Tax and developing countries

Ritchie has a bleat about how taxes don\’t seem to be capturing much more money in developing countries.

The reason is that import duties have been lowered (much the easiest tax to collect but they do horribly hamper trade), corporate taxation levels are being competed away and so the tax load has to go onto personal and consumption taxes like VAT.

OK, so why has this move been made? Well, it appears that it is this sort of tax system which actually builds a functioning society:

In colonial Nigeria in the last years of the 19th century, a strange quirk of history led the British rulers to draw an arbitrary boundary line along the 7?10? N line of latitude, separating the population into two separate administrative districts.

Below the line, the colonial government raised money by levying taxes on imported alcohol and other goods that came through Southern Protectorate’s sea ports. Above the line, the administrators of the landlocked Northern Protectorate had no sea ports, and instead raised money through direct taxes. In the areas near the border, this took the form of a simple poll tax, where tax officials collected from each citizen the equivalent of between $4 and $20 in today’s dollars.

Could this seemingly minor difference—created over a century ago by a long-defunct colonial administration, and long ago erased by subsequent administrative divisions—possibly still matter today?

Yes, it could, according to Daniel Berger, a PhD student in politics at NYU. Berger’s paper, Taxes, Institutions and Local Governance: Evidence from a Natural Experiment in Colonial Nigeria, finds that the “simple act of having to collect taxes caused governments to be forced to build the capacity which can now provide basic government services.” As a result, governance today is “significantly better” in areas just above the line than in those just below it.

If people actually see and feel the taxes they have to pay then they\’ll demand that they be better spent perhaps?

As ever it appears that we all want the same thing: better governance in these nations and thus more economic growth in this instance. However, Ritchie is, as ever, arguing for the counter-productive policy, the one which will not improve governance and thus will not improve economic growth.

Plus ca change.

2 comments on “Tax and developing countries

  1. I certainly have anecdotal evidence from chums who have visited Nigeria that the people of the North go out of their way to distance themelves from their southern compatriots. This is especially the case when it comes to the commonly held beliefs about Nigerian honesty and probity. But I wonder if Mr Berger considered Nigeria’s pre-colonial history before making his deductions.

    Before colonisation both northern and southern Nigeria had developed quite sophisticated societies but there were quite notable cultral differences. The northern kingdoms were heavily influenced by Muslim concepts of law, society and learning from the tenth century onwards. The southern kingdoms were less influenced and for a shorter period before the arrival of the Europeans and their own brand of social development.

    I doubt this provides a full explanation for it; but I do wonder if prolonged exposure to a religion noted for promoting learning, a stable legal system and generally more ordered societies also played a part in developing the phenomenon Mr Berger has identified.

  2. RM,

    “a religion noted for promoting learning, a stable legal system and generally more ordered societies”

    This is undeniably true until – oohh, stab in the dark here – say 1600? What went wrong with Islam after this point?

    There’s a fascinating post right there….

    (But in the meantime, can I be the first to offer “WGCE?”)

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