Thursday
September 9
2010

Rebecca Regan-Sachs

Investing in Africa: An Interview with Todd Moss from the Center for Global Development

Editor’s Note: This post is the latest in NextBillion’s series on the effect of governance and corruption on enterprise in the developing world. With this post we also welcome Rebecca Reagan-Sachs to the team of Staff Writers of NextBillion.net. Welcome, Rebecca!

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Todd Moss is the Vice President for Corporate Affairs, and Senior Fellow at the Center for Global Development. An international expert on African development, he has served as Deputy Assistant Secretary in the Bureau of African Affairs at the U.S. Department of State and advisor to the Chief Economist in the Africa Region of the World Bank. At the Center for Global Development, Dr. Moss directs The Emerging Africa Project, which focuses on business and finance issues in sub-Saharan Africa.

Following are highlights from a recent interview with Dr. Moss about private sector and governance issues in his region of expertise.

Rebecca Regan-Sachs, NextBillion.net: What are the biggest impediments to private sector growth in Africa today?

Todd Moss, Center for Global Development: There’s a long list of barriers to private sector growth in Africa. I think that the data, including some that my colleagues here at the Center have done, points to infrastructure, and in particular, electricity and transportation costs and reliability, as the largest barriers to private sector growth, particularly in the manufacturing sector. There’s literally not a country in Africa that doesn’t have an electricity problem-and that includes South Africa-so you can imagine how difficult it is to run a business if your electricity’s really expensive and you can’t count on it. So that’s probably the single largest barrier.

I think that [there are] two other areas people talk a lot about. One is access to finance. I think that’s changing quite rapidly, but there are still segments of the private sector that have difficulty getting access to finance, or getting access to risk capital in particular sectors.

And the other area, which is related to corruption, is just the extremely difficult regulatory environment. The regulations tend to be thick, difficult to navigate, difficult to get clarity [on], and even when they are clear, it’s difficult to maneuver through. And all of those create opportunities for potential corruption, and they typically are not by accident…It’s a messy system on purpose, either to protect specially privileged firms-to keep out competitors-or to create opportunities for collecting rents or using privileged access in order to take advantage of difficult regulations.

RRS: What do you see as the connection between corruption or poor governance and the rate of private sector growth in Africa?

Todd Moss: When you have environments with high amounts of uncertainty, you can’t price risk, you can’t price the likelihood of things happening, and so you get a very narrow band of competitors. In some countries, it’s so bad that the only actors you get are people willing to break the law. So if you have an environment where the government’s not trying to actively encourage business, it’s trying to squash business, or live like a parasite off of business, then you get a very narrow slice of the business sector. Most businesses are scared off.

Nigeria’s a good example here. Most U.S. companies don’t even want to think about what they would do in Nigeria because it’s just a hornet’s nest. They don’t know what they’re in for, they can’t assess risk, they can’t navigate the regulatory environment, and they think that they’re going to be at risk for high levels of fraud that they’re not going to be able to deal with.

So what do you get? You get either companies that are very large that can mitigate that risk because their margins are so big-like oil companies-or you get sectors where there are no U.S. companies that would even think about going in there. And therefore you only get either local companies, or you get particular slices of foreign companies that might not be the most competitive and the most constructive in trying to build a robust 21st century economy.

RRS: It would seem, then, that many businesses would not actually have an incentive to challenge the status quo. To what extent do you think this is true?

TM: Well, it’s clear that in a lot of countries there’s what we would call a low-level equilibrium, where the companies that are there are making fat margins, and they actually are quite happy to keep it the way it is. They want to keep other companies out; they don’t want rivals.

At the same time, many governments view their own domestic private sector with significant suspicion. They (in many cases correctly) suspect that the opposition party is funded by private business, and they would view the rise of a powerful domestic private sector as a political challenge-they don’t want that. That’s why you get the odd situation like we had in Ghana in the 1990s, which was very open to international business but very closed to allowing domestic entrepreneurs to grow. That’s changed a little bit recently, but that link, the connections between the domestic private sector and domestic politics, means that you often have well-connected businesses that don’t want competitiveness and are thriving from the corrupt environment.

So what can you do about that? Well, if you promote greater transparency and greater competitiveness, you hopefully will attract both more foreign companies that are not gaining their positions of influence in the marketplace from being relatives of the president, [but] through their market power. At the same time, you want to try to encourage an independent business class in countries. The bedrock of democracy historically has always been the middle class. Most African countries don’t have a middle class; they have a huge underclass and a small elite that’s very politically connected.

The bright spot that we’re seeing is that a lot of Africans who left their countries-particularly places like Ghana or Nigeria-in the ’80s and ’90s, and went and became professionals in London or New York, are now coming back. And they’re bringing their connections, their wealth and also their way of doing business, which is not based on being the president’s cousin, it’s based on how you operate in an international environment. So we are starting to see the sort of first kernels of an independent business sector in a lot of countries, which I think is very promising.

RRS: How are companies starting to do this if the business environment is dominated by cronyism and bribes?

TM: Mostly…they’re not coming and trying to compete in the sectors that have already been dominated by the elites. The first sector that was most obvious here was the mobile phone networks, which have just expanded incredibly, and [entrepreneurs] were able to do that because there were no state-owned cell phone companies that they were competing against. They came in completely green-field and were able to just expand massively and have all these knock-on effects.

We’re [also] starting to see this in finance and banking, particularly in the banking and insurance sectors. And this is because the old model of banking, the old state-run, politically-connected banks, just cannot compete in a more liberal and more competitive global marketplace, and it’s the banks that are bringing international best practice that are dominant. And so in many of these countries, the expats, the kind of tip of the spear of the returning diaspora, are bankers.

The other reason [for this] is, if you’ve already got a job in a business in New York, you’re not forced to come back. If you want to open a bank, and the government blocks you, or does everything it can to not allow you to set up a private equity fund if that’s what you want to do-fine, you can just go somewhere else. So I think countries that do want to attract their diaspora back and do want to attract that capital back, and they want to have a vibrant finance sector-they have to at least allow those people to operate, or they stay home.

…I think services, business services, is the next wave. I think it’s probably less likely in things like agriculture or manufacturing, which are going to be much more difficult.

RRS: Taking a broader view now, what are some of the conditions that create these problems in the first place? Why are some countries more corrupt than others?

TM: There are a couple things. You have sort of initial conditions-[for instance], we know that countries that have a lot of oil and concentrated extractive receipts tend to have more opportunities for corruption, and that can become more entrenched [than in] countries with more diverse economies…[In] a farming-based economy, where you have hundreds of thousands of diffuse farmers-one, you have a bigger constituency you have to deal with, and two, there are fewer opportunities for large-scale kind of graft.

Another important piece, I think, is the kind of signals from the top. So in a country where the president and his family are stealing blind with no consequences, and everyone’s aware, everyone all down the chain feels empowered to do the same thing. Whereas in countries where that seems to be much more contained, [where] it’s not so open and blatant, and there are some meritocratic opportunities to make a living and feed your family through other means, then you’re much less likely to see those opportunities.

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