The World Bank’s Ease of Doing Business rankings are popular and controversial. Countries, increasingly and lately African ones, make a big show of improvements. And even as reported reforms are not immediately palpable in some cases, better rankings tend to be welcomed by foreign investors. True, as Charles Robertson, global chief economist & head of macro strategy at Renaissance Capital tells me “it is not a perfect proxy for the business environment”. But it certainly “shows a government at least has a desire to show progress, when other governments don’t bother”, Robertson adds.
For Africa, Aliko Dangote, the continent’s richest man, asserts in an article for The Brookings Institution in February 2019, that “the perception of risk often exceeds real risk and the doing business environment is improving rapidly in several [African] countries.” Mr Dangote identifies Mauritius, Rwanda, Botswana, Nigeria, South Africa and Kenya as African countries “offering ease in doing business through conducive environments and incentives.”
Nigeria & Togo among top improvers
In its Doing Business 2020 report released in late October 2019, the World Bank noted “two sub-Saharan African countries, [Nigeria and Togo], among most improved in ease of doing business.” What put Togo in the list of top improvers? And for the second year in a row at that. “Reforms lowering fees for construction permits and streamlining property registration procedures, among other measures”, were attributed by the World Bank.
Overall, the World Bank asserts Africa’s economies “conducted the most reforms in the areas of starting a business, dealing with construction permits and getting credit, with twelve reforms in each.” On average, the World Bank says, “it now takes around 20 days and costs 33.5 percent of income per capita to start a new business in the region, substantially faster and less expensive than the 62 days and 305 percent of income per capita it took in 2003.”
A reality check is apt at this point. “The pace of reforms across the region has slowed overall”, the World Bank says. Besides, “only two Sub-Saharan African economies rank in the top 50 on the ease of doing business rankings while most of the bottom 20 economies in the global rankings are from the region.” And unsurprisingly so when the details are examined. For instance, South Africa implemented only a single reform in 2019 and just four in the past five years.
And the World Bank does not entirely make it seem the improvements are anything but incremental. It notes for example, how “in getting electricity, businesses must pay more than 3,100 percent of income per capita to connect to the grid, compared to just over 400 percent in the Middle East and North Africa or 272 percent in Europe and Central Asia.”
One critical area include simplifying the regulatory environment – so this would require streamlining ministries, departments and agencies (MDAs) so business would deal with fewer government touch points, as well as reducing the costs of business
And “when it comes to trading across borders and paying taxes, businesses spend about 96 hours to comply with documentary requirements to import, versus 3.4 hours in OECD high-income economies, and small and medium-size businesses in their second year of operation need to pay taxes more than 36 times a year, compared to an average of 23 times globally.”
Nigeria needs to do more
In the more interesting Nigerian case, being as it is the most populous and largest African economy, the World Bank highlights “reforms impacting six indicators, including making the enforcement of contracts easier” as reasons why. Renaissance Capital’s Robertson tells me he is not surprised by Nigeria’s improved ranking: “We wrote a piece in 2016/17 outlining how Nigeria could jump to 100th place”, he says.
“However, this improvement (from 146th to 131st) is not yet translating into increased foreign direct investment and we believe more progress needs to be made”, says Andrew S. Nevin, partner & chief economist at PwC in Lagos. So how do governments improve their rankings? Renaissance Capital’s Robertson says “it is a matter of targeting legislation, regulation and government practices.”
On the specific Nigerian case, PwC’s Nevin highlights the steps required for improvements: “One critical area include simplifying the regulatory environment – so this would require streamlining ministries, departments and agencies (MDAs) so business would deal with fewer government touch points, as well as reducing the costs of business. In addition, clarifying the relationship between the federal government and the states is required, and in some cases, it is worth considering devolving power to states.”
Furthermore, PwC’s Nevin highlights the point that 60 percent of the Nigerian economy remains informal. So, in his view, “the federal government and the states need to think carefully about why micro, small & medium-sized enterprises (MSMEs) stay in the informal economy, and how to make it attractive to move [them] from the informal to the formal sector.”
“While an informal economy is better than no economy, it is not as good as a more and more formalised economy, as the latter has higher productivity and investment, as well as the ability to scale and raise skill levels across Nigeria”, says Nevin. In fact, “EoDB challenges can be a major reason business choose to remain in the informal economy”, Nevin adds. A focus on formalising a greater part of the Nigerian economy might be a good next step for the government.
