Ethiopia has been ranked 161st on the World Bank Group’s (WBG) 2018 Ease of Doing Business (DB) index published almost two weeks ago. The report has attracted some attention as it is deemed a competent indicator of an economy’s conduciveness to small and medium-sized enterprises (SMEs), ultimately signalling foreign investors that the business environment of the country is favourable if they ever choose to make the trip.
The Bank’s flagship annual report, published since 2003, DB provides a quantitative assessment of economies’ performance across 10 indicators that affect SMEs as defined by standardised case scenarios. The 2018 DB report covered 190 economies and ranked them based on the calculated conduciveness of their business climates.
The DB Report is primarily seen as a tool for promoting the Bank’s ultimate objective of poverty eradication. The DB is instrumental in enhancing the business climate through regulatory reforms that ultimately strengthen the private sector and enable it to create jobs, according to Kristalina Georgieva, CEO of Doing Business Team at the Bank. The report encompasses ten indicators that range from the procedures of registering a business to insolvency or exiting an operation.
The 2018 Report recorded a total of 264 regulatory reforms globally, with 119 economies implementing at least one reform. Sub-Saharan Africa by far applied the most, 83 of them to be exact, standing as the number one region in this token. In addition to reforms, it has achieved the highest increase of 1.18pc on the absolute measurement of regulatory environment improvement as indicated by the Distance to Frontier (DTF). The DTF captures the performance gap of an economy when compared with the best practice on a particular indicator – a higher DTF score shows increased proximity to the best practice in the specific category.
Ranked 161st out of 190 countries, Ethiopia has slipped two places from its 2017 ranking. This means two more countries have a more conducive business climate relative to Ethiopia’s this year than yesteryear.
Nonetheless, the relative measurement should not be misinterpreted as worsening business climate on the indicators. In fact, Ethiopia has shown tremendous improvement in this report on absolute terms. It has improved its DTF score by 2.08pc, which is remarkably higher than the global and sub-Saharan average of 0.76pc and 1.18pc respectively.
The report also recognised two reforms made by Ethiopia on starting a business and trading across borders indicators. The enactment of the trade proclamation on commercial registration and business licensing, and proceeding laws simplified pre-registration and registration formalities, and abolished the minimum capital requirement. Trading across borders was simplified through a series of initiatives including the implementation of a risk-based inspection system, pre-arrival clearance, cargo-scanning and by cutting down on red tapes (50pc reduction on paperwork related to import and export).
However, the number of reforms implemented by Ethiopia is not on par with regional peers. In this token, Kenya leads the region by six, followed by Rwanda, Mauritania, Nigeria and Senegal, all of which have implemented five.
Of course, the DB’s results shall not be taken as an absolute fact, as the report does have its critics who find it incomprehensive. There are political and economic factors, which in some cases, are better determinants than the ten indicators. The Bank has also acknowledged this in its own report.
“Doing Business does not measure the full range of factors, for example, it does not capture aspects of macroeconomic stability, development of the financial system, market size, the incidence of bribery and corruption or the quality of the labour force,” reads the Bank’s report.
Additionally, the Bank asserts the importance of complementing the DB index with other indices to enhance comprehensiveness.
Despite its limitations, a look into different economies of the world reveals that the DB could indeed bring about reforms in regulatory policies for the business climate. The Bank observes that more than 60 economies have been using DB indicators as pointers for organisational and service delivery reform areas in the past decade. Accordingly, close to a third of the 3,180 regulatory reforms that governments reported in the past decade have been inspired by DB. For instance, Rwanda and Kenya implemented a series of reforms that were reflected in their rankings as well as on their overall business climate improvements.
Rwanda is the front-runner in the region with a big jump in reforms, especially from 2009 to 2011. The country steadily reformed its commercial laws and institutions since 2001. In the 12 years since 2005, Rwanda implemented 52 reforms across DB indicators. Among the reforms, the major ones include online business registration; establishing an electronic platform for building permit applications; streamlined property registration; a public-private partnership (PPP) arrangement providing single access point to government services and information called Irembo; online tax registration, declaration and quarterly payment of value added tax (VAT); establishment of integrated border management and introduction of 24-hour border operations.
On the other hand, on the 2018 DB report, Kenya climbed up to 80, improving by 49 ranks since 2014. To mention a few of the bold reforms implemented; Single-window System (SWS) which in Kenya created collaboration across 29 government agencies; countrywide e-citizen platform providing business licensing, construction permits and investment promotion services; a fully integrated and automated tax system (iTax); and the Huduma Kenya program which offers one-stop-shop public services to citizens using integrated technology platforms.
What this shows is that the top reforming countries share common characteristics – the reforms are long-term and structural. They align with senior leadership commitment, strong cross-governmental partnerships, private sector participation, technological advancement and strong auditing and evaluation of institutions. Most importantly, almost all reforming countries have digitised and streamlined government services.
Coming back to Ethiopia, to remain competitive as a favourable investment destination, the ranking gap that has been widening against its regional peers calls for deep-rooted reforms. These reforms will cement recently registered achievements in attracting foreign direct investment (FDI) into manufacturing. Notwithstanding the limitations often echoed against DB’s limited scope, it is imperative to implement reform initiatives and become more competitive as foreign investors use it as a yardstick when deciding where to invest.
Going forward, the government needs to expedite the momentum of DB reform implementations to attain higher DTF scores and to improve global ranking. This calls for a mix of three crucial factors: attention and commitment from top leadership, inclusive stakeholder coordination and continuation of reform implementations.
First, lessons from top reforming countries show that successful implementations require a close follow-up by the highest executive body of the government. This implies incorporating DB reform initiatives into the deliverables of relevant public institutions and strengthening accountability.
Second, reform without multi-stakeholder collaboration is like clapping with one hand. DB reform initiatives are cross-cutting and require cooperation with the private sector, which is often neglected in Ethiopia. The private sector brings in new perspectives and innovative solutions as it cannot help but be on the receiving end of services reflected in the ten indicators.
Third, sustained reforms are much more rewarding than one-off efforts. International experiences show bold improvements result from unrelenting reform implementations. Kenya serves as an excellent epitome in this regard. It was able to leapfrog almost 50 ranks as a result of efforts accumulated over the past five years.
Hence, the government, through relevant institutions, needs to consistently coordinate public, private, and non-governmental organisations for the successful implementation of reform initiatives.
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