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AFRICA ON THE MEND

“The Africa Competitiveness Report 2007”
Published by the World Economic Forum on June 13, 2007
Analysis by REHAB EL BAKRY

The economies of Africa are doing better today than they have over the past 30 years, according to the “Africa Competitiveness Report 2007,” recently published by the World Economic Forum (WEF), in cooperation with the World Bank and the African Development Bank. Despite the strong performance of African countries over the past few years, which has not been seen since the 1970s, the report indicates that much more has to be done in order for the continent to realize its full potential and for its countries to achieve the UN’s targeted Millennium Development Goal (MDG) of halving poverty by 2015.

“Between 2001 and 2006, growth in gross domestic product (GDP) on the continent averaged 4.9 percent annually. In 2006, the continent grew by 5.5 percent, and in 2007, this is expected to increase even further to 6.2 percent – the highest growth registered for decades.”

Tunisia was rated as the most competitive African country, followed by South Africa and Mauritius. Egypt ranked as the fourth most competitive African economy. While much effort has been made to stabilize the continent’s macroeconomic indications, this had more to do with external interventions including international debt relief, high commodity prices, and a favorable economic environment as opposed to real sustainable development within the continent itself. The GDP growth of African countries might be higher when compared to its growth rate historically, yet it still falls short of the 7 percent needed to meet the MDGs.

“Infrastructure, investment, innovation and institutional capacity [are] the most critical areas demanding action if Africa is to make up for missing two decades of global growth or replicate the growth models that have lifted millions of people out of poverty in other regions of the developing world.”

The report identified five main themes to sustainable development in the continent. The first, and perhaps most pressing, is developing good policies designed to establish a sound business environment. Countries with sound economic policies rank higher in terms of competitiveness and continued potential for growth. The report advised African countries to rely less on their natural resources, and more on sound economic policies to develop their productive capacities.

“African countries in the continent should not rely on their natural endowment to foster productivity and competitiveness. Where policies respond to the needs of women as well as male entrepreneurs, Africa has the opportunity to unlock considerable additional productive potential.”

The second major obstacle that continues to plague Africa is poor access to finance. While this is a challenge that faces all economies on the continent, it is more pressing in lower income countries, and especially smaller, locally-owned firms. Addressing the issue would allow these economies to grow at a much faster pace, which would help create much needed jobs on the continent.

The report also cited the uphill battle African businesses face due to undeveloped infrastructure.

“Infrastructure remains one of the top constraints to business in Africa. Indirect costs can represent a substantial drag on productivity enhancements in Africa and can account for as much as 30 percent of overall cost. […] Both objective and subjective indicators clearly show that energy and transportation are among the main bottlenecks to productivity growth and competitiveness in Africa.”

Creating business-friendly institutions to help foster competition is the fourth challenge that African economies face. Corruption is a particularly big obstacle facing companies, both local and international, in the continent. This corruption is generally manifested in the form of bribes and is associated with the discretionary power of officials and haphazard implementation of regulations.

“Finally, there are significant examples of success throughout the region. […] While the basics are clearly important, the existence of highly productive firms across the continent demonstrates that they are not the only thing that matters.”

Egypt, which ranked fourth, is among the countries in the continent that has for the past three years worked to address the various issues raised within the report. Historically, Egypt depended on its geographic location, antiquities, cheap labor, the Suez Canal and remittances as its main revenue sources. However, since mid-2004, the country has been working to redefine its position within Africa to become a major destination for foreign direct investment (FDI). The government has also identified and placed a plan to create investment-friendly policies. Over a three-year period, the reforms have raised FDI from $3.9 billion in 2004 to a whopping $9 billion in the first three quarters of 2007.

“The highest-ranked countries in Africa […] show that there are strong individual country performances throughout the continent in areas as diverse as institutional quality, macroeconomics, stability business sophistication and innovation. These countries can serve as benchmarks for other economies of the region, as points of reference in the efforts to improve their competitiveness.”

Egypt has also focused heavily for the better part of the 2000s on improving communication infrastructure as well as transportation networks, through a combination of government spending coupled with public-private partnerships (PPPs). While the telecommunications and information technology sectors have become among the country’s strongest points, penetration rates for mobile and fixed-line telephony, as well as internet penetration, remain very low when compared to the population. Over the past two years, the government has taken on the responsibility of upgrading the country’s road network to facilitate further investment, particularly in the poorest parts of the country.

“Egypt’s most pressing investment constraints are related to macroeconomic uncertainty, tax regulations and tax rate policies, unfair competition and corruption.”

While the country has exerted a lot of effort to improve its economic performance, it is still lagging behind in many areas. By far, the historical tendency to implement policies only to reverse them a few years later has made investors approach with caution. Moreover, the country’s 6-million-strong bureaucracy has a lot of discretionary power. This, coupled with the fact that government employees are underpaid given rising costs of living, has allowed corruption to persist. More recently, the reforms to the tax law, customs regulation and monopolistic practices have been addressed. However, the effectiveness and impact of these initiatives on the status quo have yet to be seen.

A copy of this report is available at: www.weforum.org

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