Taxation: can the Movement lead second generational reforms in our economy?

Dr. Arkebe Oqubay has some special synonymy with the hard work we like to root for in Africa. As mayor of Addis Ababa from 2003 to 2005, he was credited with the city's transformation to modernity. Now, as special adviser to the Prime Minister of Ethiopia, Oqubay leads a huge effort to produce two million square meters of factory space in several industrial parks around Addis, every year with an expectation to generate 200,000 jobs for the Ethiopian people.

Oqubay has something even more appealing to me. The vision for the business we run in the countryside and the city is summed up in three words: "Made in Africa". To my pleasant surprise, I found out recently Dr. Oqubay has published a book chronicling the path to Ethiopia's industrial development, with a title similar to our vision; "Made in Africa".

The main reason, however, I highlight the work of Dr. Oqubay is that he reminds NRM leaders of a principle articulated by Karl Marx and Frederick Engels, two important 19^th century thinkers whose work influenced the early thinking of the founders of the Movement, especially in understanding social and economic evolution. This principle is called "The law of the negation of the Negation".

Just so the reader is not lost in the colloquialism, this law simply means that historically, the path to development for any society is a fight between two opposites; two forces diametrically opposed to each other.

For example, lower forms of production, say serfdom and peasantry, is fought and perhaps eventually destroyed by newer means and improved forces of production in order to allow an even newer and deeper form of production to emerge such as industry and processing. Even then, the process repeats itself and latest forms of production such as the knowledge industry eventually supersede what was considered the best of yesterday.

Let us assume you knew what to do in your core competence area and you achieve a measurable level of success but then you forgot to advance to a newer level; Someone coming from behind you, will use the very tools of thinking and your experience, to birth new changes that can eventually sweep you off the ground and if you are not fortunate, bury you. This principle works well in the economy as it does in politics and societal progress.

In Uganda's case, the tools that were used up to 1997, to stop revenue leakage, build new sources and raised collections from sh5b to the current sh13.1trillion have run their course.

The planners now seem to make a huge effort to tax production, a fundamental departure from the cardinal principle of growing an economy. The very reform structure initially adopted to increase investment and production has been turned on its head. Oqubay speaks of what is helping Ethiopia attract more investment in the country:  "From the very beginning, we engage investors so that we include their requirements…[in building the industrial parks]. We have to build to a high standard of eco-industry so [that] we use this as a leverage and a source of competitive advantage".

He adds, "We give them [investors] a profit tax holiday for many years; we allow them to import duty free machinery and when they export, they do not pay any type of taxes". If this sounds like your country up to 1996 (government abolished the original 10 years tax holiday and replaced it with selective exemptions on specific raw material and with the income tax act), the reader should be permitted to ask why there has been a policy reversal and little results for Uganda since.

Our planners abandoned the idea of building local content in whatever investment comes into the country, restricted our thinking to only taxation, donor aid and high interest borrowing. Now, the planners have run out of new sources to raise revenue and are turning on the chicken that lays the eggs, the small to medium businesses employing thousands of young Ugandans.

The difference with Ethiopia is that the relaxed tax rules over the years have attracted investments in the leather products, foot wear, textiles, pharmaceuticals, engineering and defense industries. Ethiopians have built 1,350 technical schools with "capacity to train a million students" to work in these emerging sectors of the economy, according to Oqubay.

In Uganda, our planners seem to enjoy the status of running a high tax country. It is easier for them to increase tax than to find new sources or perhaps it could be that Ugandans are simply too compliant to question the basis of some of the taxes arbitrarily imposed.

From all the tax heads: VAT (18%), individual income tax for persons earning above sh4.9m (30%), corporation tax (30%), Capital gains tax (30%), Excise duty on building materials such as cement (sh1,000 for a 50kg bag) or lubricants for vehicles, our main form of transport (from 5% to 10% in the last budget, withholding tax (6%) and many more, Uganda ranks high in tax rates.

But the country neither has a large or rich market for its local products nor does it present any unique incentives radically different from other nations in the world, against whom we compete for investment capital. Evidence shows nations even as small and rich as Singapore fight to keep their taxes very low while offering wide ranging incentives in real estate, professional skills, manufacturing, aviation, software development and pharmaceuticals.

Just to give the reader an unusual example in size and industry but no less important in tax policy, one of the smallest landlocked states of Europe, Andorra, lies below the Pyrenees. Readers with an interest in history remember these mountains along with the Alps were scaled by an African general called Hannibal from Carthage, who matched his army in winter into Italy, attacked and defeated the mighty Roman army at the famous battle of Cannae in 216 BC.

Today's Andorra, a rich enclave for European expatriates, sought to diversify her economy from banking and finance after the 2008 financial crisis, to real estate and tourism. Andorra cut income tax rate to 5% and a maximum of 10%. Why? If you need to grow a new sector, you must bend backwards long enough for investors to believe your consistency and reliability.