The importance of private sector growth and development in Africa

The private sector is Africa’s primary engine of growth. It generates an estimated 70 percent of Africa’s output, approximately two-thirds of its investment and 90 percent of employment on the continent. Based on these statistics supplied by the African Union (AU), the creation and development of private sector jobs is seen as one of the most effective and sustainable strategies for elevating more Africans out of poverty.

Enhanced diversification of African economies has since become an important policy focus for the majority of countries on our continent. Efforts towards achieving economic diversification have also therefore brought to the fore the importance of private sector development, especially the development of small- to medium-scale enterprises (SMEs). Consequently, African governments in the region are embarking on structural reforms aimed at improving the business environment, a development that promises better prospects for inclusive growth and job creation over a sustained period of time.

Private sector growth also continues to be crucial in financing Africa’s future development. A dynamic private sector enables domestic revenues to grow, ultimately reducing dependence on foreign aid. Currently, combined domestic revenues across the African continent are now more than ten times the value of aid flows on our continent.

African states have made vast progress in improving the regulatory environment for business and promoting competition, trade and investment over the last decade. In 2011, 36 of 48 sub-Saharan African countries improved their business regulations. Rwanda has been an outstanding performer, demonstrating the value of sustained reform efforts. From ranking 58th in the world for ease of starting a business in 2006, it reached 8th place in 2011 and has been named several times among the top global reformers on the continent. Other strong performers include Burkina Faso, Mali and Ghana.

A 2012 Africa Development Bank study shows that the average cost of starting a business in Africa fell dramatically from $217 in 2006 to $77 in 2011, while the average time for business start-up declined from 58 to 35 days.

In addition, Africa’s competitiveness has also begun to improve, although it has traditionally started from a low base. Only three African countries (South Africa, Tunisia and Mauritius) feature in the top half of global rankings in terms of competitiveness, but a number of other African countries have begun to improve their positions over the past decade. However, costly red tape and draconian processes continues to be a widespread concern, encouraging businesses to remain in the informal sector.

Another constraint to private sector development in Africa is access to finance. A third of large companies and half of small enterprises struggle to secure finance on suitable terms. However, there are some encouraging signs. Over the past decade, there has been an explosion in financial service providers, including micro-finance institutions. The spread of mobile telephones has opened up exciting new opportunities for financial services. The number of stock markets covering the region has doubled since the 1990s, with 2000 companies now listed. This paves the way for African companies to mobilise the capital they need to invest in improving productivity and competitiveness.

Traditionally, Africa’s private sector development has been held back by a range of other factors, including inadequate infrastructure and education systems poorly suited to the needs of the labour market.

However, of particular concern currently is Africa’s lack of economic diversification. A typical African state is dependent on a handful of primary products (e.g. oil, minerals, cotton or cocoa) for the bulk of its economic activity, with little value added or offered. This results in limited economic opportunities which are far too often geographically concentrated, leading to wide regional disparities. Data from a 2011 Southern African Development Community (SADC) household survey suggests that between 15 and 20 percent of income inequality stems from differences among geographical areas.

Economic concentration also increases vulnerability to changes in commodity prices and climate variability. A key priority for the future is therefore diversifying Africa’s economic base to create opportunities for a larger share of the population, while creating more robust growth and reducing vulnerability.