Our economic model, of circumstance, creates wealth but doesn't do a good job at organically distributing wealth.
Tax and employment are arguably the most critical levers of a modern economy that often get misrepresented in our economic development narrative.
Tax, at best, is a wealth redistribution tool, where the primary wealth distribution tool of any modern economy is employment. This basically means that wealth distribution is primarily done through the productive sector, which serves the function of organizing the factors of production (entrepreneurs, labour, land, and capital) and by doing so also determines how income is distributed amongst these factors.
Essentially, it is entrepreneurs and enterprise that define how wealth is organically distributed and not the Government, per se. The government being a temporary custodian of the people’s will uses tax and other methods to protect the interest of those who put it into power. The people, who are the masses, are almost always the poorest of the society often depending on these entrepreneurs to drive wealth creation for them to get a piece of the economy. The enterprise sector often forgets that, in a much as they create wealth, they do it at the mercy of the poorest of the economy, whom only the government can hold at bay. Government has the task of managing this often conflicting relationship.
As a result, the government will use tax to intervene and to normalize distribution of wealth to ensure more equitable distribution of income without suffocating the appetite for further enterprise. As such, tax can never aptly create and distribute wealth in isolation, only employment can do that.
So globally tax is viewed through this window: governments are required to declare how they will use these levers to navigate the economy safely through the often conflicting relationship between business owners, employees and the communities in which they do business. Some prefer that the wealthy are taxed more so that the government can better serve its people using the collections and some (often on the opposite side) prefer that the wealthy are taxed less to avail them more resources that will stimulate further wealth and consequently job creation to enable increased employment.
This would be the case in a ‘normal’ world but Tanzania is anything but normal.
Tanzania faces a unique challenge that the follow up article to this one titled “A tale of two identities - the moral divide” aims to explain. To drive a better understanding of our unique predicament, I compare Tanzania to Kenya. Unlike Kenya which boasts a strong economy without a ‘nation’ (hence why the constitution reform process was so key to Kenya), Tanzania has a strong nation without much of an economy (hence why a constitutional reform process here may prove to be counter productive).
When I talk of economy in this case, I am not referring simply to the size of the economy, for which I believe the gap between Tanzania and Kenya is narrow and narrowing, but rather, I am referring to economic modeling, which defines how wealth is created and distributed in an economy. Kenya, at independence, inherited the ‘English’ model, where from the outset the private productive/ enterprise sector assumed the role of wealth distribution that overtime, in Tanzania, a much smaller economy then, was assumed by the government. So while in Tanzania we demand better jobs and job creation from Government, in Kenya the same (better jobs and job creation) is demanded from privately owned enterprise.
Strangely, though, even after liberalizing our economy and handing over the productive/ enterprise sector to private ownership, the Government, 30years on, is still held to count for wealth distribution across the land and not the private sector which is now the dominant force in wealth creation.
What went wrong? The answer: politics!
The article, for which this is an add on, narrates the events leading to our current quagmire, where we are in the enviable situation of having a great nation and bullish economic growth but no trickle down effect, yet. From the days of Mkapa’s reforms and official handover of the economy from the State to the private sector, our economy has been growing aggressively but the majority of the populous are not feeling its impact.
Where does the money go? The answer: Nowhere!
Our economic model, of circumstance, creates wealth but doesn’t do a good job at organically distributing wealth. We have basically created a model that enables the rich to stay with their money. The government consequently has to use tax to redistribute this wealth at a great political cost.
Government tax, at best, SHOULD take more from the rich and give it to the poor or take less from the rich so they can be motivated to give more to the poor. The ‘poor’ represents the employed/ employable segment of the society and the ‘rich’ represents the enterprise sector whether publicly or privately owned. Sadly, in Tanzania, due to a poor economic model that does not foster organic distribution of wealth, the tax regime consequently does the very opposite: it ends up taking MORE from the poor to give to the rich.
Our interpretation of private sector ends at wealth creation and not wealth distribution which is key for sustainable wealth creation. This is best evidenced by how we, as a people, obsess over how our local entrepreneurs create wealth (primarily for themselves) but don’t even bother to examine how they organically distribute their wealth through offering quality employment and creating jobs which is the primary function of the productive sector.
Magufuli’s bullish entry into the governance scene, at the outset, in what was an effort to fuel local resource mobilization ahead of a looming financial crunch for the government, presented a unique predicament - does the government need to aggressively solicite tax and to what end?
The government has the pressure to run itself, while ensuring the provision of basic services to a 50m plus population. This pressure is further enhanced by the fact that it can only influence one lever - tax. But if the private does not play its part in wealth distribution by creating quality employment then tax collection can have an adverse effect on not just on the wealth creators but more on those that they have failed to distribute their wealth to equitably as these people will also be subjected to the same stringent tax collection methods but with the disposable income.
So why not just get the privately owned enterprise sector to offer quality employment?
Our poorly managed handover from Ujamaa to whatever it is we have now, created a moral divide in our society that continued to hold the government to count but not the local private sector, which accounts for a majority of the employment opportunities in the country.
Capitalizing on the general ignorance of our populous, the proprietors of this ill fated model, chose to pit the private sector against anything-Ujamaa, at the outset of the economic liberalization movement. This has had the consequence of making some values core to our humanity, that are also central to Ujamaa, like integrity, ethics and social welfare look anti private sector. Private sector’s job is to create wealth and government is left to collect taxes. Before this messaging jelled, we were hit by the mass enterprise wave which professes personal wealth as the source of true economic liberation.
This has had the consequence of making wealth creation the primary social value even if it undermines wealth distribution. With the local private sector now in the clear, the government and ruling party were left holding the can. With minimal tax collection and poor quality employment, the government finds itself between a rock and a hard place every five years.
Our economy is growing and clearly the wealthy are becoming wealthier or at least increasing in number but their wealth doesn’t trickle down to the poor through quality employment; in some cases people are involved in producing what they cannot consume. Yet we celebrate the wealthy and hold to count the government to an extent that we provide them moral cover - they don’t even feel shame in professing their personal wealth while their employees can barely make ends meet, let alone prepare aptly for the future. We demand internationally owned firms best behavior when it comes to quality of employment but turn a blind eye to the local enterprises that employ the majority of our people.
Why should an international firm, like Standard Chartered, which earns a fraction of what some of the locally owned firms make, be able to develop world class resources while these locally owned outfits can only profile their owners?
Remember, by design, republics (in particular democratic republics) are a rejection of an exclusive elite system whether it be privately or publicly formed; if it doesn’t result into a more openly inclusive system, it will be rejected.
Magufuli, who has been playing Robin Hood from day one, has created a political precedence that enables him to pit the poor of a modern economy (employees/employable) against the rich of a modern economy (entrepreneurs/ enterprise owners) to have them (the rich) show them (the poor) where the money is.
Kenya’s economy has achieved robustness because it is attuned to this reality; there is a minimal difference in employment quality between internationally owned Unilever and locally owned Bidco; maybe apart from the global profiling that comes with the former; creating a greater pool for wealth and job creation. With the difference in the size of our economies (Kenya and Tanzania) narrowing, this could be the main reason why Kenya still ‘looks’ miles ahead economically; potentially fostering a more people centered development agenda than us as a result - the irony.