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Tuesday, January 30, 2018

REDUCING TAXES ON SMARTPHONES IS SMART ECONOMICS

In 1999 Uganda’s GDP growth jumped to 8.1 percent from 4.9 percent the previous year. There was no coffee boom that year. There was El Nino, the freak weather pattern which manifested itself in Uganda as an unusually long rainy season, in 1998 which affected the harvests.

But something else happened in 1998 whose effect rolled into 1999. A second network operator was licensed in 1998 and in 1999 Uganda became the first country in sub-Saharan Africa were mobile phone coverage exceeded the number of land lines.

It was not saying much at the time seeing that Uganda only had 50,000 landlines, but it illustrated the explosion in mobile phone uptake. Essentially mobile users had skyrocketed from about 4,000 the previous year to beyond 50,000 in about 12 months.

So the spike in growth in 1999 was in no small part to the heavy investment required to roll out the network across the country but also, down to the increased economic activity the little gadgets stimulated...

While around that time it was reported that Ugandans were burning the wires talking to all and sundry – each user was earning the networks about $8 per month or about $100 a year, this was not only idle gossip. They were saving time and money finding out about markets, supervising projects remotely and catching up with relatives and friends at less cost to both sides than previously.

Then the only service provided was voice there were no text messages, no WhatsApp and no Facebook.

I couldn’t find any research in Uganda on how much economic activity has been generated as a result of mobile phones and more specifically smartphones, but the anecdotal evidence cannot be ignored.
Businesses are growing up around smart phones.

Numerous goods and services can now be bought off the phone from food to houses to counselling services. Then there is mobile money which in 2016 saw sh44trillion changing hands on all platforms. A figure that continues to grow. This is not only one and half times the current national budget but it is almost half the national GDP.

How do you think this money was being shifted before mobile money?

My guess it only a fraction of these sums were changing hands. Think what it took to get money to the village those days. One would often have to know someone who was going in that direction and then there had to be the happy coincidence that when they were going you also had money on you. 

And when the messenger reached the village he did not necessarily make a beeline for the beneficiary’s doorstep meaning the person may get the money days or even weeks after it was sent or not at all.

What happened when you got home and found that your power had been cut off?

 If you were law abiding you grit your teeth through a candle lit night, go to the bank then go settle your bill at power company and then beg them to reinstall the fuse – which was what they confiscated when you hadn’t paid. There was no guarantee the man with a fuse would reconnect you that day.

And what would happen if you jumped into a cab and at the end of the journey you didn’t have enough money for the fare?

You did surrendered some item in your possession as compensation or as collateral for when you could pay the taxi driver, but in worse case scenarios you might beaten to within an inch of your life or worse.

Long story short. These maybe small transactions but they are economic activity that was not there before and when aggregated is significant and growing every year.

"The growth in internet connectivity Uganda, now at about 30 percent of the population – below Kenya’s 68 percent,  has seen a jump in recent years with the falling prices of smart phones. It therefore follows that a fall in taxes will lead to an increase in smartphone users who can then be exposed to and take advantage of this new economy...

The conservatives will argue that smart phones will only be abused for their social media applications, so why should we forgo revenue for unserious people?

Mobile phones demonstrate the network effect, that a mobile phone becomes more and more useful the more people have one. And the more people have one the more people will get one – a virtuous cycle.

In the early days of mobile phones when they were just a handful of them snapped to their owner’s belts, mobile phones were merely a status symbol – people used to walk around with them even when they had no credit or the battery was flat, just to be seen.

Today a mobile phone is not just a necessity, it is  an appendage to ourselves. No one leaves home without their mobile phone. It would mean being out of touch, unreachable by your business partners or unreachable from your bosses at or from the interviewer for your next job.

And its not the most radical tax reform we have done in recent memory.

In the 1980s at time when we need every penny we could get as a country, we scrapped taxes on coffee exports – which accounted for at least seven in every 10 shillings in revenue the government collected. The leap of faith was taken because it was believed the sacrifice would stimulate coffee exports and pay off in higher exports, more jobs and higher hard currency earnings. Even then there were loud naysayers and prophets of doom – mostly older technocrats who couldn’t fathom a country without the coffee export tax (where are they now I wonder).


They say that a normal phone has more processing power than the computers that put a man on the moon in 1969. Smart phones have multiple times more processing power than a non-internet enabled phone has. Imagine how that economic activity that a phone connected to millions of other phones can unleash?

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