How Does Influence-Peddling Impact Industrial Competition? Evidence from Enterprise Surveys in Africa

Abstract

Prior research has emphasized that the high costs and risks arising from a poor investment climate-lack of clear property rights, macro-instability, the burden of regulation and taxation, poor infrastructure, lack of finance, and lack of human capital-have impeded the development of the private sector in sub-Saharan Africa, despite adoption of structural adjustment and liberalization policies. Given the resulting wide differentials in productivity, it is not surprising that most of the African manufacturing sector has not been competitive in exports. However, trade liberalization should have had greater impact on domestic markets for manufactured goods in Africa, leading to either to a rapid decline in the size of the manufacturing sector due to import competition, or to a rapid increase in productivity of surviving enterprises. In fact, neither has happened to any significant degree over the last 20 years. Based on data from Enterprise Surveys conducted by the Regional Program for Enterprise Development at the World Bank, this paper argues that some African manufacturing enterprises have continued to retain their market leadership in domestic markets by investing in relationships with governments, thereby maintaining high barriers to entry and a reduced degree of competition. This influence is particularly severe in some countries in Africa and is often driven by relatively few enterprises. In particular, Zambia and Kenya seem to suffer a high degree of influence-peddling, while Mali and Senegal are at the low end of the scale. Comparisons with selected countries in Asia show that lobbying in East Africa is different than in Asia-larger enterprises, and enterprises with higher market share lobby in Africa, as compared to Asia where market share is not a significant determinant of lobbying activity. The results imply that attempts to improve the productivity of the African private sector through focusing only on the removal of trade barriers, improvements in the investment climate, and private sector capacity building will at most be partially successful. In order to escape from the current low-level equilibrium trap, future reforms will need to explicitly consider political economy issues. From this perspective, the role of regional integration as a tool of competition policy will need to be given greater consideration.