TAXATION, INFLATION RATE, AND ECONOMIC DEVELOPMENT IN WEST AFRICA (1980 – 2022)

CHAPTER ONE

INTRODUCTION

1.1 Background Of The Study

The extent to which tax revenue stimulates economic performance in an economy especially in developing nations has continued to attract empirical debate. In 2014, eight African countries - Cameroon, Côte d‟Ivoire, Mauritius, Morocco, Rwanda, Senegal, South Africa and Tunisia reported tax revenues as a percentage of gross domestic product (GDP) ranging from 16.1 to 31.3% (Revenue Statistics in Africa, 2016). Indeed, all of these countries presented rise in their taxation-to-GDP ratios ranging from 0.9% points in Mauritius to 6.7% points in Tunisia.

When compared to the average of organisation for economic co-operation and development (OECD) countries, the increase of 34.4% was only 0.2 percentage points higher in 2014 than in 2000. The revenue data for these eight African countries accounted for almost a quarter of Africa‟s total GDP (Revenue Statistics in Africa, 2016).

Some African countries are significantly dependent on non-tax revenues, and more specifically on grants such as foreign aid (Kenya) and resource rents from oil (Nigeria and Angola) and Bauxite (Zambia); these countries‟ economies tend to be highly volatile that their finances could not be stabilized and predictive through tax revenue. The nagging question is whether the revenues from taxation in African countries are growing as a proportion of national incomes. This becomes critical in view of the falling prices of oil and other commodities (Ziaur, 2018).

Regarding inflation, there has been increasing interest in economic and monetary integration around the world since the introduction of the euro in 1999. This is because monetary integration is considered essential in international economic relations as it involves the use of a common currency in two or more countries while centralising monetary authority in a single joint institution (Mundell, 1961; Mckinnon, 2000). he member countries of a monetary union usually relinquish their national currencies and adopt the union’s common currency as a medium of exchange. The adoption of a common currency does not come without some costs to its members as they are expected to have the same response to external and internal inflation shocks (Ziaur, 2018). However, the associated benefits of the union as noted by some authors tend to outweigh the costs. The union reduces the risk of high inflation, cuts transaction costs, reduces exchange uncertainties for firms trading within the union and strengthens the member countries’ position in trade negotiations with other economies. It also creates opportunities within and beyond the constituent states by removing some of the payment obstacles to trade (Harders and Legrenzi, 2008). An independent institution is often established to provide a framework for member central banks to start the integration and preliminary preparations for the printing and minting of the currency (ECOWAS, 2017).

A survey of evidence from empirical studies reveals that the Africa region has been characterised by dismal economic performance as evident in their rising inflation rates, low output growth, rising unemployment rates and high dependence on imports among others (National Bureau of Statistics 2019). In an attempt to tackle these weak economic conditions, African nations including those in the West African sub-region have initiated a series of economic policy reforms and consolidated strategies. One of such policy strategies is the adoption of regional economic and monetary integration across the region. The quest for a monetary union within the Economic Community of West African States (ECOWAS) began with the establishment of a regional body in May 1975. After the establishment of the ECOWAS; there was only one monetary zone in West Africa; the West Africa Economic and Monetary Union (WAEMU1), which comprises the francophone West African countries (ECOWAS, 2017). With the establishment of the WAEMU, the francophone member countries use CFA as their common currency, while the Anglophone West African countries use their independent currencies. To fast track the common monetary policy framework of ECOWAS, a second monetary zone, the West African Monetary Zone (WAMZ) for Anglophone West Africa was initiated in 1999. This second monetary zone is expected to later merge with the existing monetary union, the WAEMU to form a single currency in West Africa (Olu, & Idih, 2015). From the above analysis on taxation and inflation, this study seeks to assess taxation, inflation rate, and economic development in West Africa between 1980 - 2022.

1.2 Statement Of The Problem

On taxation and economic development in African countries, empirical literatures depict different and disaggregated findings. Ugwunta & Ugwuanyi (2015) and Wambai, & Hanga, (2018), indicated positive relationship between taxation and economic growth. On the other hand, a negative nexus was reported in the works of Yaro, & Adeiza, (2021), Saibu (2015) opined that progressive taxation dampens investment, risk taking, and entrepreneurial activity due to the fact that a disproportionately large share of these activities is done by high income earners; contrary to this, some studies still find no significant relationship between the variables.

Jaimovich, Rebelo, (2015) has found support for the position that taxes have no impact on economic growth when the USA experience from the end of World War II in 1945 to 2011 was examine. The examination of 18 OECD countries by Agarwal, (2019) also report that the effect of taxation on national growth was insignificant. Although effective consumption taxes increase investment, the overall tax burdens have no effect on investment or growth of the economy.

The impact of taxation is also not homogenous; the investigation on taxation impact on economy by Jens et al. (2011) using 21 OECD countries between 1971 and 2004 finds that corporate taxes has been most harmful to the economy, likewise taxes on personal income, consumption, and property. Indeed, progressivity of personal income taxation is deleterious to economic growth. When the top marginal rate on personal income increased, productivity and growth are adversely affected.

On inflation and economic development in African countries, A lot of empirical studies have been conducted to establish the optimal inflation rate for developing countries such as the WAMZ member countries, however, there has been inconclusive and significant prevalent differences in the results obtained from empirical studies. While Uzonwanne, (2015) and numerous others favour single-digit inflation for the WAMZ, Olu, & Idih, (2015) and a host of others are of the opinion that the optimal inflation rate for developing countries like the WAMZ is higher than 10.0 percent. One wonders if the difference in the established threshold point in the earlier studies is as a result of different time periods, methodological issues or structural differences in the countries. It is apparent that the impact of inflation on output growth in the WAMZ is still an unresolved issue in the empirical literature, thus necessitating the re-investigation of the threshold level of inflation for the WAMZ.

The conflicting findings on the relationship between taxation, inflation rate and economy growth necessitate this study which seeks to further investigate both the relationship between these variables in Africa. The study covers forty two years between 1980 and 2022.

1.3 Objectives Of The Study

The primary objective of this study is to examine taxation, inflation rate, and economic development in West Africa between 1980 - 2022. Specific objectives of this study are:

To determine the relationship between taxation revenue and economic development in West Africa.

To determine the relationship between taxation revenue and economic development in West Africa.

To determine the relationship between foreign direct investment and economic development in West Africa.

1.4 Research Questions

The following research questions will be answered in this study:

Is there a significant relationship between taxation revenue and economic development in West Africa?

Is there a significant relationship between inflation rate and economic development in West Africa?

Is there a significant relationship between foreign direct investment and economic development in West Africa?

1.5 Research Hypotheses

To determine the effectiveness of this study, the following research null hypotheses will be formulated to guide the study and it will be tested at 0.05% levels of significance.:

HO1: There is no significant relationship between taxation revenue and economic development in West Africa

HO2: There is no significant relationship between inflation rate and economic development in West Africa

HO3: There is no significant relationship between foreign direct investment and economic development in West Africa

1.6 Significance Of The Study

This study is of significance in three respects including helping monetary authorities to appreciate variables that impact on West African countries inflation, with a view to managing such variables appropriately and effective. Also, the recommendations, based on the finds are expected to assist the government in finding a lasting solution to the problem of inflation in Nigeria.

Additionally, this study period spans economic cycles of West African countries and provides an opportunity for a comprehensive assessment of the effect of inflation rate and taxation revenue on selected African economies.

Finally, this study will provide guide and a reference material for other researchers who might be interested in conducting research similar or related area of study.

1.7 Scope Of The Study

Broadly, this study focuses on taxation, inflation rate, and economic development in West Africa. Specifically, this study focuses on determining whether there is a relationship between taxation and economic development in West Africa, determining whether there is a relationship between inflation rate and economic development in West Africa among others. The study will cover a period of 42years starting from 1980 to 2022.

1.8 Definition Of Terms

Inflation: In economics, inflation is a general rise in the price level of an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services.

Inflation: In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.

Economic development: In the economics study of the public sector, economic and social development is the process by which the economic well-being and quality of life of a nation, region, local community, or an individual are improved according to targeted goals and objectives.