Complex regulations and high start-up costs can be a major barrier to business growth and development in Africa. However, the World Bank’s 9th Doing Business report, “Doing Business in a More Transparent World” released last week found that “over the last year a record number of governments in sub-Saharan Africa changed their economy’s regulatory environment to make it easier for domestic firms to start up and operate.”
This is great news and it will hopefully mean that more legitimate businesses will be setting up on the continent –- something that is crucial for long-term poverty reduction in Africa.
With nearly 400 million people in sub-Saharan Africa still living on less than $1.25 a day, there is a need for business growth in order to provide jobs and economic growth to reduce poverty. Jobs provide an essential form of income for the poor with which to lift themselves out of poverty, and every extra percentage point of economic growth means more money collected from taxes to pay for schools, more health facilities built and more safe drinking water supplied. Admittedly, some businesses do not always behave in a way that puts their workers first, so employment and investment standards are simultaneously needed in Africa to ensure the poorest are not exploited. However, because business growth is crucial for poverty alleviation in Africa, the Doing Business results are very encouraging.
This year, in sub-Saharan Africa — a region where eight years ago, little attention was paid to the regulatory environment — 78 percent of economies implemented Doing Business reforms, compared to an average of only 56 percent over the last six years. These changes to regulations can be highly beneficial. In Ghana, for example, in 2005, it used take business owners nearly three months to simply register a business. Now, following targeted aid programs and government leadership (which changed and enforced the regulatory process) registration time has been brought down to less than two weeks. The results are dramatic –- new business registrations are up by 87 percent with more than 21,000 new businesses created.
However, challenges still remain: getting an electricity connection costs more on average in sub-Saharan Africa than any other part of the world, at 5,400 percent of the income per capita. Compared to processes in the UK to set up a business, in Uganda, entrepreneurs face three times the number of procedures, double the time and a cost of more than 90 percent of their average annual income. More still needs to be done to address these limitations to business growth and the appreciation of environmental and employment standards. But overall, as the Doing Business report shows, progress is being made in the right direction, which is encouraging.
Additionally, these improvements to the regulatory environment are also only one part of the story. Africa is rising.
Growth is no longer restricted to resource-rich countries as the caricature goes; growth in 18 non-oil exporting countries averaged 5.5 percent annually over the last decade. Africa is also projected to have 128 million households with discretionary income by 2020 -– more than double than two decades ago. Africa now has more than 700 Bilateral Investment Treaties in place to protect investors. Also, when the rest of the Western world are only seeing annual growth rates of 1 percent, sub-Saharan Africa is seeing rates of 5 percent.
There has never been a better time to invest on the continent and businesses need to realize it –- not just for their private profit but to bring about the growth and job creation needed for poverty alleviation in Africa.