Entrepreneurs in some of the world’s poorest countries should find cause for optimism in “Explaining Africa’s (Dis)Advantage,” a recent study co-authored by Wharton management professor Ann Harrison and published by the National Bureau of Economic Research.
“If … you were to give African entrepreneurs the same kind of environment as an American or European entrepreneur, they would outperform their counterparts,” Harrison says. By imagining impoverished African nationals on a level global playing field, Harrison and colleagues Justin Yifu Lin at Peking University and L. Colin Xu at the World Bank see ample potential for “a positive reinforcing cycle of development.”
In contrast with existing research that examines the big picture in Africa using macroeconomic data and microeconomic studies of single outcomes — which often overlook the broader aspects of how African firms behave and perform — Harrison, Lin and Xu take their research a step further. They parse the macro picture using firm-level data from 12,000 companies in 32 sub-Saharan African countries whose average annual per capita GDP languishes below $3,000. Per capita GDP in the poorest countries is less than $500 a year. The data were supplied by the World Bank’s Enterprise Surveys, which, the researchers write, are designed “to benchmark the investment climate in developing countries across the world and to understand the determinants of firm performance and behavior. In each country, the survey was based on the universe of eligible firms obtained from the country’s statistical office … and the result is a representative sample of the non-agricultural private economy in the country.”
According to the researchers, insufficient infrastructure, scarce access to credit and political monopolies cripple these economies. Inefficient telecommunications, a proxy for infrastructure, consistently retains top ranking among the reasons for their perennial disadvantage. The difficulty to gain financing — due to a lack of formal lending sources — garners second place. Single-party rule also inhibits progress to a lesser degree. “If one could adjust the daunting list of geographic, infrastructure, political, economic and institutional factors to the levels [that exist] elsewhere,” the authors write, “Africa possesses an inherent advantage.” Harrison adds that this could be because African firms have had to become stronger and work smarter in order to survive such a challenging environment.
A ‘Daunting’ Business Environment
Using statistical adjustments that offset regional disadvantages, the researchers recalculated key performance measures. A revised roster shows that Africa leads in total factor productivity (the gold standard for firm-level performance in academic research), sales growth, labor productivity and labor productivity growth, among other variables. They also added adjustments for regional conditions like bribery, tenacity of regimes to stay in power, predilection for armed conflict, ethnic fractionalization, difficulty firing unsuitable workers and a sizeable “informal” business sector that doesn’t report bottom lines.
The researchers then compared the adjusted results from the poorest African nations with two other groups: A similar “average comparison” group of countries outside Africa and a “better comparison” group populated by countries with more advantageous conditions for doing business. Several industries furnished data about manufacturing and services, including metals and machinery, electronics, chemical-pharmaceuticals, wood and furniture, non-metals and plastics, automobiles and parts, and other types of manufacturing.
The researchers found that unsurprisingly, without controlling for the significant challenges that African countries face, the businesses in those nations perform significantly worse than those in other parts of the world, exhibiting lower productivity levels, growth rates, fewer exports and lesser investment rates. But when the researchers controlled for all the mitigating factors, the outcome changed — African firms in the formal business sector led those located in other areas in productivity levels and growth. The region’s advantage was greater in low-tech as compared to high-tech manufacturing. It was also not present in the service sector.
However, that optimism is still tempered by the facts, the researchers note. “African firms face a more daunting business environment in almost all respects,” they write. “They operate in poorer, smaller economies that are more likely to be landlocked and they have inherited a history of armed conflict. Political monopolies divert profits, tariffs are higher and bribes are routine.”
Making Progress
The research indicates that the success of many African firms depends on autocrats surrendering power and vibrant financial systems taking root, among other tectonic shifts. The number of years that a single party has ruled is adversely correlated with labor productivity and sales growth, Harrison notes, and the negative effects of a political party monopoly are slightly stronger in countries where informal commerce plays a bigger economic role. Similarly, party monopoly significantly reduces growth in manufacturing but not in services.
Far-fetched as it may seem, don’t rule out the possibility of an upheaval that would change the business climate in some of these nations for the better, Harrison adds. Change comes fast nowadays, often spurred by telecommunications, as the Arab Spring illustrated. In that respect, these countries are fertile. When landlines prevailed in central Africa, barely 2% of consumers had access to telephones. Today, technology has leapfrogged landlines, and more than eight in 10 Africans have access to a cell phone. That’s a lot of progress in a relatively short period of time, Harrison notes, and it signals the chance for more to come, possibly sooner than traditionally expected.
Some of the researchers’ data even shed a favorable light on ethnic fractionalization, which is common in Africa and thought by most experts to hobble progress. “Our micro evidence does not bear this out,” the researchers say. “Indeed, ethnic fractionalization is robustly and positively correlated with labor productivity levels and growth.” Harrison compares this advantage to the ways that America has benefited from being a nation of immigrants. “The heterogeneity encourages creativity and cooperation,” she notes.
The authors conclude that their study attacks a paralyzing preconception. “There is no inherent Africa ‘curse’ that hinders its development,” they write, “only a need for action to address the poor political and business environment. This is consistent with Africa’s growth record before the 1970s and the growth record in the past decade.”
Don’t blame the myriad problems facing the region on local firms, Harrison adds. They often have the right stuff to succeed. Instead, blame governments and a corporate climate that fails to furnish what the sector needs in order to flourish and grow to the next level. “The implications for what needs to be done to nurture a strong business sector are clear: promote infrastructure, expand access to bank and trade credit and encourage political competition,” she notes.
