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Financial Transactions Tax Not the Answer for Africa

They say that two wrongs don’t make a right, but what about two failed policies? That’s the hope of French President Emmanuel Macron, who in a recent speech advocated for a Europe-wide tax on financial transactions to fund more foreign aid for Africa. Taxing financial transaction would be a disaster for Europe, while Africa is much worse off as a result of foreign aid. Combining the two doesn’t make them any better.  

Macron’s proposal to revive a European financial transaction tax (FTT) isn’t anything new. The FTT was originally proposed by the European Commission back in 2011 and 2013, imposing a low rate tax on a wide range of trading in shares and derivatives. Yet the previous attempts never managed to get off the ground, faltering without member support—and for good reason.

The FTT wouldn’t achieve any of its desired aims. The original tax was meant to be a form of redress for the financial crisis, playing to the populist hatred of banks in order to repair European government finances. However, it won’t be the banks who bear the cost of the tax, but workers and consumers. Users of financial products, such as mortgages or business loans, will have the costs passed onto them, while workers will have their wages lowered while as the higher cost of capital reduces productivity growth. The result is a much smaller economic pie for everyone, and an even smaller tax base for the government.

Macron should know the problems of the FTT. The French have levied the tax since 2012, with financial services companies fleeing. However, in the wake of Brexit, the French Prime Minister Édouard Philippe has pledged to lower taxes for banks and cut red tape in order to attract bankers over from London. One of the key sweeteners in this deal was the proposed cancelling of the extension of the FTT tax past 2018. But while the Prime Minister supports it, it seems that the President, Macron, has other ideas. Rather than reducing the French tax, it may be easier to apply it to the rest of Europe.

Imposing a FTT to fund a shortfall in government revenue is one thing. But imposing it to increase foreign aid is a disaster. Over the past 50 years, world governments have contributed almost $4 trillion to aid programs, with Africa the largest recipient. Yet economists have often found that this aid has no effect on economic growth whatsoever, while other have found that it even has a negative influence. Zambia is one such example. Given the amount of aid Zambia received between 1960 and the early 1990s, their per capita GDP should have been around $20,000. Instead, an average Zambian in the early 1990s lived off of just $500 per year—less than in 1960.

Perhaps the greatest comparison in aid-driven development is between South Korea and Ghana, who had similar per capita GDPs in the early 1960s. While South Korea pursued a market economy, Ghana embraced a socialist government that was propped up by foreign aid. By 2015, Ghana’s GDP per capita sat at just under $2,000, while South Korea was over $25,000.

More aid is not the answer. A better place to start would be removing European trade barriers—a chief obstacle to African growth. For example, some 10 million farmers in Central and Western Africa who rely on the production and sale of cotton lose up to $250 million a year due to Western subsidies. Another example comes from the substantial EU tariffs on roasted coffee and processed cocoa products. These are exactly the kind of industries that African nations specialize in, but EU tariffs penalize investment in these sectors and keep them from lifting people out of poverty.

European nations should care about the plight of the world’s poor, but taxing themselves to squander aid money is not the answer. The late British development economist, Peter Bauer, said that foreign aid is “an excellent method for transferring money from poor people in rich countries to rich people in poor countries.” Funding more foreign aid through a financial transactions tax would do just that.