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EAC’s allure as investment hub dims as countries dither on reforms

Saturday September 07 2013
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The region is said to continue to lag behind on some of the most pressing challenges facing investors

East Africa’s claim to be one of the continent’s most attractive investments destinations has been dented as four of the five EAC countries slip in the rankings in the latest Global Competitiveness Index.

Kenya emerged as the most improved country in Africa in this year’s Global Competitiveness Index (GCI), moving up 10 places to position 96, in the wake of the institutional and policy reforms the country has pushed through over the past three years.

However, across the region, lengthy licensing processes, excessive bureaucracy and sluggish commercial dispute settlement procedures continue to hurt competitiveness.

Uganda recorded a decline in competitiveness, slipping six places, as did Tanzania, which dropped five places. Rwanda — which remains the most competitive place to do business in the region at position 66 — slipped three places in the rankings done by the World Economic Forum (WEF). Rwanda, is the third most competitive economy in Africa after Mauritius and South Africa, mainly because of its sound institutions. Burundi slipped from position 144 to 146 this year.

(Read: Rwanda tops EAC in global competitiveness)

The GCI, which is published annually, assesses the competitiveness of economies based on 12 pillars —strength of institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication and innovation.

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This year’s rankings assessed 148 economies, up from 144 last year. The pillars are ranked on a scale of 1-to-7, with seven being the highest score.

“While most countries in Africa rank poorly in basic requirements, some middle-income countries fared reasonably better, with South Africa, Mauritius and Kenya featuring in the top 20 per cent in financial market development,” said Standard Investment Bank in a research note last week.

The report shows that EAC countries continued to lag behind on some of the most pressing challenges facing investors, in most cases retaining prohibitive licensing processes and foreign ownership restrictions in key sectors of the economy.

The EAC has been found by the World Bank in its Doing Business Survey 2013 to restrict foreign ownership in more sectors than most of their African counterparts. But still, there have been marked improvements.

“We’re seeing trade rules and controls becoming fewer, which is increasing the region’s ease of doing business,” said Felix Okatch, a trade expert and council member at the Association of Professional Societies in East Africa (APSEA). “But we still need more streamlining at border points to make the region more competitive,” he added.

Overall, East Africa’s strength is in its labour market efficiency, according to the rankings. There is high flexibility in wage determination, as well as in hiring and firing.

East Africa is also the place where you are most likely to encounter a woman in the workplace. Out of the top 10 countries for women’s participation in the workplace, East Africa takes four slots: position three (Burundi), four (Rwanda) five (Tanzania) and eight (Uganda). Only Kenya lags behind at position 50.

However, the region is let down by the poor health of its workforce, low access to secondary education, poor infrastructure and generally weak institutions, with the exception of Rwanda.

Malaria is a particularly heavy burden, with the business impact of malaria hitting hardest in Tanzania and Burundi. Malaria has been estimated to cost Africa more than $12 billion every year in lost gross domestic product (GDP), and can decrease GDP by as much as 1.3 per cent per year in countries with high levels of transmission. The relatively high HIV prevalence also reduces the productivity of the workforce.

In addition, with the exception of Kenya, the secondary school enrolment rate is among the lowest in the world; consequently, a university degree is beyond the reach of most East Africans.

The impact of this is felt through the more complex parameters measured by the GCI: Without a well-educated and trained workforce that is adept at absorbing new technologies, and without sufficient financing of research and development, business sophistication and innovation are difficult to achieve.

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