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The Africa Competitiveness Report 2007 Part 3/6

The Africa Competitiveness Report 2007 Part 3/6

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Measures competitiveness of countries and economies in Africa.
Chapter 1.2: From Benchmarking to Impact: Identifying Which Dimensions Matter.
Measures competitiveness of countries and economies in Africa.
Chapter 1.2: From Benchmarking to Impact: Identifying Which Dimensions Matter.

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Published by: World Economic Forum on Sep 30, 2008
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CHAPTER 1.2
From Benchmarking to Impact:Identifying Which DimensionsMatter
REYES ATERIDOMARY HALLWARD-DRIEMEIERGIUSEPPE IAROSSI
at the World Bank
Chapter 1.1 has laid out a methodology for benchmark-ing the competitiveness and business climate of Africancountries.In setting priorities for reform,benchmarkingis an important place to begin—but it is not the laststep.Priorities should be set by an issue’s impact.Issueswith the greatest impact are often ones characterized bythe longest delays or highest regulatory costs,althoughthis is not necessarily always the case.What also mattersis how central the issue is to firm operations—to produc-tivityand job creation—and what alternative copingmechanisms are available to the firm.Linking investmentclimate conditions to firm performance reinforces theimportance of finance,skills,infrastructure,and the ruleof law.However,such linking also underscores the ideathat that the impact of these conditions varies by who you are and where you are.The investment climate’s impact on job creationand productivity is substantial.Costs and delays intransportation,electricity,and crime alone can raiseoverall costs by 20 to 30 percent,undermining whatever advantage firms enjoyed by lower labor costs or greater productive efficiency.
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In addition,weak property rightsand unpredictable enforcement of regulations weakensincentive to invest and work hard.Improving the invest-ment climate is recognized as one of the most importantways to increase growth and expand opportunities— particularly for poor people.
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In tackling the agendaof economic growth,the challenge is to identify thepriorities for reform.To be able to address this challenge better,the WorldBank’s program of Enterprise Surveys has interviewedover 70,000 entrepreneurs and senior managers in 104countries (see Appendix A for further information onthese surveys).The focus for this chapter are the 11,600interviews in 34 countries in Africa.The EnterpriseSurveys program has four distinguishing features:First,the program can benchmark not only subjec-tive rankings of investment constraints to businessperformance (for example,the extent to whichelectricity is rated as a problem),but also objectivemeasures of these constraints (for example,thefrequency and duration of outages,production lostfrom outages,and the use and cost of generators).Second,it covers a wide range of issues—fromaccess to financial and infrastructure services,tocrime,corruption,and government regulations— allowing a ranking of these issues.
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    1 .    2   :    F   r   o   m    B   e   n   c    h   m   a   r    k    i   n   g   t   o    I   m   p   a   c   t   :    I    d   e   n   t    i    f   y    i   n   g    W    h    i   c    h    D    i   m   e   n   s    i   o   n   s    M   a   t   t   e   r
The views expressed here are those of the authors and do not neces-sarily reflect the views of the Board of Executive Directors of the WorldBank or the governments they represent.
 
Third,the data can also go beyond benchmarkingto test directly the impact of these objectiveconditions on the actual performance of the firm,for example,how the actual investment climateconditions affect the productivity and employmentgrowth of respondents.Fourth,large,randomly selected samples of firmsallow for results to be compared across typesof firms,with particular attention paid here tofirm size.For many of the countries in the region,theEnterprise Surveys are the only source of detailed infor-mation on firm performance and disaggregated objec-tive indictors of a wide variety of business environmentindicators.The next section demonstrates the range of pro-ductivity and employment growth outcomes across theregion,including the results from Brazil,China,andIndia,for comparison.It then moves to identify keydimensions in the investment climate across countries inthe region that can help account for these patterns.First,it examines the top constraints as reported by firms,linksthem to objective measures of these constraints,andlooks at how these patterns vary across different group-ings of countries.Second,it examines ways to prioritizeconstraints from among obstacles in a longer list and toidentify which measures account for greater differencesacross groups of countries.Third,it links the objectivemeasures of the investment climate directly to produc-tivity and job creation across countries,illustrating thepotential gains from reform.While most of the chapter analyzes the impact of the investment climate acrosscountries,the last section disaggregates the effects of thevarious dimensions of the investment climateby typesof firm,focusing on firm size,ownership,and exportorientation.Access to finance,electricity,tax rates,regulatory uncertainty,and corruption emerge as keyareas for reform—with specific priorities varying not just across countries,but within countries too.
Firm performance across Africa
Growth rates in Africa have been rising in recent yearsas greater macroeconomic stability has been achieved inmore countries and additional reforms have been under-taken.But the key to maintaining growth is not simplymobilizing more capital or labor.What is needed isgreater productivity—being able to produce more withthe same inputs.
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Productivity growth in Africa has beenlower than in other regions.The average productivitygrowth from 1970 to 2000 was stagnant or even mildlynegative.
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Returns to investment have also been relativelylow.Investment rates are lower and the returns averageabout half those of other developing countries.
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What isencouraging is that the recent trends have been morepositive.Regional growth rates over the last five yearshave been higher than in Latin America and theOrganisation of Economic Co-operation andDevelopment (OECD) countries,with the averagegrowth rate in Africa of just under 5 percent.Within Africa,productivity varies tremendously— both across countries and within countries.Some of this is simply the result of differences of entrepreneurialtalent across individuals.Some of the variation reflectsdifferences in endowments or geography,but at least asmuch mirrors differences in investment climate conditionsas illustrated in Figure 1 (see also Appendix B).Figure 1shows how there are more productive firms in locationswith better investment climates or business environments.The figure plots the share of firms in each country withlabor productivity above a benchmark against the GlobalCompetitiveness Index (GCI) discussed in Chapter 1.1.
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As the GCI captures many dimensions of the businessenvironment,it is a suitable summary measure to corre-late against firm performance.Figure 1 uses as its bench-mark the median labor productivity of all the small andmedium size firms (11–150 employees) combined into aregional sample.The first thing to note is that
every
country hassome firms that are above the regional median.Productive firms exist in every location.The very bestfirms do not operate only in the biggest economies or the countries with the highest standards of living.Firmscan succeed even in poor investment climates.This isnot to say that reforms are unnecessary.Clearly,morefirms can achieve greater productivity when they oper-ate in a stronger business environment.Based on thesesamples of firms,over three-quarters of firms in Mauritiusand Namibia and two-thirds of firms in Algeria andBotswana operate above the regional median,while only10–15 percent of the firms in Gambia or Burundi doso.Putting this into a broader international context,about 80 percent of firms in a comparable study inBrazil surpass the median African productivity level.InChina this is about 60 percent and,in India,55 percent.Thus,several countries in the region—includingAlgeria,Botswana,Cameroon,Mauritius,Morocco,Namibia,Senegal,Swaziland,and South Africa—have ahigher share of productive firms than China has.
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The relationship between productivity and the GCIis not perfect.Egypt has a lower share of productivefirms than would be expected given the quality of itsbusiness environment;Cameroon has a higher share.
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But correlations will almost never be perfect whenusing a composite index.The investment climate is notthe only determinant of productivity—and an overallindex can underemphasize a particular dimension that isconstraining to a particular country.As the analysis hereshows,elements of the GCI have relatively more or lessimpact for different groupings of firms and countries.Aggregate analysis is very useful at highlighting the
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broad patterns,but it cannot explain all the variations atthe micro level.Turning to employment growth,there is a largeamount of dynamism among incumbent firms (theEnterprise Surveys cannot capture the effects of entryand exit),with relatively high shares of firms that areexpanding.Fully half of all the incumbent firms reporthaving increased the number of workers they employ.Between 20 and 25 percent of firms reduced their num-ber of workers,with the remaining 25 to 30 percent of firms maintaining the same number of workers.Withincountries,beyond the smallest or micro firms (which arerelatively more stable),employment growth is bothmore likely and at a higher rate for small and mediumfirms,while very large firms have the lowest rates of growth.
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The correlation,however,between employmentgrowth and the GCI is less strong than with productivity.The next section turns to the indicators of thebusiness environment to investigate which dimensionsmake the most significant contributions to productivityand job growth.
How to identify priorities for reform
Ultimately,the aim in benchmarking and measuring allthe dimensions of the investment climate is to identifyareas where improvements can make a real difference.Benchmarking investment climate conditions,particularlyof more objective measures,makes a significant contri-bution.But if one cares about assessing their impact,such benchmarking measures still need to be combinedwith additional information.
Going beyond simple costs or delays to capture the impacton performance
It is straightforward to use benchmarks on costs,delays,number of procedures,and so on to identify those areaswhere a country’s scores are weak—either across issueareas within a country or relative to neighboring or other comparator countries.Priority can then be givento improving those scores where a country is particularlyweak.Targets for reform can then be very specific.However,because certain costs or delays are highdoes not necessarily imply that these are areas of actualimportance to firms or that they have a particularlyonerous impact.This is particularly true if firms can eas-ily adapt to or circumvent the problems,or if the costsor delays occur in areas of only marginal importance tofirm operations.Thus,delays in getting a new telephonelandline may be long but have minimal impact,particu-larly if mobile telephones are available.Likewise,outagesfrom the public electricity grid can be disruptive.However,choosing technologies that are less energyintensive or using a generator can mitigate some of these costs.There are three approaches that can shed light onthe impact of investment climate conditions.The first isto compare the list of constraints as reported by firms.Implicitly,this ranking of constraints captures the impactof an issue;respondents are balancing their assessment of 
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    1 .    2   :    F   r   o   m    B   e   n   c    h   m   a   r    k    i   n   g   t   o    I   m   p   a   c   t   :    I    d   e   n   t    i    f   y    i   n   g    W    h    i   c    h    D    i   m   e   n   s    i   o   n   s    M   a   t   t   e   r
306090120150020406080100
South AfricaMauritiusAlgeriaBotswanaNamibiaMadagascarCameroonZambiaMauritaniaAngolaMalawiBurundiEthiopiaMoroccoKenyaGambiaBeninUgandaTanzaniaEgypt
Figure 1: More-productive firms are in locations with better investment climates
Source: World Bank Enterprise Surveys, 2002–2006; World Economic Forum.Note: Firms are categorized as ‘productive’ if their value added per worker is above the region’s median level for firms with 11 to 150 workers.
Global Competitiveness Index rank
    P   e   r   c   e   n   t   o    f   p   r   o    d   u   c   t    i   v   e    f    i   r   m   s    (    1    1  –    1    5    0   e   m   p    l   o   y   e   e   s    )
 

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