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Atlantic Council AFRICA CENTER ISSUE IN FOCUS BY AUBREY HRUBY Investment and Ingenuity: Overcoming Obstacles to Doing Business in Sub-Saharan Africa AUGUST 2014 In 2010, the Indian telecom giant Bharti Airtel acquired the East African operations of Kuwait’s Zain Group for Africa Center The Atlantic Council’s Africa Center was established for global business and particularly for companies in September 2009 with the mission to promote $10 billion. The deal marked a significant turning point strong geopolitical partnerships with African states sale catapulted African opportunities from a million- and to redirect US and European policy priorities dollarseeking to growth a billion-dollar in the wake scale of and the changedfinancial thecrisis. way The that toward strengthening economic growth and many Western business executives looked at Africa. prosperity on the continent. Africa markets were no longer the homes of small-time The Africa Center provides thought leadership deals but billion-dollar game changers that required on emerging security, geopolitical, and economic serious attention. challenges in Africa through congressional Since then, the buzz about “Africa Rising” has gone from the backroom to the boardroom. Many multinationals a robust media presence. The Center assists are now taking a hard look at investing in the continent. policymakerstestimony, publications, in addressing briefings, the complex events, security and Corporate executives have heard that seven of the challenges facing Africa, including the problems world’s ten fastest-growing economies are located in of state collapse; humanitarian crises; piracy; the Africa and are now interested. Almost two decades growing nexus between extremism and criminality of solid macroeconomic performance and sustained in West Africa and the Sahel; the ongoing political commodity prices have buoyed investors’ views of transitions in North Africa; ongoing challenges the continent and opened their wallets. Africa’s share in Central and Southern Africa; and the growing of global foreign direct investment (FDI) increased impact of Islamist extremism on African polities by 6.8 percent in 20131 2 and economies. Within the context of the Atlantic despite falling investment from developed to Council’s work to promote constructive US to net inflows of $43 billion, leadership and engagement in international In addition to Africa’s traditional trading partners affairs, the Center supports and collaborates inemerging Europe marketsand the Unitedas a whole States, over Turkish, the past Chinese, five years. with the public and private sectors in forging Indian, Malaysian, Brazilian, and other companies are practical solutions to challenges and opportunities searching out opportunities in the energy, agribusiness, in Africa, especially those associated with the infrastructure, nascent manufacturing, and consumer strong economic growth that many nations on the goods sectors of African economies. continent have experienced in recent years. however: political crises, security issues, and pervasive These are not the obstacles that are commonly corruption. Although such concerns do factor into associatedBut significant with obstacles Africa in tothe investing public imagination, in Africa remain. companies’ and funds’ consideration of African opportunities, many African countries—including 1 UNCTAD, “General FDI Rose by 11%; Developed Economies Are Trapped in Kenya and Nigeria—have grown and continue to grow a Historically Low Share,” no. 15, January 28, Global Investment Monitor despite the drag of lingering insecurity and instability. , pdf. This brief argues that inadequate infrastructure across 2014 http://unctad.org/en/PublicationsLibrary/webdiaeia2014d1_en. 2 World Bank, “Africa Overview,” http://www.worldbank.org/en/region/ small national markets, lack of market data, and poor afr/overview. Aubrey Hruby is a visiting fellow at the Atlantic Council’s Africa Center. policy implementation and execution by African Figure 1. Africa’s Growing Consumer Base governments are by far more serious factors impeding Western investment in the region. They result in higher Country/ Percent Population Potential Region in middle (millions) consumer assessments, and policy uncertainty. class base costs of doing business, inaccurate or inflated risk (millions) These obstacles have already slowed mainstream US investment in the region, and if not properly and Africa 936 321 concertedly addressed, will limit the success of US Nigeria 22.8 173 companies in Africa. They will also eventually act as a 34.3 Kenya 19.8 brake on critical African social development projects 39.4 Angola 38.1 21 8 and job growth. But they are not insurmountable: Many 44.9 44 companies are adjusting their mindsets to the realities South Africa 53 22.9 Ghana 26 12.1 the process. 43.2 Ethiopia 21.5 20.2 of frontier markets and finding innovative solutions in 46.6 Obstacle One: Inadequate Infrastructure Source: African Development Bank, “The Middle of the Pyramid: 94 and Small, Land-locked Markets Dynamics of the Middle Class in Africa,” http://www.afdb.org/ Land-locked Equals High-Cost. Location matters the%20Pyramid.pdffileadmin/uploads/afdb/Documents/Publications/The%20; World Bank Country data, http://data. landlocked countries typically struggle to attract worldbank.org/countryMiddle%20of%20the%20Pyramid_The%20Middle%20of%20. investmentwhen it comes in the to trademanufacturing and investment sector flows. because Small, it is over the border to the Kenyan port of Mombasa before harder and more expensive to transport their exports they are processed—a journey that can take over two to global markets. Smaller land-locked nations also tend weeks. Rail transport, where available, is not much to have small consumer bases that are not large enough to produce the economies of scale that transnational in the United States, usually around $0.12 per ton per companies require to overcome the high costs of kilometer.more efficient:6 Transport It costs costs three are, to fiveon average, times what 63 percentit does accessing the market. This is one of Africa’s most higher in African than in other developing countries. profound structural disadvantages: Outside of Africa, It can cost twice as much to ship a container from only 12 percent of people in developing countries live West to Central Africa than it does to ship the same in landlocked nations, as compared to nearly 30 percent container across the Atlantic, from the US East Coast to 3 in Africa. There are sixteen land-locked developing West Africa.7 Low wages alone cannot make up for the countries in Africa, compared to ten in Asia and two in economic implications of geography: In terms of doing Latin America. everyday business, the differences are enormous and 4 The cost of transporting goods to distant ports can opportunities in the region. make potential investments economically untenable— are a significant disincentive for investors considering transport costs in such cases can constitute up to 75 The Infrastructure Gap. Africa’s lack of infrastructure 5 percent of the value of exports. Currently, the majority also increases the cost of investment, but there has been of African exports have to be carried by truck over thousands of kilometers of poorly maintained roads. Bank estimated that Africa faced an infrastructure Goods from the Burundian capital of Bujumbura, for some significant progress made. In 2010, the World example, have to be driven over 1,500 kilometers and closingfinancing due gap to ofa number$93 billion of ambitious per year, with infrastructure an over $40 3 Paul Collier, “Africa: Geography and Growth,” Center for the Study of spendingbillion deficit programs in the powerbeing executed sector alone. by African The gap is slowly African Economics, Department of Economics, University of Oxford, 2006, governments as well as foreign investment. According pdf. to Deloitte, there are over $67 billion in infrastructure http://online.wsj.com/public/resources/documents/africa_geog_082806. Republic, Chad, Ethiopia, Lesotho, Malawi, Mali, Niger, Rwanda, South Sudan, 4 The sixteen in Africa are Botswana, Burkina Faso, Burundi, Central African Swaziland, Uganda, Zambia, and Zimbabwe. In Asia, Afghanistan, Bhutan, projects under construction in East Africa, 42 percent Kazakhstan, Kyrgyzstan, Laos, Mongolia, Nepal, Tajikistan, Turkmenistan, 6 US International Trade Commission, Sub-Saharan Africa: Effects of and Uzbekistan. In South America, Bolivia and Paraguay. Infrastructure Conditions on Export Competitiveness, Third Annual Report, http://www.usitc. Africa Economic Brief,” vol. 1, September 2010, http://www.afdb.org/ . 5 African Development Bank, “Infrastructure Deficit and Opportunities in Investigation No. 332-477, Publication 4071, April 2009, 7 Ricardo Hausmann, “Prisoners of Geography,” Foreign Policy, January 1, gov/publications/332/pub4071.pdf 2001, fileadmin/uploads/afdb/Documents/Publications/ECON%20Brief_ . geography. Infrastructure%20Deficit%20and%20Opportunities%20in%20 http://www.foreignpolicy.com/articles/2001/01/01/prisoners_of_ Africa_Vol%201%20Issue%202.pdf 2 ATLANTIC COUNCIL of them in the transport sector.8 China has invested infrastructure. In their search for larger markets, many much of its bilateral aid into infrastructure in the region. global companies—including Procter and Gamble, Angola, Côte d’Ivoire, Ghana, Nigeria, Rwanda, Zambia, and others have used Eurobonds to raise billions for regional integration agenda infrastructure projects on international