- Laura Wallace
- Published Date:
- May 1997
Peter Heller has done an excellent job of defining the challenges that African countries face in mobilizing tax revenues. He has also nicely encapsulated the IMF’s latest thinking on tax reform.
What I would like to do is to comment both on the challenge of raising tax revenues and on the recommendations—taking the perspective of East and Southeast Asian countries during the 1970s when, I think, their economies more closely approximated those of African countries. However, before I do that, I would like to say a word or two about tax ratios.
In his paper, Heller notes that tax effort in his sample of 29 sub-Saharan African countries has been disappointing—below 15 percent of GDP for two-thirds of the total. He also notes that in almost one-third of the countries, the ratio has been less than 10 percent. This performance is certainly disappointing. However, if one enlarges the sample to include the remaining 13 countries of sub-Saharan Africa, the picture changes somewhat. Averages for 1990–94, derived from the IMF’s Economic Trends in Africa database, show that 7 of these countries had tax/GDP ratios of greater than 15 percent and only 3 (Rwanda, Madagascar, and São Tomé) were at 10 percent or below.
How does Africa compare with East and Southeast Asia? The average unweighted revenue/GDP ratio for 42 African countries was in the 17 percent plus range during 1994, a modest increase over the average for 1980–84. This is just slightly below the 18 percent figure for East and Southeast Asian countries in the 1970s. Moreover, in the early 1990s, at least 18 of the 42 sub-Saharan African countries had ratios that were equal to—or exceeded—the average for East Asian countries in the 1970s and even in the 1980s. In fact, if one takes Asia as a whole and not just Southeast and East Asia, a paper by Burgess and Stern,1 using IMF data, shows that the average tax/GDP ratio for Asia in 1989 was 15 percent, which is less than the average for Africa in the early 1990s.
If we were to compute indices of tax effort using per capita GDP, the structure of the economy, the volume of trade, the size of the informal economy and so forth, which Heller does not do, my sense is that African countries would compare quite favorably with their Asian counterparts, whether in the 1970s or even the first half of the 1980s.
Let me turn now to the structure of taxation. It is certainly true that the average African country derives much more revenue from trade taxes than the average Asian country, about 30 percent in 1986–92 as against 18 percent in Asian comparators. And to some degree, I think this is unavoidable. But the share of direct taxes and indirect taxes in total revenue is broadly similar.
Furthermore, East Asian countries in the 1970s and early 1980s had tax systems that suffered from many of the same distortions and exemptions that one finds in Africa. Whether you look at South Korea or Japan in the 1970s, you have many of the same kinds of problems that we note in the African countries.
The problems of excessively high rates and of too many bands and exemptions also existed in many of the East Asian countries. So here again the difference between African countries and fast-growing East Asian countries is not particularly stark.
Much like East Asian countries in the early 1980s, many African countries have embarked upon serious tax reforms, assisted by multilateral agencies, and Heller has talked about those. In the countries of East and Southern Africa that I know best, the recommendations he proposes are being put into effect. The tariff structure is being simplified and rates lowered. Income tax rates are being cut, and the number of bands is being reduced. Several countries have introduced value-added taxes and begun using presumptive taxes based on either standard or estimated assessments. And a few countries have set up revenue boards to improve tax administration.
So change is occurring, and it follows a pattern that emerged in East Asia only about ten years ago. For instance, if you take the tax reform process in South Korea, it starts around the late 1970s but only gathers steam in the first half of the 1980s. Likewise, in Indonesia, tax reform was implemented between 1983 and 1986. No doubt African countries could usefully accelerate the implementation of new tax measures, but it is encouraging to see that reform is being actively pursued by a large number of countries.
Let me turn now to another aspect of government resource mobilization, which is the level of public savings. What is significant about East Asia’s experience to me is not so much the tax/GDP ratio and revenue effort, but the level of public saving. Most East and Southeast Asian countries were able to raise national savings by several percentage points of GDP through public savings, and the strong correlation that exists between savings rates and growth would suggest that this effort made a substantial contribution to development. For instance, public savings in the late 1970s in East Asian countries ranged from about 1.3 percent of GDP in Thailand to over 8 percent of GDP in Taiwan Province of China.
Public sector savings were the result of careful expenditure management, especially the control over administrative expenditures and subsidies to the parastatal sector. Thus, expenditure management, rather than extraordinary tax effort, was one of the factors responsible for the growth performance of East Asian countries. Expenditure management also ensured that governments gave the requisite emphasis to social sectors and infrastructure building and ensured macroeconomic stability.
African countries, even those with high tax/GDP ratios, are often less successful in containing expenditures and generating public savings. On average, they provide, for instance, 2 to 5 percent of GDP in subsidies to parastatals, and their administrative outlay tends to be high. It is in this regard that there are lessons to be learned from East Asia.
Finally, tax administration in East Asian countries is, and was, much more effective than in African countries for the reasons that Heller has given, and taxpayer compliance has been significantly higher. I tend to give a little more weight to voluntary taxpayer compliance than to tax laws and the machinery of collection.
In East Asia, taxpayer compliance, though far from perfect, as we well know, is greater than in Africa because states are better equipped institutionally to enforce penalties on evaders. Thus, the cost of evasion in East Asia is higher. Perhaps more important is the ability of the state to deliver goods and services so that, on balance, taxpayers feel that their dues are well spent and show a greater readiness to pay taxes.
To summarize, my three main points are as follows.
First, on average, tax/GDP ratios in Africa are comparable to those of East Asian countries in the 1970s. In terms of tax structure and exemptions, East Asia only began introducing significant reforms in the early to mid-1980s, and Africa is following with a decade’s lag.
Second, East Asia does provide significant lessons on the control of current expenditures and the generation of public savings. This might be a higher priority for many African countries than increased tax revenues, which do introduce distortions, as Heller mentioned.
Third, revenue raising in East Asia has been aided by the enforcement capacity of the state, the political commitment to this, and the state’s ability to deliver on the promises of development.
Robin Burgess and Nicholas Stern, “Taxation and Development,” Journal of Economic Literature, Vol. 31 (June 1993), pp. 762–826.