TCS Daily


Shaming "Vampire States" Part Two

By Marian Tupy - March 31, 2006 12:00 AM

Editor's Note: This article is the Part Two of a series on African corruption and foreign aid.

The callousness of African leaders often beggars belief.

An acquaintance of mine used to be a U.S. diplomat. Among the tasks he was given during his diplomatic career was to negotiate the delivery of American food aid with the Southern Sudanese rebel leader John Garang. For much of the period between 1962 and 2004, Sudan was engaged in a bloody civil war between the Arabs in the north of the country and Christians in the south. Millions of people lost their lives and many more were starving.

My acquaintance sought Garang's permission for the United States to commence the food relief operation. After much negotiation, Garang graciously agreed to have his people fed courtesy of the U.S. taxpayer. He then demanded to know how much of an import tariff he could impose on the U.S. food aid without irking the American government. My acquaintance informed him that making money out of American food aid was "out of the question." It should be mentioned that John Garang was a highly educated man -- he received a PhD in agricultural economics from the Iowa State University -- and was generally considered to be one of Africa's more enlightened leaders.

Import tariffs are among the most damaging means by which African political elites inflict pain on their subject populations. Many African leaders have called for further trade liberalization in the past. But, although they urge an end to protectionist policies in rich countries, African leaders refuse to open their own markets to foreign competition. For example, the African Union (AU) meeting in Libya last June called for "the abolition of [the rich countries'] subsidies that stand as an obstacle to trade." The meeting produced no concrete results on intra-African trade liberalization, however. That is unfortunate, because Africa remains one of the most protectionist regions in the world. While rich countries reduced their average applied tariffs by 84 percent between 1983 and 2003 (to 3.9 percent), African countries only reduced theirs by 20 percent (to 17.7 percent). Strikingly, some of the highest tariffs on African exports are imposed by other African countries.

The World Bank has recently estimated the value of Africa's income growth resulting from full liberalization of global merchandise trade. Taking 2001 as the base year, the authors estimated that by 2015 annual income growth in Africa would be $4.8 billion greater than it would have been had no trade liberalization taken place. Trade liberalization in rich countries would only account for $1.92 billion of those gains. The rest would come out of trade liberalization in the poor countries, including Africa itself. Accordingly, the World Bank found that income gains from regional trade liberalization in Africa would account for $1.75 billion by 2015, or more than 36 per cent of all the gains that Africa stands to receive from full liberalization of global merchandise trade. To put it differently, Africa stands to gain almost as much from regional trade liberalization as from greater access to rich countries' markets.

African leaders are often oblivious to the negative effects of trade protectionism. They see trade through the prism of vested domestic interests. Speaking at the AU meeting, for example, Uganda's trade ambassador Nathan Irumba urged African leaders to "reject the straightjacket of radical tariff reductions, which would pose terrible risks for our domestic industries and jobs." The hungry multitude in dirty rags that could be fed and clothed more cheaply does not feature in Mr. Irumba's thinking or the thinking of those like him. But the most revolting example of African leader's callousness must surely be taxation of foreign medicines and medical equipment.

Death and Taxes in Africa

The United Nations' Human Development Index (UNHDI) measures human development or basic living standards on a scale from 0 to 1, with 0 being the lowest and 1 being the highest score. The score for Africa south of the Sahara was 0.468 in 2003. In contrast, the score for the world's richest countries was 0.929. In fact, Africa's score was lower than that of the developing world as a whole (0.655). According to the UNHDI, Africa lags behind most of the world in practically all indicators of human well-being. Africans suffer from shorter life spans; higher infant mortality; a higher incidence of HIV, malaria, and tuberculosis; and higher incidence of undernourishment. Yet, African governments have a dirty little secret -- the role they themselves play in making the suffering of their people even worse.

In a recent paper entitled "Taxed to Death," Roger Bate, Richard Tren and Jasson Urbach from a non-governmental organization called Africa Fighting Malaria, estimated the amount of taxes that governments of some of the world's poorest countries impose on imports of medicines from overseas. In 2005, the authors found, the combined value of the import tariff and value added tax on foreign medicines was 38 percent in Kenya, 36.2 percent in Tanzania, 31 percent in Uganda and 28 percent in Nigeria. In Zimbabwe, where AIDS and government's ruinous policies have caused the life expectancy to fall from 56 years in 1993 to 30 years in 2005, the government taxes foreign medicines at a rate of 22.5 percent.

The per capita GNI in Kenya, Tanzania, Uganda and Nigeria was $460, $330, $270 and $390 in 2004. (In Zimbabwe, inflation runs at 600 percent per year, making determination of living standards difficult). The combined effect of low incomes and high tariffs on imported medicines makes access to essential medicines in Africa difficult. According to the authors of "Taxed to Death," at least half of Kenya's and Nigeria's citizens lacked access to essential drugs in 1999, while at least 20 percent of Tanzanians and Ugandans had no access to vital medicines when they needed them.

Or consider the case of the war-torn Democratic Republic of Congo (DRC). According to a January 2006 report in the British medical journal The Lancet, the conflict in the DRC was killing approximately 38,000 people each month. Yet, the combined value of taxes on foreign medicines in the DRC was 21.8 percent in 2005. To buy U.S. medicine worth $100 (transport costs included), in other words, a Congolese citizen would have to pay 8.8 percent import tariff and 13 percent value added tax, bringing the overall cost of the medicine to $123. The gross national income (GNI) per capita in the DRC, it should be noted, was $120 in 2004.

The U.S. Trade Representative (USTR) initiative on "Open Access to Enhanced Healthcare" would eliminate tariffs on all products classified in Chapter 30 of the World Trade Organization's harmonized system of exports, as well as many Chapter 29 items. Goods classified in Chapter 30 include manufactured pharmaceutical products, while goods classified in Chapter 29 include basic organic compounds that are used in the manufacture of pharmaceuticals. If successful, the USTR initiative would see tariff elimination with respect to life-saving vaccines, antibiotics and vitamins, and a variety of medical and dental equipment, not to mention such simple items as gauze and bandages.

The response of African governments will be keenly watched. They will have a choice between improving the lives of the African people and preserving the system of political patronage that benefits corrupt officials and domestic production monopolies. The same applies to non-governmental organizations, such as Oxfam, which have been calling on Africa to retain its tariffs on imports from abroad. For if tariff reduction on medicines and medical goods makes moral, not to mention economic, sense, why not extend the same logic to clothing, food and industrial machinery -- all of which would make the lives of African masses more bearable? The office of the U.S. Trade Representative has issued a direct challenge to the protectionists around the world. What will their response be?

Marian L. Tupy is assistant director of the Cato Institute's Project on Global Economic Liberty.

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12 Comments

Something from nothing
The author seems to oppose the collection of tariffs and taxes on the part of the governments of sub-Saharan countries. No doubt he also opposes graft and corruption.

Would he/she care to mention some acceptable means by which they can gain revenue? After all, as I understand economics, no nation (other than, of course, the United States) can run a government for long in the absence of a revenue base.

Please jump in with your response, Mr/Ms Tupy.

Try something new
Well, Africa could try capitalism. try representative government in which the people choose their leaders. Eliminate the concept of president-for-life. Establish rule of law, instead of all power in the hands of those people having the guns now.

Knowing when to fold them.
Not being much of a student of this, have we ever backed any group within any country that didn't, at some point, come back and bite us?

Thanks

I'm trying
All your points are well and good. But I was referring to finding some way to fund government. Without it, you must have anarchy and the rule of the predator. With it, you must-- at least in my own limited view-- have taxes and/or tariffs.

If you have a better way to fund government, please let us in on it.

An interesting question
I can't think of any. On the other hand, we should expect it. We always back the dictator instead of the public, and do so in the name of freedom, no less. But here are a few of the groups we didn't back when they needed us:

Hungarian freedom fighters, 1956
Solidarnosc, in Poland, 1981
Prague Spring, 1968
Bosnians, 1992
Rwandans, 1994
Iraqi Shiites, 1991

in your world
are tarrifs the only form of taxation?
If so, how can the western world possibly survive with tarifs in the 3 to 4 percent range?

A 64 cent question
Mark, I know your mind has been a little muddled since that business with the drugs... but I think if you go back and actually look at the words I wrote, you'll see that I mentioned taxes OR tariffs.

I even asked whether anyone had any other good ideas. Apparently you don't.

An Answer
The hanging judge misses something critical, though I am not critical of him missing it since pretty much everyone else in the foreign affairs, foreign aid community also do.

Well if you have some miserably poor country in Africa that is completely informal meaning it has nearly no reportable income and, of course, and all the property is extra-legal(houses, businesses, cars)what do you tax? Or more to the point, how do you fund government? You could squeeze the elites but they are already heavily taxed (its called corruption) so you live off foreign aid and tariffs.

Take a look at the current Economist. The issue is about how to fix China. Answer? Property rights. Is this relevant to this conversation? If you have all property registered, you actually have a tax base. And, as in the US, that property is at risk if you cheat on your income tax.

But having said that, there is no government in Africa that is not a criminal enterprise (yes including Liberia, though who knows in time). Remember Corazon Aquino (St. Cory)? She was honest but her family stole enormous amounts of government money. It is the system, not the person.

The fix? Rule of law. And, oh, guess what? Rule of law governing personal behaviour is meaningless if it doesn't cover property too. And there you have it.

An Answer
The hanging judge misses something critical, though I am not critical of him missing it since pretty much everyone else in the foreign affairs, foreign aid community also do.

Well if you have some miserably poor country in Africa that is completely informal meaning it has nearly no reportable income and, of course, and all the property is extra-legal(houses, businesses, cars)what do you tax? Or more to the point, how do you fund government? You could squeeze the elites but they are already heavily taxed (its called corruption) so you live off foreign aid and tariffs.

Take a look at the current Economist. The issue is about how to fix China. Answer? Property rights. Is this relevant to this conversation? If you have all property registered, you actually have a tax base. And, as in the US, that property is at risk if you cheat on your income tax.

But having said that, there is no government in Africa that is not a criminal enterprise (yes including Liberia, though who knows in time). Remember Corazon Aquino (St. Cory)? She was honest but her family stole enormous amounts of government money. It is the system, not the person.

The fix? Rule of law. And, oh, guess what? Rule of law governing personal behaviour is meaningless if it doesn't cover property too. And there you have it.

The Rule of Law
Establishment of a true rule of law in any of these countries would be a blessing-- and an important first step in establishing an order where everyone is required to pay their fair share toward maintenance of the commonly held infrastructure. This is, to my mind, the basis for the establishment of a fair system of taxation.

Once the Soviet Union fell, the nations of former Eastern Europe were faced with that problem. In that case-- well ahead of where sub-Saharan Africa is-- several of them still fell behind. In places like Bulgaria, Romania, Ukraine and Belarus the tendency is still for the largest mafia to rule the country, while smaller mafias do their business unimpeded so long as they contribute to the capo di capos. Ordinary people stay poor, and business is impossible to conduct in anything like a comfortable atmosphere.

They are the poorer for it. Even in the United States, where the middle class pays the taxes the poor can't afford and the rich can get a free pass from, things are better than in those countries.

17% of zero is...
zero.

So, no matter how high the rate is, governments can't possibly get any tariff revenue from aid that is given for free. The same applies for falue added tax, and anything else that is applied as a percentage of price.

Article interesting but one-sided/ developing country perspective
I agree with some of the ideas about giving food aid here as it would help with the hunger in Africa. The leader mentioned here was really callous because obviously those tariffs would have been used to buy arms and not help his people. We all know the drill.

However as a national of a developing country I am conscious of the phenomenon where goods are dumped into our markets, sometimes thinly disguised as bags of "food aid" but actually designed to destroy our local producers and make us even more dependent on imports than we already are. It can be really frustrating as production in developed nations is highly subsidized whereas we do not have that luxury. The "free market" to be really free must operate without subsidies and without tariffs. It can't be one-sided as it is now with us dismantling tariffs and being flooded with subsidized imports.

There needs to be more aid in terms of technical assistance and helping local producers to get on their feet and not more building of dependency. This is well known in development studies circles but developed nations prefer the dumping method as it encourages our dependency on them and our desire to import their goods.

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