The Time is Now: Building a human economy for Africa | Economic Inequality | Taxes

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Africa faces economic challenges not seen for many years. Growth is slowing and commodity prices have fallen. Inequality is high and growing fast in many countries. Africa’s greatest natural resource, its young people, risks being squandered. Africa is losing billions to corruption, poorly negotiated deals and tax dodging. Citizens are becoming more outspoken and more active – unhappy with the deals their leaders are striking. Leaders must listen to their people. They must crack down on tax dodging and maximize progressive revenues to invest in the classrooms, clinics and crops that will create a more human economy for Africa.
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  OXFAM BRIEFING PAPER 10 MAY 2016 www.oxfam.org  Children attending school in Northern Ghana, December 2015. Northern Ghana has poverty levels two to three times higher than the national average. The region is covered by dry savannah land and lacks key infrastructure. Photo: Adam Patterson/Oxfam THE TIME IS NOW Building a human economy for Africa  Africa faces economic challenges not seen for many years. Growth is slowing and commodity prices have fallen. Inequality is high and growing fast in many countries. Africa’s greatest natural resource, its young people, risks being squandered. Africa is losing billions to corruption, poorly negotiated deals and tax dodging. Citizens are becoming more outspoken and more active – unhappy with the deals their leaders are striking. Leaders must listen to their people. They must crack down on tax dodging and maximize progressive revenues to invest in the classrooms, clinics and crops that will create a more human economy for Africa.    2 THE TIME IS NOW  Africa faces tougher times than we have seen for many years. Commodity prices have fallen rapidly and are set to stay low. As recently as 2012, Zambia could borrow dollars more cheaply than Spain. 1  Those days are gone, with average rates now at 10 percent. 2  Debt levels are already very high in some countries. Donors are distracted by the refugee crisis on their shores. Governments have spent a lot in recent years, much of it on badly needed infrastructure, but this means many governments are running significant deficits.  Against this backdrop, Africa’s largest, best-educated generation is coming of age. By 2025, half the continent’s people will be under the age of 25. Building on the theme of this year’s World Economic Forum on  Africa, Oxfam believes that these young women and men are by far  Africa’s greatest natural resource. They will lead the continent for the 21 st  century. Investing in them, and building the economies that can support them with jobs and opportunities, is paramount. It is clear that the future external trends are far less benign than those of recent years. Yet Africa is blessed with huge natural resources, human and physical which if used wisely can build strong and resilient societies and economies that will face up to and overcome problems, and create better futures for the next generation. But in order to do this, African governments have to be far more strategic, wise and forward-looking in how they spend their increasingly limited resources. The growing gap between rich and poor across Africa Inequality is harming the ability of growth to reduce poverty and deliver shared prosperity in Africa. It is preventing the emergence of a new middle-class. Instead, the benefits of economic growth are all too often accruing to a small minority. Between 2003 and 2009, Nigeria experienced positive economic growth, yet poverty increased and everyone other than the richest 10 percent experienced a fall in share of the national consumption. 3  With growth slowing, the need to tackle inequality is vital. It is vital to providing the opportunities needed for the millions of young people across the continent. The IMF has calculated that if African nations were to reduce their inequality levels to the same as those seen in ASEAN countries, this would add almost one percent to GDP growth, the equivalent of closing the infrastructure gap between the two regions. 4  The first priority is therefore to tackle the growing inequality crisis in  Africa. The gap between rich and poor is higher than in any other region on earth apart from Latin America, and is growing in many countries. Seven of the world’s most unequal countries are in Africa. 5  Equatorial Guinea is a high-income country, with a per-capita income higher than   3 that of Spain, but with an infant mortality rate significantly higher than that of Burundi. Such statistics shame the continent. 6  One measure of the rapid growth of inequality is the increased number of very rich people compared to extreme poverty levels. The number of  African millionaires has increased by almost 50 percent in five years, and the number of billionaires has doubled since 2010. 7  The richest 10 people in African now have a combined wealth equivalent to the GDP of Kenya. Meanwhile the number of people living in poverty in Africa has increased by 50 million since 1990. 8  Economic inequality compounds existing inequalities. In Ethiopia, if you are a rich man in an urban area there is only a 12.2 percent chance you did not go to school. If you are a poor woman in a rural area, the figure rises to 69.6 percent. 9  Meanwhile, there remains virtually no recognition of and support for reproductive and unpaid care work that is mostly performed by women. Currently women in sub-Saharan Africa spend five billion hours a year collecting water. 10  This unpaid work further increases the inequality between women and men. Many countries in Africa also still have legal restrictions to gender equality that are inhibiting, including women’s equality in the economy. Policies should promote equal pay and decent work. Rectifying gender inequalities in access to credit, equal inheritance and land rights can make a huge difference, and many countries in Africa have begun to do this. The need to maximize progressive Government revenues  African governments already fund the vast majority of their spending from domestic sources. They have managed to raise their tax-to-GDP ratio from around 18 percent of GDP to 21 percent of GDP over the last 10 years, which is admirable. However, the IMF believes there is scope to raise this significantly further in the near term, between 3 and 6.5 percent. 11  This would be enough to double health spending in most countries. In the medium term, the aim should be tax levels similar to those in the OECD at around 35–40 percent of GDP. Whilst this potential is exciting, when increasing revenues through taxation and other means, African governments must ensure that they do this in a way that decreases rather than increases inequalities. Tax systems in Africa are some of the most regressive in the world. VAT, a regressive tax paid disproportionately by the poor, makes up 67 percent of revenue on average in sub-Saharan Africa. Because VAT is a consumption tax, it can also have a disproportionate impact on poor women, as they pay for more basic goods and services on behalf of the household. For example, a study in Ghana found that removing VAT on children’s goods would most strongly benefit female-headed households, as women had lower incomes and were also predominately responsible for purchasing such items. 12  Instead of focusing their efforts on taxes that will take from the poorest and women, African governments should concentrate on implementing  4 taxes that derive revenue from those with the broadest shoulders. The IMF, amongst others, recommends ensuring better compliance from high-income individuals and companies, alongside other measures. It highlights the success of a number of countries in setting up a dedicated ‘large tax payers office’ to chase these taxes. 13  Removing unproductive tax exemptions is another key way to raise revenues. Tax exemptions to foreign firms are estimated to be costing the Kenyan government $1bn a year. 14  Tax dodging by rich individuals and corporations deprives African nations of huge amounts of money. Corporations have been estimated to lose  Africa $38bn annually in lost tax revenues. 15  Rich individuals in Africa are making use of the global network of tax havens to avoid paying an estimated $14bn a year in taxes. Oxfam has calculated this would be enough to pay for the healthcare that could save the lives of four million children and employ enough teachers to get every African child into school. 16   Africa is hugely rich in minerals, but this source of growth is finite and must be used well to ensure that all benefit, including future generations. Instead, often the main beneficiaries are foreign companies, many of whom are paying very little tax. The extractives sector is the source of one-third of all tax revenue in Africa, but nevertheless extractive industries still actively use global tax loopholes to avoid paying their fair share of tax, robbing countries of much-needed revenues to spend on infrastructure, agriculture, job creation, healthcare and education. Zambia could be losing as much as $2bn annually to tax avoidance, with the mining industry the biggest culprit, and only one or two mining operations actually declaring profits. 17  Stronger contracts are being negotiated in some countries, often as the result of campaigns by civil society. In Niger, local campaigners and activists worked with campaigners in France to force the French company Uranium Areva to sign up to a new contract with the government which meant it would pay more. 18  Whilst the majority of Africa’s development will be achieved through maximizing domestic resources, external financing will play a part. Whilst there is a place for foreign direct investment in Africa, and it can and is playing a key role in the infrastructure and some other sectors, it is clear that private finance is neither a panacea, nor a blank cheque. When available, it needs to be regulated to offer guarantees on delivering sustainable and equitable development, as well as poverty reduction. It must lead to job creation, enabling people to learn new skills and generating the wages local communities desperately need to prosper. We also need to see more and better aid from donor countries and a significant increase in long-term, predictable budget and sector support which supports country development plans. Aid should not be used to fund risky and unproven public-private partnerships (PPPs) in areas such as health and education which only serve to widen inequalities.
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