While entrepreneurship in developed economies has long been understood to play a major role in a country’s wealth creation and ultimately, economic growth, it is only recently that Sub Saharan African countries have started catching the trend. From tax incentives, legislative measures, state support to corporate-led initiatives, there has been a growing interest in entrepreneurship and the role it can play in boosting African economies, especially in the context of their strong informal sectors. What remains to be seen however, is how this interest can be transformed in concrete measures. Below, we look at a few avenues to explore in that regard.
Ghana Business Journal
Rules and Regulations: Theory…
With the usual slow pace that characterises the policy-making process in Africa as far as business is concerned, there is little hope to see countries on the continent achieve such proclaimed goals as attracting investment, diversifying their economies and reducing unemployment in the short-term without first removing some simple and yet rarely thought of bottlenecks. Indeed, a country can only attract legitimate investment if it is able to provide at first an attractive business environment to potential investors both local and foreign. Such an environment, in turn, can only be ensured by a regulatory framework set up through clear and sensible legislation and working institutions. To put it simply then, a regulatory framework provides a country with a formal, stable and well-regulated environment, which in turn is conducive to business, essential guarantees for attracting investment in a country.
Achieving this objective starts with acknowledging the importance and benefits of a formal business environment, i.e. an environment that is subject to rules and regulations (hence the term regulatory framework) and in which, all stakeholders operate according to said rules and regulations. The benefits of a regulatory framework are immense:
- Firstly, it forces all stakeholders (i.e. individuals, businesses, financial institutions) wishing to participate in the economy to abide by the same set of rules or risk being sanctioned by the authorities,
- Secondly, it reduces the risk for foreign business entities to commit illegal acts without fear of penalty;
- Thirdly, rules and regulations allow for an increase in the tax base and easier taxation. With an increase in the tax base comes more revenue for the state; such revenues would then be re-injected into the economy for the well-being of the population.
Acknowledging the importance of a regulatory framework is however, only the beginning; defining the rules governing such a framework is essential to making the latter work. According to Tebogo Skwambane, Managing Partner at the Monitor Group Johannesburg, speaking at Omidyar Network’s Entrepreneurship in Africa Summit in Accra, Ghana, in 2010, “To maximise the contribution that entrepreneurs can make to the continent, it is critical that policymakers craft policies that are suitable for their national or regional context. This requires not only better understanding the strengths and weaknesses of the entrepreneurial environment...but also requires more focused, tailored and locally meaningful strategy formulation by policymakers”. This, in other words, means that, boosting the impact of entrepreneurship in African countries requires the adoption of appropriate (read: entrepreneur-friendly) policies and regulations based on clearly defined needs.
Practice
The issue of entrepreneurship-friendly business legislation is of paramount importance in a region where the informal sector represents 55% of Sub Saharan Africa’s GDP and employs 80% of the labour force. With informal employment representing 66% of the total non-agricultural employment in SSA in the period 2004-2010, legislation that specifically aims at formalising business activities for increased efficiency is therefore highly in need.
Business legislation can be broadly seen as the range of laws enacted by a state to regulate (and ultimately simplify) the conduct of business within its borders. All such laws affect the business environment one way or another and only flexible and comprehensible laws can foster entrepreneurship in a country.
While this may seem obvious, it is a pity to note that few political leaders in African countries share this sentiment. Only when all options have been exhausted while looking for the much-needed “investment” does business-friendly legislation become an important item on the agenda.
It is true that some of the most common concerns that can explain the time it takes to enact legislation include, amongst others:
- the lack of integration between regions/economic communities, best expressed in the diversity of laws and systems amongst countries, and
- the fear that tax legislation might be exploited and lead to tax avoidance and evasion (especially in light of the recent Panama papers dossier).
While such concerns may be legitimate, it is worth considering the impact the lack of innovative legislation can have on economies that purport to be “open to business”. Indeed, while economic liberalism is the option chosen by many countries after the decades of failed imported economic systems, liberalism is characterised by a high degree of flexibility and openness at various levels, particularly legislative. This openness and flexibility, in turn, is what fosters entrepreneurship. Ensuring this openness thus ensures that entrepreneurship grows within countries and in turn contributes to the growth of economies. Which innovative solutions can then be proposed to achieve that goal?
Taxation Regimes Conducive to Entrepreneurship
With corporate income taxes as high as 35% in some countries (e.g. Chad, Congo, Equatorial Guinea and many others), it is no wonder African tax regimes give the impression to be designed to prevent business initiatives from succeeding. Despite this, it is still possible to spur entrepreneurship with a workaround: a system in which the taxation of companies is no longer based on a one-size-fits-all approach but rather on specific criteria. The rationale is to avoid taxing all companies regardless of their type or stage of evolution, thereby avoiding penalising the most vulnerable amongst them (especially SMEs). A suggestion for an entrepreneurship-friendly tax regime would be one in which the liability for Corporate Income Tax would depend on the annual profit rather than the annual turnover. Furthermore, the liability for VAT could be scaled depending on the annual turnover instead of being applicable to all corporate entities regardless of size, age, turnover, etc. South Africa provides a good example: only companies with an annual turnover of more than 1 million Rands are obliged to collect and pay VAT (and accordingly claim tax deductions); companies with an annual turnover of less than 1 million Rands (about 82 000 USD) are exempt from, but can register for VAT voluntarily.
The Regulation of Labour: Inclusiveness and Structure
Labour laws have a direct impact on the human resources of a country. The amendment of labour laws, irrespective of governments’ intention, usually generates a lot of attention from all stakeholders involved in a country’s economy. As a result, such laws should be amended following broad-based consultation with all essential parties involved in the national economy: businesses, trade unions, professional associations, the government, etc. One of the additional goals of amending laws for the purposes of creating wealth with the help of business would be for example the creation of structures tasked with defending the interests of both workers and employers, attracting a foreign skilled labour force, resolving disputes related to competition/intellectual property, etc. Such structures could include for example consumer tribunals, competition tribunals, business unions, etc.
Building Forward-looking Economies with Access to Credit and Mobile-based Financial Transactions
It is a well-known fact that most financial transactions in the informal sector on the continent are done in cash. This leaves a great amount of money out of the financial system, an amount which could play a significant role in the formal economy. The popularity of services such as M-Pesa in East Africa (and to a smaller extent, MTN Mobile Money in West Africa) is a testimony of the number of people out of the formal banking system. Encouraging financial institutions, especially banks, to replicate such services in the business world and offering them to SMEs would not only enable the latter to trade seamlessly, with greater flexibility and with more transparency, but it could also enable informal businesses (and their owners) to have access to previously inaccessible potential or existing international clients. This would result in more growth for a business and indirectly for the economy. Access to credit on the other hand, can spur business creation as cash-strapped entrepreneurs would have the opportunity to access much-needed capital to start their ventures but also, since dealing with a financial institution, entrepreneurs would be more careful and serious with the loans awarded to them. As an example, the Micro-credit to the most disadvantaged people programme instituted in Benin in 2007 has enabled to date over a million women and youth to obtain micro-loans (to the value of about 100 USD repayable at an interest rate of between 5 and 8%) and start their businesses.
Institutional Support
Legislative initiatives to spur entrepreneurship should ideally focus on three main pillars: business creation, business growth, and business sustainability. Indeed, seeing the light of day, growing and ensuring their own sustainability is one of the goals of many SMEs and many initiatives can be taken in that regard, particularly with regards to institutional support. The institutional support required to provide such assistance to businesses simply requires the creation of a number of organs with specific responsibilities. Ideally, such institutions should include, among others:
- a companies tribunal which would be responsible for resolving disputes involving businesses,
- a body responsible for business registration, deregistration, conversion, etc.,
- a body responsible for intellectual property (IP) rights, the promotion of education and awareness of corporate and IP law, etc.
In addition, business development and support services should be provided by non-governmental entities such as incubators, accelerators, crowdfunding platforms, and business networks. As primary actors in the business sector, such entities are much more aware of the needs of entrepreneurs and their newly-formed ventures and therefore better equipped to assist the latter on their path to growth and success.
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