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.
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-Ã -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.