Improving the Investment Climate in Sub-Saharan Africa

Vincent Palmade Lead Economist,

FIAS World Bank Group

Paper presented at the high-level seminar: Realizing the Potential for Profitable Investment in Africa Organized by the IMF Institute and the Joint Africa Institute Tunis, Tunisia, February 28 – March 1, 2006

The views expressed in this paper are those of the author(s) only, and the presence of them, or of links to them, on the IMF website does not imply that the IMF, its Executive Board, or its management endorses or shares the views expressed in the paper.

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Improving the Investment Climate in Sub-Saharan Africa

IMF Institute

Tunis, the 28th February, 2006

Vincent PalmadeLead Economist,FIAS

World Bank Group

11

A LONG AND LOW PLATEAU ENDED BY A STEEP CLIFF

Source: World Bank; Little data book 2005

Ethiopia

Swaziland

Botswana

South Africa

Mauritius

90

500

4,000

GDP/Capita($ in 2003)

Population size (millions)

Dem. Rep.Congo

Average

70069 122

Gabon

Cape VerdeNamibia

Nigeria

22

SUB SAHARA AFRICA IS FINALLY TURNING THE CORNER BUT…

GDP per capita growth

Gross capital formation as a percentage of GDP

Annual increase in the number of people living in poverty

1990 - 2002 2003

1.7%

0%

17%19%

3.5%

0.4%

1990 2003

1980 - 2000 2004

Source : Africa Action Plan – World Bank 2005

33

…INFORMALITY IS GETTING WORSE AND…Informal output as a percentage of total economic output

1990 2003

Source : Schneider

10

33

29

21

18.5

22

30

Developed Countries

Europe & Central Asia

Latin America & Caribbean

Middle East &North Africa

East Asia & Pacific

South Asia

Sub-Saharan Africa

13

38

38

27

21

28

39

44

…COMPETITIVENESS IS DECLININGPercentage of total exports in trade and services from developing countries

East Asia & Pacific

Europe &Central Asia

Latin America& the Caribbean

Middle East &North Africa

South Asia

Sub-SaharanAfrica

Collapse of tradeWithin Eastern Europe (recovering)

1990 2002

9

4

14

20

31

20 35

5

5

10

20

23

Mostly commodities

Source : World Bank

55

THE POTENTIAL IS THERE Productivity levels at the factory floor

506565 65

100

90

75

98 98

Ethiopia Eritrea Morocco India ChinaTanzaniaUganda Kenya Senegal

Source: Investment Climate Surveys of the World Bank

66

THE PROBLEM IS WHAT HAPPENS OUTSIDE THE FACTORY% of firms reporting external factor as major constraint

Note: Weighted average based on the number of firms surveyed in Eritrea, Ethiopia, Kenya,Senegal, Tanzania, Uganda, Zambia. Average for courts and legal system based on only three countries.

Source: Investment Climate Surveys (WDR 2005)

23

25

28

38

43

45

46

52

61

Courts and Legal System

Labor Skills

Crime

Policy Uncertainty

Electricity

Public Sector Governance(corruption)

Tax Administration

Access to Finance

Tax Rates

22

18

25

42

25

38

25

33

40

Developing WorldSub-Saharan Africa

77

KEY TRENDS IN THE SUB-SAHARAN INVESTMENT CLIMATE

Significant progress

• Political leadership/stability

• Macroeconomic stability

• Capital market regulations

Slow progress

• Infrastructure

• Privatization

• Openess to trade

• Labor skills

No Progress

• Tax burden on formal firms

• Land market regulations

• Labor market regulations

• Judiciary systems

• Administrative red tape

And last but not least:

• Regulations and governance of key industries (e.g. mining)

88

NOT ENOUGH PROGRESS TO CLOSE THE GAP WITH COMPETITORSDoing Business rankings - 2005

1- 40- Botswana

82- Ghana

123- Sao Tome

126- Zimbabwe127- Mauritania

129- Benin130- Cameroon131- Madagascar132- Senegal

94- Nigeria

96- Malawi 135- Angola97- Lesotho 136- Sierra Leone

137- Eritrea

139- Rwanda23- Mauritius 101- Ethiopia 140- Tanzania

143- Burundi144- Guinea

28- South Africa 67- Zambia 145- Cote d’Ivoire68- Kenya 146- Mali

148- Congo, Rep110- Mozambique 149- Togo

33- Namibia 72- Uganda 150- Niger151- Sudan152- Chad153- Central African Republic154- Burkina Faso155- Congo, Dem. Rep.

39- 78- 117-

Source: Doing Business

99

IT COULD BE DONE…

Time to open a business (days)

Registering Property (days)

Paying taxes(number of payments)

Time to export(days)

Sub-Saharan Africa (average)

Best practice in Sub-Saharan Africa

Global best practice

Source: Doing Business in 2006

64

21

2

118

23

1

41

7

1

49

16

5

1010

…BUT IT IS NOT BEING DONE

Average number of reforms per country in 2004

Middle East and North Africa

Sub Saharan Africa

East Asia Pacific

South Asia

OECD – High Income

Eastern Europe and Central Asia

Latin America and Carribean

0.6

1.0

2.4

1.4

1.6

0.8

0.9

Source: Doing Business database

1111

FIRST STEP = IDENTIFICATION OF REFORM PRIORITIESResults from Benin

Very important X SecondaryImportant

• Education

• Infrastructure

• Industry Specific regulations

• Land market

• Labor market

• Capital market

• Governmentcontrol

• Tax system

• Judiciary system

• Macro conditions

Housing constructionRetailPortPowerTelecomBanking

Agro-processing/light

manufacturingCotton

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

1

2

3

4

5

• Administrative red tape X X

1212

HOW OTHER COUNTRIES DID IT?

• Small World class team leading the reform process at the outset BotswanaMalaysiaSingapore ChileIndonesia

• Special Economic Zones as reform pilots MauritiusChinaJordan

• Regulatory reform units MexicoHungaryKoreaSlovakia

• Focused reform efforts along key export industries ChileSingaporeTaiwanMauritiusBotswana

1313

REFORM PROCESS MANAGEMENT CHECKLIST

1. Do you have a dedicated world class team leading the reform process?

2. Have you identified cross-cutting as well as industry specific reform priorities?

3. Has the top level leadership of the country committed publicly to the reforms?

4. Are the reforms being designed leveraging relevant international good practices?

5. Are there clear strategies in place to mobilize supporters and neutralize opponents for each key reform?

6. Have you considered doing reform pilots to tackle the most difficult issues?

7. Have you designated accountable leaders for implementation?

8. Have you provided them with realistic targets and the means by which to achieve them?

9. Are you maximizing and coordinating donor support on the reform priorities?

10.Have you put monitoring systems in place?