Monday, June 07, 2010

Undoing Business in East Africa

Despite all the self-congratulatory back slapping that greeted the release of the Doing Business in the East African Community 2010 report, the document makes for depressing reading. Though not a total solution or yardstick, the DB reports are increasingly used as a leading measure to gauge the attractiveness of a nation as a place to do business and as a measure of competitiveness. For reform-minded governments, how much their indicators improve matters more than their absolute ranking. On this score, for EAC countries and the region as a whole, it is a case of one step forward and two backwards.

Although Kenya, the region’s economic powerhouse, has instituted comprehensive licensing reforms that have led to annual private sector cost savings of $62 million, and the country is ranked 4th out of 183 nations for “ease of getting credit,” the fact that Kenya’s overall rank, measuring the ease of doing business in the country, dropped from 84 in 2009 to 95 is more significant.

Compared to 2008 when Kenya was cited as one of the world’s top ten reformers in that year’s DB Report, the country’s ranking has actually plummeted 23 places. Similarly Uganda’s overall ranking also fell from 106 in 2009 to 112 this year and Tanzania’s from 126 to 131. Burundi only marginally improved from 177 to 176.

The lone exception was Rwanda which leapt to an overall position of 67 in the 2010 rankings, up from 143 in 2009. The top reforming country in the world, the country’s efforts have paid off as it attracted some $1.1 billion in investment, 41% more than in the previous year and this in the midst of the global economic crisis which saw global FDI inflows slide by up to 44% the first quarter of 2009.

Though there is widespread expectation that integration will lower the cost of doing business, in 2009 EAC secretary general Juma Mwapachu described it as "unnecessarily too high" saying it undermined international competitiveness of the region, This is borne out by the report which observes that if each East African country were to adopt the region’s best practice the region would rank 12th rather than 116th. In other words, if the best of existing East African regulations and procedures were implemented across the board, the business environment in the region would be comparable to that in Thailand which in the first quarter of 2009 alone garnered more than $2 billion dollars in investment, according to the United Nations Conference on Trade and Developments World Investment Report 2009.

The fact that needed reforms are in place in some but not all EAC countries inevitably calls into question the effectiveness of the regional integration experiment. In fact, though regional integration has long been touted as necessary for economic development in sub-Saharan Africa, the fact is Africa remains one of the most protectionist areas in the world. With 14 landlocked countries, only 10 percent of African exports are intraregional, according to the World Trade Organization. In contrast, intraregional trade in Western Europe, is 68 percent and in Asia hovers around 40%.

Under the EAC, the five countries have officially formed a free trade area and a customs union. The common market protocol, the next step on the route to full economic integration, is set to go into effect in less than a month’s time. It will supposedly allow the free migration of businesses and people across borders as the bloc prepares to move to a common currency by 2015. However, according to the Director General, EAC customs and Trade Directorate, Mr. Peter Kiguta, despite the successful elimination of internal tariffs among Partner States and consequent growth of intra-regional trade, the ratio to total volume of trade in EAC is still a paltry 13%. “We produce what we don’t consume and we consume what we don’t produce,” as President Jakaya M. Kikwete of Tanzania said recently in Dar es Salaam at the World Economic Forum on Africa.

Mutual suspicion between partner states may be to blame for this state of affairs. According to Nation Media Group CEO, Linus Gitahi, “it is much easier for a Chinese company to get licensed to do business in any of the East Africa countries than it is for any local companies moving across the borders. Many in government have what President Yoweri Museveni calls the ‘pygmy syndrome’-the idea that you are bigger than me and by supporting you, you will get bigger and bully me.”

The EAC states may have made strides in improving literacy, fighting AIDS and improving infrastructure but when it comes to governance, the parochial nature of the region’s politics has limited gains. Little is done to curb rampant corruption. Comparing EAC country rankings in Transparency International’s Corruption Perception Index 2009 to those from the previous year reveals that the problem either worsened or stagnated in all EAC countries except Rwanda, which registered a significant improvement.

Violence, intimidation and disputed results continue to be a feature of elections. In Burundi, whose abysmal ranking in the DB 2010 Report is reflected in a report by the African Development Bank which says the country “investment, production and commerce in the country are hindered by the political and institutional environment,” opposition parties have recently demanded a repeat of communal elections, alleging massive fraud and poll-rigging. Just last week, their candidates announced their withdrawal from this month’s presidential election. Kenya’s decline has been blamed on the post-election violence and creation of a coalition government, which slowed decision-making at a time when over 70% of the countries in the world are actively reforming.

The Global Competitiveness Index identifies 3 stages of economic development, the first driven by primary factors, such as unskilled labor and natural resources, and the others marked by increases in efficiency and innovation. The EAC region is firmly rooted in the baby-stage. To be competitive, EAC states must, in addition to improving infrastructure and creating a healthy and literate workforce, focus on developing well-functioning public institutions and a stable macroeconomic framework.