TAXABLE CONDITIONAL CITIZENS’ DIVIDEND: Towards a resource-curse free Africa

BY KWAME MARFO

INTRODUCTION

In 2008 Ghanaian presidential elections, Nana Akuffo Addo, the flag bearer of the ruling party, the New Patriotic Party (NPP) campaigned on his party’s platform of having grown Ghana’s GDP four-fold since it took office (from $3.9 billion to $16.3 billion), a stunning development by any standard of measurement (NPP Manifesto, 2008). Unimpressed, the Ghanaian electorate voted them out of power, albeit it by the tiniest of margins. What was their complaint? The average Ghanaian livelihood had barely improved – if not worsened – during NPP’s term in office. The New Patriotic Party pointed to a myriad of indices from major international institutions about the strides the country had made in becoming competitive. However, in a country where a third of the population lives in “extreme poverty[1]”, what mattered most were the core bread and butter issues, which had not walked in lockstep with the macroeconomic numbers (World Bank, 2003). If there ever was a flaw with macroeconomic assessment of development and progress, look no further.

Ghana’s new found oil resources which went live in the fourth quarter of 2010, is estimated at $560 billion dollars (Boateng, 2007). This is quite significant for a $15 billion dollar economy. Runaway economic growth indices have been projected. With the benefit of hindsight, one hopes that the powers, that be, will learn from NPP’s experience and like the proverbial ostrich, not bury their head in the sand by extolling macroeconomic credentials while the rank and file of the population dawdle in the mire of absolute poverty and despair. Another lesson that can be learned is the so-called resource oil curse that has kept Ghana’s richer neighbors trapped in the vicious cycle of corruption, authoritarian rule and poor economic performance (Gary and Karl, 2003).

In this white paper, I propose a plan, “Taxable Conditional Citizens’ Dividend” (TCCD) to counteract the resource-curse that has bedeviled many an African country. TCCD will have the twin goal of alleviating the plight of the “extremely poor” Ghanaian population, commensurate with economic growth, whiles offering a judicious way to manage oil revenues.

What

What is a “Taxable Conditional Citizens’ Dividend”? It is a taxable hybrid scheme that borrows from Conditional Cash Transfer (CCT) and Citizens Dividends. It is a CCT program in the sense that it will offer money to poor families in a ‘social contract’ which ties beneficiaries to a set of conditions such as sending kids to school and regular medical check ups (Fiszbein and Schady, 2009). This cash transfer will incentivise parents to invest in the health and education of their children. This scheme is a type of Citizen’s Dividend by virtue of the fact that it gives a share of nations resources back to its citizens as is done in Alaska where the citizens of the state receive cash hand outs generated from the state’s oil exports. This scheme is a multi-pronged attempt to combat poverty and enhance development by developing human capital, promoting broad-based economic growth, strengthening ties between electorates and the elected, reducing corruption and lastly, enhancing the societal role of financial intermediaries.

Developing human capital

Due to the finite nature of natural resources, it is incumbent for developing countries to use the revenue generated to invest in its human capital in order to diversify away from natural resources. This is a more sustainable form of development (Friedman, 2007). This explains why resource-poor countries such as Singapore and Belgium outperform richer countries (resource-wise) such as Saudi Arabia, Angola and Nigeria on virtually every human development index. This maxim holds especially true in a country like Ghana where agriculture accounts for 35% of GDP and employs 55% of the workforce (CIA, 2010). A good number of poor citizens depend “on their children’s labor as an asset to maintain current consumption, rather than invest in their children’s future human capital by educating them…this risks future income-earning capacity, perpetuating poverty from one generation to the next” (Moser, 1998:31). Taxable Conditional Citizens’ Dividends will attempt to mitigate this vicious cycle with cash transfers that will help soften the impact of lost income from parents who offer to send their kids to school instead. Education also presents opportunities for inducing good behavior, by paying poor families to make good decisions. As Ariel Fiszbein, World Bank’s Chief Economist observes, monetary incentives help militate against poor choices that lead to inefficient outcomes such as sending only boys to school. He indicates that studies of programs that gave money to women resulted in higher “proportion of the family budget spent on children’s welfare”. On health, with the myriad of diseases – tropical, childhood killer disease, and etc- that plaque most resource-rich countries, it is not hard to see the role of health investment in boosting human capital.

Promoting broad-based economic growth

Neo-liberal market orthodoxies that have dominated development discourse over the last three decades argue that there is a trade-off between growth and equity. However, events on the ground suggest that this relationship is tepid at best. Over the last three decades, the East Asian region- which has registered the highest regional growth rates in the world- achieved these feats with relatively low levels of inequality. In contrast, many developing countries in Africa and South America – the regions with the highest levels of inequality – saw an up tick in poverty along with inequality (Dagdeviren et al, 2002; World Bank, 2000). Even in countries which managed to reduce poverty such as Ghana (from 50% to 40%), the statistics masks regional inequalities.  Rural poverty is three times higher than urban poverty and hence, the need to address it (World Bank, 2003). ‘Pro-poor’ growth policies that target a reduction in poverty leads to a more efficient outcome. Targeted programs to the poor, in the short run, may reduce growth of other groups due to ‘redirection of investment’. However, in the long run, it makes the poor a more productive group of society and thus, raise income levels for all (Chenery and Ahluwalia, 1974a:47 and 1974b).

Strengthening ties between electorates and the elected

Clearly, such a costly scheme (TCCD) will come at the expense of sorely needed funds to develop infrastructure, insulate national budgets and meet other pressing demands. This is where the most innovative part of this scheme comes in. A tax on transfers, perhaps as high as 70%, could be levied to recoup some of the money back. The focus is not so much on the money disbursed to recipients. There is ample evidence from micro finance initiatives with poor citizens who have gone on to build successful enterprises on very small amounts of money. The goal with taxation is to strengthen weak ties between unaccountable government elites and citizens which over the years have been usurped by roles of other players such as civil society and development agencies (Moyo, 2009). For example in Ghana, donor contributions make up 79% of education budget (Oxfam, 2004). This type of scenario relieves politicians of their constitutional responsibilities to their constituents, cascading into a ‘race to the bottom’ dysfunctional system where abscondment of constitutional duties on the part of politicians is fully matched by apathy on the part of its citizens. By introducing taxes into the equation, Taxable Conditional Citizens’ Dividends will attempt to address this situation by mainstreaming taxation, making citizens become comfortable with the idea of taxes and also recognizing its benefits. This generates multiplier effects such as bringing huge swathes of economic output from the informal economy into the sphere of influence of the government. According to the World Bank (2011), informal economy makes up 20-80% of non-agricultural employment in developing countries. Proponents for informal economy argue that provides opportunities for those without the skills needed to access the formal economy. Others argue that it enables employers and employees increase their take home income by evading taxes. However, having a dual economy which blurs the lines between legal and illicit activities creates harbors for criminal activity, undermines law and order and leads to loss in state’s revenue. At best, informal economies are short term solutions which are neither sustainable nor desirable. TCCD attempts to deal with legitimate reasons why well meaning citizens resort to informal economy on two fronts. First, it provides cash transfers that increases take home pay of less privileged citizens. Secondly it creates incentives for parents to invest in their children in order to put them in a better position to access the formal economy. More importantly, a government that is generous to its people will find citizens less inclined to avoid and evade taxes. Also, on the one hand an increased tax base reduces the tax burden on the registered workforce, often the engine of growth of the economy. On the other hand, it enhances the governments’ institutional capacity and is critical in helping it meet its obligations such as building infrastructure and meeting other public goods and services. This generates goodwill on the part of its citizens and creates a mutually re-enforcing virtuous cycle.

Enhancing the societal role of financial intermediaries

As stated earlier, TCCD borrows heavily from Conditional Cash Transfers (CCT). Some of the biggest criticisms of CCT programs have been the cost of administering them. For example when Oportunidades, Mexico’s CCT program began in 1997, administrative costs consumed 92% of the budget. Other CCT programs have found ways to manage these costs. Brazil’s Bolsa Familiar, for example, transfers payments directly from the national treasury into recipients’ accounts in order to eliminate costly administrative disbursal apparatuses (Weld, 2009). Adopting such a scheme in the TCCD program could be a welcome shot in the arm of the nation’s nascent financial sector. For one, it will enable the unbanked poor to access the financial sector as never before and increase their comfort level with this industry. This could encourage them to bring hordes of money, often stashed unproductively under pillow cases into the market, increasing money supply in the system and enhancing financial intermediaries’ ability to efficiently allocate capital from people who have a little extra to aspiring entrepreneurs and small and medium sized enterprises, the backbone of these economies. Increased pool of and access to capital benefits all by reducing the cost of borrowing due to increased supply of money and an increased number of participants (Law of supply and demand).

Reducing corruption

Taxable Conditional Citizens’ Dividends can also contribute, in no small measure to curbing patronage networks as there will be less money in the hands of politicians. Finally and among other things, increased participation of the poor in national revenue generating schemes would bring much needed transparency and serve as check on corrupt government officials and avoid situations where disaffected youth sabotage oil pipelines because they feel left out, such as what we have witnessed in the volatile Niger Delta region.

IN CONCLUSION

For better or for worse, the political economy of oil is here to stay. In 2010, the Gulf of Guinea, the West Africa coast became the number one source of oil in the world outside the OPEC region (Klare and Volman, 2006). Unremarkably, poverty shows no sign of abating. In a perverted way, bountiful resources and poverty have ended up becoming strange fellows. This white paper contributes to the debate on solutions that attempt to offer solutions to arrest these hideous developments by redirecting oil resources to halt the blood flow of intergenerational transmission of poverty; “inability of poor households to invest in the human capital of their children” (IDB, 2004;20). It combines innovative development tools; Conditional Cash Transfer, Citizens Dividends and Taxation under the banner of the Taxable Conditional Citizens’ Dividends program. This scheme blends tried and tested social engineering tools that have attained varying degrees of success in the developed (e.g. Alaska) and the developing worlds (e.g. Brazil).With oil prices expected to double by 2050 (Shell, 2009), doomsayers cringe at the damage it may cause the already battered continent. Oil-rich countries like Sudan and Libya provide ample evidence. On the other hand, I see increase in oil prices as an opportunity to scale this program up, institutionalize it and “progressively” invest in as many of the nations citizens as possible to diverse its resource base from natural into its human capital.

While TCCD provides a noble attempt to deal with a very real problem, lessons from history informs us that like its predecessor, it is not insulated from some formidable hurdles. The program could stifle local entrepreneurship by making recipients dependent on the largesse of the state (Stoesz, 2000). However, the conditional element gives policy makers flexibility to attach conditions as they deem right to yield intended outcomes. Another drawback is that it presupposes that “extremely poor” are a homogenous group that can equally convert resources into utility and thus, skirts the issue of structural inequalities that may handicap some poor individuals (Sen, 1992). That is to say TCCD does not deal with the issue of structural inequity. Again and certainly not the last nor the least, there are gaps between activities and anticipated outcomes such as Norbert Schady’s observation that increased attendance in school (good measure of whether parents are sending their kids to school) does not always lead to higher academic performance (Weddle, 2009).

Finally, I am aware that like most good-natured projects, such an initiative could yield unintended consequences such as elite capture and corruption, complicating the problem it was intended to solve. I also acknowledge that ideas, however brilliant they are conceived in theory, often fail the test when they come into contact with the reality on the ground due to wrong assumptions, unexpected twist of events, and a more importantly, a lack of political will. We cannot, however, let an elusive perfect solution become the enemy of a good one. With 90% of African countries currently engaged in oil production, concessions and exploration of some form, not having a plan in place to manage oil revenue when they are realized could be deleterious. In the words of former 19th century Prussian Field Marshal Helmuth Karl Benhard Graf von Moltke “no battle plan survives upon contact with the enemy”, but nevertheless, we ought to plan”. That is what Taxable Conditional Citizens’ Dividend is- a plan, however imperfect but nevertheless one worth exploring.

---

[1] Defined by the World Bank as living on less than $1.25 per day (World Bank, 2010)

Copyright 2011 (March) Neo-African Consensus