Africa – good governance and investment

This is Africa/allAfrica

“Measuring attractiveness on the basis of governance rankings success, a country like Rwanda should be a veritable magnet for foreign capital, while Nigeria should be the reverse.”

This article is not intended to question the role of governance in development. On the contrary, it assumes that improvements in the rule of law, pluralism, democratic participation and other indicators are indispensable components of successful economic and social development.

Yet the equation is not so simple when it comes to the commonly held assumption that improvements in governance are a prerequisite for countries in Africa to attract foreign investment. Rankings that measure the ease of doing business, corruption and political stability are routinely cited as key metrics in this regard.

At the top of the list are indicators such as the World Bank’s Doing Business ranking, Transparency International’s Corruption Perception Index and the Ibrahim Index of African governance. The guiding principle? The easier you make it for the investor, the better.

Many countries feel pressured to perform well on such indicators, regardless of how they relate to national development priorities. In some cases, this leads to policies so geared towards the assumed desire of investors that the country’s interest barely registers.

Measuring attractiveness on the basis of governance rankings success, a country like Rwanda should be a veritable magnet for foreign capital, while Nigeria should be the reverse. In 2010 the former was the top reforming country globally in the World Bank’s ranking, and placed 45th in the 2012 tables, ahead of Brazil, China and India. Rwanda also placed 25th on the 2011 Ibrahim Index and 49th on the 2011 CPI. Nigeria’s performance in each of the indicators was far less impressive: 133rd, 41st and 143rd respectively.

Yet Nigeria routinely trumps Rwanda on the list of preferred target markets cited by international investors. A recent survey of investor sentiment on Africa carried out by Invest AD and the EIU found that more than 51 percent of respondents identified Nigeria as the market offering the best overall prospects for investment returns over the next three years. Just 6 percent picked Rwanda.

That is in part because of Nigeria’s natural resource wealth and the sheer size of its market, but there is something more at play. The reason is simple enough, says Cambridge economist Ha-Joon Chang. “The problem with these indices is that they are built on a particular theory of what is good for investment and growth (basically the view that the closer an economy is to the idealised version of the Anglo-American economy, the more investment there will be), which is not a very good theory,” he argues.

In his latest book, 23 Things They Don’t Tell You About Capitalism, he notes that South Korea required up to 299 permits to open a factory in the 1990s. Yet then, as now, it attracted high levels of foreign capital. “Strange as it may seem… businesspeople will get 299 permits…if there is enough money to be made at the end of the process,” he writes. “If there is little money to be made…even 29 permits may look too onerous.”

Nigeria attracts the interest it does because investors make a calculated decision that its notoriously difficult business environment is worth navigating because of the potential return its 160 million person market offers. This is not to say that countries should not make an effort to improve business and policy environments. If anything, Nigeria attracts interest despite its operating environment, rather than due to any conscious effort to define terms of engagement beneficial to its long-term development.

Many African countries, regardless of their size, have compelling investment opportunities to offer. Identifying and pricing these appropriately by balancing investor expectations with a country’s development priorities is the challenge. As Africa attracts more foreign capital, it is a challenge countries should not shy away from.

Lanre Akinola is the Editor of This Is Africa – allAfrica

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