Africa and the private sector challenges and difficulties

African continent suffers from fragile private sector dynamism
Puerta principal de la Zona Internacional de Libre Comercio de Djibouti (DIFTZ) AFP/YASUYOSHI CHIBA

(DIFTZ) AFP/YASUYOSHI CHIBA  -   Djibouti International Free Trade Zone main gate

The private sector is an important source of economic growth, and Africa needs to enhance it.

Entrepreneurship in Africa is a major challenge for job creation in a continent where the growth of the working age population will be the highest in the world by 20501.  Hence the importance of public-private dialogue, and the role that professional organisations can play, in achieving the better business environment so necessary for Africans today. 

Private sector activities and investment are important sources of economic growth, job creation and sustainable development. On average, the private sector contributes more than 80 percent of government revenues in low- and middle-income countries through taxes on companies and employees. It generates more than 90 percent of employment in developing economies, including both the formal and informal economy. Most African private enterprises are small; very few are medium and large ("the missing middle" and "the missing big"). Small firms are less productive than larger ones, particularly in manufacturing, small and medium-sized enterprises (SMEs) in Africa struggle to survive and grow into large firms, largely due to financial constraintsi (AfDB 2019). Even so, SMEs are considered the backbone of African economies, accounting for about 90 per cent of all private enterprises and accounting for more than 60 per cent of employment in most African countries (ITC, 20182).

Grúas y contenedores vistos en APM Terminals en el puerto de entrada en Apapa, Lagos, Nigeria 30 de julio de 2019 REUTERS/TEMILADE ADELAJA
REUTERS/TEMILADE ADELAJA-Grúas y contenedores vistos en APM Terminals en el puerto de entrada en Apapa, Lagos, Nigeria 30 de julio de 2019

The productivity gap between SMEs and large firms is due to the low value-added and labour-intensive sectors in which SMEs predominantly operate, as well as their limited use of technologies and low participation in foreign markets. However, as is often the case, SMEs that export or operate internationally are more productive, contribute to higher-paying jobs, especially in low-wage segments of the economy, and grow 4 percentage points faster than non-exporting SMEs. (Edinburgh Group 2013ii)  

Characteristics of the private sector in Africa

The private sector in Africa has some characteristics that set it apart: 

Informality. Informal companies group together all the productive entities that are illegal for the State (undeclared companies), the UNWTO (World Labour Organisation 2018) estimates that they represent 80% of jobs in Africa. By comparison, according to this organisation, the informal sector accounts for 65% of jobs in Asia, 40% in America (North and South) and 25% in Europe. Another fact to keep in mind according to the UNWTO: only 16 of the 73 million jobs created in Africa between 2000 and 2008 were occupied by young people between 15 and 24 years of age. This age group represents 23.5% of the 38.1% of the total number of working poor in Africa. Nearly 16 million young people were unemployed in 2018. Young people usually find their first job through informal employment, but the COVID-19 crisis could destroy some 20 million jobs on the continent.

Camiones aparcados esperan en una cola de 10 km, para cruzar la frontera keniana-ugandesa desde la ciudad de Busia, Kenia REUTERS/BAZ RATNER
REUTERS/BAZ RATNER-Parked trucks wait in a 10 km queue to cross the Kenyan-Uganda border from the town of Busia, Kenya.

The preponderance of micro-enterprisesiii.  The share of enterprises with less than 10 workers in Africa is 10% higher than in other developing countries. Africa lacks in many cases medium and large enterprises.

African enterprises are less productive. On average, an African worker is less productive than a worker in a similar firm in a developing country, according to the World Bank's Enterprise Surveys database. (Source: Casting a Shadow Productivity of Formal Firms and Informality Mohammad Amin Franziska L. Ohnsorge Cedric Okou,2019.  See endnote)

This fragile dynamism of the private sector has several known causes and they are: the poor allocation of the factors of production (capital and labour), the low level of education, the poor quality of infrastructure (transport, energy, communications, etc.), and the state is unable to provide the necessary public goods and services, as well as a coherent and defined regulatory system, because it lacks them.  And in all of this, and we will go into this now, the bad governance that we will find in several African countries is largely to blame.

Public governance in Africa

There are several definitions here. Good public governance could be defined as the ability to devise and implement policies oriented towards the collective interest. The concept of good governance leads to transparency of public action, control of corruption, free functioning of the market, democracy and the rule of law.

These terms are part of any national poverty reduction strategy and are the key in many cases to the allocation and distribution of funds (financing) from major donors and fundersiv.  

Puerto Multipropósito de Doraleh en Djibouti AFP/YASUYOSHI CHIBA
AFP/YASUYOSHI CHIBA-Doraleh Multipurpose Port in Djibouti

It should be noted that notions of "Afro-pessimism" regarding governance are in many cases misguided, as several African countries have significantly improved their governance in the last decade, such as Ghana, Liberia, Rwanda, Angola, Ethiopia and the Democratic Republic of Congo, albeit often from scratch or from a very initial base. In any case, governance "if it cannot be measured", as Lord Kelvin put it, "cannot be improved". 

The public governance problems faced by many African countries are particularly detrimental to the development of private enterprise, as the rules of the economic game are broken, since entrepreneurs need transparent and coherent rules if they want to make long-term investments and thus develop. The excessive regulations and procedures that must be complied with greatly hinder the development of the company itself and its investment initiatives. A clear example of this is reflected in the World Bank's Doing Business rankings, where the costs of administrative procedures for setting up a company, obtaining a building permit, transferring property or executing a contract in Sub-Saharan Africa are much higher than in other regions of the worldv.  The regulatory framework must also be impartial and apply to all in the same way in order to ensure a healthy insolvency environment (how many regimes have favoured a certain business environment close to the ruler in power and his family clan)! But it is not only politicians who are responsible, but also some private companies dedicated to conquering the state by influencing the creation of a certain law in their favour and thus obtaining certain privileges when it comes to obtaining permits, and better property protection rights either through legal means (lobbying, financing electoral campaigns) or illegal ones through the corruption of leaders and public officials. How many companies have been portrayed in this modus operandi; in the long run the only thing they do is damage their international image and not be respected or considered in future tenders and public tenders, as well as being fined. On the other hand, in places where corruption is prevalent, companies that want to succeed suffer additional costs by employing strategies to avoid bidding in certain markets and taking secondary routes: for example, South African companies near Maputo, Mozambique prefer to import their goods from the port of Durban in South Africa in order to avoid having to pay port officials under the table despite having to suffer additional customs duties, and having to deviate from their route by making a much longer journey (over 300 km on averagevi). 

Aprendices aprenden a sangrar un árbol de hevea para cosechar caucho de látex en una plantación en Sikensi, a unos 50 km al noroeste de Abiyán, al sur de Costa de Marfil AFP/ ISSOUF SANOGO
AFP/ ISSOUF SANOGO-Apprentices learn how to indent a hevea tree to harvest latex rubber at a plantation in Sikensi, about 50 km northwest of Abidjan, southern Côte d'Ivoire.

Despite all this, is the legendary African corruption, the archetype of bad governance, still a brake on the subcontinent's growth? Jean-Michel Severino/Olivier Ray in their book 'Le temps de l'Afrique' argue that there is indeed a pathological form of predatory corruption that exists in rentier and fragile states. However, in fast-growing countries, petty corruption often smoothly supplants economic relations, while formal systems of relations and exchange are slow and ineffective. This often occurs at times of economic take-off when administrative bureaucracies are ill-equipped to respond effectively to management and administrative demands. The same authors argue that vigorous economic growth could be compatible with a high level of "benign" or "stable" corruption. How then can it be explained that countries with high levels of corruption such as Mali, Tanzania, Mozambique and Uganda have not been prevented from growing at considerable rates over a long period of 10 years? 

It is true that corruption does not originate in black Africa, and Africans are not the only ones susceptible to it; it exists more or less everywhere and in various forms. The problem is when (and this is the case in many African countries) it becomes legitimate.

Corruption has been the driving force of the administration and the state to such an extent that citizens have gradually come to realise that it is inherent in all bureaucracy. We know that in black Africa everything can be bought and sold, from school grades, diplomas, public jobs, false marriage documents, deaths and births, etc. Are we talking about something that is accepted, whether it is major or minor corruption? How do we get out of this quagmire?

Mercado de ganado de Merille, a unos 411 km al norte de Nairobi AFP/ TONY KARUMBA
AFP/ TONY KARUMBA-Merille cattle market, about 411 km north of Nairobi.
In any case, it is business-minded and necessary to strengthen institutions

In general, the quality of institutions and prosperity go hand in hand. Countries with accountable and well-managed institutions are better able to deliver public services and create an environment conducive to job creation and growth. Trust between citizens and those who govern them is based on the transparent use of public resources. It is also a way to better target public spending and make it more efficient. If there is one formula in development that can be applied everywhere and in all circumstances, it is this one, which combines improving institutions, increasing domestic resources and mobilising citizens. 

For chronic mismanagement and corruption demoralise citizens and undermine their trust in the state; corruption exacerbates poverty, exposes the poor to all forms of exploitation and forces them to pay bribes to obtain essential services (e.g. health and education); and citizens cannot fulfil their potential if they do not participate in the governance of their countryvii

Bibliographical references:

1 - World Population Prospects 2019 (departamento de asuntos económicos y sociales de la ONU)
2 - International Trade Centre. El Centro de Comercio Internacional (ITC) es la única agencia de desarrollo que está totalmente dedicada a apoyar la internacionalización de las pequeñas y medianas empresas (PYMES).

i - Las entidades de crédito perciben a las pymes africanas como estructuras de riesgo: poco resistentes y frágiles en términos de actividad, solvencia y gestión.

ii - Edinburgh Group es una coalición de 16 organismos contables de todo el mundo, que representan a más de 900.000 contadores profesionales en países de África, América del Norte, Asia, Australia, Europa y América Latina. Formado en 2000, la misión del Grupo de Edimburgo es asegurar que el desarrollo de la profesión contable internacional satisfaga las necesidades de sus diversas partes interesadas, reflejando el progreso en la economía global y la sociedad en general.

iii - 

iv - El Banco Mundial a la hora se repartir subvenciones entre los PMA (países menos avanzados) se sirve del CPA (Country Policy and Institutional Assessment) en donde existe una horquilla de evaluación de beneficiarios clasificados según la calidad de sus políticas. Cuanto mejor este gobernando un país, más derecho tendrá a beneficiarse de un sobre de ayuda importante, en virtud del principio que la ayuda siempre será más eficaz en un país bien gobernado. WGI (Worldwide Governance indicators) What is Governance? Governance consists of the traditions and institutions by which authority in a country is exercised.  This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them. 

v - Fuente: 

vi - La economía africana 2021 AFD.

vii - (La bonne gouvernance est à la base de la lutte contre la pauvreté et la corruption : Sri Mulyani Indrawati. Banco Mundial