26 Apr Domestic Resource Mobilisation in Africa: A Need for Intervention
By Gretta Digbeu
The question of domestic resource mobilization, which was a major preoccupation for early development economists in the period before the neoliberal counter-revolution, has become an increasingly pressing issue for African countries in the context of financial liberalization, rising external debt and capital flight. We saw how rapid liberalization has hurt state revenue generation across the continent, and how massive outflows of private funds have fueled external borrowing, which in turn has driven further capital flight. The negative gap between saving and investment in sub-Saharan Africa has been growing since the 1960’s, and the region’s heavy reliance on aid to finance this gap has only exacerbated capital flight. Not only is sub-Saharan Africa a net creditor, but it also has a larger share of private wealth held abroad than any other developing region. Moreover, it is well known that much of the external debt contracted by African governments ends up being illegally exported as private assets into western financial markets, prompting more and more ordinary citizens to keep their wealth outside their domestic economies. Foreign aid has actually been detrimental to African development; is has provided public agents with funds to funnel out of their administrations and dis-incentivized private agents from investing in their home countries, instead of helping to reverse the decried cycle of dependency between Africa and the West. There is hope however. The experiences of Botswana and Kenya provide useful lessons for leaders in the region seeking to boost savings and capital formation. The old Kenyan Postal Savings Bank might seem like a detail in the institutional landscape of the continent, but it serves an essential function that feeds its state and citizenry with vital resources.
One of the most prominent features of the East Asian miracle was the state’s reliance on domestic resources. The East Asian development experience highlights how taxation, and therefore domestic savings, is closely related to processes of state formation and the political settlements formed by the elite. The East Asian tigers’ high dependence on the domestic economy for state revenue encouraged leaders to adopt policies that promoted economic growth and long-term structural transformation. The fact that these countries had superior saving performance – rates 10% higher than those of sub-Saharan Africa from the 1970’s to 1990’s, with savings exceeding investment for most of that time – largely accounts for their developmental success. Furthermore, and perhaps most importantly, we have seen how in these countries superior saving performance was achieved through the coercive power of the state, as it mobilized revenue through various forms of forced savings (e.g. restrictions on consumer credit, financial restraint, mandatory pension contributions, and the promotion of postal savings). State coercion is central to domestic resource mobilization, and such coercion is only achieved through strong political coalitions. For instance, in Singapore the People’s Action Party has been in power since 1959. The PAP’s uninterrupted rule allowed the state to institute the famous Central Provident Fund, a compulsory national savings plan that has been an important form of funding for development projects, like the public housing in which most of the country’s residents now live.
Political coalitions lay the foundations for the development of the state and other institutions that are indispensable for its economy to function. They drive policy responses to resources booms, external threats, paradigm shifts in development practice, and crises in commodity prices. They help us understand divergent development trajectories across regions and countries with similar economic indicators and colonial experiences, as leaders choose whether to consume surpluses or invest them in long-term development goals. They drive and sustain certain levels of economic performance according to the depth of leaders’ commitment to common goals, and the breadth of their inclusiveness of political rivals.
Botswana and Kenya are two cases in point. As a general trend, Southern African countries – South Africa, Zimbabwe, Botswana, Namibia – and Kenya have always had higher tax takes than we would expect from their income per capita figures. Their superior tax collection performance is due to the institutional and infrastructural legacy they inherited from the labour reserve organization of the colonial order. In these countries indigenous populations were integrated into labour markets so as to uphold the social and political supremacy of the white population, leading to more elaborate state structures, repressive state capacity, higher levels of regulatory reach, lower levels of informalization and severe socioeconomic inequality. Botswana and Kenya owe their governments’ administrative strength to the emergence of a developmental racist welfare state, whereby cross class solidarity among whites buttressed large bureaucracies that closely managed native Africans and white businesses alike, extracting revenue from them through poll taxes and income taxes respectively. We can partly accredit the institutions of labour reserve economies with both countries’ remarkable performance in harnessing domestic resources for developmental purposes. However, we must ultimately attribute the fact that these institutions survived political restructuring after independence to the rise and sustained dominance of strong and resilient political coalitions in each of these countries.
Botswana’s successful transition from a poor agrarian economy, to the fastest growing economy in the world until 2004, was made possible by the Botswana Democratic Party’s stable and enduring monopoly on power. The BDP rests on a broad electoral coalition that formed in the early years of independence and has endured the strains of economic inequalities among certain segments of the population, ethnic competition, and tensions over the role of traditional leaders. At independence in 1966 the country’s economy relied mainly on cattle exports, remittances from migrant labor in South African mines, and foreign aid. When diamond mining began in the 1970’s, the BDP made sure to strategically use the country’s mineral wealth to maintain its firm grip on power. The ruling party brought together groups with disparate interests by building on economic interdependencies, defused political competition among rival groups, and most importantly, marginalized radical domestic parties by using apartheid in South Africa as an existential threat to the state that called for strong macroeconomic performance. This reliance on economic growth for survival and stability resulted in laudable, prudent management of the country’s mineral sector, and capital accumulation that far surpassed any other African country that experienced similar periods of sustained growth. Botswana effectively avoided rentier politics and Dutch disease in exploiting the booming diamond industry, legitimizing its monopoly on power over five decades.
The BDP made sure that during the period of astonishing growth driven by the expansion of diamond mining, other traded sectors (e.g. livestock) were not completely sidelined, and that there was growth in non-traded sectors. Moreover, Botswana is one of the few countries to achieve high and sustained growth despite persistently low private saving rates, thanks to its extremely high public savings, which have been made possible by the fact that the government collects 75-82% of diamond industry profits. The BDP has been able to exert its coercive authority so that heavy revenue extraction through corporate taxes (including capital gains, dividends, interest and royalties) more than compensate for the population’s very low personal saving levels. Lastly, the BDP has provided incentives for businesses to keep their capital in the domestic economy through tax exemptions and the creation of the Botswana International Financial Services Center (IFSC). Although things in Botswana are far from perfect – extreme inequality, poverty and unemployment have emerged as pressing social issues – the BDP government has the political, financial and administrative foundations necessary for tackling these problems.
Similarly, Kenya’s longstanding legacy of strong and autonomous executive power has allowed ruling coalitions to pursue sound macroeconomic policies despite shifting alliances and heightened ethnic competition over time. Throughout most of the post-colonial era, patronage and rent distribution among elites helped the executive branch manage ethnic divisions and preserve its monopoly on power. The presidency has remained the central seat of power to this day despite Kenya’s transition to a bicameral parliament in 2010, so much so that the expansion of political parties has remained stunted even after the return to multi-party politics in the early 1990’s. The Kenyan leadership ensured stable periods of accumulation and growth throughout the 1960’s and 1970’s; moreover, the country owes its general economic recovery from the 2007-2008 post electoral violence to the strength of its ruling coalitions, which have dominated the political scene despite frequent party realignments in an increasingly polarized environment. While extreme poverty remains a crucial development challenge for Kenya, overall trends have been positive in recent years: the middle class continues to grow and public service provision has improved.
Since the early days of independence the Kenyan government has instituted forced savings through strict import and foreign exchange controls, and regulations that appropriate private savings to finance fiscal expenditure. Kenya effectively protected its domestic industry in the 1990’s despite the onslaught of structural adjustment and liberalization in the previous decades; it also maintained stable saving rates in the late 1980’s and early 1990’s in the face of chronic fiscal deficits that emerged in the 1970’s. Kenya became East Africa’s biggest economy while erecting an extensive and elaborate taxation regime that closely monitors the corporate sector, thereby keeping more private capital at home. Moreover the country developed one of Africa’s most dense and diversified financial sectors, which has contributed to 40% of gross domestic savings since the late 1980’s thanks to heavy regulatory supervision by the state. The Central Bank of Kenya has been the powerhouse behind such supervision, as it closely monitors money supply through restrictions on commercial banking activity. For instance, in 2016 the Bank imposed controversially tight controls on large cash withdrawals and deposits, requiring individuals to state the provenance or destination of the funds, and specify how they had been obtained or to what use they would be put.
A key component of Kenyan domestic resource mobilization, which is reminiscent of the success of East Asian development, is the government owned Kenya Post Office Savings Bank. Established in 1910, the bank provides tax exempt interest income to key segments of the population, as well as linkages with the corporate sector and commercial banking institutions that streamline and facilitate private savings. Moreover, the bank now has an extensive geographical reach (over 100 branches nationwide) that enhances the opportunities of financial inclusion for rural populations, whereby they can contribute to state revenue generation.
The experiences of Botswana and Kenya illustrate the imperative of domestically generated national savings as a vehicle for capital accumulation and broader resource mobilization. Before African states can even hope to mobilize revenue through taxation, pension funds and other forced savings schemes however, they must impose capital controls to curb capital flight. Highly indebted nations with low levels of GDP per capita, large informal markets and narrow tax bases cannot leap to enacting reforms like mandatory pension contributions, higher import tariffs, or higher direct and progressive income taxes if they do not first keep capital in the domestic economy. These states must defy the so-called logic of free capital markets, and impose strict barriers to the movement of funds outside of their countries. Despite their growing unpopularity in the international community with the rise of the Washington Consensus, capital controls are an imperative policy tool.
Domestic resource mobilization in Africa requires that states reclaim policy space and appropriate resources through coercion if necessary. While the imposition of capital controls are one way of achieving this, such reforms hinge on the stability and strength of political coalitions. These coalitions are indispensable for legitimizing the institutional arrangements that allow for robust state revenue generation, and buttress long-term macroeconomic stability and growth.
Gretta Digbeu is completing her MA in Development Studies at the London School of Economics and Political Science, she is a graduate of Georgetown University in Economics and Spanish. A native of Cote d’Ivoire, Gretta’s research focuses on trade policy, structural transformation in Africa, industrialization and food sovereignty.
Featured Photograph: View of Le Plateau in 2010, the central business district of Abidjan, Côte d’Ivoire, and the current economic and administrative capital.