Doing Business In Africa - Dutch Style

A recent book by Marjolein Lem, Rob van Tulder and Kim Geleynse offers some interesting insights for those interested in promoting investment in Africa. Given from a Dutch perspective, Doing Business in Africa provides  some very useful insights for those of us worried about how African countries can attract "good" FDI, and how donor countries engage with their private sector for development.

Africa as a good place to do business:

1. Apart from the usual stuff about growth rates, growing middle class, improved macro and political stability, they point to the heterogeneity of the continent, and particularly the difference between RSA and the rest of sub-Saharan Africa, even if its economy will soon be overtaken by Nigeria for size:

• Of Africa's 50 largest companies, 38 are South African
• South Africa's rail networks represents around a third of that of the whole continent
• RSA has 3000 supermarkets and 300 large shopping malls and 16 Makro- Nigeria has 10 supermarkets and 1 Makro

2. The importance of infrastrutcures - 23% of total investments in Africa from 97-07 were in electricity generation, distribution and transmission but still less than 25% of the population has access... 

3. "It is increasingly recognised that firms that adopt BoP strategies ["narrowBoP" focused on consumers; "broad BoP" including producers] or inclusive business strategies need to work in partnership with 'non-market parties' such as NGOs or local authorities. Such partnerships can help firms not only to reach untapped markets of poor, but also to develop adequate solutions"

What about doing business though... ?

4. "If large-scale agricultural projects are designed both to increase food production and include development goals, then they may dampen controversy - in particular for European investors"

5. 3 types of risk - if too much as a combination, no investment... 

• Operational risk - currency risk, duties, fees, 
• Strategic risks - political risks, expropriation, legal processes - government issues
• Sustainability risks - "relationships with secondary stakeholders" - social risks, poverty, disease, environmental risks,  

6. Risks relate to distance measured as sending and receiving country relative positions on various indices:

• cultural (Hofstede (1980) dimensions, Project GLOBE dimension) 
• governance - government effectiveness, legal systems, political risk/corruption measures (Worldwide governance indicators; corruption perceptions index; freedom house data; political systems Uni Ottawa; Economic freedom index by Heritage foundation; ease od doing business WB)
• geographical - physical distance between cities
• economic or development distance - e.g. HDI positions; GDP per capita; WEF Global Compet Index; colonial distance index worldstatesmen.org; EIU political instability index; responsible competitiveness index by Accountability

7. The "closest" countries to the Netherlands (and therefore with least risk for a Dutch co.) are: Botswana, Mauritius, South Africa, Namibia, Ghana, Cape Verde, Rwanda, Benin and Zambia. 

8. They conclude that while "doing business in Africa is like doing business in any other foreign country" in that operational and strategic risks can be somewhat minimised or mitigated, "the larger the development gap between the home and host countries, the more a firm will be challenged to take responsibility for the problems it encounters...it will be expected to contribute to solving development issues" (P36). The Ethiopian government is mentioned as a government that requires local partnerships and employment creation. As such, decisions are a balance of risks and resposibilities. [this has echoes of the observation that poor people have more responsibility for everything in their lives form the Abdit Bhanerjee book]

Different approaches - multi-sectoral partnerships is one! 

9. They also present a useful hierarchy of entry modes, increasing in ownership and control, and in cost and commitment (so decreasing in ease of retreat):

• indirect export
• direct export - relatively easy retreat
• strategic alliance/partnership (investment)
• joint venture
• marger and acquisition
• greenfield investment

10. "96% of the world's largest firms have entered into partnerships with 'non-market' parties, primarily NGOs" while "all Amsterdam stock exchange companies have formed cross-sector partnerships". The folliwng Dutch firms formed these partnerships to enter new markets in SSA: Achmea, BAM Intl, Royal DSM, Friesland/Campina, Heineken, Philips, TNT Express, Vitens EVides International. DSM & Unilever laucnhed the Amsterdam Inititive for Malnutrition

11. Main focus of Dutch firms is governments and other businesses rather than consumers - so not actually "base of the pyramid" as such! Generally aimed at exploiting existing competencies, not developing new ones or seeking efficiency gains... 

12. Main reasons for doing business in Africa are: growth and profit (55%); growing consumer markets in Africa (31%), personal interest of management(30%). Still, 17% of surveyed dutch companies responded that they entered Africa becuase of subsidies, while 25% were "following the client into Africa"

13. Overall observations on motivations for entering Africa:

• resources are out, markets are in - new markets more of a driver now than resources
• Dutch firms don't feel the urge to "jump on the bandwagon" of African investment - "no belief yet of urgency"
• SMEs and MNEs different in appraoach - Attractive financing more important to SMEs than large firms; MNE's more following the client; MNEs apply specific strategy to Africa, SMEs less so
• motivations to work in Africa not very different from other emerging markets

14. Necessary tradeoffs

• short versus long-term
• alone vs partnering
• exports vs local production
• global coordination vs local responsiveness
• spread of activities vs concentration
• exploit existing abilities vs future opportunities
• reactive stakeholder appraoch vs proactive stakeholder
• local control/ownership vs high control/ownership
• risk vs responsibility
• costs vs benefits

15. For those firms engaged in Africa, most are satisfied. Even among dissatisfied, few considering pulling out.

16. 5 models for engaging in Africa (P148)

• Trade
• Multi-domestic
• Regional
• Global
• Transnational

17. Heineken - working with USAID, Common fund for Commodities, and NGOs like EU Cooperative for Rural Development. Across countries take different approaches depending on "risk distance"

18. "Large Dutch firms on average participate in about 20 partnerships with non-profit organisations such as NGOs and public sector agencies". "The Dutch Government has formed more than 100 partnerships with the private sector".."Managing such large portfolios - involving many stakeholders from different sectors - is often difficult and can influence the effectiveness of the partnerships"

19. Successful partnership requirements:

• link with most important stakeholders on a specific issue
• think about entry and exit from partnership
• align goals of oberall partnership with stakeholder interests
• designate top management to oversee
• monitor density, diversity and dependencies
• ensure companies can dedicate enough resources
• partnerships about building trust, not trust as a starting point
• be explicit about where expectations/interests do not match

Some of the companies mentioned:

Dutch FLower Group (ODI AfT case study?)

Unilever

Enviu - housing

Remco Afrique - generators

ROyal Haskoning DHV - fishing ports
TomTom
FrieslandCampina
Vopak
Spar
Philips
DAF Trucks
SNS Asset Management
Shell
Heineken
Rabobank
Nutreco

Learning to Compete: Is Small Beautiful? Small Enterprise, Aid and Employment in Africa | Brookings Institution

Learning to Compete: Is Small Beautiful? Small Enterprise, Aid and Employment in Africa | Brookings Institution

This paper makes the very important point that donors are financing SMEs as it is an "identificable problem" and "money is the solution".

However, as the authors point out, just because more people are employed in MSMEs, doesn't mean that this is where policies should focus - similar to the point made in the recent WDR on jobs.

Since without other changes that allow MSMEs to expand, aid to MSMEs is potentially simply fuelling the growth of more and more inefficient, uncompetitive, stagnant firms.

The basic conclusion of the authors then is that no, small is not beautiful and better jobs are in larger enterprises.

But how to encourage large-scale investment? Increasing donor interest in engaging with the international private sector may provide something of an answer according to the rationale here....

Oil, cash and good governance - sounds good but can you tax it?

When a revised income tax code was introduced in Mozambique in 2003, civil servants began to pay income tax on their salaries for the first time.  Little changed initially except that the budget for civil service salaries increased in the national budget, and income tax revenues increased by the same value - it was bascially some arithmetical juggling with no overall impact. (It was a complicated administrative process, even if others nonetheless had to comply with it(!), and nobody wanted to see a decline in civil servant net-incomes). So what was the point?

Well, apart from putting civil servants in the same boat as other workers, potentially improving tax morale in the formal sector at least, the growing literature on taxation and accountability would suggest that it might also increase government accountability and strengthen the "social contract" - taxes paid for useful services provided lead to greater scrutiny of government performance, the story goes. (Actually, by extension of that logic one could argue that it might make civil servants work harder given that they are delivering some of those services!). Whether or not it worked, I'm not sure.

But the story relating taxation to the social contract and increasing government accountability is increasingly accepted in the development discourse. As a corollary, the absence of government reliance on tax revenues is thought to result in a less accountable government. This is part of the story thought to arise in resource-rich countries, and part of the "resource curse".

CGD recently published an innovative and thought-provoking proposal that might address these issues (discussion of the paper here). As their description puts it,

Under this proposal, a government would transfer some or all of the revenue from natural resource extraction to citizens in a universal, transparent, and regular payment. Having put this money in the hands of its citizens, the state would treat it like normal income and tax it accordingly—thus forcing the state to collect taxes and fueling public demand for the government to be transparent and accountable in its management of natural resource revenues and in the delivery of public services.

While an attractive idea on paper, the authors recognise that there would be some practical difficulties. The first of these is the need for political will to distribute the funds.  This may be tricky to find - the kind of government most willing to do this is probably least in need of tying its hands into such an arrangement in the first place. Nonetheless, there is a logic that by binding future governmnents into such an arrangement, the future can be better determined so maybe a reform-minded government would nonetheless be interested.

The second challenge cited is that redistribution schemes may open up opportunities for "leakages in the system" in a low capacity environment. Indeed. If civil service salaries lead to "ghost workers", the prospect of "ghost citizens" collecting their oil cash is not far-fetched. The third is  that having taxation as part of redistribution of oil revenues induces transaction costs - some of the original pot of money is lost on administering the system in the first place. So this is not proposed as a fix-it solution for all circumstances by any means.


Nonetheless there are some additional questions.  While the study refers to a range of successful cash transfer programs to replace subsidies, such as Iran, or Bolivia and Mongolia where natural resource rents are being used to finance pensions or other direct cash transfer schemes, this only really addresses the issue of whether or not cash transfers are useful, but not the feasibility of the taxation side.


So perhaps the main problem, also recognised by the authors, is that the tax system may not be sufficiently able to identify and therefore capture the increased incomes that result from the distributed cash. They state that  it "should not be implemented in a country with extremely weak governance indicators and virtually non-existent tax systems." But even where tax systems are far from "non-existent", they  also recognise there are "many questions [that] need to be answered such as the existing capacity of revenue administration and the tax culture in a country or which tax instruments (e.g., direct personal income tax, property taxes or some types of indirect taxes, such as the VAT, and user fees) should be used?"

These questions are certainly justified. Without widening the tax-base, only formal sector employees would be taxed on the additionally distributed cash with little impact on increasing government accountability as these people are already paying taxes. For the tax base to widen requires some improvements in tax administration and general tax policy. Although some would view investment in the tax system as inherently in the interest of a government with a long-term view (as in Besley and Persson's model), even with an additional investment of extra cash from the oil revenues here too, this is not guaranteed by any means.

And even if there is political will to adopt such a programme, taxing individuals at a very low-income is administratively burdensome, and in any case often not desirable.  This is similar to the question of whether or not to tax micro-enterprises, where there is a tradeoff between  bringing them into the tax net to increase their role in the fiscal contract, against the costs involved in doing so and the small amounts involved.

So might oil to cash raise more people to the income-level where it becomes worthwhile and administratively feasible to expend the extra effort to gather the tax revenues? Perhaps - and this may be the key question...

Or would it be possible to get some of the gains of the idea without relying on improvements in the tax system? In a footnote the authors suggest it might be possible by transferring the net amount with a note stating how much they have paid in taxes on paper. This less ambitious option takes us back to the Mozambican civil servants.

I'm not sure if anything changed in the minds of the the tax-compliant civil servants, if they really did work harder because they were now nominally paying taxes, nor whether or not it made government more accountable. While that might not bode well for this less ambitious option, the civil servants never actually receive additional cash either, so maybe cash is key here.

In any case, these are certainly interesting questions that are posed and how best to link taxation and governance of natural resources is receiving increasing attention. WIth their recent finds, the Mozambicans may also want to pay more attention...

Beyond development as a business by-product?

Who does this guy think he is? Well, personally I think he has a point.....

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Small is not beautiful - at least for firms...

"Why small firms are less wonderful than you think" is the title of an article in a recent edition of The Economist. Although this is something of a straw-man (who says they're wonderful?), it makes the point that countries with greater bureaucratic burdens on firms, through strict labour laws and the like, tend to have smaller firm size. The implication is that having lots of small firms is not a sign of flourishing innovation and entrepreneurship (even if you need to be entrepreneurial to get around the bureaucracy), but more a sign of constraints to firm growth. Small, young firms may have the potential to hit success and grow, raising productivity, and expanding employment, but if they do not, and hang around as inefficient small firms, then the economy also stagnates.

Although the Economist article refers to developed economies, the point is closely related to a point made elsewhere (it is, for example, Ha-Joon Chang's Thing 15): basically that poor countries do not need more entrepreneurs, but less!

Developing country economies are of course full of one-man companies, traders, stall-owners, small-holders etc, and people eking out livings where you might least expect (like queue-waiting for a fee).
Of course there is always a discussion about whether they are in this job out of necessity or desire, with a related discussion on informality, but nonetheless these entrepreneurial people are often considered by donors to represent the kind of spirit that is required for greater economic development - promoting entrepreneurship as a pathway out of poverty through access to micro-credit, business training and all that. The thinking goes that if only these people could get some assistance they would be able to expand, create jobs, raise their own income, and contribute to more inclusive sustainable economic growth.

While the logic is appealing, as Chang points out, in developed economies very few of us are actually entrepreneurs and  willing to take the risk of setting up a business (least of all us economists!). Most of us are instead employees, working within institutions that provide all sorts of framework conditions that make us much more productive than we otherwise would be. Take any multi-millionaire businessman from the North and drop him in the middle of Africa - do you really think that person is going to emerge with another million? It seems highly unlikely without relying to some degree on external institutions.

So what is missing in developing countries is not more entrepreneurs, but greater organisational frameworks, both in the form of institutional rules, and corporate structures. The impact of weak institutions of rule of law etc is broadly recognised in developing countries. But on the corporate side, if the blend of rules and weak institutions leads to discrimination against large firms, then clearly there is a disencentive to becoming a larger firm and therefore achieving the economies of scale and organisational structures to raise productivity and employment.

While the Economist article mentions employment laws for the cases of Greece and Portugal, tax policy may also be an important culprit in many developing countries - small companies stay below the radar to escape tax inspector attention, while larger firms are easy targets (while very large firms are likely to be large enough to negotiate specific tax incentives).

But that may not be the only factor. John Sutton raises the point that the skills required to run a successful large firm are quite different to those you need to work by yourself or with a single employee (discussed in an earlier posts here). He refers to his finding that most medium sized firms in Ethiopia and Tanzania emerge from other medium sized firms, not from successful small firms that grow.  They are the ones capable of negotiating the market conditions, testing markets, and building on existing experience from operating in that market.

Together, these insights simply further confirm that we need to "improve the business environment". But is this really the answer? Although it would theoretically remove the disencentive to larger firm size, and although removing red-tape is apparently relatively easy, given that countries such as Rwanda appear to have managed successfully with a bit of concentration, there is another aspect to take into account.

In another very interesting paper, Pritchett and Hallward-Driemeier compare Doing Business data with reported data from enterprises on certain business procedures, such as the time taken to get a construction permit. They find enormous differences in the average "de facto" conditions  compared to the "de jure" estimate from Doing Business estimates. While that in itself is indicative that firms do find a way around regulations, they also find enormous dispersion in the "de fact" conditions. That is, some firms manage to get things done very quickly, while others take a lot longer, presumably depending on their networks, ability to bribe and other hard-to-observe factors.

So actually, the "de jure" investment climate that we focus on for improving the business environment is actually not that experienced by ALL firms. Therefore, those who have gained the management skills and market share within the existing environment may not be particularly keen on making life easier for new entrants. And if certain politicians happen to be businessmen themselves, like some presidents, then the scope for change is further reduced.

So where does this leave us for trying to promote firm growth and productivity. Well,  Pritchett highlights that it means that the outcome of de-jure reforms is actually quite unpredictable, depending very much on who and what kinds of companies are anyway subject to these. But further, it may explain why it appears to be so hard to bring about these kinds of business reforms in some countries.

In some ways that leaves us with trying to work on those reforms that receive least resistance from the political and business elites - indeed, Sutton's proposal is to work on "doable" reforms, if you can recognise them (Pritchett may be able to help there also - see last post here). But maybe it just takes us back to trying to head in the long-term for stronger institutions.  That may take a while...

Pritchett, Isomorphic Mimicry and Wicked Hard Problems(!)

Lant Pritchett gave the keynote speech at the OECD Development Centre's 50th anniversary conference in Paris last week. In it he summarised a few simple but helpful insights that could be useful for helping understand how and where policy reforms might have more impact. 

One idea he discussed was that of "isomorhic mimicry" - basically, in nature when something takes on the appearance of another thing but without any of the underlying, more complex form. And his proposal is that donors and governments too often take institutional reforms from elsewhere, but that although these bear a resemblance in formal terms, they do little in terms of substance as they fail to reflect the full original set of institutions.  

For anyone who has worked in a developing country, the fact that governments adopt policies and strategies, often for very little to happen is nothing new - it's basically the "implementation deficit", or saying you'll do things but not doing them. In some cases this may be unintentional, although in many cases it is strategic - a memorable description of this kind of thing was given by The Economist some years ago:

 "Over the past few years, Kenya has performed a curious mating ritual with its aid donors. The steps are: One, Kenya wins its yearly pledges of foreign aid. Two, the government begins to misbehave, backtracking on economic reform and behaving in an authoritarian manner. Three, a new meeting of donor countries looms with exasperated foreign governments preparing their sharp rebukes. Four, Kenya pulls a placatory rabbit out of the hat. Five, the donors are mollified and aid is pledged. The whole dance then starts again."   The Economist (19 August 1995).

So calling it isomorphic mimicry is really just giving a complicated name to something we all recognise when we see it. Still, maybe it is a useful concept to think more clearly about the distinction between superficial policy appearance and actual policy substance.

The second idea presented was Pritchett's classification of types of policy problem. To oversimplify a little, instead of lumping together policy issues by their sector or target audience or some other common factor as is commonly done, he distinguishes between different types of policy reform according to the number of face-to-face transactions required for the policy to be implemented. That is, where there are few transactions required, and less room for subjectivity or negotiation, it is generally easier to implement a policy. Although he goes into a more detailed typology, the main extremes are what he calls "logistical" problems, that is getting vaccines to patients, or building schools; to far more complicated ("wicked hard"!) problems such as tax collection, where the number of face to face transactions are high, there is room for negotiation, so there is far more room for things to go astray. His view is that performance has been relatively good on the former type of problems, and weaker on the latter, precisely because of their nature.

While this is also actually a pretty simple idea, it is nonetheless a useful insight: we often fail to think properly about the requirements for certain policy reforms to meet with success on the assumption that all policy reforms are more or less the same. Perhaps, then, such a way of thinking about these would assist us in taking the steps to try and turn some of these trickier, high-transactions policies into more manageable bits.

But what we usually think about when we talk of failure to implement these days is political economy. More and more is being written about how a better understanding of context, actors, their history and motivation can help understand why governments agree to certain policy reforms and then fail to implement. (A whole bibliography of readings is available here, while a recent paper summarises the issues here.) The implication is that by understanding motivations, we can better alter the incentives at the margin to achieve better policy results. Although the political economy aspect was not explicitly mentioned in the presentation, it would seem that indeed the two approaches may be highly complementary: not only do you need to understand the types of actors and their motivation etc., but also the nature of the policy itself.

The next question is harder though. Even once you understand all that, how much can you actually say or do to improve the policy outcome? Or do you just understand better why it didn't work the first time around...?  

Any point in Fair Trade coffee & chocolate?

Aid Writing links to a post by James Choi discussing fair trade coffee and the finding that it has in fact zero-impact on coffee producers. I haven't read the study, but presumably zero impact is all the more unexpected since you would more likely expect a positive effect simply due to self-selection effects, even if steps are taken to try and minimise their impact on the outcome.

In any case, the reason given for zero effect is that high coffee prices mean that the guaranteed price offered under fair trade is actually below market price.

As it happens, I recently read The Chocolate Nations which, apart from providing an interesting insight into the importance of cocoa for Ghana and Cote d'Ivoire, has similar findings for fair-trade chocolate. Basically all cocoa buyers offer certain incentives so that producers will sell to them, such as tools, household items etc., and ultimately an additional financial incentive from fair-trade companies when cocoa prices are high anyway is made irrelevant.

I suppose the question is what will happen if and when prices come down... The coffee summary suggests that so many flock to fair-trade certification that the share that can be given the higher mark-up falls, thus still neutralising the effect. Or do companies form long-standing commitments with those producers who stick by them even when prices are high so that those serving the fair-trade market reap the benefits while the others bear the brunt?

In any case, it is interesting to see that the simple story that western consumers can "pay more to pass on more benefit" hides a rather more complicated story, although I'm not sure it means that fair-trade is totally useless....



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