It is undeniable that there is a correlation between a country’s business environment, foreign direct investment inflows and international trade performance. Countries that make setting up businesses easy, allow clearance of goods at ports with little hassle, grant entry and exit visas to investors and visitors alike in quick time, enable the registration of property with little trouble, provide reliable electricity, and make documentation like construction permits easy to acquire, attract more foreign direct investment (FDI).
The easier it is to do these things, the more likely cross-border and broader international trade would flourish. These benefits are what motivate countries to try to improve their business environments, more so now that capital is increasingly choosy and circumspect.
|Country||GDP per capita (US$) (2016) (PPP)||Overall DB rank (over 190)||Trading across borders (over 190)|
|Source: IMF, Doing Business 2017: Equal Opportunity for All (World Bank, Oct 2016)|
Singapore as role model
Singapore is the quintessential example. In the World Bank’s Ease of Doing Business (DB) 2017 rankings, Singapore is second out of 190 countries ranked globally, having topped the rankings at least nine times since they began in 2004. With a GDP per capita on purchasing power parity (PPP) basis of US$87,855 (2016), it is one of the wealthiest countries in the world. More than three decades earlier, its GDP per capita of about $8,852, was just one-10th of its current level. Between 1980 and 2016, the Singaporean economy grew twenty-five times over from $12bn to $297bn. Its remarkable success is testimony to the heights any country can reach on the back of sustained reforms and reinvention. In Singapore, contracts matter and are readily enforced, the resolution of insolvencies are not tedious, there is little or no red tape in conducting tax affairs and cross-border trade thrives consequently. Despite the second-place ranking referred to above, Singapore is still widely acclaimed as the easiest place in the world to do business in.
One aspect of doing business in foreign countries that investors dread, is that of dispute resolution. Court processes can be unnecessarily long and slow in most jurisdictions. Singapore overcame this constraint by automating the process, with almost all litigation activities (e.g. submission of claims, payment of court fees, serving of initial summons, etc.), outside of those requiring the physical presence of the litigants or their lawyers, doable online.
Even as some aspects of the Singaporean model are clearly replicable, attempts at copying it often falter when some of the necessary conditions that enabled the Southeast Asian nation to succeed, are missing. “Remaking is essential”: A country must be willing to reinvent itself when the variables change. So just because a model proves successful over a certain period, does not mean it would be a good fit when the times change, as they always do. “Collective response” and “social consensus” also matter a great deal. A determined leadership in the absence of an equally enthused followership may still flounder. Singapore has the unique distinction of having both. Still, there are probably just two essential ingredients for success. First, there must be the political will for reforms. Second, and probably most important of all, the political leadership must be in a secure position and endure long enough for what are sometimes painful reforms, to translate into concrete progress.
The two identified prerequisites go together. Otherwise, longstanding African regimes could easily have been similarly transforming. Unsurprisingly, with political will lacking, most are not. There are a few exceptions, however. That is, cases where there have been both the political will for reforms and stable government to see them through. Successes recorded by Mauritius, Botswana and Rwanda, as the DB rankings show, offer a ray of hope for the continent. In line with the Singaporean evolution, their experience also adds to evidence about the identified necessary ingredients for success. In other words, they offer a template on how to assess the likelihood of success of many other countries, African ones especially, who now seek to be similarly attractive to foreign investors.
The case of Mauritius
The one African country that has consistently topped the rankings on the continent, and sometimes dubbed the “Singapore of Africa” – Rwanda also shares the epithet these days – is Mauritius (ranked 49 in the latest DB rankings). Although the Mauritian economy (GDP of$12bn) is relatively small when compared with continental giants like South Africa ($294bn) and Nigeria ($406bn), it is one of the wealthiest. Its remarkable evolution especially suggests the Singapore model can be successfully replicated by African countries. Like Singapore, Mauritius ranks high for good governance and its politics is quite stable. Mauritius’ strong institutions have also been widely acknowledged to be a key success factor. Its cosmopolitanism, similar to that also evidenced in city and coastal states like Singapore, together with similarly close ties to China and India, were also crucial to the development of its manufacturing sector.
There is also a consensus in the literature about the huge role its trade policies played in its rapid development. Preferential trade access agreements with key export markets and investment incentives via export processing zones (EPZs), enabled it to develop an apparel and textile manufacturing base, for instance. There is also now a vibrant light manufacturing sector. In addition, tax incentives have enabled Mauritius to become a preferred destination for offshore financial services, and was hitherto a major channel for Indian capital flows, a feat it competes with Singapore to achieve. Unsurprisingly, Singapore and Mauritius already explore palpable synergies between them, signing an air corridor agreement in October 2015, for instance.
Mauritius especially highlights its DB ranking when pitching to foreign investors, and is acknowledged to be for Africa what Singapore is to Southeast Asia. However, unlike Singapore, it has not been similarly successful in getting foreign businesses that register within its jurisdiction, to actually situate the bulk of their operations within the country. That is why it is widely considered to be mostly a tax haven, a characterisation Mauritian authorities dislike and would like to disabuse.
Unsurprisingly, its goods exports trend is not impressive, unlike the Singaporean example. It is noteworthy though that the bulk of its goods exports emanate from its EPZs. Lately, Mauritius has been forced to address these deficiencies, as developed economies crack down on tax havens and avoidance schemes and hitherto lucrative tax arrangements are renegotiated. Mauritius, which does not charge a capital gains tax, used to be the preferred destination for channelling capital to India, where capital gains tax can be as high as 40% and accounted for a quarter of its foreign capital inflows. This may change from April 2017, when India started charging taxes on investments from Mauritius, after the more than three-decade tax treaty between the two countries was amended in May 2016. Consequently, Mauritius has ramped up its African focus, with more than half of foreign companies registered by it in the past few years, aiming to do business on the continent.
Corruption and poor governance may weigh on Nigerian reforms
Other African countries have been trying to improve their business environments. Even so, most African countries remain in the lower rungs of the DB rankings, with South Africa and Kenya respectively at 74 and 92 out of 190 in the most recent one. Still, more than a quarter of ease of doing business reforms in 2015-16 were by sub-Saharan African countries, with Kenya one of the top-10 improvers globally. Others seek to join the list of top improvers. Most recently, Nigeria (DB rank: 169) has made a splash about its DB reforms, announcing a 60-day action plan in late February 2017. Nigeria’s abysmally poor non-oil goods exports is another motivation for the authorities’ forced reformist stance, after low crude oil prices over the past two years starved the government of revenue. Crude oil exports constituted more than 90% of total goods exports between 2009-15. That is, even as total goods exports were less than 20% of GDP on average. Unfortunately, attempts at using EPZs to spur export of manufactured goods have been slow-moving, with the most promising one (Lekki Free Trade Zone) still largely at development stage.
Fundamentally, the recently proposed DB reforms are aimed at increasing international trade and FDI. This is what motivates the three broad areas that Nigerian authorities have identified for reform: entry and exit of goods, entry and exit of people and government transparency and procurement. Agencies at the ports are to be reduced to six, from almost a dozen. Visitors to the country would be able to get visas on arrival, and those that apply at the country’s embassies, would hopefully get theirs within two days.
Incidentally, attempts were made in the past to sanitise the maritime ports. That the bottlenecks remain, point to the intense pushback reformers tend to face. Corruption is a principal motivation and is why Nigerian ports are some of the most expensive to clear goods at. A report commissioned by the ports authority in October 2016, found that Nigerian authorities lose about ₦1tn annually to corruption at the ports. Under new leadership, the ports authority has embarked on an anti-corruption war. Not unexpectedly, it has come under attack, with death threats and mudslinging in tow.
To demonstrate progress, Nigerian authorities announced in April 2017 that the number of days for registering a business had been reduced to two days from at least 10 days, as part of reforms to ease doing business in the country. Ordinarily, the activity takes longer than the statutory two working weeks hitherto. With that now reduced to two days, it could be reasonably expected that new business registration would be accomplished in a week, say. How was this achieved? Automation. Similar to how Singapore (and many other countries that copied its model since) was able to get rid of human-related bottlenecks to the ease of doing business, some of the tortuous tasks would now be done electronically.
For instance, a lawyer would no longer be required to prepare registration documents, as some of the tasks they charge for, could easily be done online by the prospective business owner. Also, such arduous tasks, in the Nigerian context at least – like registering with tax authorities – have been integrated into the government’s company registration portal. Additionally, lawyers at the business registry can now certify incorporation forms and other statutory compliance declarations for a token fee, tasks previously done by lawyers hired by the prospective business owner.
Considering how extraordinarily frustrating the Nigerian legal system is, the knotty issue of dispute resolution may be a hard nut to crack. Setting up specialist courts like Singapore did has not been similarly effective because the judiciary is as yet not equipped for the automation element. Judges still write their judgements by long-hand, there are no audio recording facilities in courts and virtually all documentation is in hard copy form. These deficiencies are why, even with specialist courts like the National Industrial Court, Investments and Securities Tribunal and so on, cases can sometimes take years before resolution. And even when successful after years of litigation, red tape can be craftily deployed by a well-connected local partner or disputant to make the whole exercise seem like a total waste of time. A much broader reform of the Nigerian judiciary would have to presage any potential measure directed specifically at the ease of doing business. Understandably, the proposed DB reforms focus on those issues that can be easily fixed. But considering how important dispute resolution is to increasing investor confidence – as the Singaporean and Mauritian examples show – lack of progress in this regard only buttress the poor governance characteristic of the Nigerian business environment. And as earlier highlighted, entrenched interests, corruption and inter-agency rivalry at the ports, mean multiple inspections and continued unwholesome practices, which increase the lead time of goods clearance, would probably endure and continue to stymie the country’s trade performance. Patronage networks around doing business in Nigeria, beneficiaries of which include politicians and their lackeys in every facet of government, would be difficult to dismantle as well.
Nonetheless, even the slightest attempt at improving the Nigerian business environment should be applauded. Still, it would take at least a year of monitoring to determine how much difference the announced reform moves would make and if that would eventually be reflected in the DB rankings. Besides, there are other more entrenched problems that would require time and determination to fix. With Nigerian politics still relatively fragile, and even simple activities like passing the budget enmeshed in much wrangling, the risk remains that these new reforms may suffer the fate of earlier botched ones. That said, the legislature has expressed support for the efforts of the executive and aims to pass relevant legislation to ensure the DB reforms become codified in law and hopefully survive future administrations. As at late April 2017, two of the identified fifteen DB legislative bills had already been passed.
However, despite recent crackdowns on treasury looters and other corrupt persons, corruption would be harder to tackle. There is the impression that should there be a change of government after the 2019 elections, the current anti-corruption momentum is likely to slow. Besides, a judiciary not in trend with the times would likely continue to slow the wheel of justice. And defence lawyers have proved to be quite deft at beating the system: successful prosecutions of high-profile corruption cases are rare. Thus, if one were to use the Singaporean and Mauritian success stories as templates, scepticism about the potential success of current reform proposals would be somewhat justified. Still, even the slightest reduction in red tape would bring tremendous relief to those foreign investors who are already decided on doing business in the country. Besides, foreign companies who have anyway managed to make hay despite the many constraints, could do with the efficiencies that some of the reforms would potentially bring about; that is, despite the risk of holdups down the line. But with a still fragile political fabric – evidenced by much infighting within even the ruling political party, which is an agglomeration of strange bedfellows of sorts – endemic corruption and poor governance, the reforms may yet flounder. There needs to be a “collective response” and “social consensus” around the reforms for them to succeed.
Dr Rafiq Raji, is an adjunct researcher of the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation.