Category: Private sector

Africa needs private sector growth and jobs.

If there is one thing that African economies are not good at, it is fostering the growth of the private sector and creating jobs. This problem, more than debt, more than global geopolitics, more than infrastructure deficits is holding the continent back.

As the last two centuries have shown in Europe, America and Asia, the greatest poverty reduction strategy is jobs. People getting regular incomes spend creating demand in the economy and driving growth. They save creating a pool of savings (something else Africa struggles to do) and that is invested in funding the growth fuelled by the growing demand. Africa needs jobs, and to get those we need a growing private sector. On top of this, private sector fuelled growth is indigenous, it is not reliant on cheap western credit, or Chinese largesse.

However, Africa does not benefit from this self-perpetuating driver of prosperity and poverty reduction. Wage employment in sub-Saharan Africa has barely risen 2% since 1991.

Figure 1: Wage and salaried workers, total (% of total employment) (modelled ILO estimate) – Sub-Saharan Africa | Data (worldbank.org)

In fact, we have become so bad at it we have fetishised entrepreneurship, micro-enterprise, and self-employment. Encouraging young people to become entrepreneurs, to hustle, celebrating those that make it while not acknowledging the high failure rates that they experience (estimates suggest that 70-80% of African startups fail within their first five years). More so, the policy makers, multilaterals and foundations that lead the entrepreneur and MSME cheerleading fail to acknowledge that the high cost of credit and capital that fundamentally undermines those same entrepreneurs and businesses is driven by the fact that we have low savings and thus low levels of native capital available for investment. More than that, everyone trying to be entrepreneur, whether they want to or not, does the wider economy little good.

To rekindle our private sector and create jobs. We must create the conditions in which businesses can thrive and hire more people. Today African businesses are strangled by an ever-growing web of regulations, a policy environment that is unpredictable and disconnected from their everyday realities. Africa needs to create its own prosperity, drive its own growth and for that we need jobs, and our policies need to be geared towards that outcome.

Regulation that works not hinders

Regulation is necessary and it is not evil. Standards agencies and food authorities ensure that the food sold to us is safe to eat, medical boards and bar associations ensure that our doctors are not quacks and lawyers are not hacks.

A well-regulated economy is a positive for the private sector, it ensures stability, enables competition by levelling the playing and most importantly protects citizens. Africa, in general does not have good regulatory systems, and as a result the private sector is hampered by old regulations, poorly written regulations, contradictory regulations and sometimes no regulations. What Africa needs is regulation that works and getting there will require regulatory reform that does three critical things, expand capacity, updates and Africanises regulations.

  1. Capacity – many African regulatory agencies are understaffed, under resourced and underfunded and struggle to enforce their mandates. Frustrating businesses that need licenses, permits, approvals, certificates, standards etc. and endangering the public. Regulations are a necessary public service and the agencies in charge of delivering that service should have the capacity to deliver that.
  2. Updates – a lot of regulation and legislation on the continent is old, dating back to decades some to the colonial era. To operate modern businesses and attract investment you need modern regulations that cater for modern world. Without that you get either chaos or stagnation. For instance, Kenya’s building code dates to colonial Kenya of the 1950’s it does not account for modern construction methods, or modern ways of covering up shoddy work. This has led to a chaotic construction sector dependent on the morals on the developer in question. Leading to a country of modern buildings side by side with collapsing buildings that kill people. African governments need to take a step back, assess their critical regulations and bring them up to date.
  3. Africanisation – we have a bad habit of adopting regulatory regimes from another part of the world, because it is ‘global best practice’ but never updating and adapting them for the African context. Thus, we end up with regulations that we don’t really understand, that are not fit for the African purpose. It is not enough to adopt global best practice, but African governments must ensure that they adapted to and fit their context.

Coherent predictable policy

I have written about this previously and will keep writing about it. The way most African governments make and implement policy lacks coherence and ends up creating a disjointed and unpredictable policy landscape. Sectors (and their ministerial departments) do not exist in isolation, policy in one sector must be connected to another. A packet of biscuits, that you find on the shelf of a shop utilises products from different sectors, wheat from agriculture, milled flour, and sugar in the manufacturing sector, it is transported in trucks on roads from the transport sector and sold in a shop from the trade sector. It is very likely that the farmer, manufacturer, or shop owner has utilised credit from a bank or insurance from the financial sector. If policy is made in any of those sectors it can affect the others and the costs of doing business, and when done so in isolation, the unfortunate biscuit manufacturer may find their business adversely affected by a choice made without the consequences on their sector in mind.

Coherent, predictable policy is the bedrock of a growth environment for the private sector. We must keep demanding this from African governments until it becomes a reality.

Public Private Engagement, Accountability and Action.

One of the key lessons I take from the rise of the Asian tigers is the constant dialogue and collaboration between the public and private sector. Taiwan’s semi conductor industry, now the most important in the world would never have become a reality unless the industry and government were constantly talking and acting in pursuit of shared goals.

In Africa much the government and private sector have either an adversarial reaction where they are fighting each other or an ambivalent one where they talk but don’t listen. Significant sustained private sector and job growth requires genuine engagement and understanding between the public and private sectors.

Government and private sector must not only talk to each other but listen to each other. This requires both sides to recognise and understand that the motivations and goals of the other are legitimate and beneficial. Once that understanding is in place then shared goals can be developed. The growth of the private sector is an inherent goal of business, but it must also be one of government, tied to that the government goals of job growth and key issues like worker conditions, training and education, environmental sustainably must also be private sector goals.

When an honest dialogue and shared goals are established then, plans with key actions and milestones can be developed and the public and private sectors can hold each other accountable to those plans, and thus take real action.

Right now, Africa has an overwhelming number of vision 2030/35/40/60s etc. strategic plans, manifesto’s and blueprints. All of them developed largely by public sector and highly paid consultants with token input from the private sector. The core of their ineffectiveness stems from the fact that these documents are disconnected from and largely meaningless citizens and private sector they are being enacted on. Honest dialogue to establish shared goals and a shared plan will lead to real action and accountability because both the public and private sectors have something to gain from effective implementation.

So long as we continue the ambivalent and adversarial relationship between the public and private sectors, their engagement shall continue to be ineffective.

Jobs and growth

Without private sector growth and jobs, much of our development discourse is meaningless. With jobs come incomes, savings, investment, demand, and tax revenue. With jobs individuals and households have incomes, the ability to pay for housing, healthcare, recreation and invest in the future. In short with jobs come agency and dignity both for people and the nation, and dignity is at the core of my definition of development.

Without private sector growth and jobs, we will be stuck in our perennial cycle of economic growth that is meaningless to the vast majority of African’s, followed by debt crises as African governments attempts to invest and spark growth with debt (on the advice of consultants or multilaterals) falls flat yet again.

If we want indigenous self reinforcing growth, that enables people to live dignified lives out of poverty, then the lesson of the industrial revolution and rise of Asia is that you need a growing private sector and jobs. Our governments need to get serious about providing an environment that can foster that and collaborating with the private sector to create a shared vision for the future with jobs at its heart that both the public and private sector have a stake in achieving.

 

Bad policy is bad business: Reforming the African Business Environment

African economic policy does not have much wiggle room at the moment. The two policy levers that are most commonly used, tax policy (new taxes or tax breaks) and fiscal policy (spending money on things) cannot be used. We have no money so we can’t give tax breaks and we have reached our credit limits so we cannot borrow or spend more. There is no commodities boom to fill our coffers and there is no China riding to the rescue with loans and aid.

So, what can we do? How do we drive the investment and job creation our continent desperately needs without using tax policy or spending?

I think African policy makers have been lazy, or at the very unimaginative and inattentive. Economic policy encompasses a large universe of policies, laws and regulations that govern how the economy functions, how different entities interact with each other, what they are allowed to and what they aren’t, and even how they fail. How all of this is applied, how responsive regulatory structures are to a changing world and how often it changes, all contribute not just to economic policy but to the business environment. Creating a conducive business environment for MSMEs and large businesses is critical to having businesses that invest and create the jobs that we need.

I define a conducive business environment as one that gives businesses, investors and entrepreneurs a stable and secure operating environment, which puts the onus on them to grow rather than government to subsidize the economy. An environment that doesn’t let failure be a death sentence but an opportunity to bounce back. Creating this environment on the continent would help take our private sector from being resilient to being dynamic.

Predictability and stability

Businesses and investors think about today, tomorrow, next year, three years from now and a decade from now. In other words, businesses have plans. They plan to grow, and that growth needs investment, expansion and people (jobs) to make it happen.

The thing that businesses and investors crave is predictability and stability of the business environment. If a business or investor can understand what their operating environment will look like, they can make and implement their growth plans, invest in expansion and employment. Whether you are a motorcycle rider who wants to grow your income or big business making billions, the ability to plan for the future is critical.

African governments are notoriously bad at providing predictability and stability. Policy and regulatory changes seemingly come out nowhere, policies are suddenly reversed without warning, or changes are promised and soon forgotten about. A great example of this tax policy in East Africa. A recent IMF report showed that countries in the East African Community (EAC) have, since 1988 made an average of 13 changes to tax policy and law every year, that’s 1,845 changes since 1988. When on top of this you add unforeseen charges to other policies, laws and regulations it makes the African operating environment an ever-changing mess.

What governments need to do is simple, make multiyear (e.g. 3 year+) plans and communicate those plans as I have written about it before, good communication is good policy. Clearly articulating the intent of policy, what it is going to do, how it is going to work and when it will happen, may seem like policy 101 but it’s astounding how many times this has not happened. If you as a business or investor know what’s coming you can plan for it, integrate into your plans so that when it happens it’s not disruptive but wholly expected.

Connect the dots.

Policy, legislation and regulation do not exist in isolation. What happens in one sector, ministry or agency can have significant impacts on another. For example, if governments want to domesticate value chains and export more their trade policy, industrial policy, employment policy, financial sector policy must speak to each other in order to be truly effective.

Unfortunately, the situation we get most of the time is that policy in one area is made in isolation from another despite them being mutually reinforcing. Thus, businesses and investors are confronted by, at best disjointed, at worst contradictory policy that isn’t worth the paper it’s written on. For business and investors this creates confusion and uncertainty.

What is required is the for the policy development process to be inclusive of others in the public sector and those in the private sector who could have influence over it. For instance, if a government wants people to consume locally produced bread it must talk to the wheat farmers to understand how to increase production, to millers to understand how to increase wheat flour production, to bakeries to understand how to increase production of bread that people actually want. Then it must align the policy of the agriculture ministry, the ministry of industry, and the ministry of finance to make sure the interventions needed at the various stages of the value chain are aligned and mutually reinforcing. If not, the government will buy fertilizer for wheat farmers that isn’t suitable for them, the millers may have access to loans for expansion but no wheat to actually produce with and the bakeries will use the tax breaks on domestically produced bread to sell unfinished imported bread that just needs a few minutes in the oven.

While the example may seem preposterous, it’s an all too familiar tale on the continent. If governments don’t connect the dots, the impact of policy is like swimming upstream, lots of effort expended for very limited outcome.

Better bankruptcies

Walt Disney, Henry Ford, Heinz, Marvel, American Airlines, and General Motors. These entrepreneurs and companies have two things in common, they are immensely successful, and, at some point they had all declared bankruptcy.

One of America’s greatest innovations is bankruptcy protection. Instead treating bankruptcy as a shameful thing that killed the business and stained the reputation of its owners. In America bankruptcy is a chance for a reset or to start again. Companies that go bankrupt get protection, space and time to sort out their issues and emerge leaner and meaner. People who declare bankruptcy have the chance to have their debts discharged and to start again.

In Africa, we still treat bankruptcy like Europe did a century ago, as a disaster. People who go bankrupt are saddled with odious debts, companies that go bankrupt are broken up, sold off by creditors. It’s time to change this thinking, as America shows giving people and companies a second chance fosters innovation, it encourages entrepreneurs to take bold leaps and it enables people and businesses to bounce back from adversity quickly and effectively. African businesses experience a lot of headwinds, many of them stemming from forces (and regions) outside their control, changing insolvency and bankruptcy laws to be more American, may be the catalyst that enables African businesses to grow in the good times and innovate in the bad.

Bad policy is bad business.

It is incredibly frustrating watching African governments repeatedly miss the opportunity to drive growth without having to spend money or give tax breaks. There is so much that could be done to give the private sector the predictability and stability it craves to enable planning, investment and growth. To link relevant policy areas and reinforce the growth prospects of key sectors of the economy through mutually supporting government action. Or to simply help businesses understand what you are trying to do, and work with that in mind.

Instead, we have fostered uncertainty, and an adversarial relationship between governments and the private sector, which, in turn leaves the private sector surviving rather than thriving, and when businesses cannot survive, they are picked apart like a   with a carcass as part of the bankruptcy process.

Today the reality is, that while Africa would like to and needs to spend money and use tax policy to drive key development goals, we don’t have the fiscal room. The only way to create that room is for the private sector to grow and pay more taxes, and though it may seem like it, this is not a chicken and egg situation. How policy is crafted, communicated, and implemented has a real and significant influence on how companies grow and where investors decide to put their money.

We must do better at creating the environments in which businesses thrive and investors want to come to. Otherwise, an underperforming private sector will continue to stagnate, and our policy makers will be wasting air, money and perfectly good paper on strategies and plans that will fail.