Africa needs less red tape – Business in Africa

29th September, 2004

We all agree that too many Africans are poor. But why? Certainly not because of a lack of entrepreneurial skill or ambition. From Addis Ababa to Yaoundé, city streets all over the continent are crowded with clever and hardworking street vendors, often women and children. They can be a pleasure for the tourist, a convenience for the locals – but a sign of ill-health for the economy.
There is no longer any mystery as to why so much economic activity in Africa is in the informal sector.
The World Bank’s Doing Business report showed last year that African countries are tying up their formal economies in red tape: it currently takes just two days to set up a limited liability company in Australia, New Zealand or Canada, but over four months in Burkina Faso, Angola, Mozambique, or Congo.
That’s bad news for the economy. Informal businesses pay no taxes and can avoid providing basic protection for their employees, who are disproportionately women, low-skilled workers and young people.
Yet businesses do not lurk in the informal sector for fun. Unregistered businesses are denied access to the courts, to police protection, and to credit from the banks. Unregistered property is useless for securing a loan. If entrepreneurs could reasonably enter the formal sector, they would do so.
But Africa’s problems are more widespread than delays in starting new businesses. When a customer doesn’t pay his bills in Nigeria, it takes the victim two years to enforce the contract. Firing an incompetent or redundant worker in Sierra Leonecosts three and a half years of his salary.
The results are obvious: businesses won’t do business with large unknown customers except for cash; property registers become hopelessly outdated; employers will be slow to hire and conservative about giving a chance to inexperienced workers; credit goes only to those with the right connections.
The good news is that these problems are often very easy to fix. Rich and poor countries the world over have pioneered simple regulations and administrative systems which do the job they were supposed to do without pushing people into the informal sector, where they get no benefit from regulations anyway.
Other developing countries have discovered the benefits of simple solutions to regulatory problems. In Tanzania, bankruptcy procedures are now carried out in a specialised court, which is fast and in high demand. In South Africa, small investors are protected because data on ownership and company finances are publicly available. Courts in Botswana have improved the efficiency of their courts by limiting nuisance appeals.
In just one year, 58 out of the 145 countries benchmarked in the Doing Business in 2005 report have measurably improved some aspect of their business environment.
What is frustrating is that most of the reforms have not been in places like Ethiopia, Slovakia or Colombia, but in Belgium, Norway or Spain. The countries which are most desperately in need of reform are not reforming. And that means that the people most in need of protection – small businessmen, women with part-time work, young people looking for an apprenticeship – are not getting it.
It is a myth that efficient regulation, which protects those it should protect without distorting the economy, is a luxury that only rich countries can afford.
Doing Business in 2005 has shown that regulations that work are simple to design and cheap to introduce, that they are fairer on vulnerable groups but also good for economic growth. A lot of progress has been made in one year. Next year we’re pushing for even more.

First published in Business in Africa – Online.

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