Opportunities galore – Africa has enterprising people, but too few businesses
Jul 2nd 2016 Economist
If anything explains the poverty in many parts of sub-Saharan Africa, it is not an unwillingness to work hard—most of the continent’s people still sweat to survive tilling fields with medieval tools. Nor is it because of a lack of enterprise and optimism: on the permanently traffic-jammed streets of Lagos, Nigeria’s main commercial city, hawkers gingerly ease their way between cars trying to sell almost anything from snacks to books, pirated DVDs and even toilet seats. Africans are far more likely to be self-employed than people in richer parts of the world, for the simple reason that without social safety nets, many of them must hustle or starve.
Yet for all Africans’ energy and ingenuity, the region struggles to produce enough of the productive and profitable small businesses it needs to lift hundreds of millions of people out of poverty. The World Bank reckons that sub-Saharan Africa has only a quarter as many small businesses as Asia, relative to its population. Members of the OECD, a club of mostly rich countries, have about eight times as many formal small businesses per person.
Part of this is explained by the poor climate for enterprise. Indices of entrepreneurial activity place African countries far below even sluggish European ones such as Greece or Italy (see chart). The gap grows even wider if you look at the number of big firms Africa produces. Apart from a handful from South Africa and Nigeria, few African companies have grown large enough to expand into markets beyond the continent, or even beyond their hometowns. Africa has produced just one of the world’s 169 “unicorns”, the label given to privately held tech start-ups with a valuation of more than $1 billion: Africa Internet Group, which adapts foreign business models such as e-commerce and mobile cab-hailing to African circumstances.
Yet the paucity of businesses is not due to a shortage of opportunities to make money. In fact, given a small nudge new entrepreneurs seem able to make it hand over fist. In a tiny hut a few hours north of Kigali, Rwanda’s capital, just before the land starts lifting steeply towards to the volcanoes of the Virunga mountains, a group of men and women in their mid-20s stand proudly around bins of seed potatoes. The group, who were taught how to run their own businesses by TechnoServe, an American non-profit, banded together to borrow money to grow high-quality tubers. The profits from this venture were enough to kick-start others.
Emmanuel Bunani used his winnings to rent a plot of land to grow garlic for export. He now pays two people to work his fields and another three to shell and dry the garlic. He has also come up with a novel way of making sure he gets a good price from the traders he sells to: he has invited them all to a group on WhatsApp, a mobile phone chat service, and gets them to bid against one another when his crop is ready.
On another farm a few hours away Thacienne Ahunkuye, a shy 26-year-old, looks down at her feet as she explains how a year ago she was unemployed and had sat around for four years doing more or less nothing on her parent’s small homestead. Now she earns some $300-$400 a month (in a country with an annual average income of $700) from an egg farm she started after getting some training and help in applying for a small loan to buy 250 chickens. She sells eggs internationally: twice a month a rickety lorry comes up to collect crates of them to take to the Democratic Republic of Congo.
Yet the success of youngsters such as Mr Bunani and Ms Ahunkuye is also puzzling. If it is really so easy to make money growing garlic or keeping chickens, why aren’t more people doing it? And how can more people be encouraged to do so?
There are many reasons why Africa has failed to produce many profitable small firms, never mind larger ones, but high among them is access to finance. “There is a myth out there that every good idea can find funding,” says Goolam Ballim, the chief economist of South Africa’s Standard Bank. “But in Africa that simply isn’t true.” For a start banks in many African countries serve mainly to take savings and channel them into the hands of governments rather than entrepreneurs, since treasury bills often pay juicy rates of interest. Government borrowing drives up interest rates for everybody else. (In much of east and west Africa, for instance, people have to pay eye-watering interest rates of 20-45%.) The easy profits from lending to the state also make banks lazy. Many do not bother to learn how to measure and manage the risks of lending to businesses when they can simply hold government paper.
This is beginning to change, thanks largely to the spread of mobile phones, which is allowing for new ways of lending cheaply. Take Letshego, a Botswana-based microlender with operations in nine other African countries. It signs up customers using their mobile phones and runs its entire operation from a data centre in South Africa, giving it a cost-to-income ratio (a standard measure of efficiency in banking) that is about half that of traditional banks. Lenders are also experimenting with new ways of measuring how risky borrowers are using data from their phones. One discovered that customers who listed their contacts by both name and surname were 16% less likely to default.
Even if entrepreneurs get access to finance, it is still difficult for them to make and sell things. Ashish Thakkar, an African entrepreneur and philanthropist, says that shortages of electricity, potholed roads and inefficient ports and railways hold back manufacturers. “If someone making shoes in Port Harcourt can’t even get them to Lagos [both are cities in Nigeria] then forget about them going global.”
Yet that too may change as governments and investors channel huge investments into infrastructure and power. TradeMark East Africa, an NGO funded largely by western governments to encourage trade, reckons that improvements in Kenya’s ports and roads have cut by about 60% the time it takes to ship a container from the port of Mombasa to Kampala, the capital of Uganda, lowering costs too.
Access to markets is not simply about physical infrastructure, but also about social networks. In many parts of the continent there are so few successful companies that would-be entrepreneurs seldom see inspiring examples or have trusted friends in business to turn to for advice or as suppliers or customers.
Where such networks exist, for example among Lebanese expatriates in west Africa or Asians in east Africa, business often flourishes. Yet even where they don’t, they can sometimes be replicated using technology. Cherie Blair, a lawyer married to a former British prime minister, has a foundation that helps teach women to run their own businesses. Some, she says, have done so for years but still do not know how to read a balance-sheet, so she connects them with one another and with mentors abroad using an online platform.
Some investors have figured out how to start businesses without the existing chains of suppliers and customers that allow firms to flourish elsewhere. Take H2O Venture Partners, an investment firm that has started several agricultural businesses in Africa. It found that in many cases it is impossible to start one business—an exchange for trading beans, say—without also setting up other firms in the value chain. So it has started a food-processing company to buy and cook beans, and also firms that sell seeds, fertilizers and tools.
Many obstacles remain, not least of which are widespread illiteracy and innumeracy. But there are also many opportunities to be exploited in doing simple things for local markets that may in time lead to bigger ones. Often it does not take much to get these off the ground. Ms Ahunkuye says that before she was taught how to hatch a business from eggs, she “was waiting for a job but didn’t know where it would come from”. She adds: “I knew it could be a good business because I had seen others doing it, but I didn’t know where to start.”