Africa has spent the past 18 years growing at 5 percent a year, after a similar period of decline during which per capita incomes fell by 1.3 percent annually. Much of Africa’s growth has undoubtedly been fueled by a natural-resource boom, but other factors mattered too: The end of the Cold War helped reduce the incidence of armed conflict to a third of previous levels; structural adjustment reform started to pay dividends; and global debt forgiveness cleared the burden of past debts.
This opened up new investment dynamics – for global investors and, arguably more important, for a crop of burgeoning local entrepreneurs who could respond to these opportunities, from micro-entrepreneurs to larger domestic and regional investors. It is primarily on the needs and aspirations of these business people that the World Bank Group (WBG) has been focusing our investment climate (IC) advisory reform efforts in Africa since 2006.
Over the years, we have looked at how IC reforms have translated into the kind of impact that policymakers and their constituents in the private sector and beyond try to achieve – such goals as cost savings, investment and jobs. We recently undertook such an effort, pursuing a substantial review of five Sub-Saharan African countries on both sides of the continent: Burkina Faso, Liberia, Rwanda, Sierra Leone and South Sudan.
Some numbers
A key measure of our success for much WBG investment climate advisory work is private-sector cost savings (PSCS), which monetizes the fees and time that businesses save as a result of the IC reforms that we support.
For example, reforms that changed the procedures for registering a business – through such steps as streamlining processes and putting a number of tasks online, as well as reducing fees related to registration – puts money back into the budding entrepreneur’s pocket.
Trends in Business Registration in Rwanda
PSCS totaled nearly $40 million across the five countries. Most of that sum came from high-transaction-cost government procedures, where a small fee reduction can lead to a relatively high aggregate benefit, such as in business registration and trade logistics. In Liberia, just one reform – reducing the pre-shipment inspection fee from 1.5 percent to 1.2 percent – saved saved traders US$ 4.6 million.
Beyond measures of PSCS, we also sought to understand the degree to which IC reforms play a direct role in encouraging investment and related job creation. However, only a limited number of our reforms have a clear enough line of sight to investment and jobs numbers.
With business registration serving as the most direct route to this data – a process in which we estimate the change in registrations as a result of our reform interventions and then look at what these new firms have generated in terms of jobs and investment through firm-level surveys – the clearest and most positive results come from Rwanda, where business registration followed an unambiguously upward trajectory above its predicted trend. This generated an additional US$33 million to $US$88m in investment (depending on whether we use the median or the average firm-level investment figure) and between 19,000 and 24,000 jobs. These are encouraging figures.
In addition to business-entry reforms, investment and jobs impact was also generated from sector-specific investment climate interventions. Building from a few successful large investments in particular sectors – such as the tea sector in Rwanda and the tourism sector in Sierra Leone – the study indicates that a combination of general IC reforms with sector-specific interventions can yield strong results.
Perceptions also matter
As a group that focuses on private-sector growth, like businesses we have a strong orientation toward numbers. However, numbers do not tell the full story of IC impact.
We therefore also undertook surveys of how small and medium-sized enterprises (SMEs) perceived IC reform, getting qualitative data. In Rwanda, we see the greatest enthusiasm, perhaps predictably, with positive perceptions extending to virtually all aspects that we explored. Views are particularly positive regarding tax-administration aspects (with no less than 96 percent of views being reported as positive), in large part as a result of the introduction of a WBG-supported e-tax system.
On the other hand, IC reforms also address factors that do not affect an average SME much of the time, or potentially ever, but which are nonetheless crucial for the effective operation of markets. In Burkina Faso, some respondents answered: “I’m sorry, but I really don’t have experience in these areas,” and, “Commercial disputes? No idea of how it works. We try to avoid problems by all means.” In such cases, neither quantitative nor qualitative impact measurements capture what we believe are important IC interventions.
What this means for IC reform champions in Sub-Saharan Africa
Where does this leave us in terms of the kinds of questions clients ask about our impact in terms of investment, jobs and growth? We have a strong sense of the importance of IC reform. In many cases, strong reformers have also been able to generate growth and investment. However, we do not have clear enough evidence of all of these linkages, so more work is needed here.
The results overall, and the Rwanda data in particular, suggest that IC reform is usually necessary to clear out the morass of often-outdated regulations – many of which even date back to the colonial period in Sub-Saharan Africa – that constrain business growth and consign too many businesses to the informal sector. The impact studies also point toward the importance of taking a holistic approach to IC reform, pursuing active interventions across a broad spectrum of areas that can lead to a cumulative impact on the economy, changing business’ perception of investment prospects.
Investment climate reform alone, while necessary, is not sufficient to launch a country on the path to economic transformation and higher growth. Other issues such as infrastructure, access to finance and good governance are critical. Within the investment climate space, clear linkages between economy-wide IC reform and value-chain-level interventions probably hold the greatest promise for generating impact. So we plan to build on this, to develop deeper linkages between economy-wide IC reform and sector-focused interventions, to continue to generate meaningful impact for the private sector, government and citizens of this dynamic continent.
Join the Conversation