General Discussion

Laura Wallace
Published Date:
January 1999
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Regulation and Private Investment

Hirohisa Kohama of Japan opened the discussion by asking the speakers what the private sector’s role should be in designing the regulatory framework, since private sector participation was essential to ensure a realistic framework. Vina-Seeburn Dabeesingh of Mauritius cited her own country’s case, where the private sector was closely consulted on all policy decisions, typically through formal mechanisms, such as the Joint Economic Council and Chamber of Commerce.

This type of approach was supported by Iain Christie of the World Bank, who suggested that a private sector interface imposed discipline—an environment where decisions were taken jointly so that one party could not back out. Often, the World Bank ran into situations where the minister of energy, for example, opposed privatizing the power company, but the minister of finance said the government would go ahead anyway, a situation that did little to build private sector confidence. The more the government was forced to face the private sector, the more it was forced to harmonize its view. The same pertained to the private sector, where the government was often faced with sharply divergent views. The public-private consultation process thus was not just a “touchy-feely” way of involving all stakeholders, but a hard-nosed way of securing better and more credible policies. In essence, Africa would be building on Asia’s experience, notably Korea’s and Singapore’s.

Florian Alburo of the Philippines stressed the need to go beyond the “organized” private sector, as chambers of commerce typically left out nongovernmental organizations and small businesses. What was important was to have as broad a base as possible for consultation, without committing to respond to every concern raised by the general public. Hak Kuk Joh of Korea urged Africa not to delay on deregulating foreign direct investment, as Korea had done, largely because of misguided worries about losing sovereignty over economic policymaking.

Daniel Ramarokoto of Madagascar cautioned that, in a sense, there were two private sectors involved, at least in Madagascar—the preexisting one, which enjoyed a privileged position and was thus reluctant to support liberalization efforts, and the one that policymakers now wished to promote, including through outside investment. When Madagascar consulted with the preexisting private sector on a new competition law recently, the result was a law that was more conservative and protective than before. In the end, it had to be reviewed and revised.

Mansour Cama of Senegal pointed to Senegal’s formal framework that had been set up to facilitate a dialogue between the private sector and the government—and sometimes even the trade unions—a framework that existed in many West African countries. He also pointed to all the progress that had been made in Africa in recent years on the macroeconomic front and in some of the structural areas. Yet, despite the reforms and good results, private investors were not rushing in. What was the problem? Cama, speaking for the private sector, suggested that the problem was, in part, Africa’s image to the rest of the world—what co-chairman Motomichi Ikawa later referred to as “the image gap.” He suggested that African governments, and Africans in general, perhaps with their partners, should do a lot more to project a positive image for investors—echoing Dabeesingh’s call for policymakers to get out the word on reforms already undertaken and progress made.

What should countries be doing to convince investors to invest? On this question, Kwesi Botchwey of Ghana urged participants to try to prioritize, given Africa’s limited capacities. Tomáz Salomão of Mozambique cited political stability and then capacity building in the public and private sectors as key. After all, without the capacity to implement decisions, little would result from decisions taken except frustration.

Jean-Claude Brou of Côte d’Ivoire agreed on the need for capacity building, noting that with the private sector driving the economy, governments had to have the capacity to regulate the environment. But he also stressed the need for macroeconomic stability, pointing out that the CFA franc devaluation in 1994 had been a turning point for his country in terms of attracting private investment. A competitive real exchange rate, combined with macroeconomic reforms (such as reducing the fiscal deficit) had enabled Côte d’Ivoire to almost double investment, to 15 percent from 8 percent of GDP. Even more important, the private share of total investment had almost doubled, bringing it to 70 percent of total investment. The key was to create a better environment for the private sector, which also entailed establishing judicial security. He said the judiciary at the national level had been improved, and private investors had even been encouraged to set up an arbitration court. Moreover, regional integration in West Africa had brought an overall harmonization of the legal framework, giving investors greater security.

Edith Gasana of Rwanda seconded Brou and Cama’s emphasis on capacity building and institution building, noting that perhaps the most important element was regulatory reform. But setting up a regulatory framework was not enough. Very often, laws existed that were never implemented.

Botchwey added to this list of priorities the need for information sharing, to avoid having decisions be governed by ignorance; buildup of infrastructure; regional integration; and financial sector reform. On the last priority, Piero Ugolini cited an IMF study showing that a major problem for the private sector was its very limited access to credit. In fact, for sub-Saharan Africa (excluding South Africa and Namibia), loans to the private sector generally represented only 20–25 percent of the portfolio of commercial banks. This contrasted sharply with Asia, where, despite the financial crisis, the figure was about 70–80 percent. He said the problem was that the banks saw private sector credit as risky, preferring to invest in treasury bills—one reason why the IMF counseled fiscal discipline. Thus, it was no coincidence that those African countries with large domestic debt loads were the same ones with a low percentage of bank loans to the private sector.

Christie picked up on the risk question, suggesting that it was much overplayed in the media. He cited a recent World Bank study that showed that rates of return in Africa were 25–30 percent, significantly higher than the 16 percent worldwide. True, risks were also somewhat higher in Africa, but this just meant that investors should manage risk by diversifying their portfolios. In response to a question from Gasana on why the World Bank was reluctant to support fiscal incentives for foreign investment, he pointed out that Brou had not cited such incentives as a reason for Côte d’Ivoire’s higher foreign investment. Much more important, Christie said, was maintaining a stable and predictable investment environment.

Gray Mgonja of Tanzania, however, supported Gasana, saying fiscal incentives were needed in the short run, when a country was struggling to establish an attractive regulatory framework and when its neighbors offered them. He also suggested that the private sector would feel more confident if there were not a perception that reforms were being “imposed from outside.” In other words, how could the private sector know the government would stick to a certain position if it was constantly being swayed by outsiders?

Godfrey Simasiku of Zambia closed the discussion by urging investors to try to understand Africa better—a continent rich in human resources, raw materials, and culture. He also reminded participants of the challenges of switching to an open market economy, as jobs are lost and civil servants become insecure. “We are being portrayed as a government that is not listening, a government that does not care. Then in two years’ time, we have to fight and defend ourselves in an election.”

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