How Africa Can Get Rich

Africa too can get rich, as once-poor Asian countries have, but not if governments keep doing what they’ve been doing. Basically, they will have to throw off the stifling tax systems inherited from their prior colonial governments. Certainly, there are other things you can add to that. But, I think we can say, with confidence, that if things stay as they are, nothing is possible.

Tax Revenue/GDP in Africa.

OECD

Much of Africa was once ruled by European governments, including those of France, Germany and Britain. These countries gained their independence in the 1950s, 1960s and 1970s, but still, particularly among those with a prior connection to France, they retained close ties with French influences.

These included various forms of corruption and exploitation – basically sweet deals for entities in France. Several countries, particularly in West Africa, have recently thrown off these French influences – including Guinea (2021), and joined by Burkina Faso (2022), Mali (2021), Chad (2021), Sudan (2021), Niger (2023) and Gabon (2023), all of which were former French colonies.

Along the way, they also inherited the French currency, now the Euro. These are the West African CFA Franc, and the Central African CFA Franc, originally pegged to the French franc in 1945, and pegged to the euro since 1999.

With all this, they also inherited the French tax system. The individual income tax has a top rate of 40%, hit at an income of 20 million francs, or about 30,000 euros. The 35% rate starts at 10 million francs, or about 15,000 euros. The standard rate on Corporate Income is 35%.

Then, there is a payroll tax, totaling a 24.5% combined rate. Plus, a VAT, of 18%. And, a universal tariff of 10%, rising to 20% on “final consumer goods.”

See what I mean about inheriting a tax system from France? But this huge pile of taxes generates revenue equivalent to about 10.8% of GDP. Nobody pays these taxes. I would guess this is almost all illegal evasion – as often happens in these cases, for the simple reason that nobody can pay these taxes and survive, especially in West Africa.

With their euro-linked currencies, most of these countries at least have one half of what I call the Magic Formula – Low Taxes, and Stable Money. Good! But guess what they lack … it’s pretty obvious, right? I do not think there is a single example, in all the world, of any country achieving substantial economic development with a tax system like this. The successful Asian countries all had Low Taxes, at least during their high-growth eras. (You can read about it in my 2019 book, The Magic Formula.)

What usually happens in these situations is that the government has turned the entire population into tax-evading criminals. Even though nobody pays these taxes, the result is that nobody can become very wealthy or successful, before the tax collectors come by for their share. Typically, the way this goes is that the tax collector threatens to impose all the taxes due, plus all the back taxes due, plus fines and fees, unless they receive a big fat bribe. So, the bribe becomes the new tax system, except for big companies (for example foreign mining concerns) that can’t resort to such methods. Now you have made criminals of not only the whole population, but the whole government bureaucracy. Of course, the government never receives revenue from these bribes.

The nice thing here is that, since tax revenue/GDP is only about 11% anyway, we don’t really have to worry much about “losing revenue.” So, we can be ambitious.

I would eliminate, completely, the entire individual and corporate income tax system. The VAT can be seen as a kind of indirect income tax, actually quite similar to the Flat Tax systems popular in the United States. And, the VAT of 18% is already pretty high. Just do it overnight, don’t bother with phase-ins or other delays.

No more income taxes. The US got rich with this strategy, in the nineteenth century, so why not?

Then we have the quite high payroll taxes, of 24.5% in Guinea. Obviously these are mostly not getting paid either. The chart above shows tax revenue/GDP for Guinea, and also, tax revenue/GDP for Guinea excluding income from payroll taxes. Since these are almost the same, it appears that the revenue from these payroll taxes is almost zero. You might cut this to 10%, to start. But, in the case of Guinea, since it appears that almost no revenue is generated from these taxes, I would just eliminate them.

This would leave a VAT of 18% – plus some tariffs and other nontax revenue. A VAT of 18%, just that alone, is actually not such a low tax. If people actually paid it (not so hard since there are no other taxes), in addition to tariffs and nontax revenue, it would probably generate revenue/GDP about the same or higher than governments have already.

But, the real benefit comes from rising GDP. A high-growth economy can experience a tenfold increase in GDP over twenty years – as several Asian countries actually did. If you make the same 11% of GDP on a GDP that’s ten times larger, that means ten times as much tax revenue. Governments and the people get rich together.

If African governments actually did this, they would have a shot at becoming as wealthy as Singapore – or, at least, as wealthy as Malaysia. But, I am pretty sure that, if things stay the same as they are today, nothing will be possible.