Rules and tools for Africa’s growth
After several decades in the shadows, Africa has entered the spotlight as one of the best investment destinations since the economic crisis of the West. The tone has changed from dramatically negative in the 1990s to overly positive in the last five years. Indeed, Africa’s investment climate has improved, and many African jurisdictions have equipped themselves with new and adapted regulations, sometimes breaking radically from their colonial roots. Another key development is the recent regained momentum of regional integration and consequently improved regional legal and regulatory regimes.
Africa’s Investment Climate Has Dramatically Improved
African economies are showing impressive growth. With an average GDP growth forecasted to be 6.3 percent in 2013, Africa has become the fastest growing region in the world, and only a few Asian countries will continue to grow faster than the continent’s top performers. In addition, the debt to GDP ratio has reduced and become stable with an average of about 33 percent (in comparison to above 85 percent for the European Union and around 100 percent for the US). The times of sextillion percent inflation rates (which were the inflation rates reached in Zimbabwe in 2008 before it abandoned its own currency) are also gone. The average inflation in Africa is now around 8 percent.
The political environment is a lot more stable. Between the 1960s and the fall of the Berlin Wall, Mauritius was the sole African country where a ruling party or government was peacefully voted out. Since then, there have been more than 30 examples of democratic elections resulting in a change of power (such as Zambia and Kenya recently). Only four jurisdictions in Africa do not have a multi-party constitution. Coups still occur but they have become less the norm.
So, strong continuous growth, limited sovereign external debt, controlled inflation and more stable political environment constitute clear and compelling signals to investors. In addition, deep regulatory reforms are improving the legal landscape.
African Regulatory Reforms in Ebulltion
There is no doubt that laws have now become a priority for many African jurisdictions, and although most of them are simply modernizing the laws they inherited during colonization, a few countries are adopting fundamental changes. In many jurisdictions, the laws were “frozen” following the end of colonization. However, in the last two decades, thanks to improving political stability and increased investment, African jurisdictions have concentrated on updating their laws. For example, Libya, Zimbabwe and Egypt have recently adopted a new constitution. Malawi is in the process of revamping all its laws. Liberia, South Sudan and Somalia have started legislating for the first time in over 30 years. Rwanda, for example, switched from its 19th century Belgian civil law systems roots to common law a few years ago. Rwanda replaced French with English as its primary business language. These amendments, although partly politically motivated, were mainly put in place to improve Rwanda’s overall business environment. From 158th position in the World Bank’s 1998 Doing Business survey ranking countries according to their ease of investments, it jumped to 48th position in 2012. In fact, Rwanda was the first country in the world to voluntarily adopt a common law legal system.
The other popular change, which has been made by many African countries upon achieving independence was the rebalancing of property ownership. Although often contested by foreign investors, indigenisation laws and quotas have been introduced in some African jurisdictions. For example, in South Africa where almost 80 percent of the population is black, it was judged necessary to pass the Black Economic Empowerment Act in 2003 to readjust the inequalities generated by decades of apartheid. With respect to land, many countries removed the ability for anyone to own freeholds, leaving individuals with long leaseholds (such as Nigeria or Zambia). Some countries go further and discriminate between foreigners and citizens (for example in Kenya, last year, foreigners suddenly woke up one morning with their freehold having been converted into a 99-year leasehold). It may be worth highlighting that many Western and emerging countries have some property ownership restrictions (such as Switzerland, the Channel Islands or China). It is, however, interesting to note that Rwanda, one of the world’s biggest business reformers, refused to go down that route, and both locals and foreigners can own freehold properties.
However, despite all the recent economic, political and regulatory improvements and despite accounting for about 15 percent of the world population and representing more than 20 percent of the land area on earth, Africa’s GDP is still less than 4 percent of the world is total GDP. Indeed, the GDP of the all the 54 African countries is less than Brazil’s GDP and about one-quarter of China’s GDP. Africa will not be able to compete if it remains a legally and economically fragmented region (however good and competitive each individual state is). For this reason, regional integration has once again become a hot topic.
Regional Integration: A Regained Momentum
Dr. Mo Ibrahim urged the heads of state across Africa at the Dialogue on Africa in 2011 to prioritise regional integration as there are too many sub-scale African countries which are economically unviable. This statement reflects the focus on regional integration by not only governments, but civil society and business as well.
The East African Community (“EAC”), which regroups Kenya, Uganda, Tanzania and since 2009 Burundi and Rwanda, is a good example of progressive regional integration on several fronts. Although this organisation was created in 1967 as a result of long historical cooperation between Kenya, Uganda and Tanzania, it collapsed in 1977, and took more than 30 years to be revived by treaty in 1999 which came into force in 2000. However EAC now has a common external tariff, an internal trade and common customs procedures. It is also working hard towards a common currency. Nevertheless, this regional organisation is small with only 105 million people and represents a limited part of the African market. Also, EAC does not share the same business laws like OHADA.
West Africa, too, must be lauded for its progress. OHADA (which is an acronym for the Organisation pour l’Harmonisation en Afrique de Droit des Affaires) was created in 1993 and now (with the addition of the Democratic Republic of Congo in 2012) groups 17 African jurisdictions. OHADA is pioneering: it gives all its members one set of business laws, one Supreme Court, a council of ministers and a permanent secretariat. OHADA’s uniform acts are directly applicable in all the member states. However the number of OHADA uniform acts is currently limited to key business laws and does not deal with free movement of goods and common tariff like EAC. There are however two sub-groups of OHADA countries which have formed the only two common currency unions in Africa: Benin, Burkina Faso, Cote d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo share the West African CFA Franc and Cameroon, Central African Republic , Chad, Republic of Congo, Equatorial Guinea and Gabon share the Central African Franc.
There are various other regional organisations such as COMESA, SADC or ECOWAS. However the main issue is that many states belong to different overlapping organisations dealing with different priorities. A solution lies not only in the private sector promoting cross border trade, but also in development banks such as the African Development Bank, the Eastern and Southern African Trade and Development Bank (PTA Bank) and so on use development finance of infrastructure and trade to unite countries.
Africa has all the ingredients for success: growth, increased stability, improved regulations and focus on regional integration. Although the AU’s plans seem ambitious at present, one thing is clear: Africa is firming up its own legal structure. The use of cut and paste legacy laws is dwindling. In addition, the continent has diversified its trading partners and no longer relies solely on Europe, the U.S. or China. Intra African trade, though still less than 15 percent of the continent’s trade, will surely increase with improvements in infrastructure and increasing trade finance. Increased manufacturing and production value added goods (with improved trade facilitation measures, of course) will encourage greater internal consumption. The success of Africa’s integration will be based on the full cooperation between political leaders, citizens and a unified mission for sustainable and inclusive growth for all. The laws and regulations are increasingly in place, now action is left to the people.