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Party monopolies in Africa: Bad for business

Adam Green

Party monopolies reduce African firms' productivity, according to new research

While infrastructure and access to finance are much-cited constraints on African firms' competitiveness, a new study has identified a less obvious burden: political monopoly. A team at the World Bank and the University of Pennsylvania found that the length of time a political party remains in power directly affects firm productivity. Party monopoly accounted for around half of the labor productivity growth disadvantage of African firms, and about 130 percent of the sales growth disadvantage.

The researchers, comprising former chief economist of the World Bank Justin Lin, current World Bank economist Colin Xu and Ann Harrison at the University of Pennsylvania, compared firms in African countries with a GDP per capita of less than $3000 with those in other economies of similar size - including Bolivia, Colombia and Vietnam. It encompassed the political monopolies of Angola (34 years), Cameroon (31), Uganda (27), Chad (23) and the Gambia (19). Performance areas measured included static and dynamic efficiency, export shares, and investment ratesmeasured included static and dynamic efficiency, export shares, and investment rates.

“When there is only one party in power and there is no way for others to participate, that could be highly correlated with a lack of rule of law, uncertainty, nepotism, possibility of expropriation,” explains Ann Harrison, professor of multinational management at the University of Pennsylvania. “Essentially government is not accountable because it knows it will be in power no matter what. It can extract a lot more rent from firms, and firms have no choice but to comply.”

This is not the case everywhere - political monopoly in Singapore and China has gone hand in hand with impressive firm productivity. But in the African case, party monopoly negatively affects firms. Interestingly, the monopoly-productivity correlation weakens when you add the richer economies of South Africa and Botswana into the sample (both have de facto party monopolies). “The richer you are, the more likely you are to have better rule of law. The importance of party monopoly [therefore] diminishes because you have managed to introduce regulation,” argues Harrison.

Despite lumbering under a fearsome ‘tripod’ of competitiveness constraints - infrastructure, access to finance and political monopoly - African firms are performing remarkably well, the team concluded. “If you look at the raw numbers, it looks bad. On average, African firms are exporting less, investing less, productivity is lower. But then put in some key variables of telecommunications infrastructure, party monopoly and credit, especially trade credit, and we find an African firm, if it had a similar environment to others - if you take it out of where it is, and plunk it into another country - could outperform its competitors”. It is, she says, “an optimistic message.”

*Reprinted from This is Africa April 10, 2013