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Capitalist revolution
David Christianson
Published: 03-NOV-06

The previous issue of The World Bank IFC Doing Business series — based on data collected in 2004 — observed that Africa had the lowest reform intensity of any region in the World. Only 42 percent of African countries had made at least one reform in that year. This has now changed dramatically. In the latest publication — Doing Business in 2007 (based on 2005 data) — Africa has leapt from 7th to third place. With one-and-a-half reforms per country and two-thirds of African countries making at least one reform, the region has jumped ahead of the Middle East, Latin America, East Asia and South Asia.

Given that Africa includes some of the world’s most tardy reformers, notably countries preoccupied with internal strife — the DRC, Sierra Leone, Chad, Eritrea and the Republic of Congo are all in the bottom 10 of the 175 countries ranked on ease of doing business — suggests that the top reformers are moving fast.

Indeed two African countries are listed among the 10 top reformers; they are Ghana in 9th place, with three reforms in 2005, and Tanzania in 10th with four reforms. Two other African countries — Nigeria and Rwanda — are part of a group of 13 countries that are praised for having three or more reforms in the same period.

This is tremendously hopeful. Africa has overwhelmingly opted for a private-sector- driven development paradigm, and reforms of these sort are utterly necessary if the developmental power of business is to be allowed to play through. But the Doing Business indicators themselves show that there is a long way to go. That makes this publication even more important because, for the first time, the series has really grappled with issues of implementation.

Advocates of regulatory reform have always known that implementation is the Achilles heel of the regulatory reform movement. All the world’s reform-minded leaders found that it was easier to talk about cutting red tape than it was to actually get public bureaucracies to step aside. Bureaucrats, political opponents of regulatory reform and entrenched economic interests, it has been found, keep bouncing back. Successful reform takes a great deal of commitment, political will and consistent application, and, what is more, almost invariably requires processes that operate simultaneously at a number of levels.

Even in the UK, where the government is widely recognised as one of the most reform-oriented in the world, progress has been complicated and patchy. Regulatory Impact Assessments (RIAs) — emphasisng the impact of regulations on the most vulnerable parts of the private sector (especially small business) — have been successfully introduced and powerful administrative instruments established in key parts of government to slash red tape. But Gordon Brown’s promise to introduce legislation has struggled in the face of accusations that giving so much power to the executive — to cut bureaucracy — is unconstitutional. Nor has his promise to reduce the number of regulatory bodies from 29 to 7 yet been fully implemented.

The commitment of the UK’s political leadership to regulatory reform is all but unassailable. Blair and Brown, in particular, have been both vocal opponents of the bureaucratisation of the EU and strong advocates of regulatory reform as a development strategy. Indeed, through Department for International Development funding, the UK has done more to put the issue on the international development agenda than anyone else except perhaps the World Bank and the IMF.

Cynics might ask if the UK has struggled, what chance do far-less resourced developing country governments have?

Perhaps surprisingly, it seems, the answer is quite a good chance.

One of the biggest problems in implementing reforms is the opposition of vested interests. For example, a government that wishes to reduce the number of tariff bands in order to facilitate cross-border trade will have to face lobbying groups, each arguing for the reduction of its own tariffs and the maintenance of those that keep foreign competition out. The governments of less industrialised countries simply have fewer of these lobby groups to worry about. There is no reason why a country like Lesotho — which has the second highest number of tariff bands after Morocco — shouldn’t be able to make rapid progress in this area. Reducing the number of tariff bands, notes Doing Business in 2007, “is one of ways to reduce corruption … an estimated 70 percent of bribes paid to customs officials change hands when a trader wants to get into a lower band”.

But there is a problem. The lobbying power of vested interests is relative, and a small but highly organised lobby can be very powerful in a weak economy. This is probably one of the reasons for there being very little progress in what appears to be one of the most intractable problem areas in Africa — employment regulations. As Doing Business in 2007 points out, only a select minority enjoy the protection of labour regulations in developing countries. In Mozambique, the laws apply to 350 000 formal workers in a population of 20 million; in Malawi it is an even more dire ratio — 50 000 formal private sector workers in a population of 12 million. Not a single African country reformed in 2005, even though 90 percent of the region’s workers are locked into the informal economy by the understandable reluctance of potential employers to take on the red tape involved in hiring and firing.

In sub-Saharan Africa, organised labour stands out as a very powerful force in civil societies characterised by generally low levels of organisation. This presents a political challenge. But, as Doing Business in 2007 points out: “(Some) countries are not even contemplating (labour law) reforms because critics denounce them as reducing worker protections. This ignores the reality in Africa — 90 percent of people work informally, without any protection whatsoever.

Eastern Europe and the former Soviet Union have been the most successful labour law reformers in recent years. One of the weakness of the Doing Business report is that it doesn’t really explain the conditions that made this possible — other than the rather weak suggestion that there may have been a better marketing of the message (that more flexible labour regulation creates more jobs) in these countries.

This is a potentially contentious area. Agencies attempting to influence policy from the outside do not want to unnecessarily antagonise powerful indigenous interests and the perception that the regulatory reform lobby is out to indulge in ‘union bashing’ is dangerous. Nevertheless this is a nettle that will have to be grasped sooner or later.

Post-conflict societies, it seems, are especially well positioned to reform rapidly. They often start in a condition where no regulations are effectively observed and where entrenched interests are weakly organised.

In such societies — Mozambique, Angola, Uganda, Rwanda, the RDRC, Sierra Leone and Liberia, for example — the trick is to implement good regulations from the outset, as the system is rebuilt. Some of these sub-Saharan examples have achieved notable success. Uganda, for example, ranks 10th in the world in ease of employing workers, 43rd in paying taxes, 44th in ease of closing down a business, 60th in protecting investors, and 71st in enforcing contracts. Unfortunately poor performance in terms of some of the other indicators — notably property registration and trading across borders — drags Uganda’s overall ranking down to 107 in the world (11th in sub-Saharan Africa) (see table).

Of course being a ‘post-conflict’ society does not necessarily mean rapid reform. No reforms have happened in Angola, ranking of 155 in the world. The DRC — which has yet to consolidate ‘post-conflict’” status — is the worst of the 175 national business environments measured. Yet given the natural wealth of these countries and the reforms happening all around them, it may now be appropriate to see them in terms of reform potential.

Doing Business in 2007 firmly suggests starting with the most simple and least contentious reforms, especially those that can be introduced by a stroke of a minister’s pen rather than a more complicated and potentially politicised legislative process.

Africa’s reformers are generally following this advice. Reforms are overwhelmingly concentrated in the areas of business entry (10 reformers) and property registration (12 reformers). Burkina Faso has moved furthest in terms of easing the regulatory hurdles to registering a business. The introduction of single access points — so called one-stop shops — made it possible to reduce the time to complete registration of a new business from 135 days in 2004 to 34 now. Nigeria cut the time required to register a property from 274 days to 80 by placing time limits on government consent and digitising records.

These are areas that offer what might be described as quick wins. It should be noted that they also have direct developmental implications. Making it easy to register a business makes it possible for firms to leave the informal sector and enjoy the benefits of formalisation. Although benefits may seem to be accompanied by burdens (taxation being a prime example), it has been demonstrated many times over that fast growth is almost impossible for firms that remain informal. Formalisation is a pre-requisite for access to credit and commercial justice. Easier property registration makes it possible for more firms to enter Hernando de Soto’s world of fungible assets. De Soto of course is the economist who first pointed out that the difference between growth and stagnation revolves around the ability of ordinary people to obtain credit — for economically worthwhile purposes such as starting a business or educating children — by using the title deeds of their properties as security. Where it is all but impossible to register property — as was the case in Nigeria until the recent reforms (registration used to cost 27 percent of the value of the property and take over nine months) — access to credit will be a problem for businesses, no matter what reforms are made to the banking system.

There are two other areas where there has been notable progress in a number of African countries. Burundi, Chad, Gambia and Nigeria have all improved contract enforcement, mostly through the introduction of specialised commercial courts. The time required for contract enforcement in Nigeria has dropped from 730 days to 457. Africa’s two top reformers, Ghana and Tanzania, have lowered red tape delays for both imports and exports.

There are so many elements that have to operate effectively in any business climate that reforms are necessarily incremental, especially when assessed in terms of overall impact. Indeed in many respects it is the overall package that counts. Failing to reform in only one key area may all but negate reforms painfully made in all other aspects of the economy. There would probably be little point to reforming every other aspect of the Mauritanian economy while maintaining a tax rate on profits in excess of 100 percent (currently 104 percent).

Doing Business in 2007 suggests that even small reforms can generate momentum. “They can attract investors seeking the growth opportunities that can follow. India’s economic boom may have started with just such reforms in the 1980s,” it notes. More importantly though, many regulatory reforms come with notably low political costs. In most instances the only negative impact will be on corrupt bureaucrats whose opportunities for enrichment will be reduced or, in some cases, on early-moving foreign corporates which, having negotiated a regulatory maze, would like those conditions to remain in place to deter potential competitors. At the moment, the demonstration effect is critical in Africa. The World Bank notes that if all examples of regulatory best practice in the region could be combined in one country, it would achieve a ranking of 11 globally. There can be little doubt that that would be a thriving economy. The likes of Ghana, Tanzania and Uganda are moving towards this goal. -Business in Africa Magazine

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