Private sector indispensable to Africa’s economic growth, says African Development Report

The private sector in most African countries plays critical role to helping the continent reach its full economic and social potential, according to the latest African Development Report published by the African Development Bank (AfDB) in May 2012.

The sector is now poised to become the main engine of growth for the African continent, after being hamstrung for decades by difficult political and economic conditions and burdensome government policies, AfDB president Donald Kaberuka says in the report which examines the challenges facing the sector’s development and highlights ways to address these challenges, taking country differences into account.

“The African Development Bank is committed to addressing the constraints of private sector development, Mr Kaberuka said, adding:  “We believe that private sector development is fundamental for creating inclusive growth through employment creation.”

The private sector is also a provider of essential goods and services to the public and a key source of the revenues African countries need to meet their development challenges.

Having promoted development of the sector for more than 40 years, the AfDB has made private sector development one of the four priorities of its Medium Term Strategy (MTS) for 2008-12, along with infrastructure, governance, and higher education.

In order to generate a greater developmental impact, the AfDB is integrating private sector development across all its operations with threefold objectives.

The objectives, according to the report, are supporting regional member countries in improving business enabling environments and strengthening their international competitiveness; broadening participation and inclusion in the private sector and supporting local enterprise development for spurring robust employment creation and improving social well-being; and encouraging the embodiment of social and environmental responsibility, sustainability, and good corporate citizenship in private sector development.

Though the private sector helps to reduce poverty, reliable statistics on private sector activities in African countries are scarce.

Most of the activities are informal, carried out by micro, small and medium enterprises.

Among its other findings, the report says, laws and regulations critical for private sector development and corporate governance were undermined by poor monitoring and enforcement.

“Developing Africa’s infrastructure at the pace necessary to unleash its economic potential requires a concerted effort to improve planning, preparation, and procurement capacities in line ministries and relevant sector units; mobilize financial resources; and adopt a regional approach to infrastructure development,” says the report.

Africa’s private sector accounted for more than 80 per cent of total production, two-thirds of total investment, and three-fourths of total credit to the economy over the 1996-2008 period.

It was also responsible for 90 per cent of formal and informal employment.

Although the private sector in African countries faces common challenges, the impact of these constraints varies according to the stage of economic development.

Fundamentally, the constraints include insufficient transport networks and lack of access to power and finance.

Challenges also differ by type of firm, with large companies being more concerned about corruption, skill shortages and labour regulations, while export-oriented businesses place tax administration at the top of their list.

“These systemic factors are of less importance for small firms, which find the lack of access to (and high cost of) finance, insufficient collateral, and the business owner’s limited technical, management and accounting skills, to be more binding.

“The most severe challenge for microenterprises is access to finance, with those in AfDB countries also constrained by business licensing procedures,” the report points out.