My good friend Ken Opalo has an excellent substack post on the fierce urgency of ending aid dependency in Africa. Ken’s post is inspired by the negative shocks to foreign aid as a result of the “Trump aid cuts” and budget re-prioritizations currently underway in Europe. As Ken is careful to point out, the recent shocks, as significant as they are, are part of a general downward trend, a pattern that has been evident for a number of years. Back in 2018, I wrote a post about the declining significance of foreign aid to Zambia’s overall budget. As I mentioned in that post, and as Ken points out, even though aid’s total significance (as a proportion) has been declining, it has continued to be a non-trivial source of financing for health and education in many African countries. Seen this way, the negative shocks to aid will be catastrophic for health and education systems, at least, over the short to medium term.
Towards the end of his post, Ken sees growth as key to ending aid dependency. He writes: “the first and most important step towards ending aid dependency must be laser-focused attention to [economic] growth. There’s simply no other way to create the fiscal space to absorb aid cuts in the long run…bigger economies will mean more money available to spend on essential public goods and services and less reliance on aid.” I agree on the necessity of growth. Like him I see significant growth as something that can only realistically be achieved over the medium to long run. Meaningful growth is very difficult to achieve overnight.
So what can be done in the short-run? Ken, in passing, hints at a possible short-run solution that is worth emphasizing — the need for African countries to collect more taxes than they currently do.
One of the striking facts about African countries are the low levels of tax collection relative to their economies and relative to other parts of the world. Figure 1 below, taken from the 2024 Revenue Statistics in Africa report, shows the scale of the problem. The figure shows tax-to-GDP ratios for the African continent and other regions of the world. The tax-to-GDP ratio gives us a good idea of how well a country is doing in collecting taxes when compared with other countries.
Figure 1: Average tax-to-GDP ratios for Africa, Asia Pacific, LAC and OECD, 2000 to 2022
What is clear from the figure is that the African continent consistently underperforms other regions when it comes to tax collection. For example, for 2022, the latest year with comparable data, the average tax-to-GDP ratio in Africa was 16% whereas the average for the OECD countries (a group of developed countries) was 34%. This means that the OECD countries collect taxes at twice the rate of African countries! Asia-Pacific countries and Latin America and the Caribbean countries (LAC) all have average tax collection rates higher than the African average.
Consider this back-of-the-envelope calculation: Increasing the tax-to-GDP ratio in Africa from its current rate of 16% to the Asia-Pacific average of 19% or the LAC average of 22% would, all else equal, yield average additional tax revenues of between $80 billion and $160 billion. These numbers are higher than, for example, the total official development assistance the African continent received in 2022! And increasing the collection rate to that of the average for the OECD countries would, all else equal, double tax revenues on the African continent.
So why is Africa’s tax collection rate so low? One hypothesis has it that the tax collection rate is negatively influenced by aid (or in social science speak, the collection rate is endogenous to aid). The presence of aid might blunt some of the incentives for governments to collect more in taxes. Logically appealing as this hypothesis is, the empirical evidence in its support is rather weak (see here and here, for example).
More fundamentally, I believe that tax collection rates are lower in Africa because our economies are generally dominated by extractive sectors that are, in turn, dominated by multinational corporations (MNCs). If there is one thing we know about MNCs it is that they will do everything in their power to reduce their tax liabilities including lobbying for lower taxes, hiring armies of tax consultants, capturing local policy elites, undermining multilateral initiatives at cross border cooperation, etc…For a classic example of the last point, consider the tragic and short-lived history of the United Nations Center on Transnational Corporations (UNCTC). The UNCTC was established in 1975 to act as a global watchman of MNCs especially their activities in developing countries. After making good progress in discharging its duties, the UNCTC was abruptly shutdown in 1992 largely at the behest of developed country MNCs (this book gives a very good account of its short history).
On the capture of local policy elites, consider the bizarre policy of perennially granting tax incentives to MNCs when the evidence shows that foreign direct investment (FDI), especially into the extractives sector, rarely, if at all, responds to such incentives.
Small increments in the tax collection rate, by, for example eliminating tax incentives and other obvious tax loopholes, can immediately yield significant dividends in tax revenues (as per the above back-of-the-envelope calculation).
In the long-run we need economic growth, but in the short-run Africa could cushion some, if not all, of the aid shock by simply collecting taxes at the same rate as peer regions in the world.