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Sorry, Mitt: Businesses Aren't Built on Their Own (Bloomberg Businessweek)

July 23, 2012

CGD senior fellow Charles Kenny's weekly column in Bloomberg Businessweek; this article cites CGD senior fellows Vijaya Ramachandran and Alan Gelb.

The following column originally appeared in Bloomberg Businessweek:

The latest election campaign flap—the pink slime filler in the cable news Big Mac—is over President Obama’s having told American business owners “you didn’t build that.” Or, to add a little more context: “Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business—you didn’t build that.” Mitt Romney has suggested the remark reflects a misunderstanding of how business works—and that a company’s success is due to “people who take risks, create dreams, who build for themselves and for their families.”

For Romney, it’s a good attack line. It’s also wrong. To see just how much American businesses benefit from the “system” that Obama extols, it’s instructive to examine countries where the system—and in particular government—isn’t doing its job terribly well.

Take Sub-Saharan Africa. A big reason the region remains so poor, with an average income only a little above $2,000 per head, is because the private sector is so weak. There just aren’t many large, profitable enterprises around. According to business surveys conducted by the World Bank over the last decade, the average value added per worker in companies in Tanzania or Uganda is below $4,000 a year. Even in Nigeria, it stands only a little above $6,000 a year. Compare that to about $63,885 of value added per person employed in the U.S.

In their book on the private sector in Africa, Vijaya Ramachandran and Alan Gelb of the Center for Global Development discuss “net total factor value.” The figure is what’s left after you subtract from business sales the costs of raw materials, power and transport, license, and other indirect expenses. This is what can be used to pay workers, make interest payments, invest in expansion, and give back to owners as profits. To cite one example, the authors write that due to the appalling business climate in Zambia, the average company in that country has net total factor value about one fifth as large as the average company in China.

Why the big difference? It’s not as if no one in Africa is willing to take risks, or dream, or build. It is that creating a successful company is a lot harder south of the Sahara because the basic infrastructure that underpins business growth is creaking or collapsed. Electricity is one example. In many African countries, more than half of all companies own generators because the public supply is so unreliable. Countries including Gambia, Guinea, and the Democratic Republic of Congo each see electricity blackouts occurring more than 150 days each year. The losses associated with power outages, as estimated by the firms themselves, can equal more than 10 percent of sales. World Bank research (PDF) suggests that the unreliable electricity supply reduces the productivity of Zambian companies by 34%.

Poor transport infrastructure also hurts African businesses. Ramachandran and Gelb report that the vast majority of business owners don’t even consider selling their goods outside local markets because it is so hard to move stuff around. One manager of a regional cement manufacturing company reported that he sometimes resorted to airlifting cement across countries because road and rail haulage was so slow and unreliable. In the U.S., the average cost to deliver a container of goods to the country’s trade partners is $1,160 for export and $960 for import. That’s about one-third the costs faced by Ugandan trading companies and about half the costs in Kenya. And that’s just shipping; across Africa, goods sit on the docks for weeks at a time because of slow customs clearance.

There’s a way to accelerate that process, of course: Around two thirds of companies in Kenya report paying bribes to government officials to get things done. African managers spend from 5 percent to 10 percent of their time dealing with regulators, according to survey responses—haggling over complex and corrupt licensing and oversight procedures.

Beyond infrastructure and weak regulatory systems, businesses in Africa face severe shortages of trained, educated, healthy workers—the result of weak public education and health systems. Companies in the U.S. constantly complain that they can’t find skilled staff. Imagine the problem faced by employers in Kenya, an advanced economy by African standards: Only about 4 percent of all kids go to college. And even though most children in the country finish primary school these days, many emerge functionally illiterate.

It is presidential election season, so you can hardly expect political debate to center on substantive discussion of the role of government in society. The Romney campaign’s attacks on the president for suggesting “you didn’t build that” are no more willfully ignorant of context than Democrats’ attacks on Romney for suggesting “I like firing people”—or the idiocies traded by both sides on who is the outsourcer-in-chief. But Obama’s remarks were at least based on an important and too-often-ignored truth: Edison was wrong. Success may be only 10 percent inspiration; but perspiration gets only a further 20 percent. The other 70 percent comes from the adequate provision of public goods, from infrastructure through education to health and decent regulation—and all of that takes a well-functioning government.

Kenny is a fellow at the Center for Global Development and the New America Foundation.

Read it here.