oa Journal of Development Perspectives - Costs, competitiveness & reforms: is Africa different? Evidence from the investment climate data
This paper considers the impact of high costs and losses in reducing the productivity and competitiveness of African manufacturing, and the complications posed for reforms by having sparse business sectors heavily segmented by size, productivity and ethnicity. The conceptual framework is based on trade theories that see the evolution of comparative advantage as influenced by the business climate - a key public good - and by external economies between clusters of firms entering related sectors. Macroeconomic data from purchasing power parity (PPP) estimates, though imprecise, confirm that Africa is high-cost relative to its levels of income and productivity. Firm-level estimates using data from Investment Climate Surveys in 2000-2004 confirm the impact of high indirect costs and business environrnent-related losses in further depressing the performance of African firms relative to those in other countries, when performance is expanded from a 'factory-floor' concept towards a broader 'net productivity' measure. There are differences between African countries, however, with some showing evidence of a stronger business community and better business climate. Costs reflect poor infrastructure, business services and regulation. The paper adopts a political-economy perspective on the prospects for reform, considering common features of African economies: sparse, with small business sectors fractured along ethnic dimensions and with wide differences in the productivity of large and small firms. Minority and foreign investors have higher productivity and a greater propensity to export. The tendency to overcome difficult business climates by working in ethnic networks slows new entry and may decrease the incentives of key parts of the business community to form an aggressive pressure group for reform. This increases the possibility that countries settle into a low-productivity low-reform equilibrium. The paper concludes with a discussion of the findings for reforms to boost the competitiveness and diversification of African economies.
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