Competitiveness and Innovation in Africa’s Business Climate

1. Competitiveness and Innovation in Africa’s Business Climate Abdul B. Kamara Manager, Research Division, Development Research Department African Development Bank Presentation at the Conference on AFRICA’S NEW FRONTIER: Innovation, Technology, Prosperity Organized by IDRC Ottawa, 4-5 February, 2010

2. Outline • Investment Climate and Competitiveness of African Countries: vis-à-vis peers & elsewhere (The African Competitiveness Report) • Case Studies - Botswana, Mauritius, Namibia, and Tunisia • Some Concluding Remarks on Improving Africa’s Competitiveness

3. How we Define Competitiveness • Competitiveness is “the state of the set of institutions, policies, and factors that determine the level of productivity of an economy.” • The level of productivity, in turn determines rates of return to investment, and thus sets the sustainable level of wealth creation in an economy (returns to investment is a critical driver of economic growth); • A more competitive economy is likely to be more productive and grow faster over the medium term. • How we do not define competitiveness: “an economy’s share of the world market for its products”

4. Why Assess Competitiveness • Examine the drivers of competitiveness and growth of the countries in a global context; • To establish a quantitative toolto help policymakers benchmark and measure the competitiveness of a given country; • Prioritize those areas requiring urgent policy attention; • Monitor progress over time (this is the 3rd ACR; 1st in 2004, 2nd in 2007) • Collaborators: AfDB, WB, WEF – with the objective of generating a better understanding on the ingredients of Africa’s economic growth (assessing the investment climate & competitiveness landscape);

5. Methodology and Data • The ACR adapts the methodology Global Competitiveness Index; • Data Sources: AfDB, WB, WEF – Executive Opinion Surveys (WEF) – Enterprise Surveys (WEF) – Doing Business Indicators (WB) – Country Private Sector Profiles (AfDB) – Country Governance Profiles (AfDB)

6. The Global Competitiveness Index (GCI) • The GCI is developed using both “hard” data from public sources (such as inflation, forex regulatn., internet penetration, life expectancy, school enrollment rates, etc), as well as data from the other sources indicated above; • The surveys provide crucial data on a number of qualitative issues (e.g. corruption, confidence in the public sector, quality of schools, etc) for which no hard data exist; as well as on SMEs (starting up business, permits, taxes, forex, labor laws (on firing/hiring), wages, property rights, etc).

7. GCI Methodology • The GCI is based on 12 pillars of competitiveness, divided into 3 groups: • Basic Requirements (4 pillars) • Efficiency Enhancers (6 pillars) • Innovation and Sophistication Factors (2 pillars)  each pillar comprises several indicators • Raw data on indicators for a given country are scored on a scale of 1 to 7, where 7 is the best score. The pillars are then given a score by averaging the indicator scores under that pillar. • The overall score for each country, weighting applied, based on GDP/capita  development state.

8. Methodology (continued) • Countries are grouped into three Stages of Developmentbased on their GDP per capita:

9. Methodology (continued)

10. Methodology (continued) • Weight of different pillar groups (in %) changes depending on the stage of development:

11. Some Results – GCI 2008/09: Ranks for Africa’s 3 best & 3 worst e.g. Burundi: Strengths: macro-stability and health/primary education. Weaknesses: institutions, technological readiness, market size.

12. GCI Scores -- Africa in International Comparison

13. In 2004-2008 Period – Improvements on GCI (Scale of 1 to 7) The scores for most African countries remained stable or improved, on average from 3.5 - 3.7 • Northern Africa: • Algeria and Egypt (no change); • Morocco (from 4.0 - 4.1) and Tunisia (from 4.3 - 4.6) • The SSA countries had more striking improvement in line with the improving economic climate in recent years: • Botswana, Ethiopia, and Kenya (0.5-pt); • Gambia and Mauritius (0.4pt); • Mali, Nigeria, S. Africa, and Tanzania (0.3pt); and • the rest remained stable except Uganda (- 0.2 pt)

14. 5 Areas of Improvements in GCI 2004-2008 • General improvements over the years (all indicators/pillars) • Higher education and training lagging behind, though improving • Institutions and market efficiency significantly improved

15. Short and Long-term Policy Reforms for Improving the Competitiveness of African Economies • Short-term reforms: • Keeping markets open to trade • Increasing access to finance through market-enabling policies • Long-term reforms: • Infrastructure remains one of the top constraints to businesses in Africa – especially energy and transport (key for value addition; for eff. reg.integ) • Education and Health: higher education and training; improved healthcare systems key for Africa’s productive potential • More examples of effective institutions; good governance and strong and visionary leadership may still be improved.

16. Competitiveness - Case Studies Botswana, Mauritius, Namibia, and Tunisia

17. Botswana, Mauritius, Namibia, and Tunisia in International Comparison

18. Botswana, Mauritius, Namibia and Tunisia consistently enjoyed good economic performance over the past decades • Sound economic policies played a key role improving their investment climate • In each of the 4 countries, sound institutions were decisive factors in reducing transaction costs and promoting innovation. • Good governance and strong and visionary leadership greatly contributed to the success of the four countries. • Tunisia (36th) - the highest rank in Africa close to Thailand (34th) • Botswana (56th) - was 20 places up the biggest improvement in GCI rankings. • Namibia at 80th place - moved up 9 places. • Mauritius (57th) place - up 3 places

19. The four countries all grappled with challenge related to global economic crisis in the short- and medium-terms • Their growth outlooks deteriorated and macroeconomic balances worsened. • The crisis also underscored the relative vulnerability of small open economies. • Need for diversification in reinforcing the resilience of economies to external shocks. • Need to improve the investment climate and deepen policy reforms.

20. The relatively more diversified Tunisia and Mauritius were hit less than the more resource-dependent Botswana and Namibia

21. Tunisia tops at 36th position Strengths: • Institutions - operate on fairly transparent basis • High public trust of politicians (16th) • Relatively good infrastructure • A well-functioning health and educational system • Sound levels of domestic competition (34th) • Strong innovative capacity (27th) Weaknesses: • Rigid labor market (ranked 103rd) • Macroeconomic management

22. Botswana (56th) up 20 places Strengths: • Strong, reliable and institutions • A stable macroeconomic environment Weaknesses: • Strong commodity dependence • Human resources base • Education & Health situation

23. Mauritius up 3 places to 57th Strengths: • Strong and transparent public institutions • Private institutions are rated as accountable and improving • Infrastructure is well developed • Goods and financial markets function well - an efficient allocation of resources Weaknesses: • Labor markets could be made more flexible • Some health concerns—particularly the high prevalence of HIV • Improve the macroeconomic environment stability (117th)

24. Namibia up nine ranks to 80th Strengths: • Quality of the institutional environment (ranked 42nd) • Private institutions function well • Predictable and stable macroeconomic management • Infrastructure, especially the transport, is also excellent (33rd). Weaknesses: • Health and education can still be improved • Goods markets suffer from a number of distortions • Need to do more to harness new technologies to improve its productivity levels. • Low penetration rates of new technologies - mobile phones and the Internet.

25. The Way Forward • Address the diversification of the economies: • New efforts to develop the productive base in a context of a global economic recovery and acute competition from other emerging economies. Improve their competitiveness position in a number of areas: • The market size in a regional context • Improve the employability of the labor factor • Deregulate the labor market • Facilitate access to bank financing

26. Role of the Bank: Some Examples – ICT • As of 2009, the East African Coast characterized by a missing link in connectivity; • Connect Africa initiative: goals of connecting Africa capital through broadband links by 2012 (Kigali); and to promote adequate regulatory and policy environment to encourage investment in ICT infrastructure. • By 2010 the East coast to be connected through fibre optic submarine cables, TEAMS and SEACOM; the West coast by at least 3 fibre optic submarine cables on open access; User prices to decrease by 2010. As of March 2009 MULTIPLE SOLUTIONS THE MISSING LINK SAT3 AT LEAST ONE LINK Source: World Bank Group 2008, www.manypossibilities.net (Steven Song).

27. Role of the Bank in ICT: Some Examples • The Bank is playing an important role in encouraging ICT development and adoption in Africa, through lending, technical assistance, policy advice, and knowledge products (research and training on ICT usefulness). • Examples: • AfDB supports Submarine Fiber Optic Cable for Western Africa(up to 66 mln USD) • AfDB supports Science and Technology Skills Development in Rwanda • AfDB and Microsoft strengthen partnership to increase ICT access in Africa in the fileds of health, education, public administration and governance. Countries targeted include Nigeria, Senegal, Angola and Kenya. • African Economic Outlook and the African Competitiveness Report (2007) include sections on ICT • AfDB assessing the potential of concentrated solar power (workshop done)

28. Role of the Bank in ICT: Some Examples • Between 1995 and 2005, the Bank invested US$440 million in telecom infrastructure in Africa, and US$120 million in e-applications in the education, health and agriculture sectors. • Supporting “Connect Africa” goals of connecting Africa capital through broadband links by 2012 • Promoting adequate regulatory and policy environment to encourage investment in ICT infrastructure • ICT operational strategy developed in 2008 • Short-run – 2 pillars: (i) direct finance of broadband infrastructure, and (ii) regulatory frameworks • Medium term – stimulating demand for ICT services by promoting e-government and connectivity to educational facilities

29. THANK YOU!