Perspectives

The IMF enslavement of Black Africa

By Jude Wanniski
-Guest Columnist- | Last updated: Nov 24, 2003 - 6:21:00 PM

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Supporters of Guyde Bryant, the new interim chairman of Liberia under a peace accord cheer upon his arrival at the Robertsfield airport, outside Monrovia October 13.

(FinalCall.com) - Much can be done to help African countries expand their economies internally, in ways that don’t require handouts from American special interests or American taxpayers. Instead of sending billions in "aid," send some good advice.

Kenya is a perfect example of a country that has been hammered mercilessly by the inflation of the last 32 years, since President Nixon floated the dollar in 1971. When I visited Nairobi in 1967, its economy was in great shape, and I marveled at the obvious prosperity I could see throughout the country. What wrecked it were the devaluations of the Kenyan shilling and the great inflation that produced.

As it has throughout Africa, the economists at the International Monetary Fund (IMF) recommended the currency devaluations. The resulting inflation dramatically increased the progressivity of the income-tax system. The IMF also urged the U.S. government to balance its budget by raising tax rates even higher, along with the "bracket creep" produced by the inflation. The most recent data I have at hand indicates the per capita income of Kenya’s 29 million people is not much above $340.

Now, look at the tax system: On the personal income tax, an individual pays a top rate of 30 percent. This does not sound that bad, but the taxpayer encounters the 30 percent at a threshold of $5,646 (at the current exchange rate). The 25 percent rate hits at $4,256, the 20 percent rate hits at $2,865.

On top of these debilitating rates, Kenya has an 18 percent Value Added Tax (VAT). This is because the income tax collects so little revenue at these steep rates. There is also a raft of taxes faced by business and industry, including export duties, import duties, stamp duties, fringe-benefit taxes, etc. Local businesses pay a 30 percent corporate income tax and branches of foreign companies pay at a 37.5 percent rate.

All of the taxes together produce $1.9 billion per year. That’s pocket change to Bill Gates. He could easily give Kenya that amount for several years and it could operate without a tax system! It would grow like crazy.

Then, we have Botswana, a sizeable country of only 1.5 million. Its "showcase economy" produces 10 times the per capita GDP of Kenya’s 29 million people. The top marginal tax rate is 25 percent, just five points lower than Kenya’s, but the individual does not pay that rate until his taxable income is $21,413. The 20 percent rate hits at $17,398, the 15 percent rate hits at $13,383, the 10 percent rate at $9,368.

The five percent rate hits at $5,353, which is almost where the Kenyan pays the marginal rate of 30 percent!!! And there is no VAT in Botswana. Corporate tax rates are 15 percent for manufacturing, 25 percent for non-manufacturing. And all of the taxes together yield $1.3 billion in revenues! With these much lower rates and no VAT, Botswana’s government gets almost as much revenue from its 1.5 million people as Kenya does from its 29 million.

Professional economists who advise the Democratic Party, like Dr. Paul Krugman at Princeton and the New York Times, will tell you supply-side economics does not work. Cutting tax rates only increases budget deficits. He might say Botswana is lucky, because it has diamond mines that produce lots of revenue. He might say that Kenya is poor because its political leaders have mismanaged expenditures. George Ayittey, a Black African from Ghana who professes economics at American University and votes Republican, says supply-side economics only works in mature countries like the United States and Europe, and the immature countries are poor because they have corrupt political leaders.

In other words, the tax system is the result of good people who shun the temptations of corruption—not the cause of a sound economy where people can afford to shun corrupt ways because they can support their families on their after-tax incomes.

The Wall Street Journal editorial page recently ran an op-ed by a Nobel Laureate economist, Douglas North, who asked the question: "If there are so many Nobel Prizewinning economists, why is there so much poverty?" Dr. North summed it up: The corrupt politicians in the poor countries do not take the economic advice of Nobel Laureates. Can you hear me laughing?

Back in July, when all hell was breaking loose in Liberia and Pres. George Bush was thinking of sending a few divisions of Marines to stop the civil war, I wrote a memo to Treasury Secretary John Snow. I suggested it might be a lot cheaper if he took a good look at the Liberian tax system. The civil war is the result of the poverty in Liberia, and the poverty is the result of a series of IMF programs of currency devaluations and tax increases. The 3.3 million Liberians only collected $6.5 million in income-tax revenue!!

Nobel Prizewinners are blaming the politicians for the miseries of Black Africa—and other parts of the impoverished world—because they can’t admit to themselves that their demand-side economic policies have been the CAUSE of the poverty.

(Jude Wanniski is a political- economical analyst, and founder and chairman of Polyconomics Inc. He can be reached at [email protected])