In recent years, the private sector has been recognized as a critical engine of Africa’s development. It provides around 90% of employment on the continent, including formal and informal jobs. The private sector in Africa accounts for over 80 percent of total production and two-thirds of total investment. According to the UN Economic Commission for Africa. “the private sector consists of Micro, Small, and Medium-sized Enterprises (MSMEs) who are the backbone of Africa’s economy, accounting for over 90% of businesses in Africa and translating to 63% of employment in low-income countries while contributing to over 50% of the GDP.” Maximizing the private sector’s role is instrumental for Africa’s economic development.
With the world’s largest free trade area, African Continental Free Trade Agreement (AfCFTA), Africa is set to create a new path to develop its resources and people. With a large percentage of its people in the informal sector, an enabling environment for the private sector is even more important to harness its people. Compared to other emerging economies, the number shows that African countries are underperforming. The challenges faced in Africa’s economy include job and wealth creation so economic development can exceed population growth and drive global competitiveness. Employment generation is going to be facilitated by an enabling business environment.
Promoting investments in infrastructure, boosting skills through technology and skills transfer, job creation, and supporting the emergence of high-value experts that can compete in the international market are necessary to sustain Africa’s long-term growth per capita. The public and private sectors have a role to play in achieving these.
To facilitate the growth and input of the African private sector, governments need to diversify economically and not just focus on one aspect of what is helping the economy at the moment (think oil revenues). Governments should also fund and promote industrialization initiatives so that local private companies can thrive with their made in Africa goods and services. A good example is an agriculture, where governments can raise commodity-based industrialization to increase productivity in the sector.
As a percentage of total GDP, agriculture contributes on average 25%, while services are the largest contributor at 45%. Additionally, supporting small-holder farmers in this sector by providing quality seeds, training, tools, and access to finance can significantly improve their productivity.
A common approach to strengthening the private sector is through Public-Private Partnerships (PPP), where a private enterprise and the government provide a public asset or service. Public-Private Partnerships can help with private capital and provide financing to solve critical infrastructure issues for a better performing private sector. PPPs in Africa is a small market with projects concentrated in South Africa, Nigeria, Kenya, and Uganda and concentrated in the energy sector (78%), followed by transport (22%). African governments should increase their PPP engagements to achieve more and drive sustainable development on the continent.
Africa’s industrial policies should be coherent and in sync with other countries in regional and international markets. Policies should include trade policies to promote value addition and economic diversification, and they should also have regulations on preserving and protecting the industrial sector. In addition, policies should reduce tariffs on imported inputs to industrial sectors and reduce barriers to imports of services that are input to the industrial sector. African countries should work towards efficient and timely implementation of AfCFTA, which looks to liberalize trade and improve intra-African trade.
What happens when government supports the private sector to improve Africa’s economy?
- There will be the utilization of the already prospering global digital revolution.
The use of technology has accelerated the modernization of several factors, including finance, agriculture, entertainment, and even health. But does Africa have the same digital development as other continents? No. As much as Africa has followed the world of digitalization and even sells more phones than other areas, there is still a significant digital divide in the level of internet access, reaching only 18% of the population compared to Asia’s 27.5% and Europe’s 63% usage.
Government can solve this problem by improving infrastructure and lifting legislative and regulatory barriers limiting the attraction of the private sector to invest in ultra-high-speed broadband.
- Private Sector through MSMEs will help take up the challenge of local processing.
Africa has immense agricultural riches producing 3% of the Earth’s flour, 6% grain, and 7% corn. Still, it imports its food and many other finished products while exporting its resources in unprocessed forms, thereby paying large sums of money for importation and taxes attached to it. Africa gains $45.2 billion in exports and uses $81 billion to feed itself, creating a negative balance of $36 billion. Corn, palm oil, flour, sugar, and rice gulp $32 billion of imports alone.
The government and the private sector can help by providing financial and human resources to embark on the industrialization of the major sectors, like agriculture. African governments should strengthen or adopt legislation that would facilitate the development of the local industry and create a business enabling environment to attract foreign direct investments. Foreign firms’ presence can help invest capital and new technologies, which would help improve local human resources.
- The Private sector will help accelerate financial integration in Africa.
Africa is notable for the restrictiveness of its financial markets, under-capitalized with limited liquidity. Borrowing and lending are tedious, and the cost of credit is high with minimal medium to long-term resources. These limits have caused Africa to be an economy of debt. Africa has $610 billion of capitalization, less than 1% of global capitalization, and 25 times less than the New York stock exchange. The government and private sector can increase financial integration on the continent through the convertibility of African currencies, making it easy for a South African that wants to do business with a Kenyan in Kenya.
A great example is the Pan-African Payment and Settlement System (PAPSS) which enables cross-border payment transactions across Africa. The concept of convertibility is vital to strengthen trade and investments within each region and ultimately throughout the whole continent.
As existing industries in Africa expand and develop, modern technological capabilities for cleaner industrial production must be of paramount importance, ensuring that the environment is not damaged, water polluted, or released damaging greenhouse gases. Ethiopia is an excellent example of how industrialization can create jobs and improve the livelihood of citizens without damaging the environment. Leslie Neme, Commissioner of the Ethiopian Investment Commission, described the country’s $1.3 billion investment achievements. About a dozen industrial parks investment attracted anchor companies from China, India, South Korea, Sri Lanka, Taiwan, and the United States. The project created 50,000 permanent jobs, of which women hold more than 85 percent. The Park is also Africa’s first zero-emission textile industrial Park.
Conclusion
Governments should acknowledge the obstacles and solutions proffered to promote an enabling business environment for the private sector to thrive. The challenges are corruption, lack of skills, economic uncertainties, insecurity, good governance, and poor institutions. African companies are also relatively small, with 70% Small, Medium, or micro-enterprises, making it difficult to influence their environments. Lastly, access to credit and financing is limited, affecting MSMEs operating to their full potential. Government assistance is needed to enable these small businesses, and one way to start is with a vibrant private sector. In PwC’s annual global survey of 300 African CEOs of large firms, 91% said they were optimistic about their growth in the short term and 93% about the next three years.
Given the shared and visible optimism, large firms leaders are increasing their confidence in Africa by investing in it. Would a high percentage of African MSMEs share this same optimism considering the obstacles they face operating in their current business environment? Probably not. For this optimism to be shared, governments should focus on the private sector to develop it. Large firms can navigate a poor-performing private sector because they have access to capital and government networks and can push for legislation to meet their businesses’ objectives. On the other hand, small companies cannot, so when governments partner with the private sector by creating a business enabling environment, MSMEs can also tap into this and advance their businesses’ objectives.
