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From indicators in the areas of macroeconomic stability, finance, market structure, infrastructure, skills, customs procedures, labor regulations, business regulations, corruption, and security, it is evident that most African business environments still have serious shortcomings compared with their international competitors.
Although more analysis is needed to quantify the impact of different dimensions of the business environment on firm-level productivity, in some cases the direct costs of poor business environments to firms are quantifiable, and the results are striking. The results suggest that improved competitiveness in Africa will require lower costs of doing business and higher productivity, not lower real wages, which are not the main obstacle.
Large, broad based, competitive private sectors are still relatively rare in Sub Saharan Africa, reflecting the pervasiveness of poor business climates and weak enabling environments that depress the productivity of existing enterprises and discourage the entry of new ones.
There are a number of explanations for African countries’ poor performance in fostering labor intensive manufacturing and private sector development. The pessimists argue that Africa’s scant human capital and rich natural resource base ensure that manufactured exports will always be unprofitable.
However, dynamic trade theory suggests that comparative advantage is partly endogenous, because a country’s production and trade are not limited by its endowed resources only but also by a process of searching and learning, stimulated by competition incentives in an appropriate institutional setting.
The policies, institutions, and infrastructure maintained by African governments and the effects they have on transactions costs are crucial in encouraging, or discouraging, firm specific learning and the development of competitive advantage and export industries.
Competitiveness is a comparative concept by definition: The ability of African countries to develop competitive manufacturing sectors depends on the quality of African business environments and labor forces relative to those of the export powerhouses of the developing world.
Although productivity analysis is needed to quantify the relative importance of different business climate factors, my preliminary sense is that the common major bottlenecks are macroeconomic instability, policy uncertainty, poor access to finance, and shoddy electricity service, with governance as a cross-cutting theme.
African economies badly need rapid progress in these areas, and the contrast with China, India, Morocco, and even Bolivia is stark. On other dimensions of the business environment such as market structure, transportation, telecoms, tax administration, and regulatory quality some countries have made real progress, while others have faltered.