NS4301 Summer 2015

Africa’s Private Sector

Overview

• While Africa’s economies have improved recently• Still a large lag in terms of:

• Long-term growth

• Structural change and

• Industrial development

• Main questions:

• Why is business performance lagging in Africa?

• Is Africa different from the rest of the developing world?

• Africa is distinctive in several ways

• Economies are both very small

• Vary sparse, and

• Their manufacturing sectors are modest

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Africa: Private Sector I

• “Africa: Creating Private Sector Jobs Will Test Leaders, “Oxford Analytica, May 22, 2014

• Because of Africa’s population growth of 2.2% and population doubling y 2050, new methods to create productive employment will become necessary

• Yet the record of SSA in creating formal sector employment is worse than in many other parts developing world

• The dearth of private formal sector employment in SSA due to multiple barriers

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Africa: Private Sector II

• 1. Structure of production and trade

• Relative share of extractive industries in GDP of SSA (excluding South Africa) has risen sharply over the last three decades

• Whereas in 1980s it was 10%

• In 2000-09 it averaged 22%

• Extractive industries – oil, gas, metals provide very little increments to formal sector employment per unit of investment

• Yet they still absorb the greatest share of foreign direct investment flows to SSA

• In search for formal work, surplus labor from agricultural sectors tends to be absorbed into low productive services (retail trade and catering) 4

Africa: Private Sector III

• Manufacturing output and exports of manufactures have actually contracted relatively over the 2000-09 period

• the sector with the greatest potential to create formal sector employment

• While some evidence of investor shift towards Africa’s consumer market, it is at a very early stage

• 2. Small formal sector firms• Formal sector private sector firms in SSA tend to be between

20 and 24% smaller in terms of workers employed than equivalent firms in other regions

• Stunted nature of SSA firms partly reflects

• The small size of their domestic markets

• Limited ability to export unless they are foreign owned.

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Africa: Private Sector IV

• 3. Infrastructure Inadequacies, State Weaknesses

• Power deficits. Infrastructural deficiencies undermine production and trade prospects

• Power outages (sometimes eroding 10% of sales) make it necessary for firms to invest in costly private generators

• More than half of SSA firms cite power unreliability as a major constraint on their operations

• This rises to 80% in Ghana, Uganda and Tanzania

• Transport infrastructure – transport networks are sparse and subject to delays

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Africa: Private Sector V

• Although delays have been reduced in many SSA countries, cost of shipping a standard container has risen in others

• In 13 countries – Botswana, Lesotho, Malawi, Mali and Nigeria

• Cost rose between 2009 and 2014 despite shorter delays

• Suggests the power to trucking cartel to manipulate their market.

• 4. Public-Private Ties

• Quite rare of governments to enter into growth promoting partnerships with businesses in SSA, and

• some have a lingering distrust for the private sector

• 5. Regulatory weakness

• – corruption unnecessary cumbersome regulations raised the cost of doing business, even when factory productivity in SSA at competitive levels

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Africa: Private Sector VI

• Moreover many firms are are family owned and managed

• Lack professional management skills

• Fear that raising capital for expansion would lead to dilution of their ownership and control

• Export expansion failure?• Poor use of US trade promotion schemes – granting duty free

access to 96% of African products illustrates firms’ constraints• In 2012 Angola, Nigeria, and South Africa between them

provided more than three quarters of SSA exports to the US• Dominated by oil, minerals, and South African manfactures

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Africa: Private Sector VII

• Underlying problem is the lack of competitiveness of SSA products

• Its primary cause is the high indirect costs that have to be added to their direct factory floor costs of production.

• In China, indirect costs amount to 7% of total costs and in India 12%.

• In Nigeria they make up 20% and in Zambia and Mozambique 30% or more of the total

• Without reducing indirect costs, manufacturers and manufactured export will not grow fast enough to provide employment for SSA’s growing population.

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Africa: Private Sector VIII

Political entrepreneurs?

•Like many other parts of the world, domestic entrepreneurs in SSA are bound by political constraints

•In many instances, safe passage through thicket of regulations may be assured only when their political counterparts have been sufficiently assured of the benefits that will occur to them or the wider network

•This can allow for some sub-sectors to thrive

•Not because they are protected from political interference but because the political interests happen to align with those entrepreneurs.

•State or party affiliated companies in Rwanda or Ethiopia illustrate this phenomenon

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Africa: Private Sector IX

• However this can often create market monopolies which further inhibit the development of inclusive grwoth and job creation

Assessment• A massive expansion in formal, private sector job creation in

SSA faces major structural barriers• Will probably be new pockets of employment creation in some

sub-sectors of African economies.• However will depend on the confluence of political and

business interests.• Moving to a coordinated employment push across the

industrial and service sectors will probably remain beyond the scope of most African governments – at least for another decade.

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