NOTE NUMBER 346 98923 viewpoint PUBLIC POLICY FOR THE PRIVATE SECTOR JULY 2015 Investment Climate in Africa This note has been The Impact of Reform on Sub-Saharan Africa’s Growth T r a d e a n d C o m p e t i t i v e n e s s G l o b a l P r a ct i c e prepared by David Bridgman, Practice Th e Worl d Ban k G rou p h as be e n worki n g on i n ve stme n t c l i mate Manager, Trade and Competitiveness Global re form i n S u b- S ah aran A fri c a for n e arl y a de c ade , a pe ri od Practice (T&C), and Aref c h arac te ri z e d by dramati c e c on omi c growth on th e c on ti n e n t. Adamali, T&C Regional E stabl i sh i n g l i n ks be twe e n su c h re form i n te rve n ti on s an d e c on omi c Economist, both with the World Bank Group. growth , h owe ve r, i s a c ompl e x probl e m. A l th ou gh th i s n ote fi n ds some c on n e c ti on be twe e n i n ve stme n t c l i mate re form an d e c on omi c growth , e stabl i sh i n g more c on c re te e vi de n c e of c au sati on wi l l re qu i re gre ate r foc u s at th e c ou n try l e ve l , as we l l as on smal l an d me di u m e n te rpri se s. Th i s i s wh e re i n ve stme n t c l i mate i n te rve n ti on s ge n e rate c h an ge . The dramatic change in how the world perceives governments and the private sector expand busi- Sub-Saharan Africa has often been illustrated by ness opportunities through investment climate the juxtaposition of two cover images from The reforms covering a range of regulatory and policy Economist. In 2000, the magazine cover showed a issues from starting a business to construction bleary-eyed young man with a rocket-propelled permitting to taxation, agricultural reform, and grenade launcher over a map of the African debt resolution. After years of effort and many continent with the title, “The Hopeless millions of dollars of investment, now is an appro- Continent.” By contrast, an issue in 2011 showed priate time to identify what these reform efforts THE WORLD BANK GROUP a boy flying a rainbow-striped kite in the shape have achieved, and what role they have played in of the continent with a soft glow on the horizon, Sub-Saharan Africa’s growth trajectory. titled “Africa Rising” (The Economist 2000, 2011). This analysis begins with an overview of the Sub-Saharan Africa has gone from being known story of the region’s economic growth and the as home to the majority of the world’s poorest social and political drivers propelling it. Next, billion people to being the newest market oppor- the note examines the Bank Group’s investment tunity of a billion consumers. climate reform efforts in Sub-Saharan Africa For much of this transformative period, the followed by an analysis of how the results of World Bank Group’s investment climate efforts, reform factor into the story of the region’s eco- now managed by the Bank Group’s Trade and nomic transformation. The analysis concludes Competitiveness Global Practice, have helped that countries in Sub-Saharan Africa that have in v estment c limate in a f ri c a t h e I m p a ct o f R e f o r m o n S u b - S a h a r a n A f r i c a ’ s G r o w t h embraced business reform have also attracted However, some more traditional growth fac- domestic and foreign investment and achieved tors have persisted, including the importance of steady growth. Reform efforts have generated natural resources in driving many economies. beneficial spillover effects, as neighboring coun- This has raised concerns as to whether current tries subsequently embarked on similar reforms. growth is any different than in the past, and what will happen should commodity prices continue A fundamental break with the past? their current decline as part of historical com- The average growth rate of 5 percent per year modity price boom-and-bust cycles. The World over the past 18 years across Sub-Saharan Africa Economic Forum’s Africa Competitiveness Report 2 marks a stark contrast with the “lost decade” of 2013 warned that “for many African economies, the 1980s, when growth rates lagged population sources of growth are insufficiently diversified. increases, resulting in citizens growing poorer Mineral exports make up over half of the region’s year after year. total exports, rendering them vulnerable to com- The end of the Cold War that had factored modity shocks” (WEF 2013). into local conflicts across Africa helped reduce Africa’s oil and mineral exporters have the incidence of armed conflict to a third of reported robust growth rates, but by no means peak levels. It also ushered in opportunities for have they been alone in the top growth ranks. democratic expression, which led to greater civic Some of the faster growing economies in the freedom and demands for public accountabil- world have been Sub-Saharan countries with few ity. The excesses of the past have given way to if any significant natural resources. As shown in more sensible governments that have controlled figure 1, analysis by both the World Bank and the budget deficits and inflation, leading to greater International Monetary Fund (IMF) finds agricul- macroeconomic stability (though government ture and services to be the major drivers behind corruption remains a significant issue). a set of high-growth, resource-poor countries, This process was aided by structural adjust- which include Ethiopia, Mozambique, Rwanda, ment reforms—unpalatable though they were Tanzania, and Uganda (IMF 2013; World Bank at the time—and, comparatively more agreeable, 2013). extensive debt forgiveness through the Heavily- Indebted Poor Countries Initiative (IMF 2013). Doing business differently The World Bank Group has been partnering with governments, development partners, and the pri- vate sector across the continent to build a business environment that supports entrepreneurship, Not only natural resources Figure (Sectoral contribution to total growth for selected countries) innovation, and competitiveness. Launched in 1 2006 as a joint World Bank-International Finance Growth (%) 8.7 Corporation (IFC) program, investment climate 8.2 work initially focused broadly on topics defined 7.8 8.0 8 7.4 6.7 by the World Bank Group’s Doing Business report. 6.5 6 This work capitalized on the high profile of Doing 4.9 Business report rankings among country policy- 4 makers and the wider public, with a focus on tangible indicators and the healthy competition 2 that the annual rankings generated. The program has delivered strong and steadily 0 improving results in the region. Doing Business 1995–2010 1995–2000 2001–2007 2008–2010 1995–2010 1995–2000 2001–2007 2008–2010 2012 documented reforms in 36 Sub-Saharan Resource-poor Resource-rich (Ethiopia, Mozambique, Rwanda) (Angola, Nigeria, Zambia) Africa countries, with 4 reaching the top 10 of global reformers. Doing Business 2013 found that Agriculture Services Resource rent Manufacturing and other industries one-third of the world’s 50 best reforming coun- Source: World Bank, “Africa’s Pulse,” April 2013. tries were from the region. Further, Doing Business Note: High-growth, resource-poor countries reviewed by the IMF also include Tanzania and Uganda. Some of these countries have since 2014 reported that Sub-Saharan African countries made resource discoveries and are already or will soon become resource producers. accounted for almost half of the world’s top-20 reformers. In this context, the star performer has to the rankings. Certain economic indicators been Rwanda, having moved significantly closer are also of greater interest than others. They to the highest level of performance in the Doing begin with economic growth, but also include Business rankings from 2006 to 2014.1 increased investment. Other top performers in the region in recent years have included Botswana, Burkina Faso, Success as growth Burundi, Cabo Verde, Côte d’Ivoire, Djibouti, Figure 2 shows the relationship between the reform Ghana, Kenya, Liberia, São Tomé and Príncipe, status position of Sub-Saharan Africa economies (as Senegal, Sierra Leone, Tanzania, and Zambia. measured by their distance to the Doing Business These range from Sub-Saharan Africa’s larger frontier) and their individual growth rates. Some and more established economies to those that broad clusters of countries emerge. Group 1 rep- have only recently emerged from conflict. resents the average regional economy, positioned slightly below left of the actual average. These coun- If not an end, a fair proxy for reform tries are only about 40 percent of the way toward In many ways, Doing Business reforms are the frontier and have been growing at roughly 4 a reasonable goal in their own right toward percent per year. Group 2 is a cluster of countries which countries can strive. Focused mainly with the advantage of possessing natural resources. on domestic small and medium enterprises Although they are positioned in roughly the same (SMEs), the reform efforts spotlight bottle- place along the reform axis as Group 1, their necks faced by firms throughout their life resource-based economies have enabled them to cycle, from start-up, to acquiring land and achieve much faster growth. finding financing, and, when necessary, to Group 3 consists of a mix of countries that debt resolution and closure. are fast growing and positioned above the aver- As the Doing Business reports point out, age on Doing Business performance. It includes however, they do not cover all areas of invest- resource-rich countries, such as Ghana and ment climate reform that matter to businesses. Zambia, as well as the fast-growth, non-resource This requires an assessment of the relation- endowed countries—Mozambique, Rwanda, ship between changes in Doing Business and Tanzania, and Uganda. other key indicators of economic change for Group 4 comprises countries that are well past Sub-Saharan Africa.2 Thus, the focus is on the the 50-percent mark on their Doing Business impressive economic change that has occurred journey toward the frontier, but which have had in the region, and how these changes relate growth rates below the regional average. This Broad mix of countries Figure (Position on Doing Business frontier and growth, 2007–11) 2 Growth rate (%) 14 12 Liberia 3 10 Angola Ethiopia 2 Eql. Guinea Rwanda Ghana 8 Malawi Uganda Mozambique Zambia DRC Tanzania 6 Sierra Leone South Africa Burkina Faso SSA ave Kenya Mauritius 4 Mali Namibia Senegal Seychelles Cameroon South Africa 2 1 Côte d’Ivoire 4 0 Zimbabwe 20 30 40 50 60 70 80 Distance to Doing Business frontier (scale 0–100) Sources: World Bank Doing Business data, www.doingbusiness.org; World Development Indicators, www.data.worldbank.org . Note: SSA ave abbreviates Sub-Saharan Africa average. group is comprised of some of the region’s more Varied reform enthusiasm diversified economies, as well as some of the more Figure (Change on Doing Business frontier and growth, 2007–2011) 3 globally integrated ones, such as Mauritius and Growth rate (%) South Africa. 14 However, this is a comparatively static image, at least on the Doing Business front. The more 2 3 Liberia 12 interesting aspect of the Sub-Saharan Africa eco- nomic story relates to change. Figure 3 shows the 10 Ethiopia Angola region’s growth against how its countries have Eql. Guinea 8 Ghana Rwanda advanced toward the Doing Business frontier. Uganda Malawi Mozambique The clusters move and merge in interesting ways. Tanzania Zambia 6 DRC Sierra Leone Group 1, the somewhat lackluster group that Mauritius Kenya SSA ave Burkina Faso was ranked below average in figure 2, moves Mali 4 Namibia Senegal above average in terms of change (as opposed South Africa Cameroon to position) on the reform scale, indicating a 2 4 1 level of desire to address business environ- Zimbabwe Côte d’Ivoire ment and growth constraints. On this scale, the 0 –2 0 2 4 6 8 10 12 14 Group 1 cluster of countries shifts from seem- Change in distance to Doing Business frontier (%) ing under-achievers to being serious reformers Sources: World Bank Doing Business data, www.doingbusiness.org; World Development Indicators, www.data.worldbank.org . with aspirations for growth. This group includes Note: SSA ave abbreviates Sub-Saharan Africa average. some of the most active clients of the Trade and Competitiveness Global Practice (see table 1, and so they do not prioritize additional reforms Annex). on this front. With the exception of Kenya, coun- In figure 2, the high growth, resource-rich tries in this group can be considered to have and non-resource rich countries, Groups 2 and graduated beyond improving performance on 3, are partially separated from each other by the Doing Business indicators as the main focus their position on Doing Business. However, of their investment climate reform efforts. when analyzed in terms of their movement on Finally, Liberia and Rwanda, both of which Doing Business rankings, the two groups merge are high performers in figure 2, emerge as excep- into a cluster characterized by above-average tional performers in figure 3, where movement growth, but merely average reform perfor- up the Doing Business rankings is considered. mance. This implies that Group 3 begins to Despite experiencing strong growth in the case take on some of the characteristics of Group 2, of Rwanda and remarkable growth in the case of whereby high levels of economic growth may Liberia, neither country exhibits signs of relax- dampen the appetite or perceived need for ing its reform efforts. Indeed, they undertake investment climate reform. reforms year after year as they try to move closer The countries in Group 3 are above average toward the reform frontier, exhibiting the same in the Doing Business rankings, but only when aspirational characteristics as Group 1 but with compared to the regional average. They fall far the added benefit of fast growth. below average when compared to a global pool of countries, and they could be overtaken by other The bottom line: investment countries in the region that are pursuing reform. After a decade of experience with investment cli- There remains an incentive, therefore, for the mate work in the region, patterns and linkages countries in Group 3 to pursue an aggressive are emerging between Doing Business reform reform strategy, even though their recent eco- and economic growth. However, the drivers of nomic growth may have a tendency to obscure growth—the abundance of natural resources that incentive. is just one of these—are too numerous and The countries in Group 4 have been largely dis- varied to establish simple causation. A coun- engaged from Doing Business reform despite the try with a reasonably sound investment climate fact that they are not experiencing high growth. may still experience severe growth challenges—a In some cases, this may be because they are suf- circumstance to which many European countries ficiently well positioned in the reform rankings, could currently attest. Investment levels may stand as a better mea- large investments that have less to do with a coun- sure of the success of the Bank Group’s Africa try’s business environment than with the pres- interventions. They serve as a gauge of the effect ence of valuable sub-soil resources or of positive of business environment reforms on private macroeconomic conditions. National-level invest- sector decision making, as marked by the most ment data also insufficiently captures changes important decisions that entrepreneurs make: in how local SMEs—the main beneficiaries of where and how much to invest. investment climate reform—invest and grow. Encouraging investment is the subtext of 5 all the business life-cycle reforms promoted by Conclusion the Bank Group in Sub-Saharan Africa. Trade Sub-Saharan Africa today is a very different place and Competitiveness work in the region focuses than it was only a decade ago. It has achieved explicitly on investment generation, often includ- greater stability and growth, and some parts con- ing program performance targets that specify tinue to grow rapidly. Pockets of fragility and minimum investment levels that interventions unrest remain and at times expand. There is also are expected to generate. concern that economic growth remains too heav- Investment also serves as an important mea- ily tied to natural resource endowments. sure of perceived stability, with entrepreneurs However, across most of the continent, invest- and their families forgoing consumption now to ment has been rising and businesses are increas- make medium- to long-term commitments to an ingly making long-term bets. The Bank Group economy in the belief that their investments will supports this process in Sub-Saharan Africa by offer a greater pay-off in the future. The willing- helping governments in their efforts to cut red ness of Sub-Saharan African entrepreneurs to take tape for SMEs and to establish legal, regulatory, the long view of investment prospects is a funda- and procedural frameworks that encourage mental element of the larger story of economic entrepreneurs to take risks. growth on the continent, enabling the region to The Bank Group’s efforts with client countries attain average investment levels of 22 percent of have made the region one of the fastest reform- GDP—equivalent to China in the early 1960s and ing in the world. However, not all of this reform India in the early 1980s (World Bank 2013). has translated directly into increased growth and Part of the challenge in looking at linkages investment for all countries. Some economies in between investment climate reform and actual the midst of strong growth, whether resource- investment in the region is reflected in the char- driven or otherwise, may see little need to engage acteristics of the period under review: Doing in extensive reform. Other countries trying to Business reforms in Sub-Saharan Africa started exceed average growth rates look to change this gaining momentum just as the global economic by embarking on above-average business environ- downturn of 2008 launched the world into the ment reforms. Investment data in smaller econo- “great recession,” which dampened investment mies, of which the continent has many, tends to levels globally. More fundamentally, too many be too heavily influenced by a few large deals for factors drive investment decisions, making it meaningful trends to be identified. difficult to isolate the impact of Doing Business Further work will be required at the coun- reforms from the aggregate data. try and SME levels to determine the impact of Establishing these linkages with greater preci- investment climate reforms on investment and sion requires a more detailed look at the level of economic growth. In this context, the Trade and investment in each country. This would include Competitiveness Global Practice is undertaking attempting to count the investment generated analysis at the country and enterprise levels to by each individual reform, or for an aggregate determine impact. This is especially important of reforms where they positively reinforce each as the Bank Group and its developing country other. Without this analytical level of granularity, partners in Sub-Saharan Africa and elsewhere the potential investment impact of investment around the globe embark on the next generation climate reforms will be subsumed by a handful of of investment climate reforms. in v estment c limate in a f ri c a t h e I m p a ct o f R e f o r m o n S u b - S a h a r a n A f r i c a ’ s G r o w t h Annex ———. 2011. “The Hopeful Continent: Africa Rising. After decades of slow growth, Africa has a real Active reformers (T&C investment climate reform count by chance to follow in the footsteps of Asia.” December Table country, FY 2008–14) 3. http://www.economist.com/node/21541015. 1 Economisti Association. 2011. Investment Climate in Number of investment Africa Program: Four-Country Impact Assessment, viewpoint Country climate reforms Rwanda 27 Comparative Report. March. Burkina Faso 22 IFC (International Finance Corporation). 2013. IFC is an open forum to Liberia 16 Jobs Study: Assessing Private Sector Contributions to Job encourage dissemination of Mali 14 Creation and Poverty Reduction. Washington, DC: IFC. public policy innovations Sierra Leone 13 IMF (International Monetary Fund). 2013. Sub-Saharan for private sector–led and Burundi 11 Africa: Keeping the Pace. Regional Economic Out- Mozambique 10 market-based solutions for look. Washington, DC: IMF. Côte d’Ivoire 10 development. The views McKinsey Global Institute. 2010. Lions on the Move: Democratic Republic of Congo 9 published are those of the The Progress and Potential of African Economies. Senegal 8 authors and should not be June. attributed to the World Source: Trade and Competitiveness Global Practice data, World Bank Group. Note: This reform count is based on a methodology used by the Trade and World Bank. 2014. Africa’s Pulse: An Analysis of Is- Bank or any other affiliated Competitiveness Global Practice by which a reform must achieve a minimum, sues Shaping Africa’s Economic Future. Volume 7 pre-determined level of change (often time and cost savings to private firms) organizations. Nor do any to be formally counted as a reform. (April). of the conclusions represent ———. 2013. Doing Business 2013: Smarter Regulations for official policy of the World Small and Medium-Size Enterprises. Bank or of its Executive ———. 2012. Doing Business 2012: Doing Business in a Directors or the countries Notes More Transparent World. they represent. 1. The Doing Business indicators measure a country’s World Bank Group data: http://data.worldbank.org/ reform progress in terms of distance of each economy indicator To order additional copies to the “frontier,” which represents the best perfor- World Bank Group data: http://www.doingbusiness contact Jenny Datoo, mance observed on each of the indicators across all .org/data managing editor, economies in the Doing Business sample since 2005. A WEF (World Economic Forum). 2013. The Africa Com- Room F 5P-504, country’s progress toward the Doing Business fron- petitiveness Report 2013. The World Bank, tier is represented as a higher percentage of the total 1818 H Street, NW, Washington, DC 20433. distance. 2. Doing Business notes that there is a high correla- Telephone: tion (0.83) between Doing Business rankings and 001 202 473 6649 the rankings on the World Economic Forum’s Global Email: Competitiveness Index, a broader index that measures jdatoo@worldbank.org factors from macroeconomic stability and institutional development to technology and innovation. Produced by Carol Siegel References Printed on recycled paper African Development Bank. 2011. “Middle of the Pyra- mid: Dynamics of the Middle Class in Africa.” Market Brief. April. Devarajan, S., and W. Fengler. 2013. “Africa’s Economic Boom: Why the Pessimists and the Optimists Are Both Right.” Foreign Affairs. May/June. The Economist. 2000. “The Hopeless Continent,” May 13. http://www.economist.com/node/333429. This Note is available online: http://www.worldbank.org/fpd/publicpolicyjournal