Month: April 2018

Africa’s Development Begins with Agriculture

 

“It is time to change the way we think. Farmers are not the cause of Africa’s poverty; they are a potential solution. They are key to creating the future envisioned by the SDGs.” — Kofi Annan, former UN Secretary General

The development narrative in Africa is dominated by two key strategies. The first is massive infrastructure investment and development and the second is big top down policies broadly seeking to achieve the Sustainable Development Goal’s (SDG’s). Neither of these two strategies are inherently wrong, Africa needs infrastructure to ease and stimulate commerce, trade, industry and to make people’s lives easier. In addition, the SDG’s are laudable and the goals they seek to achieve would undoubtedly make millions of lives better. However, this approach has reinforced a problematic issue in Africa’s economic story, the failure to put agriculture first. Agriculture, in particular small holder farming was and remains the largest economic sector on the continent, thus its development or lack of has a significant impact on the development trajectory of the continent. The policies and strategies adopted by many African governments at independence (and that many governments still profess today) saw smallholder agriculture as secondary to industry and were in many cases hostile to small farmers. In doing so, the core of the African economy and its engine of development was undermined. In Asia the opposite approach was taken came agricultural transformation took place before industrialisation providing the foundation of the Asian miracle. In a previous post on reimagining industrialisation I urged that we start seeing agriculture as industry, which would not only need African countries to step back from the policies that have failed the continent for the last 50 years but enact a set of policies that would empower farmers, improve livelihoods and drive growth and development.

Why agriculture

The primary reason for focusing on agriculture is its importance on the continent. Today much as at independence, agriculture remains central to the African economy accounting for over 60 percent of jobs and a meagre quarter of the continent’s GDP. The poor performance of the sector is illustrated by the fact that 90 per cent of those living in poverty are engaged in farming,[1]. If nothing else agricultural transformation in Africa would not only benefit the most people but also those who most need help.

Agricultural transformation, which we can define as the process by which the sector evolves from being subsistence and farm focused to one that is more productive, commercialised and linked to the non-farm sectors of the economy at the core of economic development. First off increases in productivity also means GDP growth (remember that GDP is the measure of the value of everything produced within an economy). Secondly, as productivity increases so does farmer income, when most of the population is involved in agricultural production these income increases have multiple positive impacts on the wider economy. Increased income means rural populations have more cash to spend and they will most likely spend that income on more local goods and services. Increased demand for local goods and services, as Africa tries to kickstart manufacturing and other industries a local market to sustain those industries is crucial and farmers with increased incomes could provide that mass market. In addition increased agricultural income generates savings, savings are the basis of investment in an economy as it what banks use when they lend money to businesses. Third higher agricultural productivity has benefits for urban populations as well, increased productivity increases the supply of and brings down the price of food, thus bringing down the cost of living. Crucially, this pro-poor developmental stimulus performance of agriculture requires the participation of small farmers, small farmers dominate agriculture in many developing economies and it is their transformation from subsistence to market participation, productivity and income gains that are the precursor to development. This process was what happened in East Asia where the technology of the green revolution combined with supportive government policies and land reform kickstarted rural economic growth, stimulating demand for local non-farm goods and services and providing the basis for industrialisation

What happened to African agriculture?

The lack of transformation in the agricultural sector since independence has had significant impacts on development on the continent. Between 1960 and 2000 agricultural productivity grew at a paltry 0.6 per cent in sub-Saharan Africa compared to 3 percent in developing countries as a whole, this can be seen clearly in the graph below comparing African and Asian agricultural productivity.

So, what happened to African agriculture, in short bad policy. At the core of the African economy at independence and today is agriculture in particular the small-scale farmer. However rather than enacting policies that would have supported farmers, increasing productivity and its associated increases in spending and saving African governments sought to rapidly modernise their economies. In this vision of modernisation, the focus of the economy is industrial, manufacturing and urban. The policies that this view entailed placed a significant burden on the agricultural economy of African countries, where governments not only underpaid farmers for their produce, but sought to extract revenue to fund industrialisation as well as keep the cost of living down for people in urban areas who worked in those industries. The creation of state corporations whose mission was to industrialise African agriculture into large-scale commercial farming not only failed but became avenues for rent seeking and corruption. It was not long until farmers retreated from markets to subsistence farming and parallel markets. As African agriculture was pushed into crisis by bad policy, African economies lost their primary source of growth. Africa’s development failure is rooted in the failure of its agricultural sector whose origins are to be found in the agricultural policies pursued by African governments, thus overturning these policies should be the first step towards reversing that failure.

New policies for agricultural transformation

If past agricultural policy in Africa provides a handbook on what not to do, then what policies should African countries be looking at to make agriculture an engine of growth. These policies must be aimed at assisting farmers in increasing productivity and connecting them to markets so that the wider populace and economy can benefit.

  • Assisting farmers

At the core of agricultural transformation is the farmers who work the land and the first policy should be providing them with the assistance they need. Rather than telling them what to do or grow (as has been done in the past) farmer assistance should be aimed at providing farmers with the skills and tools. At the core of this would be extension services which consists of farmer support through education, support and advisory and these would include:

  • Education and advisory services on the science and technology of farming such as water and irrigation, soil types, what to consider when choosing a crop to plant, what to consider when acquiring fertiliser, certified seed and where to get it.
  • Sustainability strategies on how to maintain your soil, prevent erosion and depletion.
  • Making farmers aware of market opportunities and government programs and services which they can take advantage of.
  • Facilitating the organisation and cooperation of farmers so that they can share knowledge and skills with each other and possibly enable farmers to form cooperatives or commercial groups to gain more favourable trading terms.
  • Deploying agricultural extension officers to rural areas employed by the government who can provide ongoing advice and support to farmers.

Farmer assistance policy would be aimed building the capacities of farmers to take initiative and improve their farms how they see fit, building on the expertise provided through the training and education and the experiences of their fellow farmers. In short it is about enabling farmers to be better farmers rather than old policies which tried to dictate to farmers the right way to farm.

  • rural infrastructure

As mentioned earlier much of the continent is on an infrastructure building binge, however most of that infrastructure is big infrastructure such as powerplants, railways and highways meant to facilitate international trade and industry. However, the rural and agricultural economies also need infrastructure, namely roads and storage facilities. Rural roads will help connect farmers to a higher number of potential markets and cut transport costs for agricultural goods, which will help reduce the cost of food.

Storage is crucial, post-harvest losses (agricultural produce lost between the farm and its final destination) in Africa are significant. The Food and Agriculture Organisation of the UN estimates that “sub-Saharan Africa food losses of about 20 % for cereals, 40%-50% for tubers, fruits and vegetables, 27% for oilseeds, meat and milk, and 33% for fish, that has an expenditure evaluated at US$4 billion per year – enough to feed at least 48 million people, equivalent to the population of Angola, Zimbabwe, Swaziland, Namibia and Malawi all together.”[2] Proper, affordable and widely available storage is key to ending losses and preventing produce from rotting due to a lack of refrigeration or unsuitable storage conditions. Preventing post-harvest loss through the provision of adequate storage facilities is the simplest way to increase productivity and improve farmer incomes. Governments have multiple options available to do this such as building public storage facilities, or incentivising the private sector to invest in storage solutions

  • Embrace science and technology

In the early sixties India was on the brink of famine and in search of a solution. The ministry of agriculture invited a scientist Norman Borlaug who had been working on new high yielding strains of wheat and rice and they soon adopted new 2 “miracle” rice variety. By the 1990s rice yields per hectare had risen threefold and India had gone from near famine to one of the worlds major rice producers and exporters. This is the story of the green revolution, where new technologies and research in agricultural science were successfully transferred to practice boosting productivity particularly in Asia where like India, many countries faced the spectre of mass famine. In 1970 Norman Borlaug was awarded the Nobel Peace Prize for his work in helping to feed the world. Much like Asia in the 1960’s Africa must pursue and embrace agricultural science, with climate change and shifting weather patterns farmers around the continent are facing significant challenges. If productivity is to be maintained and improved for an ever-growing population farmers will need new tools particularly those that science can provide such as drought resistant higher yielding crops. For this to happen African governments have to put more money and effort behind the agricultural research institutes and agricultural departments in African universities to come up with the tools that African farmers can use. If African governments don’t do this someone else will and they will own the rights to those innovations, making African farmers more dependent on foreign companies. New seed varieties, and technologies funded by African governments can be sold to farmers and licensed to African companies at much lower financial cost and without the strings attached to global multinational corporations.

Agriculture as the foundation for development

If Africa’s growth failure lies in policy that marginalised agriculture, the implications of this should be clear to policy makers on a continent whose economies are still agriculturally based. If, as the World Bank puts it, Africa is to claim the 21st century[3] then African governments must realise that industrialisation is not achieved without agriculture but rather with agriculture at its centre. As East Asia’s did, Africa’s agriculture sector holds immense potential not just for growing produce but for value addition (processing and marketing of agricultural products) and stimulating the wider economy. Boosting productivity would boost incomes, savings and quality of life for most of the population and the multiplier effects could spark the very industrialisation that African leaders sought at independence and still seek today. Agriculture can drive Africa’s development, but only with the right policies, policies that place the Africa’s farmers at its centre.

[1] Africa Development Bank Group – p.11-12 https://www.afdb.org/fileadmin/uploads/afdb/Documents/Policy-Documents/Feed_Africa-Strategy-En.pdf

[2] http://www.fao.org/africa/news/detail-news/en/c/445333/

[3] http://siteresources.worldbank.org/INTAFRICA/Resources/complete.pdf

Africa needs taxes not aid

Revenue collection is the one which can emancipate us from begging, from disturbing friends… if we can get about 22 percent of GDP we should not need to disturb anybody by asking for aid….instead of coming here to bother you, give me this, give me this, I shall come here to greet you, to trade with you. – Yoweri Museveni, President of Uganda

In 2014 Zambia exported 59% of its copper to Switzerland, yet a look at Switzerland’s import and export statistics shows that they barely imported any copper and barely anything from Zambia[1], it is likely that most of this copper ends up going to China or other markets. What’s happening is that mining companies operating in Zambia are taking advantage of transfer pricing. Transfer pricing is where a subsidiary of a multinational company from one jurisdiction sells goods or services to a subsidiary of the same multinational company in another jurisdiction. Multinationals will most often use transfer pricing to shift profits into tax havens and low tax countries such as Switzerland. In the case of Zambia’s copper, mining companies such as Glencore sells copper mined in Zambia by its Zambia based subsidiary to the company’s trading arm incorporated in Switzerland at lower than market prices. The Swiss based trading arm then sells on the copper to the world market at market prices. The results of the transaction will mean that Glencore’s Zambia subsidiary will generate lower profits, minimising the tax payable to the Zambian authorities, while Glencore’s Swiss trading arm will generate the majority of the profits from the sale of copper, making these profits taxable in Switzerland, which as stated earlier is a low tax country. This strategy isn’t illegal, but what it does is minimise the taxes that are paid to the Zambian government and maximise the profits that these companies can make.

What happens to copper profits and taxes in Zambia is neither new nor unique. The UN economic commission for Africa High Level Panel on Illicit Financial Flows[2] estimates that “over the last 50 years, Africa is estimated to have lost over 1 trillion dollars in illicit financial flows, this is roughly equivalent to all of the official development assistance received by Africa over the same timeframe.”  Currently, they estimate Africa is losing more than $50 billion annually which is double the aid that Africa receives per year.

Across the continent African governments are once again getting caught in a debt trap (you can read a previous post on that here)  and are struggling to raise revenue and are having to increase taxes on the poor and working classes. In South Africa the latest budget included a 1% rise in VAT among others, Niger is currently experiencing mass protests against new tax raises on common goods, Kenya , Zambia and other nations across the continent are considering or implementing similar tax hikes. These measures will hit the poor hardest as they will raise the prices of the goods such as fuel, food and clothing that they need the most.

Not only is Africa getting bilked of its taxes, African governments are trying to make up the difference on the backs of the poor. This needs to change, multinational corporations and international investors will be a part of Africa’s growth story and they will (or already are) make fantastic profits from it, it is only fair that Africans get their fair share. And now is the perfect time to enact policies that would give Africa a fair share. Across the world tax evasion is key issue, Europe is cracking down on tech companies that use tax avoidance strategies, and three years ago the G20 vowed to fight tax avoidance[3]. Rather than swimming against the tide, Africa would likely have allies in a quest to implement fair taxes.

Tax revenues and profits where they are made

Recently the EU proposed a new technology tax. For several years EU countries have been trying to deal with a tax avoidance problem, like Zambian copper, big multinationals would base their intellectual property in tax havens and have their European subsidiaries pay “royalties” for use the of it, essentially transferring profits made in Europe to tax havens. The most prolific users of this strategy have been the technology companies and thus the EU has decided to propose a 3% tax on the revenue generated made by these companies in the EU as opposed to profits. The main idea behind this tax is that companies should be taxed in the country’s where revenues and profits are made and not in tax havens, providing a simple solution that African countries should adopt.

Make taxes simpler; the Norwegian example

In the 1970s Norway started exporting oil and gas, in the 40 years since this industry has added over 1.1 trillion dollars to the Norwegian economy, which is almost the size of the combined economies of Sub-Saharan Africa. In 1990 Norway established a sovereign wealth fund to invest its oil revenues today it is now worth over 1 trillion dollars. One of the key tools they have used to benefit from their natural resources is tax, in Norway, companies drilling for North Sea oil pay a 78% tax rate on income, though it includes deductions for losses and investment they are simple and easily implemented and assessed by the government. In addition, Norway taxes entities not specific assets, once again this simplifies the system considerably (you can read more about Norwegian petroleum taxes here).

By contrast if you looked at laws or production sharing contracts around Africa on mining or oil and gas, they are complex, and contain different types of taxes levied on the companies, the mineral, the license etc. This complexity allows these tax systems to be gamed and avoided. African policy makers would do well to look at how Norway taxes the companies that extract its oil and gas and consider a similar system. A system that is simple, easily enforced and taxes the extractives industry on our terms. If we did this Africa could finally be in a position to get significant taxes from the extractives industry and like Norway plough those profits back into the continent.

Expand expertise

This policy is simple, but its subject matter is not. The global tax system and strategies used by multinational corporations are incredibly complex. Companies employ armies of lawyers and accountants to look for loopholes and provisions that will allow them to lower their tax bill, and African countries cannot match up. Thus, on this issue African nations need to come together and the AU or Africa Development Bank (AfDB) provides the perfect venue for doing so, to create an African Tax Centre. This is not a new notion, the AfDB already has the African Natural Resources Center, which was created to help African countries build capacity in natural resource management.   The African Tax Centre could have a similar mission consisting of two goals, first to pool African expertise on taxes and assist national governments in identifying and stopping tax avoidance and second to help train and build the capacity of African revenue collection authorities. Over time as the capacity of African countries to administer and collect taxes increases they will be able to close off the avenues used by multinational corporations to avoid African taxes.

More Taxes less dependency

Taxes are a decidedly unsexy topic and bore most of us senseless. However, they are crucially important, the roads, schools, hospitals and police services that Africa needs must be funded somehow. For too long Africa has relied on aid and debt to provide a substantial portion of this funding, but aid comes with conditionalities set by foreign powers and can only be spent on things they deem important, and debt if not wisely used or with a bit of bad luck can be more burdensome than helpful. The only other option is taxes, but African governments must change their tax focus, today most African countries collect their revenues from those fortunate enough to have formal employment and Value Added Taxes, these taxes place their burden on those who can least afford it, meanwhile global corporations and investors are spiriting away over 50 billion dollars of prospective revenue. It is time for Africa to adopt policies that would end these practices, by taxing profits where they are made, reforming extractives taxes to be simpler and more effective and building the expertise needed to close the loopholes.

Africa is the final frontier of the commercial world. Over the last two decades big multinationals have sought to tap into the African market in technology, telecoms, mining, agriculture, healthcare (the list goes on), which are all very profitable now and will only get more so. The world both needs the resources under Africa’s soil and wants to take advantage of one of the world’s last untapped markets, thus the business case for doing business on the continent will not disappear as some people ominously warn whenever the prospect of higher and more efficient taxes are raised.

If Africa is ever to choose its own development path, if it is to decide its own destiny, it will not be done through depending on the generosity of others, it will be through its own money. If there is one policy Africa should be able to get behind it is that Africa needs taxes not aid.

[1]https://wits.worldbank.org/CountryProfile/en/Country/CHE/Year/2016/TradeFlow/EXPIMP/Partner/all/Product/72-83_Metals

[2] https://www.uneca.org/iff

[3] http://www.oecd.org/tax/g20-finance-ministers-endorse-reforms-to-the-international-tax-system-for-curbing-avoidance-by-multinational-enterprises.htm