Business Environment and Comparative Advantage in Africa: Evidence from the Investment Climate Data

49 Pages Posted: 5 Jul 2007

See all articles by Benn Eifert

Benn Eifert

World Bank

Alan Gelb

World Bank

Vijaya Ramachandran

Center for Global Development

Multiple version iconThere are 2 versions of this paper

Date Written: February 2005

Abstract

This paper ties together the macroeconomic and microeconomic evidence on the competitiveness of African manufacturing sectors. The conceptual framework is based on the newer theories that see the evolution of comparative advantage as influenced by the business climate - a key public good - and by external economies between clusters of firms entering in related sectors. Macroeconomic data from purchasing power parity (PPP), though imprecisely measured, estimates confirms that Africa is high-cost relative to its levels of income and productivity.

This finding is compared with firm-level evidence from surveys undertaken for Investment Climate Assessments in 2000-2004. These confirm a pattern of generally low productivity, and also suggest the importance of high indirect costs and business-environment-related losses in depressing the productivity of African firms relative to those in other countries. There are differences between African countries, however, with some showing evidence of a stronger business community and better business climate.

Finally, the paper adopts a political-economy perspective on the prospects for reform of Africa's business climate, considering African attitudes to business and the fractured nature of African business sectors as between indigenous, minority and foreign investors. The latter have far higher productivity and a greater propensity to export; however, Africa's difficult business climate and the tendency to overcome this by working in ethnic networks slows new entry and may decrease the incentives of key parts of the business community form constituting an aggressive pressure group for reform. Even though reforms are moving forward in several countries, this slows their impact and raises the possibility that countries settle into a low-productivity equilibrium. The paper concludes with a discussion of the findings for reforms to boost the competitiveness and diversification of African economies.

Suggested Citation

Eifert, Benn and Gelb, Alan and Ramachandran, Vijaya, Business Environment and Comparative Advantage in Africa: Evidence from the Investment Climate Data (February 2005). Center for Global Development Working Paper No. 56. Available at SSRN: https://ssrn.com/abstract=997383 or http://dx.doi.org/10.2139/ssrn.997383

Benn Eifert

World Bank

1818 H Street, N.W.
Washington, DC 20433
United States

Alan Gelb (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/agelb

Vijaya Ramachandran

Center for Global Development ( email )

2055 L St. NW
5th floor
Washington, DC 20036
United States

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