February 2012
1.Introduction
The Government of Sierra Leone has rightly recognized that it is now timely to think beyond the immediate needs of post-conflict recovery to the longer-term objective of attaining middle-income status. In charting this path there is no textbook that the government can simply follow. Not only is socio-economic change inevitably complex, but Sierra Leone is distinctive both in its starting point and in its opportunities. The starting point is a society still deeply affected by the legacy of conflict. This makes it more difficult to undertake each of the standard functions of government: to be viable a strategy must be realistic in recognizing such limitations and allowing for them. It would be a disservice to pretend that Sierra Leone is currently analogous to where, say, Singapore was in 1960.
The opportunity is the considerable natural resource wealth that is likely to be extracted from Sierra Leone in the coming decades. But even this opportunity is two-edged: the history of resource extraction both in Sierra Leone itself and in most of Africa is not of accelerated development, but of plunder. It is not inevitable that Sierra Leone should now repeat that dismal history, but there are strong forces pushing resource-rich countries into dysfunction, so that repetition is the default option. A good indication of what it takes to avoid repeating a dysfunctional economic history is the example of Germany. Germany is today Europe’s best-run economy because it used to be the worst. Emerging from a searing economic crisis, Germans did three things to prevent history repeating itself. First, the legislated constitutional rules for the key economic decisions that had gone wrong. Second, they built institutions whose task was to implement these rules. Third, and most importantly, they built a critical mass of ordinary citizens who understood what the rules and institutions were for and therefore defended them. This approach rules, institutions, and a critical mass of informed citizens is what Sierra Leone now needs if it is to avoid repeating plunder.
The path to middle-income is driven by the private sector, but without a well-functioning government the private sector cannot deliver. Government has five core functions and each has to be thought through and implemented. I will take them in turn.
2.Taxation
For the first decade post-conflict taxation was inevitably light. The private economy had retreated into informality so there were few tax handles, and the tax administration was weak. It is now time to raise the tax effort.
Taxation helps to build an effective state in three ways. First, it provides the revenues that can finance the many public goods that Sierra Leone so manifestly needs. Second, the larger the share of economic growth that the state captures through taxation, the stronger is its incentive to adopt and maintain growth-enhancing policies. Third, the more tax that citizens pay the stronger is their incentive to scrutinize how revenues are spent.
A good current example of this virtuous circle at work is the State Government of Lagos. Since 2006 Governor Fashola has increased taxes and spent the revenues on visible improvements in infrastructure. This has proved to be politically popular and is now being taken as a model by other Nigerian states.
The task of raising tax revenues is partly a matter of good design of taxes, and partly of good administration. A crucial distinction in tax policy for Sierra Leone is between general taxation and the taxation of the rents on natural resources.
In respect of general taxation, the Government has already taken the key steps in tax design by introducing a VAT. The core task now is probably to strengthen tax administration through the National Revenue Authority. However, unlike in other African countries, revenues fell in real terms following the setting up of the NRA. Corruption and politicization of the NRA appear to be the underlying explanation. The attempt to introduce accountability and transparency in governance should therefore focus on the revenue collection institutions in particular. Also, the NRA was not allowed to collect non-tax revenues with line ministries still clinging on to this function. This function should be assigned (or re-assigned) to the NRA to promote accountability and transparency. Care would need to be taken so as not to kill the goose that lays the golden egg by excessive taxation of the small formal sector. The way forward is to broaden the tax base, for instance, by taxing self-employed professionals and urban commercial housing.
The design of a tax system for natural resources is complex and needs to reflect country specificities of geology and risk. While the potential returns from the taxation of natural resources in Sierra Leone are very large, over the past decade, natural resource revenues as a share of total government revenue were lower than all but one other country of 47 countries recently compared by the IMF.
Possible Action Point: The government should determine whether its current tax design is satisfactory, and if not commission an independent expert review. The IGC has recently provided such a Review for the Government of Zambia.
By Paul Collier
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