Doing Business - How Africa Encourages the Informal Economy

Doing Business - How Africa Encourages the Informal Economy



Doing Business – How Africa Encourages the Informal Economy: by Ndubuisi Ekekwe

Africa's Economy is Dominated by the Informal Sector

It takes less than ten minutes to approve certain documents towards starting a new business in New Zealand. At most, it takes a day to get a business approved to open its doors to customers. And all the procedures are combined into a single step. That is why the World Bank ranked it #2 in its Doing Business 2010 report. This pattern of quick new business approval is similar in most developed nations where it could take from a day to a week. In the United States, it takes about a week to launch a new business.

But move to Africa. It takes 136 days to get approval to start a new business in Equatorial Guinea. Why? Because the country’s Prime Minister must approve all new businesses. Yes, a Prime Minister must approve a small business to be operated by a college student in that country. By moving this approval to the office of the Prime Minister, the nation creates about 20 procedures compared to 1 in New Zealand.

Yet, Equatorial Guinea does better than another country, Guinea-Bissau. Guinea-Bissau needs 213 days to approve a new business. The fees and legal costs are a factor of 807 more when compared to New Zealand. So if an entrepreneur in New Zealand pays $1 to launch a new business, the counterpart in Guinea-Bissau will pay $807, in relative terms.

The whole outlooks show that only the rich can afford to create new businesses in most parts of the black race. In Haiti, it takes more than three years to get a building permit with many layers of bureaucracy.

From personal experiences, the World Bank numbers are reliable. I have created firms in two countries. In the United States, it took less than a week and all was done via the web. In Nigeria, it took weeks with endless and needless documentations. We spent the first few weeks to search for business name and that could only be validated in Abuja, the nation’s capital. The problem was that the regional offices were not equipped to check for these names. Documents were sent to the approving commission headquarters where business names are approved before the regional offices could complete the paper works. Nigeria is ranked #125 out of 183 countries in the World Bank’s Doing Business 2010.

From Cameroon to Botswana, the experience is basically the same. The high barrier to incorporation makes it tougher for most business owners to operate and join the formal economy. The reality is that unless Africa finds ways to improve its business registration climate, most entrepreneurs will continue to operate in the informal sector thereby depriving the state much needed taxes and fees.

I used some of the numbers provided by World Bank to see the relationship between the Doing Business ranking and the percentage of the GDP in the informal economy. There were no surprises- a correlation exists; as the incorporation barrier increases, the percentage of GDP in the informal economy also increases. So, Guinea-Bissau has more of its GDP controlled in the informal sector than New Zealand.

There are many reasons why this trend happens in Africa where we have disproportionate informal economies dominating our GDPs. One is that most business owners in Africa are not educated and their businesses rarely need government approvals to thrive. The women that sell oranges and carrots on the highways may not bother to register with the governments as there seem to be no major benefits that corporations could give their businesses. The same applies to most African subsistence farmers.

Another reason is the cost and time needed to incorporate. When most entrepreneurs consider these factors, they decide to go under and operate in the shadow economy.

Nonetheless, most of these business owners will be most willing to incorporate if the process is efficient and affordable. From Nigeria to Cameroon, Africa must work very hard to modernize most of its business environments so that people could be attracted to launch businesses legally. If they leave the system as it is, governments are basically encouraging their entrepreneurs to shun the formal sector. Certainly, it will not be the best model for development.