Tunis: No government can rely exclusively and indefinitely on redistributive development models when the majority of its population remains economically marginal. Broad based and accelerated growth is critical for job creation and a sound fiscal system could produce revenue flows that would enable governments to channel resources into socio-economic infrastructure and basic social services for those that are most vulnerable.
Such growth, which must be inclusive to forge social cohesion, requires widespread access to economic opportunities. A dynamic private sector is critical to achieving the inclusive growth that creates these economic opportunities. Development strategies and investment plans must leverage the potential of private capital as an agent and partner in growth and development.
- The Economic Content
Between 2000 and 2010, Africa’s cumulative growth rate averaged between 5% and 6%, thanks to greater political stability, strong global economic performance and domestic macro-economic reforms. Economic policy reforms are progressively redefining the State’s role in the economy as an enabler of private sector-led growth. Much of the emphasis, to date, has been on attracting foreign direct investment (FDI) through deregulation and incentives. Over the past decade private FDI overtook overseas development assistance as the primary source of FDI-led growth. As a result, the continent’s economies are better integrated into the rest of the world.
Economic integration offers opportunities and risks. Buoyant global economic conditions increase demand for African exports, particularly commodities, as well as external private investment and financing inflows. In turn, FDI also enhances technology transfer, grows total capital stock and improves total factor productivity. A contracting global economy, by contrast, rarifies trade outflows and investment inflows and makes financing more scarce and expensive. African economies are suffering from the recent triple global economic crises of fuel, food, and finance, which saw a sharp decrease in FDI. The renewed global economy fragility and volatility forecast further FDI contraction, particularly from Africa’s historical trade and investment partners in OECD countries.
Robust growth has helped reduce the depth of poverty in sub-Saharan Africa, dropping the percentage of those earning less than US$1.25 a day from 67% to 58% between 1998 and 2008. However, the pace of growth has not kept up evenly with population growth. With Africa’s working age population set to increase from about 400 million in 2010, to around half a billion in 2020, there is still much scope for maintaining and accelerating the pace and quality -- breadth, sustainability and robustness -- of growth. Economic growth must create economic opportunities for all, if it is to be inclusive. Sustainable growth must optimize the use of financial, social and environmental capital, by pursuing development models that use resources more productively and efficiently. If Africa’s growth is to become more robust and less vulnerable to exogenous shocks, a more diverse set of economic partnerships and alternative growth drivers beyond FDI must be nurtured.
The Bank’s RMCs must continue to strive to attract much-needed capital and increase Africa’s current share of less than 5% of global flows. However, FDI alone will not be sufficient to achieve the quantity and quality of growth needed for the continent to prosper. African policy makers and entrepreneurs have drawn important lessons from the 2007-2008 global financial and economic crises. Aware of the risks involved in pursuing undiversified, unshared or unsustainable growth and development models, they are reaching out to emerging trade and investment partners in Asia and Latin America while also looking to domestic and regional growth drivers. Increasingly, they recognize the significance of domestic and regional private sector development alongside FDI for more robust, inclusive and greener growth.
- The Missing Middle
The African private sector contributes about 80% of the continent’s GDP and creates about 90% of all jobs in 2012. Micro and small enterprises employing fewer than 20 full-time employees create between 67% and 80% of jobs and contribute between 30%-35% of GDP. In the African private sector, there is a "missing middle", and Medium-sized enterprises employ between 20% and 30% of the workforce by contrast with the more dynamic emerging economies and advanced market economies where they make up a comparatively larger share of all private enterprises and support about two-thirds of all employment. If African economies are to fully reap the rewards of a government-enabled and private sector-led growth model, the factors inhibiting the emergence of mid-sized enterprises must be tackled.
Supporting the emergence of mid-sized enterprises includes creating the macro-level conditions for enterprises of all sizes to thrive but also adopting measures that target the growth constraints and opportunities in each sector. For example, in private services, a growing middle class and rapid urbanization in Africa create significant potential for growth, where private investment has expanded dramatically over the past decade, particularly in trade, transportation and distribution and financial services. Investments in consumer-oriented sectors generally lead to the creation of many more jobs and stimulate consumer spending and position African economies to benefit further from private sector expansion.
Sectors vary as well in terms of their actual and potential contributions to GDP, private investment, enterprise creation and growth, and employment generation. In the agriculture and agro-industry sector, overcoming low overall productivity will require efficiency gains through: increasing the acreage per farmer, improving technology and labor migration into manufacturing and other higher value-added sectors. In turn, private manufacturing sector growth is contingent on improved access to technology, infrastructure and external investment.
- Impediments to Private Sector Growth
Unlocking each sector’s potential requires enhancing the competitiveness of the continent’s economy to continue to attract external and pan-African FDI and to nurture the emergence of home-grown "opportunity-driven entrepreneurs" who innovate and take risks to take full advantage of market opportunities. Enabling private enterprises to thrive will depend on addressing the "soft", "hard" and "enterprise-level" disablers.
Two-thirds of African entrepreneurs rate at least one of the following four soft disablers – corruption, customs and trade regulations, tax administration and rates, labor regulation. The reform momentum must intensify and focus on establishing appropriate policies to redress these. Accelerating regional economic integration to facilitate the flow of capital, goods, labor, services and technology among countries is also critical to overcoming the small size of most African domestic markets. Achieving systemic labor productivity enhancements remains a priority for enhanced competitiveness.
Tackling "hard" disablers -- effective, reliable, affordable social and economic infrastructure – remains a priority. African firms will remain at a competitive disadvantage so long as infrastructure services cost twice as much on average as in other developing regions and tariffs remain exceptionally high by global standards.
Enterprise-level disablers must be addressed to enable African enterprises to grow and become more competitive. Enterprise regulatory and administrative services place African firms at a competitive disadvantage. Starting a new business is 2.7 times more expensive in Africa than the global average. Women entrepreneurs face even greater constraints, in terms of access to administrative services and finance due to their often unfavorable legal status in many of RMCs. Credit to the private sector has been growing faster than the continent’s GDP over 2005-2009, but remains below levels reported for other developing regions. Without more access to financial services, African businesses will remain behind their counterparts in other developing economies. Small companies struggle the most: despite making up the bulk of African enterprises, only 16% of small firms have access to financial services.
- Extracted from: Briefing Notes for AfDB’s Long-Term Strategy (Briefing Note 3): Private Sector Development Strategy, dated 7 March 2012. The 8 page document can be accessed here.
- The following companion Briefing Notes have also been prepared for the AfDB's Long Term Strategy:
- Briefing Note for AfDB’s Long-Term Strategy - Inclusive Growth Agenda (496 KB)
- Briefing Note for AfDB’s Long-Term Strategy - Higher Education, Science and Technology (437 KB)
- Briefing Note for AfDB’s Long-Term Strategy - Africa's Demographic Trends (450 KB)
- Briefing Note for AfDB’s Long-Term Strategy - Income Inequality in Africa (760 KB)
- Briefing Note for AfDB’s Long-Term Strategy - Unique Opportunity for Africa: Architecting the Synergy between Existing Information Technologies (348 KB)