The True Costs of Doing Business in Africa

How Too Much Paperwork Creates Poverty

The following is an adapted excerpt from my upcoming book The Heart of a Cheetah: How We Have Been Lied to about African Poverty, and What That Means for Human Flourishing.

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When I give public talks, this is the core of my message: 

If we want Africans to prosper, we need to work toward greater economic freedom in Africa.

Can you hear this? Do you understand what this message means?

• In the Central African Republic, it takes 17 documents, 55 days, and $5,555 per container to import goods.

• In Angola, you must undertake 44 procedures requiring 1,296 days to enforce a contract. On average the process will cost 44 percent of the claim.

• In Eritrea, it takes 13 procedures, 84 days, and 21 percent of the average income per capita, along with 94 percent of average income per capita in paid-in capital, to start a legal business (an Eritrean basically has to deposit a year’s income in order to start a legal business).

Compare that to New Zealand, where starting a business requires one procedure, half a day, with 0.2 percent of average income per capita. And there is no minimum capital requirement.

Could it be any more obvious why Africa is so poor? 

Let’s talk about the result of this paperwork mess. Many people skip right past all this hassle of paperwork to start a business through the age-old, tried-and-true method: they bribe the officials.

People always talk about how much corruption there is in Africa. It’s another very true strike against us. But people talk about corruption as if it’s a root problem. They believe that African people are inherently more prone to corruption than others. But that isn’t the case.

Corruption is a natural consequence of too many senseless laws—laws that keep us poor.

Would there be as much corruption in the United States if contractors had to deal with truckloads of regulations just to build a house? You bet. I have many US friends who share privately the names of construction workers who will work without permits. They pay a premium for them!

In Africa, and in the United States, the only way to fix corruption is by reducing and simplifying the laws.

The good news is that my country, Senegal, has been working hard to streamline the process of starting a business. The bad news? Well, let’s look at a few features of the “streamlined” version provided by the Agence de Promotion de l’Investissement et des Grands Travaux (APIX), our “one-stop shop” for business startups.

It is possible to apply for an exemption from paying taxes on labor and equipment for the first three years of operations (with a possibility of extending it another two years). This is called the investment period. This doesn’t result in any savings—all this does is suspend the taxes you were supposed to pay for the first three to five years. After that, you must pay the value-added tax (VAT) due on everything you imported to conduct business.

In order to qualify for this dubious exemption, you have to make a list of all the materials you intend to import in order to do business: computers, cars, tables, etc., with as thorough a description as possible, including the cost. If you import something slightly different or at a different price, you might have issues importing it.

Obviously, gathering this information is timely, cumbersome, and expensive. Perhaps worse, it removes the flexibility and the freedom required to act swiftly, which is an absolute necessity when starting a business. Instead you’re stuck waiting for the approval of some official—unless you want to pay full taxes right away at customs, of course.

And by the way, if your business fails? Tough. Pay up.

Nevertheless, people are excited about APIX and its promise. I can’t think of a better way to illustrate just how bad conditions currently are.

The tax system in Senegal is exceptionally challenging. We’re supposed to make fifty-three payments per year, which consumes an average of 416 hours per year to calculate and file. How many companies are likely to relocate operations from, say, Singapore or the Bahamas to invest in Senegal?

When we import raw material and packaging, we have to pay regular customs at the border. My cost for basic business items is roughly 30–45 percent more per item than what I pay in the United States. 

After investing considerable time and money, I did eventually find a well-meaning customs official who found a one-year exemption on imports for new businesses, but with the following conditions:

The exemption only applies to materials being brought in to incorporate into your finished product, which must be exported as a finished product within one year.

The company must have a validated industrial manufacturing and warehousing site (something startups rarely have).

Ninety percent of your annual production needs to go to exportation, with 10 percent going to the local market. This applies even if there is no viable local market for that 10 percent. If you want to export the remaining 10 percent, you have to solicit the approval of the general director of the customs office.

There needs to be a follow-up (a.k.a. government control) on repatriation of currencies (suivi sur rapatriement des devises), starting at three million CFA, which is roughly $6,000. This is a very cumbersome step you need to take up with your bank. 

A government-licensed expert must also determine your “manufacturing yield rate,” which refers to the percentage of non-defective items of all produced items. In most manufacturing processes, you will end up with less than you planned for, with some losses due to, for example, spillage or evaporation. Perhaps a bad batch has to be discarded. By having a licensed expert predetermine this percentage, the government is trying to avoid having you bring in more raw material than you need at the temporarily exempted rate. 

Complying with this requirement would mean disclosing our formulations and detailed production steps to third parties. These are our trade secrets, which we paid a lot of money to have developed during the research and development process. It is not hard to see why this would be very sensitive information to share with third parties, especially in environments where you can’t always be sure of the integrity of those third parties. It is a risky proposition. 

This decision was made somewhat easier by the simple fact that even if you wanted to hire one of these experts, you couldn’t find one. Three years later I am still waiting for the high-ranking customs official to send me referrals for such experts or to give me pointers as to where to even begin looking for one. 

If by some miracle you were able to find an expert, you would then approach the Minister of Industry to get an admission temporaire exceptionnelle (“exceptional temporary admission”), where they would require you to provide at least seven more documents.

A few things have probably changed since this happened a little more than three years ago, but you can see how heavy and senseless this process is. And as I mentioned, this is the “streamlined” version. 

If you look at the World Bank’s Doing Business Index, you’ll see that it is easier to do business in any Scandinavian country than it is anywhere in sub-Saharan Africa. 

That’s why they’re rich and we’re poor.

Africa, like everywhere else in the world, needs leaders who say, “I’m going to make it easy for you to build new companies. I’m going to make it easy for you to hire and fire.”

Make the laws where I do business on an equal footing with those in wealthy countries. 

Take off the chains! Let us compete! Let us prosper!

It’s time to invest in African businesses and provide the environments and resources we need to thrive.

—Magatte Wade, from The Heart of a Cheetah

To learn more about overregulation and its effects on African prosperity, you can preorder The Heart of a Cheetah here.

Only 1.5 weeks to go before the book’s release!