Poor investment climate -- the burden of regulation and taxation, poor infrastructure, lack of finance, and lack of human capital -- has long been considered an impediment to growth of the private sector, 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 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 working 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. The results imply that attempts to improve the productivity of the African private sector by 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.
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