Is Africa Open for Business?

Tuesday, January 07,  2020 /12:19 PM  / By FDC / Header Image Credit: EcoGraphics

 

The
October releases of Doing Business 2020 from the World Bank and the Global
Competitiveness Report 2019 from the World Economic Forum (WEF) offer a fresh
chance to assess the relative standing of Sub-Saharan Africa (SSA). Both convey
the message that SSA is improving in absolute terms but making slower progress
in relative terms because other regions are reforming at a similar or faster
pace. Within this broad context, some SSA countries are rising up the rankings
while others are falling, underlining the region’s diversity. A notable feature
of the various league tables now published-including Transparency
International’s Corruption Perceptions Index and the Economist Intelligence
Unit’s Democracy Index-is the leading position held by a select group of
countries that regularly appear in the top 10 of several indices: Botswana,
Cabo Verde, Ghana, Mauritius, Namibia, Rwanda, Seychelles, Senegal and South
Africa. This is hardly surprising, given the obvious correlations between
governance, corruption, economic performance and policy coherence.

 

No
single index can capture the complexities of a country’s business environment,
as each takes a different perspective. The Doing Business index, covering 190
countries, focuses on the regulatory framework, using objective measures such
as the time needed to start a business, making it simple to understand and
explaining its appeal to policymakers. It also has flaws (as do all the
indices), as many aspects of the business climate are not included, such as
corruption and infrastructure. The Doing Business index also applies solely to
mid-sized local firms, overlooking small enterprises and multinationals, which
typically encounter different rules. The WEF’s competitiveness index takes a
much broader perspective, assessing factors such as institutions, skills and
innovation, but many parameters are subjective and country coverage is smaller
(at about 140).

 

Additionally,
some pillars, such as health and the macro-economy, are based on just one or
two underlying indicators. Regular changes in methodology in both indices make
comparisons over time less reliable. Our business environment rankings cover
just four African countries: Nigeria, Angola, South Africa, and Kenya. The
scores for these countries typically suffer from weak corporate governance and
regulation, as well as poorly trained labour forces and, in countries such as
Angola and Nigeria, an over-reliance on hydrocarbons. Nevertheless, despite the
problems of operating in the region, rates of return can be high for those
firms that can master the complicated political environment and regulatory
climate.

 

 

Doing business in SSA

 

In the
WB Doing Business league, Mauritius tops the regional rankings by a large
margin- coming first in five of the ten components- and stands 13th globally.

 

Tarnishing
this impressive performance is its reputation for facilitating tax evasion.
Rwanda ranks second regionally (out of 48 countries), despite dropping nine
places globally to 38th. Kenya, third regionally, made a strong advance
globally, rising five places to 56th, to mark a fifth consecutive year of
improvement.

 

Kenya
undertook several reforms in the year to endMay (the cut-off point), making it
easier to deal with construction permits, secure an electricity supply, obtain
credit, pay taxes and resolve insolvency, although registering property became
harder. Illustrating potential flaws in the index, Kenya ranks first globally
for protecting minority investors, which seems far-fetched. South Africa,
fourth in the region, dipped two places globally to 84th, despite facilitating
contract enforcement and, in contrast with Kenya, is sliding over time. Zambia,
Botswana, Togo, Seychelles, Namibia and Malawi complete the SSA top ten.
Nigeria’s regional (17th) and global (133rd) rankings are much poorer, although
the World Bank named the country as one of the top ten global reformers this
year, alongside Togo. Last year, 12 in contrast, SSA claimed five of the top
ten spots: Djibouti, Togo, Kenya, Cote d’Ivoire, and Rwanda.

 

Competitiveness is a relative concept

Several
of the best Doing Business locations in SSA also feature in the regional top 10
in the WEF’s competitiveness index. Mauritius claims top spot (out of 34
countries), to lie 52nd globally, followed by South Africa, which posted a
seven-place global rise to 60th, on the back of a strong improvement in its underlying
score, especially in the institutions category. Seychelles came third, Botswana
fourth, Namibia fifth, Kenya sixth and Rwanda seventh, with both Namibia and
Rwanda, like South Africa, registering solid advances. Ghana, Cabo Verde and
Senegal (114th globally) rounded off the top 10. A large majority of SSA
countries posted higher scores in the 2019 WEF index, but only nine made
ranking gains and, by extension, competitiveness gains.

 

List-topping countries 

Given
the close links between good governance and economic performance, it comes as
no surprise that SSA’s top-ranked states in the CPI and the Democracy index
feature many of the same names. Seychelles leads the corruption rankings,
followed by Botswana, Cabo Verde, Rwanda, Namibia, Mauritius, Senegal and South
Africa. In terms of democracy, Mauritius leads from Cabo Verde, Botswana, South
Africa, Lesotho, Ghana, Namibia and Senegal, with other countries falling below
the threshold for being rated as democratic. Yet another league, the Fragile States
Index, is similar, with the least fragile SSA countries being Mauritius,
Seychelles, Botswana, Ghana, Namibia, Cabo Verde, Gabon and South Africa.

 

From a
broad perspective, the countries that appear in the top 10 in all five indices- Botswana, Mauritius, Namibia and South Africa-can be seen as the most
favourable business locations. South Africa’s orbit extends to the other three,
to varying degrees. Cabo Verde, Ghana and Seychelles (with four top ten),
Rwanda and Senegal (with three) and Benin, Kenya, Lesotho and Zambia (with two
apiece) all hold promise but each has particular challenges. Kenya, for
example, ranks well on regulations and competitiveness, but falls down on
corruption and democracy.

 

The
various indices highlight two main factors. SSA is advancing in absolute terms,
by cutting red tape for example, but is failing to make gains compared to other
regions. Second, regional gains are concentrated in a select group of
countries, while others risk lagging behind. In the medium term, SSA will start
making gains vis-à-vis other regions, as they reach the limits of improvement,
although divergences and disparities within SSA will be more persistent. The
region is clearly open for business but the indices can provide no more than a
snapshot, sometimes fuzzy, of the operating environment in the region’s diverse
markets.

 

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