Megogolope e kgonwa ke go leka ele bagone

For some odd reason, I have always believed that a developing country could never transition into a developed nation as most frontier countries aim for. My beliefs are drawn by the differing economic takeoffs endured by the two quadrants.

In this regard, my sentiments have always been that, as a frontier market economy, we should not adopt economic development policies from developed markets because our economies will always be at parallel and will never meet, albeit having to engage in trade pacts.

And these sentiments are seconded by the new development financing policies from world financial institutions. These policies could be argued to stipple development by restricting financing to just environmentally-friendly activities, which in turn has halted industrialisation of most frontier markets, leading to the outsourcing of mass manufacturing activities to multinationals from developed markets. However, my recent travels had me reconsider this and think that perhaps we can adopt one or two economic development policies.

One of those policies would be tax, the imposition of compulsory levies on individuals or entities by governments in almost every country of the world. The question I ask myself is, what is the value of tax?

The World Bank describes the value of tax as a key development priority as it is essential to finance investments in human capital, infrastructure and the provision of services for citizens and businesses, as well as to set the right price incentives for sustainable private-sector investment. Therefore, you could argue that tax is a valuable policy tool to economic development. And we have seen most frontier markets rely on tax policies in attempt to recover from recent economic recessions by increasing taxes, especially on consumption, using a blanket approach.

The question is, did it work? Was the value of tax realised by this approach?

Generally, according to the OECD, tax revenue did increase after the recent economic halt as expected. However, the value of tax cannot not be perceived as just an increase in tax revenue; it must be weighed as “does it encourage economic mobility, i.e. does it not restrict movement of people and goods, thus increasing economic activity?” That is where the value of tax is.

I will give an instance. Value Added Tax was increased locally using a blanked approach. Meaning that you taxed as you consume, taking away your liquidity ability to the economy thus, restricting or reducing your economic activity movement. This was justified by the rather large consumption debt recorded of recent, indicating an increase in borrowing just to consume. Was that tax policy valuable to economic development?

Let us consider the approach of VAT in developed countries. VAT measures and other consumption tax changes were primarily aimed at easing liquidity pressures on businesses and encouraging consumption and to encourage demand and support businesses in severely affected sectors. However, the taxation tool, on the other hand, was concluded to excise duties on harmful consumption, on tobacco products, were raised in a number of countries to raise revenue and encourage healthier behaviours.

Rustically, what can we draw from this comparison? Liquidity enhances life and therefore can be used to quantify and qualify demand for life as increased mobility and ultimately sustain economic activity. And how can we qualify this? Countries which eased on consumption tax were less hit by the economic shocks from the Russia-Ukraine war in terms of increased inflation as compared to countries that had imposed consumption tax. I bring this conversation up because we have to understand that the risks involved with tax need to be considered and how that could ultimately affect the financial sector.

Again, the Bank of England’s policymakers this month echoed warnings of fresh signs of stickiness in core inflation and consumer prices that could crystalise risks of long lasting high inflation due. The question is, as a nation, are ready for the possible importation of this inflation?

In conclusion, “Megogolope e kgonwa ke go leka ele bagone”- A dispute can only be settled with satisfaction if both parties are present. For us to sustain economic activity, both policies need to be drawn to consider the value they would bring to the consumers, corporates and the government and there has to be a balance of value to each.

Bame Lesego Boitshoko

blboitshoko@gmail.com