Moeletsi Mbeki, the brother of South Africa’s President, says that the private sector is key to modern economic development in Africa. But, he says, African leaders and Western donors are holding it back. On the website of his organization, the South African Institute of International Affairs, he argues that:
foreign donors could play a more constructive role than they are doing at present through their current efforts to sustain the political elites and African states with budgetary support and the like.
Instead of giving more money to African governments, Mbeki says donors should providing the expertise to help establish independent financial institutions like credit unions and savings banks and help shield them from political elites.
Moreover, African governments need less power and the private sector more:
Africa’s private sector is predominantly made up of peasants and secondly, of subsidiaries of foreign-owned multinational corporations. Neither of these two groups have the complete freedom to operate in the market place because they are both politically dominated by others – non-producers who control the state. Herein lay the weakness of the private sector in Africa that explains its inability to become the engine of economic development. Africa’s private sector lacks political power and is therefore not free to operate to maximize its objectives. Above all, it is not free to decide what happens to its savings.
African elites have prevented peasants from reinvesting their earnings in machinery to improve their productivity:
Fundamentally, the political elite uses its control of the state to extract the surplus or savings that if the peasant were free to retain they would have invested in improving their production techniques or to diversify into other economic activities. Through marketing boards, taxation systems and the like, the political elite diverts these savings to finance its own consumption and the strengthening of the repressive instruments of the state.
The economic looting of multinational companies after independence means that international investors are wary of investing in Africa:
When the colonialists retreated from the 1950s onwards, these colonial subsidiaries [Western companies] lost their key protector, the colonial state. Before long they, like the peasants, fell prey to the appetites and whims of the new African political elites who controlled the newly independent African states. The lucky ones were nationalized and their owners were therefore paid compensation; the not so lucky ones were ‘privatized’ [confiscated by individual politicians without compensation.]
Moeletsi Mbeki’s comments are in stark contrast to those of Gordon Brown who thinks that simply throwing more at African governments is going to bring prosperity. Mbeki recognises that the West should be helping get more private investment into African and helping improve the institutions that enable business to thrive.
Crossposted from the Globalisation Institute Blog.
Very interesting essay. One might almost take from it a Marxist view that Africa suffers not from too much capitalism but not enough!
I have not heard of this other Mr. Mbeki. Does any body know where he fits into the South African power structure, or if his views have any significant support in the ANC government?
Gee, state-protected corporations piggybacked on imperial forces, gutting traditional land, extracting resources, polluting the water and air, and murdering those who say “enough”. I can’t imagine why the independent African governments kicked them out.
– Josh
Absolutely nothing will change in Africa until marginal income tax rates are no longer pro-starvation confiscatory. Until then, widespread impoverishment and Rwandas will continue to happen.
Shooting all the economists would be more productive than all the lawyers.
Machine Ghost
Nigeria is a seriously screwed up African country. It has vast oil and gas reserves and oil accounts for about 90% of GDP. Income tax rates in Nigeria are progressive from 5% to a peak rate of 25% – i.e. lower than in most western countries. At the lower end of the scale, hardly anyone seems to bother paying. “Pro-starvation” marginal tax rates simply don’t exist there.
So, which African countries have punitive levels of income taxation AND efficient enforcement (both being necessary for your thesis to be valid)?
EG
Pretty much all the sub-Saharan countries. It is not the percentages per se, but the thresholds that the percentages go into effect. Example for personal taxes in Kenya:
30% US$5,646
25% US$4,256
20% US$2,865
18% VAT
Plus export duties, import duties, stamp duties, fringe-benefit taxes, et al..
Businesses pay a flat 30% and foreign subsidiaries a flat 37.5%.
The rates and thresholds become even more absurdly punitive due to “bracket creep” when local currency inflates or when the USD goes down as the countries are largely dependent on commodity exports (priced in USD) and tourism.
So a sad lesson on neo-Keynesian economics, courtesy of the IMF. But they’re “Africans”, so no one really cares.
Machine Ghost
I forgot to add that you do not need “efficient enforcement” for such tax systems to be a massive social disincentive to produce value. My explanation for that is there’s always a vast majority of people who are naturally law-abiding and obey authority, either because they’re ignorant or fearful.
Imagine trying to achieve the necessary economies of scale in the black market producing legitimate worldwide goods without running head-first into or being corrupted by the state/ruling-class.
Machine Ghost
MG,
You said the RATES were pro-starvation, but now apparently concede they aren’t but that the THRESHOLD is the thing.
Well and good, but recall that the threshold is meaningful only in the context of relative cash income. If the threshold for the peak rate of 30% in Kenya (lower than the peak rate in the UK, BTW) is $5,646 as you state, you need to consider how many Kenyans actually earn enough to fall into that bracket. It is NOT the equivalent of a $5,646 threshold in the UK or US.
Here are per capita GDPs for comparison:
Kenya – $1,100 (2004 estimate)
UK – $29,600 (do.)
USA – $40,100 (do.)
It’s highly likely that fewer Kenyans pay the peak rate of tax than do Britons, as a percentage of population: the threshold is 5 times p.c. GDP in Kenya, a bit over 2 times in the UK AND the UK peak rate is higher than in Kenya. Therefore, one might say that the average Kenyan pays a smaller proportion of his gross income in taxation that the average Briton or American.
EG
It’s normal usage to refer to “marginal income tax rates” as meaning both the percentages and thresholds.
But what you and so-called “modern” economists are conveniently overlooking is that there is NO INCENTIVE TO ENGAGE IN VALUE PRODUCTION in any economy with confiscatory tax rates. Especially if you are barely subsisting above starvation already, you have zero incentive and energy to do anything further beyond that. The natural law of supply and demand applies to tax rates just as with any other economic activity.
If you don’t believe it, contrast Kenya’s history up to this point in time to Botswana which now has a population that is 95% less, yet ten times the per capita GDP. It has nothing to do with “relative cash income” and everything to fundamentally do with tax rates. Then look at Rwanda and all the other African countries that have experienced “ethnic cleansings” in the past. War is the only option left to allocate declining resources when society at large is disincentivized to value production.
As long as those living cushy and comfortably in the West continue to rationalize their way around the reality that confiscatory tax rates devalues human life — and in particulary BLACK human life — and act as apologists for the International Monetary Fund, the World Bank and the African Development Bank, Africa at large will continue to be a cesspool.
Machine Ghost
Maybe I should try to explain this another way.
The per capita Gross National Income in Kenya is approximately $400. In Botswana, it is approximately $3430. In the USA, it is approximately $37610.
In Kenya, the first impact of taxation as a consumer is felt with an incredible 18% VAT on top of import duties, et al.. Assuming you’re still motivated to become a value producer after all that, you then face paying an immediate 30% flat tax rate starting on the very first $1 if you decide to run a corporation, or a 20% gradually increasing tax rate on personal income starting on the very first $1.
In Botswana, there is no VAT. Corporate rate is 15% flat, 25% flat for non-manufacturing. The top marginal personal income tax rate is 25% at $21,413. The 20% rate is at $17,398, 15% at $13,383 and 10% at $9,368. The 5% rate hits at $5,353 which is VIRTUALLY THE SAME marginal rate of 30% that Kenyans pay!
In the USA, there is local & state sales tax <= 10%. Corporate taxes are a flat 15% on the first $100K. Top marginal personal income tax rates are 10% at $7300, 15% at $29700, 25% at $71950, 28% at $150150, 33% at $326450. Compared to Australian, Canada, New Zealand and Britain, the thresholds are extremely, extremely broad, one of the major reasons why entrepreneurship flourishes in the USA. So exactly how much of a living standard relative to Botswana or the USA does one expect to garner in the narrow range between $0 and $2865 in Kenya? Even adjusted for purchasing power parity, the $400 is only worth about $1100. That isn't just poverty, thats hell. Realistically no one is paying these confiscatory rates in Kenya and the economy is disincentivizing value production en masse for tax evasion which has the effect of promoting de jure monopolies for economics of scale, especially in conjunction with a corrupt ruling class. And we should be all too familiar the problems that brings. "Rational" (if you buy the moral hazard argument against private finance) tax rates should be a post-response to economic prosperity which is optimal a 0% tax rate, but in Africa tax rates have been pre-set for decades based on economic theories that have never been proven to work in the real world. Machine Ghost
In the USA, there is local & state sales tax at or below 10%. Corporate taxes are a flat 15% on the first $100K. Top marginal personal income tax rates are 10% at $7300, 15% at $29700, 25% at $71950, 28% at $150150, 33% at $326450. Compared to Australian, Canada, New Zealand and Britain, the thresholds are extremely, extremely broad, one of the major reasons why entrepreneurship flourishes in the USA.
MG, several points:
I don’t think it is reasonable to assume that 0% taxation is necessarily the optimal rate. It’s the lowest, but the lowest isn’t always the best.
You have to factor in the real (as opposed to official or nominal) incomes, cost of living, etc. Do you have any idea how much things ACTUALLY cost in African countries?
You conveniently omit the top rate of federal corporate tax in the US, which is 35%.
Corporate tax rates in the UK and Canada are lower than in the US.
EG