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How to grow the private sector in Africa

Shanta Devarajan's picture

I gave the Jerome A.Chazen lecture at Columbia Business School the other day. The gist of my talk was that:

  • Despite relatively rapid economic growth, private investment in Africa is still relatively low
  • The proximate reasons are poor infrastructure, weak skills and a host of policy and institutional impediments (such as business regulations and trade restrictions.
  • Underlying each of these proximate reasons is some government failure. Transport infrastructure, for instance, is constrained by poor regulation that generates monopoly profits for trucking companies but keeps Africa’s transport prices the highest in the world; poor skills derive from nearly dysfunctional tertiary education systems; and many of the regulations are difficult to remove for political reasons. The few private-sector success stories in Africa (Kenya horticulture, Lesotho garments, Rwanda tourism) all got around these government failures; they have not spread economy-wide.
  • The key to enhanced private sector growth in Africa, therefore, is government leadership that removes the underlying obstacles to infrastructure, skills development and entrepreneurship.

There was a lively discussion after the lecture, although I got the impression that most of the audience was broadly sympathetic to my approach. I wonder if the same is true of readers of this blog.

Comments

Submitted by Maurice on
This reader is sympathetic. Unfortunately, I find you stop short of the question that arises out of your answer. Yes, we need leadership to remove obstacles to growth. But how is that leadership going to take hold? If you consider that much business-friendly change is driven by pressure from the business community and the middle class, you can just as easily turn your conclusion on its head: The key to government change is private sector growth. The problem needs to be tackled from both ends: through better leadership and directly stimulating a stronger private sector for example through FDI.

Submitted by Oz on
Isn't it ironic that the key for growth of the private sector in Africa lies in the hands of the public sector. The inefficiencies of the public sector in Africa come full circle to negatively influence the private sector. What do you make of the call for smaller and weaker African government and also the role of NGO's in improving the factors which you have laid out above.

Submitted by Nick Blazquez on
Whilst government leadership is key to drive private sector growth in Africa, potential investors must also be helped to see the significant growth opportunities that are readily available in Africa, so that they are encouraged to invest. Looking at the performance of multinationals it's clear that the Africa region is providing superior returns than elsewhere. Concomitant with this growth is investment in building functional and leadership skills in the specific and adjacent sectors. This plus taxes paid are making a material difference to economic and social development.

Submitted by randy on
Africa seems to crash up against the Acemoglu et al. hypothesis, namely that institutions and policies are bad for a reason: the powerful gain. Reform is resisted because such reforms do not benefit the powerful. We might be able to generate a short or long list of "next-step" reforms, but that doesn't imply that the governments have an incentive to carry them out ... you note this but then don't mention it as "the key" ...

Submitted by Yahya on
It is true that without having visionary Leaders private sector growth in Africa will still remain a myth. Good example is in Rwanda where the government is championing changes in private sector development especially encouraging trade and creating incentives in key private sector development areas like tourism,ICT and handicraft development. Its smart people and systems that can make private sector develop in Africa

I think there is a need to distinguish between external private sector growth and internal private sector growth. It seems that often when people talk of 'the private sector' there is an assumption that this is inevitably related to foreign investments and/or products for export.

I would argue that it is the internal private sector that has the potential to bring real development and change, whereas external investors can come and go, unfavorable conditions can make them 'swithch' countries, whereas for the local entrpreneur they still have to function and survive whatever the local conditions, and therefore have a higher vested interest in addressing the issues of governance you raise.

The 'informal' and semi-formal sectors in Africa have great potential to develop and contribute to real development, benefitting not just themselves but their communities (as they are often based around family/clan units, and in a real sense in their functioning can often be almost classified as 'social enterprises' in the support they bring to members of the social unit (medical bills, food, school fees etc etc.).

Whilst I agree that Government leadership has a crucial role to play in removing the 'underlying obstacles to infrastructure, skills development and entrepreneurship', this is also being down by structures outside of the state, micro-fianance bodies, informal 'ousousou' groups, finance from members working as immigrants in europe and beyond, religious brotherhoods and institutions, trade unions and other civil society bodies.

If we wait for Governments to play this role, with the state of governance we could be waiting for long, but in the meantime trade, commerce and production still must go on. This is often outside of the financial institutions. One very ignored factor are the markets of Africa, some national or even regional (see for example Diaobe in Senegal) which have provided the economic lifeblood of the continent well before colonialism. These markets have a huge turnover, not always using currency, but modern barter and exchange, selling both traditional stables (salt, Kola nut, grains, herbes etc, as well as laptops and satallite dishes).

We should be encoursaging and strengthening these 'traditional' institutions, helping people to invest capital which is often locked away in cattle (or even buried in bottles etc, un-noticed by many economists, capital does exist in Africa, and not just from external sources, but people are risk adverse and security aware, valuing safety over investment and capital growth (may be a quite sensible strategy given instability).

Finally I want to give an example of an 'indigenous' economic success from Senegal; that of 'Cafe Touba'. Cafe Touba is a type of coffee produced with coffee grown either in Senegal or imported from neighboring countries, it is produced (roasted, added herb extracts (diar), ground and packetted) both artisanally by individuals and industrially by SMEs, it is marketted by word of mouth, but also by religious endorsement from the Mouride Brotherhood (i.e. the name Touba - the religious city in Senegal), and sold by large numbers of petty entrepreneurs on every street, either as a ready made hot drink or by the packet for home consumption. It is challenging Nescafe for the dominance of the local coffee market. The profits benefit whole layers of the soiety involved in its production and distribution, and support even wider layer (where as Nestle's end up with shareholders abroad).

Just some quick thoughts, and thanks for indulging me by reading.

Submitted by Anonymous on
Reading Mr. Cisse´s views was quite interesting. If the common citizen of africa can challenge nestle with "cafe Touba", why can we then use our potential more effectively? why is it that trade among african countries does not erradicate poverty...

Submitted by George Naphambo on
I agree with the idea that local investors are the key to growth of African economies. if the incentives which are given to foreign investors such as tax breaks, were given to local investors, Africa would be better off. of course relying on incentives to run a business is not sustainable in the long run but incentives do have some advantages which cannot be ignored. I think growth will primarily come from forces within Africa rather than external forces.

Submitted by rotimi on
Dear Shanta, In your blog on how to grow the private sector in Africa, you mentioned on a key point, poor skills as a result of dysfunctional tertiary institutions. This is assuming alarming rates in Nigeria. Now, big firms and blue chip companies prefer to employ people with a foreign degree based on the assumption that they have better skills than those trained at home. These phenomenom has also increased the number of students seeking to study abroad. Some years ago, people seek to go the United Kingdom or the Unted States to study. Now, i have friends in faraway places like malaysia, Russia, Khazakstan, australia. Nigerians want to study anywhere apart from home because of crumbling academic standards. I think the world bank is not doing enough to plug the skills gap and to help advise governments on the continent to reform university education.

Submitted by Mohamed on
I agree on the crucial need for government leadership to remove underlying obstacles to infrastructure, skills development and entrepreneurship. Nowhere is this more important than in agriculture and rural infrastructure. Development efforts that focus on priorities defined for communities will continue to undermine African agriculture. What we need are models of community wealth development that focus on people and positive social change in agricultural communities. Empowering African farmers to tap into market opportunities will do much more in this regard. Social enterprise development (eg for rice in West Africa) will enhance sustainable agricultural development in Africa.

Submitted by petra on
Africa is in dire need of infrastructure. Only then will we talk about the development and growth of private investment. If there is no electricity, hence no industry, and if there is no industry, there would be no jobs, money and everything will be once again reduced to poverty.

Submitted by TC on
One of the biggest problems most developing country government agencies face is, recruiting and retaining capable staff at the prevailing government salary structure. Long term development success of developing countries will very much depend on the availability of skilled staff. Why is that most commodities and products have approximately the same market price in most countries but brain power commands low price in developing countries and high prices in developed countries. There are more Ethiopian doctors in Chicago USA than in Ethiopia. Skill-Based Pay (SBP) is pay based upon acquired skills which has been competently demonstrated. Developed country public agencies all over the world are consistently using SBP to attract and retain capable staff for performance based management. It is also referred to as pay for skills (PFS). Low staff costs do not build sustainable competitive advantage, and sustained productivity growth often leads to increases in real wages. We need to address the issue of global pay for skilled brain power before we can address public agency capabilities in developing countries. It is ironic that experts from World Bank, IMF and other IFI’s expect what worked in developed countries with high skill based pay to work in developing countries at low skilled based pay while rest of the costs remains the same.

Submitted by mustafa on
The private sector is an important force for growth and development. A vibrant domestic private sector promises to be a virtuous link in the cycle of improving the competitiveness of African economies, signaling the existence of an enabling environment for business, and attracting foreign investment, which in turn strengthens international competitiveness of African economies.

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