Interview: Akinwumi Adesina
What can be done to formalise African economies?
AKINWUMI ADESINA: The AfDB estimates the informal economy in Africa accounts for 50-80% of GDP, 60-80% of employment and as much as 90% of new jobs. The vast size of the informal sector stems partly from institutional deficiencies, such as a failure to enforce regulations, as well as factors that inhibit compliance. The quality of the regulatory framework is vital in determining a firm’s decision to join the formal sector. Almost all firms at this stage are small and medium-sized enterprises (SMEs), which represent 90% of Africa’s private sector. Policies to encourage SME development are therefore critical.
The AfDB is well aware that entrepreneurs in Africa face numerous challenges, such as an unsupportive business environment, insufficient infrastructure, expensive and unreliable energy, restricted access to financing, and barriers to regional trade and movement of production resources. In response we structured our Industrialise Africa strategy to develop policy frameworks; provide additional funding to private sector projects; create and integrate regional and international value chains; and boost competitiveness and value creation by expanding supply of business services.
Africa has made progress on crucial competitiveness dimensions over the past decade, especially regarding health and quality of life. Côte d’Ivoire, Ethiopia, Rwanda and Tanzania, for example, have all improved their competitiveness ranking by five places or more since 2015, and their real GDP is forecast to grow close to or above 7% in the near future. Unsurprisingly, these countries are also those that are diversifying their economies.
In what ways can sub-Saharan African countries be assisted in diversifying their economies?
ADESINA: Africa’s commodity dependence has significantly reduced over the past few years, as investments diversify away from extractive industries. In 2015-16 foreign direct investment (FDI) in Africa was mainly targeted at the services (66%) and the manufacturing (21%) sectors, while the extractive sector only represented 11% of the total. These trends could be encouraged with strategic bank lending.
Intra-African investment is also on the rise, creating a virtuous circle that promotes further investment. Investors in Africa tripled their share of FDI projects from 8% in 2003 to 25% in 2016. Africa is now the second-most-attractive investment destination globally, with FDI rising from $10bn in 2000 to $60bn in 2017.
Regional trade integration has long been a strategic objective for a diversified Africa, but despite some success in eliminating tariffs within regional communities, African market access remains complex and fragmented. A range of barriers still raises transaction costs and limits the movement of goods, services, people and capital across African borders. Infrastructure development is a key driver for progress in this regard, and is a critical enabler for diversified production, sustainable economic growth and industrialisation. Investment in infrastructure accounts for over half of the recent improvement in Africa’s economic growth, and has the potential to widen the industrial base even further.
How do public-private partnerships (PPPs) help develop large-scale projects across the continent?
ADESINA: Governments need to work closely with the private sector to close infrastructure gaps, and PPPs are increasingly seen as a logical recourse to overcome government difficulties in financing infrastructure and other large-scale projects. PPPs are contractual relationships between the public and private sectors for the management of risks and the sharing of revenues for the provision of a service. They facilitate projects by balancing a government’s desire to leverage private capital for public benefit with private sector interest in profit. Established by multilateral development banks, including the AfDB, the PPP Knowledge Lab provides guidance on PPP conditions across different sectors as well as the apportionment of risks in specific deals.
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