A question of business cost

Every year the World Economic Forum (WEF), the organisation that gives the world the Davos get-together every winter, produces a flagship publication called the "Global Competitiveness Report", which ranks countries based on how competitive they are compared with every other country on the planet. But competitiveness, it seems, like beauty, is very much in the eye of the beholder.

According to the 2012-2013 report, the world's most competitive country is, believe it or not, Switzerland. Huh, you shrug, Switzerland? That is one of the most expensive places on the planet. How can it possibly be the world's most competitive country? Easy. The WEF definition of competitiveness is based on a whole host of factors other than cost. In fact, cost considerations are mainly for the "low-life economies', the least advanced, like India, Vietnam and most of Africa. Countries the WEF politely calls "factor driven".

Competitiveness is also defined by how innovative and sophisticated a country's firms are. The richest countries in the world are among the most competitive, according to the WEF, because they are the most sophisticated and innovative. It all appears comfortably self-serving in light of which countries are actually getting most of the investment – the Bric countries, Brazil, Russia, India and China, without South Africa.

Across the Atlantic, the World Bank produces another flagship publication called "Doing Business", which features a number of indicators, including the ease of doing business index, which measures how easy it is do business in a country.

Where a country ranks in both these indices is now seen almost as a measure of national economic virility, and a slip in either is seen as a poor score from the world's A-list economic institutions and in need of immediate remedial action.

So important are the rankings in the eyes of local policymakers and businessmen that a falling ease of doing business or global competitiveness index ranking results in the formation of Cabinet committees to address what is seen as a fundamental economic problem.

False impression
But the question is: Are these indices giving governments in Africa a  false impression of their situation vis-à-vis potential investors? Indices are nothing more than what people put in them and few bother to ask what is actually there. Governments take them to imply that a low or falling rating means no one will invest in their country. Is this really true? Although making life more difficult for businesspeople is almost invariably not good for the economy, it is not true that an easy business environment will mean lots of investment.

In the competitiveness rating, the country that always comes out on the top of the list is not necessarily the place where you would put your electronics plant. Singapore tops the list in the 2012 ease of doing business index from the World Bank. Even though you can set up a business in a few days and bureaucracy is easy to deal with, is this where people invest? Over the past decade investors have been moving their investments to places like China, India and Brazil. If you look at the WEF competitiveness index for 2012-2013, China is 29th, Brazil 48th and India 59th. In the World Bank's ease of doing business index, these three biggies are generally down at the bottom, way below Botswana or South Africa.

Where the two indices meet most dangerously is in a most unexpected place – Kigali. The World Bank and the WEF have linked up and told President Paul Kagame that his country ranks high in both the ease of doing business index (45th) and global competitiveness index (63rd). Kagame has, to his credit, done everything in his power to make Rwanda an easy place to do business and to make it competitive.

But Kagame, like all living creatures, has an appointment with the Angel of Death and, once that appointment is kept, no businessman thinking of investing in Rwanda can be sure that all the president's good work will not go up in flames in a repetition of the dreadful ethnic violence that has plagued Rwanda more than once throughout its sad history. Moreover, who can believe, given Kagame's personal power, that his reforms will necessarily stay in place even if the country remains peaceful?  

Additionally, Kigali is 1500km from the sea and it costs about $6000 to bring in a container from Mombasa through Uganda. No amount of good commercial governance changes those fundamental costs and, although Kagame's efforts have resulted in lots of infrastructure-related investment, there is as yet no evidence of transformative investment that diversifies Rwanda's agricultural economy.

If it does not materialise, then what will the world say of the World Bank and the WEF? This is why Kigali is now crawling with consultants from the World Bank, all trying to build the "new Switzerland in Africa" (forget Lesotho!).

However, neither a brutal history nor the commercial facts on the ground fit well into these index numbers.

What matters is that even sophisticated and innovative greenfield investments have been going to Bric  economies over the past decade. Yet some of these are the hardest places in the world to do business and are certainly not very competitive if you believe the WEF index.

If, however, you open a much less known report called "Competitive Alternatives", produced by the international accountancy firm KPMG in 2012, which compares the costs of doing business in 14 developed and emerging countries, which countries generally come out on top? That varies with industry but of the countries surveyed in 2012 it's almost always a choice between China, India, Russia, Mexico or Brazil. The reason is simple: no index, just the plain dollars-and-cents costs of running various types of businesses, and in the Bric countries these businesses cost the least dollars and cents.  

Davos and Washington have created indices that allow them to look in the mirror, see themselves and their countries and conclude that they offer an easy place to do business and are sophisticated and innovative. But for the past decade investment has gone to the Bric countries because, as businesspeople put it, what determines where you invest is "the size of the prize", which is either the size of the market, the very low dollar costs of running a business or, unfortunately in the case of Africa, the size of the resource.

The consequence of any recognition that it is predominantly, though not exclusively, cost that determines investment location decisions ultimately leads to a policy "race to the bottom" with countries competing with each other to slash costs and attract investment. The Washington and Davos interpretations are so much more comforting, but of what use?

These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis where he is employed.

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