International Competitiveness and the
business climate in
Berhanu Nega and Kibre Moges**
August 2003
EEA/Ethiopian Economic Policy Research Institute
Working Paper No. 1/2003
Introduction
What recommends the various reform measures that most developing countries were required to undertake in the 1980s and 90s is the deeply held belief in the mainstream economic profession that economic progress is better achieved under competitive market conditions. While this belief has been around since Adam Smith’s seminal work in the 18th century and has been the essential building block for mainstream economic theory and policy making ever since, its absolute dominance in policy making, particularly in developing countries, was not fully ensured until the beginning of the 1980s or even more so after the collapse of the Soviet type socialist experiment towards the end of the 1980s. Following this overall trend in the global environment and with some arm twisting from powerful multilateral financial institutions, most African governments started to implement these market friendly reforms beginning the early 80s.
The underlying assumptions in these reforms are rather simple and straightforward. At the center of it is efficiency in resource allocation. In this paradigm, resources are better allocated when guided by market signals than any other alternative. Self interested and rational economic agents operating in a competitive market environment will channel their resources to areas with the highest benefit leading to an optimal resource allocation at the national level. Free competition at the international level with unrestricted mobility of goods and factors of production based on the principle of comparative advantage will also ensure allocative efficiency at the global level while also making all countries economically better off. In fact, in this process what ever gap in development that exist owing to differences in initial conditions will eventually be closed leading to a convergence in the standard of living of countries at some future period.
Accordingly, the first generation reforms implemented in most developing countries tried to lift all kinds of restrictions on the operation of the market including all barriers to foreign trade. These include, inter alia, market determination of exchange rates, significantly reducing tariffs and eliminating non tariff restrictions, freeing domestic prices including interest rates, abolishing most restrictions on the operation of the private sector including privatizing public enterprises and the like. All these measures are designed to improve the efficiency of resource allocation and along with it enhance the competitiveness of the country concerned both in the domestic and international markets. At the macro level, the benefits of these reforms were to show in high levels of savings and investment, especially foreign investment, faster economic growth, rapid growth in export commodities especially in non traditional exports, low inflation, a stable macroeconomic environment overall and of course a significant reduction in poverty levels.
Especially in
It is partly this disappointing result that led to a reevaluation of the whole reform program. At least in the eyes of the Britton Woods Institutions (BWIs) that were spear heading the reforms, it became apparent that the reform measures, while not entirely wrong, were not sufficient to produce the desired results. In particular, it became obvious that for the market reforms to work there should be effective institutions and governance structures that are market augmenting. This realization led to second-generation reforms emphasizing institutional change and good governance.
Obviously, a firm’s competitiveness depends upon factors that are internal to the firm (the way the business is organized, the degree of efficiency achieved in production, the mechanism of sourcing inputs…etc.) and factors that are external to the firm and determined by the business environment prevailing in the country in general including government business relations. The business environment in a country is influenced by factors ranging from the availability of infrastructure, the efficiency of the civil service, the cleanliness of the bureaucracy, the taxation system…etc. which all have significant influence in affecting transactions costs to areas that affect the confidence of the business community including the independence of the judiciary or the parliament or the maturity of the democratization process in general. Second generation reforms are largely designed to address factors largely external to the firm that have significant effect on business competitiveness.
Albeit belated compared with
other African countries,
In line with this direction, some important policy measures were taken largely, under the IMF-WB initiated and orchestrated structural adjustment program. These policies include market deregulation (abolishing the fixed price and quota mechanism), reinstating the private sector’s role into the economy (such as lifting restrictions on investment licensing, lifting investment capital ceiling, privatizing small and medium scale state enterprises), opening up the financial sector - banks and insurance - for private participation, liberalizing the external sector (eliminating non-tariff barriers and progressively reducing import tariff) and a massive initial devaluation of the Birr followed by a mechanism for gradual and continuous depreciation. [PFPS, 1992/93-2000/01))
While taking these first generation reforms were relatively easy for the government, taking the necessary institutional reforms that are necessary for the economic and “psychological” transition from a state led economic management to a market led system was not as straight forward in Ethiopia. Some policies initiated by the previous regime and also regarded as the corner stone of socialist economic policy, which at the same time, remain controversial and critical to the promotion of private investment and the development of the private sector (such as state ownership of land and urban housing), are still intact and functional. Even the ongoing privatization program (albeit slow in implementation) which should indicate the government’s intentions to make the private sector the main engine of economic development, is not delivering the right signal as the ruling party proceeds aggressively with the establishment of large scale party enterprises raising serious questions in the minds of the business community about the government’s intentions and thus negatively affecting the business environment.[4] In addition to the government’s resistance to reform some of its policies, reforming institutions that have long standing institutional culture, even when the government is genuinely interested in reforming them, has proven to be quite a challenge negatively affecting the competitiveness of business firms.
Still, while acknowledging the existence of problems in the implementation of some of the second generation reforms, the government, especially after resolving its internal conflict in favor of reform[5] is making all the effort to convince the private sector that it is committed to institutional reforms including taking measures to improve the business environment in the country. To be sure, especially more recently, the government has taken a number of measures, including establishing a standing forum for dialogue with the private sector, reforming the tax system, decentralization to the woreda level…etc. With this and other similar measures, the government hopes to win the confidence of both the domestic and foreign private sector and hopefully lead to higher levels of investment in the country. It also hopes that these measures will lead to an improved business environment that could enhance the country’s competitiveness as promised by the second generation reforms. Is the government succeeding in its objectives? Are Ethiopian businesses more competitive now than say a year or two ago? Is the environment conducive for businesses in the country? Is the business community more confident about the business environment and the country’s future now than before?
This paper attempts to provide
partial answers to some of these questions based on a systematic survey
conducted by EEA/EEPRI in collaboration with the World Economic Forum and
The rest of the paper has four
sections. The second section provides a brief account of recent macroeconomic
developments with particular emphasis on investment trends. This will be
followed by a short discussion on the determinants of investment, underlying
business confidence as a critical factor. A brief discussion on the survey and
an assessment of survey results under 4 interrelated categories: state-business
relation, the policy environment, the business environment, and international
competitiveness are discussed in section four. By comparing survey results of
the 2000/01
II. Macroeconomic developments
The policy setting reflected above, along with many other macro and sectoral policy measures, initially thought to induce better economic advancement, have improved little the economic environment in the country. Despite a series of structural and enhanced structural adjustment programs, implemented over the decade of the 1990s, the country’s poverty situation has not changed significantly.[6]
The national income, 45 percent of which is contributed by agriculture and allied activities, is as always prone to the vagaries of natural forces, mainly weather condition. For the whole period of the regime, i.e., since 1991/92, average per capita real income (GDP) growth is a rather modest 1.5 percent. When this year’s tragic draught situation is taken into account, average per capita income growth is most likely to be much below one percent. Considering the trend over the whole of the period, per capita income growth has deteriorated in the second half of the period (1996/97-2001/02) from 2.6 to 0.89 percent.
Ironically, this low per capita income growth recorded in the second half of the period, largely emanated not from the productive sector of the economy, but from the service sector, mainly defense and security driven expenditure. The service sector, which in real terms accounts, on average, for about 43 percent of GDP, increased annually at 8%, while the productive sectors (agriculture and industry) grew annually by only 2.3 percent during the same period.
High security related expenditure implies high government consumption. The later significantly increased form 11.7 to 17.7 percent of total consumption in the second half of the period. This in turn raised the share of total consumption in GDP from 94 to 96.5 percent during the same period.
The implication for saving and investment is straightforward. Domestic saving was not only too low through out the period but also dropped steeply to almost zero in 1998/99 & 1999/00. For the second half of the period, saving figured only 3.5 percent of GDP, down form 6% in preceding half. In fact, in 1999/00 consumption exceeded domestic production by about one percent, a unique phenomenon, only observed during severe drought seasons. So whatever investment was made during this period, it must have been financed largely from domestic or foreign borrowing or foreign grant. Obviously this is a situation that cannot be sustained in the longer term.
Between 1991/92 and 1995/96, investment (gross capital formation) increased significantly from 9.1 percent of GDP to 16.9 percent. [MoPED] However, in the second half of the 90s, the rate of investment not only ceased to increase but, even more troubling, actually declined. In 1996/97 & 1997/98 it leveled off at 17 percent, while in 1998/99 and 1999/00 it fell to 16.3 & 15.2 percent of GDP. In the first two years of the millennium, however, preliminary estimates show a substantial recovery.
The declining trend in investment in the second half of the 90s is also observed in private investment licensed by Ethiopian Investment Authority (EIA). As shown in table 1 below, the number of investment projects approved by EIA, which were 795 in 1996/97 and 898 in 1997/98, declined to 713, 624 and 687 respectively in the following three years.
Table 1. Number of projects and investment capital approved and implemented
|
Year |
Description |
Licensed/approved Projects |
Operational Projects |
||||||
|
Domestic |
Foreign |
Public |
Total |
Domestic |
Foreign |
Public |
Total |
||
|
1996/97 |
No. of
Projects Investment
capital |
752 4446.91 |
42 2267.7 |
1 7.10 |
795 6721.7 |
229 1206.23 |
4 1194.35 |
-- |
233 2400.58 |
|
1997/98 |
No of
Projects Investment
capital |
816 5818.87 |
81 4106.32 |
1 14.41 |
898 9939.6 |
278 1172.92 |
12 1653.47 |
1 14.41 |
291 2840.80 |
|
1998/99 |
No of
Projects Investment
capital |
674 3764.91 |
30 1379.92 |
9 4915.23 |
713 10060.06 |
301 763.32 |
12 356.69 |
1 33.11 |
314 1153.12 |
|
1999/00 |
No of
Projects Investment
capital |
561 6740.35 |
54 1626.84 |
9 5759.83 |
624 14127.02 |
309 2899.20 |
18 317.21 |
6 2214.27 |
333 5430.68 |
|
2000/01 |
No of
Projects Investment
capital |
635 5675.70 |
45 2923.27 |
7 257.03 |
687 8856.00 |
53 400.18 |
9 83.93 |
-- |
62 484.11 |
(value in Birr millions)
Source: Ethiopian Investment Authority
The larger proportion of approved projects and investment capital comes from the domestic private sector. The foreign sector accounts for about one fourth of approved capital.
What is more interesting, however, is the amount of capital actually invested and made operational. Actual invested capital out of the total approved, i.e., the implementation rate, which was 35.7 percent in 1996/97 and 28.6 percent in 1997/97 sharply dropped to 11.5 percent in 1998/99 and 5.5 percent in 2000/01. The exception was in 1999/00 where 38.4 percent of approved capital was invested.
The decline in the implementation of foreign capital was even more dramatic. In 1996/97 and 1997/98 the implementation rate was as high as 52 and 40 percent respectively. However, in the following three years the rate steeply fall to 25.8, 19.5 and 2.8 percent respectively. Moreover, note only that the implementation rate was low, the amount of FDI is pitifully small. For the last three years noted above FDI was a meager 47.5, 39 and 10 million USD respectively.
This is a clear indication of the
erosion of investors’ confidence in the country for a variety of reasons.
Perhaps the conflict with
III. Determinants of business confidence and competitiveness
To determine the reasons behind the lackluster performance of investment in the country requires a good understanding of the determinants of investment and their effectiveness in generating growth. Without a doubt, investment is one of the primary engines of growth in all countries. However, its effectiveness in generating growth rests on strong complementarities of a number of elements/factors.[7] Moreover, as investment implies foregoing current resource use for future gain, it involves risks requiring knowledge and predictability about variables affecting returns to investment, their long-term stability and in general confidence in the future. A number of factors determine the volume and quality of investment in a country premised upon the expected returns to investment. In addition to internal factors affecting the cost of the firm, these factors include the external factors under which the business operates that have significant effect on the cost of the business including the existence of a coherent and stable macro & sectoral economic policies, infrastructure, human resource, the legal & regulatory framework, investment promotion strategy and incentive framework, client oriented institutional framework, political stability, governance, and market potential. These and other related factors influence the confidence, hence the decision of investors.
Coherent and stable macro & sectoral policies: Economic reform must be credible, maintained for long without a series of reversals. To attract long-term investment, particularly in areas such as infrastructure, large-scale manufacturing, etc, investors must be confident that the rules are clear, defensible and will not change frequently. The lack of resoluteness on controversial policies, such as the land policy in Ethiopia, not only create a wait and see attitude on the part of investors, but also sends a negative signal – generating suspicion on the continuity of other policies too. Any policy ambiguity, particularly related to critical factors carry major risks thereby keeping investors at bay.
The legal & regulatory
framework: Extensive regulations and restrictions, the lack of simplicity
and transparency of the legal system and bureaucratic hurdles unnecessarily
raise the cost of doing business, thereby rendering companies uncompetitive. An
inefficient and ineffective legal system open the flood gate for corruption,
deterring investment and diverting resources from more productive to rent
seeking activities. Double standard on the applicability of regulations, as
evidenced here in
Infrastructure: In today’s globally competitive business environment infrastructure is a critical factor. The lack of adequate and efficient infrastructure, i.e., transport, power and telecommunication, means not only high transaction cost for those that are already in business affecting their competitiveness, but could also be a serious barrier to entry for new businesses. Inadequate or poor road and rail way in a country implies limited access to natural resources and potential markets. Similarly, unreliable power/electric supply, particularly in production activities, could result not only in loss of revenue but also loss of market. Also, the cost to business of poor telecommunication ranges from loss of a potential business (contracts which are never pursued due to lack of information), to a real loss associated with loss of customers owing to orders missed or late shipments.
Political stability: A central goal of business planning is minimizing risk. Unsettled, even implicit, political dispute, internal or external, pose risk factors, particularly for long-term investment. This is a critical factor, which either delay investment until the storm weathers away, or divert away, particularly foreign investment, for good. Equally important is having a clear and peaceful mechanism for transfer of power in a country which provides stability to the political process minimizing non-commercial risk.
Investment promotion strategy and incentive structure: In order to attract and ensure the sustainability of long-term investment inflow, a clearly defined strategy of the medium and long-term development perspective of a country need to be in place. The very first thing that investors would like to know is how sound the development strategy of a country is for the simple reason that a healthy and expanding economy is at least a partial guarantee for business success as it implies a growing market, availability of skilled labor force, improved technology supply, stability, etc. The IPS should identify sectors or clusters of activities where comparative advantages already exist and where new ones can be developed; it should identify priority/targeted activities; client-oriented institutions need to be set up and their role must be articulated. It is not good enough to just draw a demarcation for activities where government or private, domestic or foreign investors could participate. Moreover, formulating an incentive scheme to targeted sectors/activities identified as priority investment areas is essential for streamlining investment for better linkages and faster economic growth.
Governance: A host has to clean the house before inviting guests. It is not just that bad governance entails additional costs to business, but the political instability that could possibly follow as a result of it also carries greater risk. Because, bad governance, such as corruption, nepotism, etc., is not necessarily caused by the inherent characteristics of individuals (politicians, etc), it is largely the product of a system. A change in government, particularly in developing countries, is often accompanied by a change in policies, not necessarily favorable to business, hence introducing uncertainty and raising risk. This erodes business confidence, deterring investment.
Human resource development: Knowledge inputs have become important components of production activities – as important as investment in tangible goods, such as machinery and equipment. Knowledge in this context implies not just the result of R&D, but also product design, quality control, process engineering, management routine, marketing, information processing, maintenance, networking and partnering skills. So in this context knowledge is not confined to high tech industries only, but also to traditional industries, such as forestry, horticulture, food processing, etc. So “the ability of a nation to develop a performing educational system and to sustain knowledge in a workforce through training is vital to competitiveness” and for investment inflow. [UN, 2000]
Clearly, all these factors
influence the decision to invest and the competitiveness of businesses. The
competitiveness survey we are analyzing below tries to capture business
attitudes towards most of these factors in
IV. The status of business confidence and competitiveness in Ethiopia
As can be drawn form the
immediately preceding section, a prime determinant of investment is business
confidence which in turn is affected by a host of factors that jointly make the
business environment in a country. The
The methodology of the ACR combines data collected from each country and international organizations and the executive opinion survey conducted in each country. The ACR encompass different sections carefully selected to measure the degree of competitiveness of an economy internationally. It includes, among others, government policies and institutions, perception of the economy, infrastructure, finance, openness, human resource, etc. Under each section, a number of questions/issues are raised which respondents are asked to rate. Based on the responses an overall index for each country is drawn and a ranking of countries listed.
The last Africa Competitiveness
Report was published for 2000/01. [WEF, 2000] In this report
The 2002/03 survey instrument has 14 sections, including perception of the economy, government policy and the public sector, public institutions, infrastructure, human resource, finance and openness, domestic competition, company operation strategy (international competitiveness), health, environment, role of international institutions, etc. A number of questions come under each section. To allow for a systematic analysis of the impact of each question on business confidence for the purpose of this paper, the questions were regrouped under four categories, namely state-business relation, government policy environment, the business environment and international competitiveness. These categories are not mutually exclusive, rather, they are closely interrelated. Some questions simultaneously fall under two or three categories, however, each category largely contains, specific issues peculiar to it alone.
In what follows, we asses the state
of business confidence in
(a) State-business relation: In developing countries, where strong democratic tradition does not exist, specifically where political power is not under the direct influence of the people, government interest tend to gravitate towards preserving political power from any potential challenger. Often the development of a strong business class is suspiciously seen as a political rival than a partner in development. Governments who seized power through a revolution – socialist or any left leaning, or by a military coup, or through an armed struggle on ethnic, religious or any other sectarian grounds often have little faith on the business community. As a result the form of governance reflecting state-business relation would be one of mistrust, biased, less supportive, and cost-imposing. Such governments are prone to favor some firms/individuals against others, provides little legal protection to business at large, indulge in corrupt practices, etc. Also, they seem to feel more comfortable with foreign businesses or foreign investors, who are thought to have relatively less interest in political power than the domestic ones. In general while developing a market based economic system primarily requires an enabling environment foremost for domestic businesses, such governments provide lip service to the construction of a market based capitalist economy while simultaneously limiting the development of domestic capitalists. This is precisely what Samir Amin termed ‘capitalism without capitalists’. [Development review, Vol. 7, No.2] Such practices, on the part of governments, inevitably erode business confidence and retards investment. On the other hand, governments genuinely committed to the development of the private sector establish rules of the game that are applicable to all businesses fairly and equally and attempts to work closely with the private sector seeing the private sector a real partner for the development of the country. The survey on government business relations tries to capture where the government lies in this spectrum from the perspective of business leaders.
From the survey, questions related to state-business relations such as system of government support to business, illegal payments to government officials, informing government policy changes to the business community, favoritism, police service in protecting business, bribes to secure government services, etc, are grouped together under state-business relation. And the statistics of the responses are summarized in Tables 2 & 3 below.
Table 2. Aggregate response by category (percent
of respondents)
|
No |
Description of categories |
Unfavorable |
Favorable |
Indifferent |
Total |
|
1 |
State-business relation |
47.5 |
36.5 |
16.0 |
100 |
|
2 |
Gov’t policy environment |
56.0 |
33.2 |
11.8 |
100 |
|
3 |
Business environment |
56.4 |
32.2 |
11.4 |
100 |
|
4 |
International competitiveness |
66.0 |
23.0 |
11.0 |
100 |
Source: Survey result
On aggregate, A greater proportion of the responses, 47.5 percent, believe that government’s actions related to state-business relation is biased against business, less supportive and cost imposing. In 36.5 percent of the cases, however, respondents think to the contrary, i.e., government is neutral, supportive and less cost imposing. [Table 2]
The structure of the ACR questions is such that it allows room for ranking.[8] Accordingly, as shown in Table 3, 14 percent believe that government is very biased, highly cost imposing, least supportive and very corrupt; and another 16 percent believe that this is largely the case. Still, another 18 percent believe that to be somewhat the case. On the other hand, 13.6 percent strongly believe that government is very neutral, supportive and least cost imposing and another 12.8 percent think that government measures have largely positive effects on state-business relations.
Table 3. Ranking of responses on state-business
relation
|
No |
Responses |
Response (%) |
|
1 |
Very biased, highly cost imposing, least supportive |
14.3 |
|
2 |
Largely biased, cost imposing, less supportive |
15.7 |
|
3 |
Somewhat biased, cost imposing, not supportive |
17.5 |
|
4 |
Indifferent cases |
16.0 |
|
5 |
Somewhat neutral, less cost imposing, supportive |
10.0 |
|
6 |
Largely neutral, not cost imposing, supportive |
12.8 |
|
7 |
Very neutral, not cost imposing, very supportive |
13.7 |
Source: Survey result
With respect to the responses for each specific question/issue, the responses vary across the spectrum of choices although the majority of the responses were unfavorable to the government. For instance, 68 percent (against 8.8) believe that current system of subsidy by government is distortive; 66 percent (against 27) think government does not make policy changes known to the public; and 64 percent (against 24) think that there is strong favoritism. Also, 50 percent (against 33) in the case of awarding public contracts, and 47 percent (against 32) in connection with winning favorable judicial decision, believe that bribes are common.
On the other hand 59 percent (against 32) believe that bribes are not common in obtaining import & export permits and 48 percent (against 33) think that police service can be relied on to protect business from criminals.
(b) Government policy environment: As
noted above, the legal and regulatory framework, i.e., government rules and regulations,
sets the playing field for business operation. As such, the policy environment
is a critical factor in determining business confidence. In the ACR, policy
issues are encompassed under the section government & the public sector and
public institutions. A number of specific issues, including effectiveness of
national parliament as a law making body, effectiveness of administrative
regulations, civil service competence, financial honesty of politicians,
independence of the judiciary, the legal framework to settle private business
disputes and challenge the legality of government actions and/or regulations,
implicit/explicit censorship and retaliatory actions of government,
intellectual property protection, protecting business from crime and violence,
effectiveness of the law against corruption, etc, are identified
To these and many other related issues,
the response of the business community is largely unfavorable. A significant
majority, 56 percent (against 33), believe that government policy is ineffective,
distortive, poorly delineated and corruption
inviting. [Table 2]
Table 4. Ranking of responses on government policy environment
|
No |
Responses |
Response (%) |
|
1 |
Very ineffective, highly distortive, very poorly delineated, corruption inviting |
18.7 |
|
2 |
Largely ineffective, distortive, poorly delineated, corruption inviting |
20.1 |
|
3 |
Somewhat ineffective, distortive, poorly delineated, creates room for corruption |
17.2 |
|
4 |
Indifferent cases |
10.8 |
|
5 |
Somewhat effective, less distortive, fairly delineated |
9.4 |
|
6 |
Largely effective, less distortive, fairly delineated |
13.3 |
|
7 |
Very effective, highly transparent, well delineated, corruption free |
10.5 |
Source: Survey result
Moreover, in 19 percent of the cases, respondents strongly believe that policies are very ineffective, highly distortive, very poorly delineated and corruption inviting while another 20 percent think that this is largely the case. On the other hand, only 10 percent has a strong positive opinion on the effectiveness and transparency of policies. [Table 4]
Considering the response for some of the specific issues, 79 percent believe parliament as a low making body ineffective; 69 percent (against 15) consider politicians dishonest with respect to financial matters; 85 percent regard the civil service vis-ŕ-vis the private sector as incompetent; 83 percent think administrative regulations ineffective; 81 percent believe the judiciary not independent from the influence of government officials, 79 percent think the legal framework inefficient and subject to manipulation; 91 percent strongly believe that intellectual property protection does not exist; and 55 percent (against 25%) think that diversion of public funds to companies, individuals or groups due to corruption is common. [Table 5]
Table 5. Responses for specific government policy related issues
|
No |
Policy
related issues/questions |
Response % |
|
1 |
Intellectual property protection does not exist |
91 |
|
2 |
Incompetence of civil service vis-ŕ-vis private sector |
85 |
|
3 |
Ineffective administrative regulations |
83 |
|
4 |
Lack of independence of the judiciary from the influence of government officials |
81 |
|
5 |
Inefficient legal framework and subject to manipulation |
79 |
|
6 |
Ineffective parliament as a law making body |
79 |
|
7 |
Financial dishonesty of politicians |
69 |
|
8 |
Diversion of public funds to companies, individuals, or groups due to corrupt practices |
55 |
Source: Survey result
On the other hand, there are strong favorable views for some aspects of government policy issues. For instance, about 86 and 73 percent believe that common and organized crime does not impose significant costs on business.
(c) The business environment: Wide spectrum of issues affects the business environment. It involves infrastructure, human resource development, finance and openness, laws relating to and promotion of ICT, domestic competition (the capacity and nature of local suppliers and consumers) legal/illegal contributions and donations to political parties, aspects of the legal framework, which invites corruption and other related issues.
In 56 percent of the cases, respondents’ views regarding the business environment is unfavorable. [Table 1] Only 32 percent think that there is a favorable environment. Moreover, about 21 percent of the total responses strongly confirm the lack of enabling business environment. In other words they believe that it is extremely weak, least developed, highly limited and least expanding. On the other hand, only 9 percent believe that there is a very strong, well developing and highly expanding business environment. [Table 6]
Table 6. Rank of responses on business environment
|
No |
Response |
Response (%) |
|
1 |
Extremely weak, least developed, highly limited, not expanding |
20.7 |
|
2 |
Largely weak, undeveloped, limited, least expanding |
17.7 |
|
3 |
Somewhat weak, undeveloped, limited, least expanding |
18.0 |
|
4 |
Indifferent cases |
11.4 |
|
5 |
Somewhat strong, developing, promising, expanding |
12.4 |
|
6 |
Largely strong, developing, expanding |
10.8 |
|
7 |
Very strong, well developing, highly expanding |
9.0 |
Source: Survey result
A reflection of the responses on specific aspects of the business environment is also given in Table 7. With the exception of air transport (referring to the Ethiopian Air Lines) where 82 percent believes to be efficient, infrastructure is believed to be poorly developed, inefficient and scarce in 76 percent of the cases. Similarly, with the exception of wage setting, 68 percent (against 19 percent) believe labor quality to be poor and unskilled, wages unrelated to labor productivity, scientists and engineers literally non-existent or fleeing the country and labor regulation with respect to hiring and firing of workers impeding. On the positive side, 87 percent believe that wages are determined by each company, and hence favorable for the business environment.
With respect to domestic competition, nearly two-thirds believe that it is difficult and time consuming to start new business, local suppliers are inefficient and have little technological capability and standards on product quality non-existent. They also think that buyers are slow to adopt to new products and processes.
The status of ICT in
|
No |
Business
environment related issues/questions |
Response - % |
|
1 |
Poor Infrastructure |
76 |
|
2 |
Poor quality& unskilled workers, labor regulation impeding |
68 |
|
3 |
Domestic competition: difficult to start new business, few and inefficient local suppliers with little technological capability, and traditional oriented buyers |
63 |
|
4 |
ICT: laws non-existent and not governments priority |
80 |
|
5 |
Finance and openness - Risk averse banks, difficult to get loans, rudimentary service - Standard bank auditing and accounting, banks not insolvent - Respondents who secured less than 10 percent of suppliers credit from total credit borrowed - Import tariffs, license fees, bank fees and time required for administrative red tape while importing raises costs by: · over 50 percent · 30 – 50 percent · 11 – 29 percent - Number of days required to claim goods from custom the day they arrive the port of entry: · Over 2 months · Between 1 and 2 months |
83 70 81 28 32 26
25 27 |
Table 7.
Responses for specific aspects of business environment
Source: Survey result
On finance and openness, 83 percent think that banks are highly risk averse and services are elementary, hence securing loans is very difficult, if not impossible and the possibility to invest abroad for domestic investors is not easy. Moreover, for over 82% of the respondents, the suppliers’ credit they get from total credit secured/borrowed is less than 10 percent and all the rest get less than 50 percent. Many claimed that the combined effect of import tariffs, license fees, bank fees and the time required because of administrative red tape raise their cost significantly. In this regard, for about 28 percent of the respondents the cost increases by over 50 percent; for one-third of the respondents by 30-50 percent; and still for another 26 percent by 11-29 percent. Related to this is the time required to clear imports from customs. Over 25 percent of the respondents believe that it takes over two months from the time goods arrive at the port of entry until they can claim them from customs; another 27 percent think that it takes between one and two months.
On the other hand, over 70 percent of the respondents believe that banks auditing and accounting system is standard, banks are not insolvent or are well managed and foreign investors are free to invest in the country.
(d) International competitiveness: The existence of companies in the country, which compete internationally, the degree of their competitiveness, the extent to which conditions in the country allow/support firms to compete, etc influence business confidence. International competitiveness is influenced by many of the specific issues noted above which affect the business environment. In addition, however, company’s operation and strategy, such as export status, technological capability, marketing and management strategy, corporate ethics, etc determine the competitiveness of firms internationally.
As could be expected, a large majority of the response is unfavorable. In 66 percent of the cases, respondents believe that international competitiveness either is non-existent or undeveloped, limited and ineffective. [Table 2] Many respondents have strong conviction on this. Nearly 28 percent think that international competitiveness is non-existent, least developed, highly limited and very ineffective. Another 22 percent believe that this is largely the case. [Table 8]
|
No |
Response |
Response (%) |
|
1 |
Non-existent or extremely weak, least developed, highly limited, ineffective |
27.5 |
|
2 |
Largely weak, undeveloped, limited, ineffective |
21.7 |
|
3 |
Somewhat weak, undeveloped, limited, ineffective |
16.8 |
|
4 |
Indifferent cases |
10.2 |
|
5 |
Somewhat strong, developing, expanding, effective |
10.5 |
|
6 |
Largely strong, developed, expanding, effective |
7.4 |
|
7 |
Very intensive and on-going, well developed, highly expanding, very effective |
5.9 |
Table 8.
Ranking of responses on international competitiveness
Source: Survey result
(e) Overall picture of
business confidence and competitiveness: An aggregation of the responses
for all relevant issues to business confidence reveals that in 62 percent of
the cases the situation in
(IV) Comparing changes in business confidence and competitiveness
To see how business confidence developed in the last three years, an attempt is made to compare survey results of the 2000/01 [World Economic Forum, 2000/01] and this most recent survey conducted in 2002. Some of the issues raised or questions posed in each ACR survey are quite different, hence difficult to draw similarities. As such, they are not comparable. Moreover, not all the results of the questions raised in the previous ACR were published and thus were not available to us for proper comparison. As a result comparison cannot be made on issues covering wide sectors and issues. However, there are few similar issues for which comparison can be drawn. Such issues related to the legal and regulatory framework, infrastructure, human resource development and finance & openness are identified and average responses compared to give a reflection of how business confidence has changed over the two years.
In Table 9, average responses for each specific question identified from the 2000/01 and 2002/03 ACR surveys are shown. With the exception of the number of days required to transfer funds from abroad, where a significant improvement is recorded (12 days in the 2002/03 ACR against 21 in the previous one) in the recent ACR survey, in many other cases the result indicate a significant deterioration in the business environment.
Table 9. Comparing changes in business confidence and competitiveness
Source: WEF, ACR 2000/01 and Survey result
Consider first questions related to government and the public sector. In the previous, 2000/01 survey, respondents suggested that government regulations were nevertheless effective (4.2), while in the recent, 2002/03 survey, the average opinion is largely
|
No |
Issues/questions |
Average response |
|
|
2000/01 |
2002/03 |
||
|
1 1.1 1.2 |
Government and the public sector: - Administrative regulation
in the country (1=very ineffective; 6=very effective) - Firms are informed clearly by the
government on changes in policies and regulations (1=never informed; 6=always
informed) |
4.20 3.62 |
2.16 2.83 |
|
2 2.1 2.1 2.3 2.4 2.5 |
Public institutions: - The judiciary is independent from political influences of members of gov’t, citizens or firms (1=heavily influenced; 6=entirely independent) - The legal framework for private businesses to settle disputes and challenge the legality of gov’t actions is (1=inefficient/subject to manipulation; 6=efficient and neutral) - In resolving business disputes are court decisions in your country enforced? (1=never; 6=always) - Police service (1=cannot
be relied upon to protect businesses from criminals; 6=can be relied upon to
protect businesses form criminals) - Organized crime and
violence (1=imposes significant costs on businesses; 6=does not impose
significant costs on businesses) |
3.53 3.38 3.52 4.25 5.20 |
2.13 2.27 3.87 3.74 5.09 |
|
3 3.1 3.2 |
Infrastructure:-
General infrastructure in your country is (1=poorly developed and
inefficient; 6=among the best in - Port facilities and inland
waterways are (1=undeveloped; 6=developed) |
3.29 4.05 |
1.97 1.39 |
|
4 4.1 4.2 4.3 |
Human resource: - Hiring and firing of workers is (impeded
by regulations; 6=flexibly determined by employers - Math and science education in primary,
secondary and universities is (1=of poor quality; 6=equal to the best in - The local labor market has a sufficient
labor supply of educated workers to meet firms’ hiring demand (1=strongly
disagree; 6=strongly agree) |
4.68 3.01 4.00 |
3.34 2.98 3.21 |
|
5 5.1 5.2 5.3 5.4 |
Finance and openness: - How easy is to obtain a bank loan from a domestic bank with only a good business plan and no collateral? (1=impossible; 6=easy) - Hidden import barriers (i.e.
barriers other than published tariffs and quotas) are (1=an important
problem; 6=not an important problem) - How long does it typically
take to transfer funds internationally to the country in which this firm
operates? ___days - If your firm imports, how
many days does it typically take from the time your goods arrive at their
port of entry until you can claim them from customs? ___ days |
3.95 3.71 21.3 35.00 |
1.50 3.92 12.00 37.94 |
|
6 6.1 |
Health: - Illness and diseases among
your firm’s employees imposes significant costs on your business (1=yes,
6=no) |
4.46 |
4.19 |
ineffective (2.16). Similarly, while the previous average response implied that firms were, nevertheless, informed by government on changes in policies and regulations (3.62), in the recent survey, the response clearly indicates that government nevertheless does not inform firms.
With respect to public institutions, except in the case of enforcement of court decisions in resolving business disputes, where the index suggests marginal improvement (3.52 against 3.87), in all other 4 issues raised, there is a deterioration. In the recent survey, the average response implies that the judiciary is largely not independent (2.13) from political influences of members of government, citizens or firms, while in the previous survey the average response was indifferent. Similarly, the recent survey suggests that the legal framework for private business to settle disputes and challenge the legality of government actions is largely inefficient and subject to manipulation (2.27), while in the previous survey the index suggests largely indifferent cases. Whether police service can be relied upon to protect business from criminals, the earlier survey result shows a clear positive response (4.25), while the recent one suggests somewhat indifferent (3.74).
While in the previous survey average response implies that general infrastructure is somewhat not developed (3.25) and port facilities and inland waterways are nevertheless developed and efficient (4.05), in the recent survey average responses strongly suggest that both are largely undeveloped and inefficient (1.97 & 1.39). This clearly indicates that there is a deterioration in the competitive status of firms, or at least in the perception of business leaders.
Regarding human resource development, according to the 2000/01 ACR survey result, the hiring and firing of workers is flexibly determined by employers (4.68) and there is a sufficient supply of educated workers (4.0). But average opinion in the 2002/03 survey, suggests that neither wages are determined by employers alone (3.34) nor there is sufficient supply of educated workers (3.21).
In the case of openness, both responses suggest that hidden import barriers are nevertheless not an important problem (3.71 & 3.92). In the case of finance, however, a worsening situation seems to prevail. Regarding the possibility of obtaining bank loan from domestic banks with only a good business plan but no collateral, the response in the recent survey literally implies not only difficult but impossible (1.5), while the previous one suggested that there was somewhat a possibility though not easy (3.95). Again, this shows a deteriorating situation in business confidence and competitiveness.
On aggregate, based on the questions/issues raised above, the overall index for the previous 2000/01 ACR survey (3.94) implies that there was nevertheless a sort of favorable condition while in the recent 2002/03 survey the index (2.97) show unfavorable situation, implying that business confidence and competitiveness is deteriorating rather significantly.
(VI) Conclusion
What clearly comes out of this survey is that the business community is losing its confidence in their (and the country’s) ability to compete internationally and does not seem to have any hope in the possibility of improvement. This might be a misguided perception on the part of the business community without any substance. But, in such matters, perception is all that matters whether backed by real events or not. Such a negative perception by the business community certainly does not bode well for investment and the future development of the country. It is important that the government takes notice of these developments and take concrete steps to alley the concerns of the business community if the hoped for rapid economic growth is to be achieved.
The decision to invest today, materializes years later. There is always a lag period between decision and actual investment. So, the decision, which led to the decline in investment in the second half of the 1990’s and later, must have been made earlier. This implies that the effect of the Ethio-Eritrean war cannot be blamed as a root cause for the decline in investment. The problem must have started earlier. The prime reason, as explicitly identified by the 2002/03 Africa Competitiveness Report survey result, lies in the various factors that business identified as impediments to their operations including government policies, which led to the deterioration in business confidence and competitiveness of firms. To regain business confidence, therefore, there is a desperate need to improve the investment climate and the competitive status of firms. This could require fundamental changes in some policies and significant improvement in others.
The starting point to effect such changes is for government to genuinely listen to the concerns of the business community. In this regard the government’s recent attempts to engage in a dialogue with the business community is encouraging. However, to regain the confidence of the business community requires more than engaging in a discussion. It necessitates taking concrete actions to address the real concerns of the business community. In this regard, the government must show its willingness to reconsider some of its rigid positions and indicate its willingness to meet them half way. There shouldn’t be any policy sacred caws (such as land policy) that are not subject for public debate and scrutiny. The government must be the first to show that its policies are recommended for their practical merits rather than for defending a priori held beliefs.
Second a significant improvement
in the legal and regulatory framework (governance) and its implementation must
be made for the business confidence to revive and competitiveness to improve.
Finally, government needs to take the business community as a partner in development, not as a political rival. In any country, industrialization/development never occurred without a close and deliberate collaboration between government and the business community. Based on a specifically drawn and a mutually agreed upon industrial policy for the country, government must guide and support the business class for faster industrialization. To this end, the institutional framework needs to be in place. Client-oriented, professional and efficient institutions are vital instruments for addressing business needs and desire, thereby reviving their confidence, hence advancing investment and improve competitiveness. These are the minimum requirements if we are going to build a vibrant capitalist economy on the shoulders of the capitalist class. Whatever the political risks, it should be clear that we can only build capitalism with capitalists.
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Annex
The Africa Competitiveness Report 2002/03 executive
opinion survey
With the agreement between the
Ethiopian Economic Association/Ethiopian Economic Policy Institute (EEA/EEPRI)
and World Economic Forum (WEF), the former conducted the 2002/03 Africa
Competitiveness Report (ACR) executive opinion survey in
The 2002/03 ACR encompass over 165 questions under 12 sections, including perception of the economy, technology, government and the public sector, public institutions, infrastructure, finance & openness, domestic institutions, etc. Most of the questions have the same format. Respondents were asked to rate the answer of each question from a very unfavorable/negative to a very favorable/positive response. For instance, for any one question choices of answers could be 1=very ineffective, 2=largely ineffective, 3=nevertheless ineffective, 4=indifferent, 5=somewhat effective, 6=largely effective, and 7=very effective.
Statistical aggregation of responses
The statistics of the responses for each question is straightforward. What percent of the respondents selected 1, 2, ..., 7 is a matter of counting the respondents for each answer of a question and calculate what percent of the total respondents does it account. In statistical terms, the questions are taken as variables and answers as cases and number of respondents for each answer as frequencies. However, aggregating the responses for a given category or for all categories (overall business confidence) requires inverting the process, i.e., to consider answers (1-7) as variables and questions as cases. First, as noted above, choices of answers for each question are set systematically from unfavorable/negative (1) to favorable/positive (7). Then the response for each answer of all questions, coming under each category, is aggregated. Lastly, the percentage share of the aggregated responses for each answer is calculated from total responses for all answers.
Comparing average responses of the 2000/01 and 2002/03 Africa
Competitiveness Report survey results for Ethiopia
The structure of the questions and answers of the 2000/01 and 2002/03 Africa Competitiveness Report have similarities as well as differences. First, Some questions are the same or are similar but not all. Hence comparison cannot be drawn for all questions. Second, sections under which questions are categorized, are not quite the same. The recent, 2002/03 ACR has more disaggregation. Third, the order of the rating is not the same across all questions; in some questions it runs from unfavorable to favorable, while for others it is set up in the reverse order. Finally, the rating of each question is different, 1 to 6 in the 2000/01 ACR, but 1 to 7 in the 2002/03 ACR.
As a result, some adjustment was necessary for
comparing average responses of the reports for the two periods. The ACR is
primarily designed to make country comparison at a point in time. Of course,
given series of surveys, time series comparison across countries can also be
made. In our case, as the data for the 2002/03 ACR for other countries is not
available, comparison between countries cannot be made. What we can is for