Introduction to a Personal Struggle
For many individuals, the topic of sending money home to relatives is a deeply personal issue. This is particularly true for Henoch Aikins, a political economist focusing on Africa. As someone who comes from a typical village with many people dependent on him, Aikins understands the importance of financial transfers. He grew up in Pretoria, South Africa, but his family is from the small town of Agona Kwanyako, about 70 kilometers from the Ghanaian capital Accra. His job allows him to provide an important source of income for many in his family, covering expenses such as his mother’s medicine bills and his cousins’ training.
A Global Influence
Aikins is one of many millions of Africans worldwide who send financial transfers to their home country or region. The importance of these transfers has been highlighted by a recent tax law passed by the US House of Representatives, which includes a 3.5% tax on transfers made by non-US citizens. Although the original plan was to impose a 5% tax, it was reduced before the vote. This legislation has faced criticism, particularly in Latin America, where poor migrants from Mexico, Central, and South America are likely to be severely affected. According to Aikins, Africans will also be significantly impacted, as these transfers have a substantial influence on African economies.
The Importance of Transfers to Africa
Transfers are crucial for Africa for several reasons. Firstly, they represent a large share of income for many economies on the continent, which are among the poorest in the world. Recent data indicate that annual transfers now outweigh both aid and foreign direct investment (FDI) as income in the continent. Aikins notes that transfers are currently the "largest external financial river to Africa." Unlike aid, which often comes with administrative problems, transfers go directly to individuals and households. This makes them a vital source of support, especially for groups with lower incomes who are most dependent on transfers from relatives or friends working abroad.
The Impact of Taxation
The proposed tax on transfers is expected to have a significant impact on migrants and their families. Monica de Bolle, a Senior Fellow at the Peterson Institute for International Economics, criticizes the transfer tax, believing that migrants will find ways to avoid it. She points out that taxation of transfers is rare worldwide and thinks that this policy is part of the Trump government’s campaign against illegal migration. The consequence will be to push migrants towards unofficial channels, which could lead to a loss of transparency and potentially harmful effects on the economy. Aikins agrees, stating that the tax will have an enormous impact on how people send money to their relatives at home, potentially driving the use of cryptocurrency and other methods outside the formal network.
A Far-Reaching Consequence
Some African countries are more dependent on transfers than others. While major economies like Egypt, Nigeria, and Morocco receive the highest total levels of transfers from abroad, smaller economies such as Lesotho, Comoros, Somalia, Gambia, and Liberia are particularly vulnerable, with transfers making up around 20% of their GDP. The taxation of transfers could exacerbate economic challenges in these countries, making it even harder for families to support themselves. As Aikins reflects on the potential consequences for someone in a village like his, who depends on a relative sending money from the USA, it becomes clear that the effects of this policy will be far-reaching and deeply felt.
