the tariff rate and reengineer the tax system. Over the past two decades, therefore, the whole issue has been on strengthening the institutional structure of tax collection, putting in place a functional tax regime with defined policy prerogatives and effective laws, building the human capital base, integrating the whole system and automating the tax collection system.
It partly is due to this effort that the current tax to GDP ratio was achieved. From the look of things, it seems that the institutional consolidation step has largely taken root. This is a positive thing for the whole economy.
Nonetheless, the era has also shown the policy and political orientation of the EPRDFites when it comes to tax collection. If one is to place them in the spectrum of the tax debate, they obviously fall to the left of the aisle. Their belief is to tax large and formalised businesses as much as possible, and use the resources to build the essentials of development. In other words, they seem to focus on optimising the collection from the existing tax base while remaining cautious of loopholes.
True, optimising tax collection from large and formalised businesses matters. However, it leaves out much of the taxable potential of the economy untapped. And according to some researches, this untaxed potential could reach from 60pc to 75pc. Indeed, this is a huge potential to just forgo.
Needless to say, tapping this potential demands for the state to be creative. It needs to understand the potential, the form it exists and the best way to tap it. No redistributive orientation of taxation could fulfil this purpose.
Politically speaking, the issue entails a shift from thinking at the firm level to thinking at the economic level. An economy expanding at an average of 10.1pc for over 12 years means that the untapped taxable potential has been growing in its own way. Yet, such taxable potential could not be exploited using the same political and policy attitude. A structural shift in thinking is imperative.
Both policy and politics ought to shift to ways of expanding the tax base. It is only by bringing more of the taxable potential of the economy into the tax regime that a sustainable domestic resource mobilisation regime could be built. In the parlance of finance, then, the shift should be towards horizontal growth than a vertical one.
As much as this is essential, it is not sufficient. The whole tax collection system also needs modernisation. In this regard, the speed at which the policy and political machine is moving is slower than the desired level. Hence, a sense of urgency ought to be infused within the state’s machinery so that modernisation could be facilitated in favour of better, conducive and convenient tax collection.
All this, however, is not to discount the importance of human capital development and institutional reforms. The efforts in these aspects ought to be conducted faster than they have been in the past. After all, the demand for resources is growing very quickly and the resource mobilisation aspect ought to do a speedy catch-up.
In hosting the President of the most powerful country in the world, therefore, the EPRDFites could not discount the fact that the converging tides of domestic resource mobilisation need their attention. The hype of hosting the most powerful person on the planet will eventually subside, and the economic needs will be apparent. It is on how they will act towards these needs that much of the state of the economy they oversee, and hence the politics, will rely.
Leave a Reply