Private sector must play its part in fragile, developmental states

With the annual Africa summit of the World Economic Forum (WEF) in Cape Town this week, one of many issues up for discussion relates to the potential of the private sector to assist with development in fragile and conflict-torn settings.

The private sector used to consider human security only when it hits the bottom line, but corporates and investors are now encouraged to see themselves as part of society, and to think more intelligently and responsibly about how violence affects development, stability, and prosperity.

There are many definitions of state fragility, a situation that is sadly still evident in a number of African countries. Perhaps the most obvious characterisation is simply that a state is fragile when it is unable or unwilling to provide basic human security and/or create the public goods and conditions needed for a minimum of human development.

This inability can be the result of poverty, or it can be due to bad governance, which remains the most important driver of violence and conflict in Africa. The private sector has a vital role to play, especially by adhering to good investment practices, not dodging tax, and not paying bribes.

Eventually, states exit from fragility through development — a catch-all phrase that means that rates of economic growth exceed population growth by a sufficiently large margin to improve average incomes, and that that the increases in income are spread evenly enough across various groups. As countries become more wealthy the role of the private sector becomes more important. At low levels of development it is often the nature and capacity of the government that determines economic growth.

Perhaps the most important single measure of fragility is simply the trend in the portion of the population living in extreme poverty. Typically the international community measures extreme poverty with reference to the number of people living below an income of $1.90, $3.20 or $5.50 per person per day, depending if the country is low, lower-middle or upper-middle income.

Actually, most poor countries experience relatively rapid economic growth as they generally have youthful, growing populations. A larger population inevitably means that the economy increases in size but, as technology has become more widely available in the 21st century, the contribution of labour to economic growth has declined in importance. Instead the importance of capital (or sufficient access to finance) and technology has increased. The result is that the contribution of a larger labour force has less positive impact today than was the situation in the past.

Broader interest

Beyond structural features such as high levels of extreme poverty, growth requires that a ruling elite needs to govern in the broader interest.

There are two dimensions to such a “broader interest”. On one hand it relates to a developmental orientation, or the commitment and determination of the governing elite to pursue positive outcomes for the populace and not in its own factional or ethnic interests. On the other, it relates to the capacity to govern.

The capacity to govern is generally a function of tax and other revenues that provide governments with the financial means to provide basic services, food and shelter. Without sufficient revenue streams, governments struggle.

A developmentally orientated governing elite can compensate for its lack of capacity through unity in purpose, improved government effectiveness and control of corruption. These are, however, exceptions rather than the rule and typical of authoritarian states such as Rwanda and Ethiopia rather than of many of Africa’s nominal democracies. Actually, at low levels of development, democracy is more likely to constrain development but remains the only means to hold poor leadership to account.

So what role can the private sector play in such conditions?

Generally, the private sector in poor and/or conflict-affected countries is small as markets are limited and business confidence thin or absent. Both the government and the private sector is generally weak and lacking in modern systems and capacity, and the opportunity for expanding the latter largely depends on the quality and effectiveness of the former.

Furthermore, the domestic private and informal sectors are often indistinguishable from one another with the result that the domestic private sector is often associated with foreign companies — often multinationals active in resource extraction which is generally the main export characteristic of poor countries.

That is about to change.

New technologies and modes of collaboration are opening up possibilities in poor countries and have many benefits, such as increasing opportunities for the inclusion of more people in the economy, increased access to government services (such as allowing registration for basic health care, and social grants), and elevating political accountability.

An example of the potential and pitfalls is the push towards national identity (ID) systems with the global goal that every individual in the world have a digital identity by 2030.

Few African countries have national ID systems but, whereas the establishment of a national population register and of births and deaths was historically a generational challenge, modern technology allows such efforts to be completed in a matter of years rather than decades.

As nations move forward with ID programmes it is imperative that they adopt standard laws and norms that ensure the integrity of these new systems and that lend them to regional inter-operability, given the need for regional integration such as with the establishment of the African Continental Free Trade Area agreement (AfCFTA).

But few governments, particularly those from poor and/or fragile countries have the ability to roll out digital ID systems, let alone systems that are secure enough to withstand the innovation of criminal entrepreneurs and corrupt officials (sometimes these are the same) to abuse the system, and that are updated and maintained over time.

If well managed, public-private partnerships provide important opportunities for rapid progress as well as drawing in the private sector in this regard. But possibly the most important contribution the private sector can play in these conditions is to adopt ethical business practices, stop engaging in corruption, commit to transparency and pay due taxes to governments, and not just to government officials. The UN’s Guiding Principles on Business and Human Rights, published in 2011, is one important reference document, as are the various efforts by WEF to advance ethical concerns in business.

This may sound obvious but it is not. Many multinational companies negotiate large tax concessions and use every tax loophole available to them to reduce taxes to the minimum. An example is the decision by Heritage Oil to transfer its registration from the Bahamas to Mauritius in order to avoid a $400m tax bill when it sold an oil field in Uganda. The Heritage tax bill amounted to 14% of Uganda’s total tax take in 2015 and was larger than its entire health budget.

Tax rates in Africa are generally significantly below global averages, often including numerous exemptions and loopholes — one of many reasons why investments in Africa provide such lucrative returns on investment.

Making the private sector play a more important role fragile countries and contribute is crucial for Africa’s development.

For these reasons, private-sector leaders attending the Africa WEF Summit this week need to refocus attention on exposing and ending tax havens, on competitive tenders, on agreements in favour of transparency, and full disclosure on who owns and profits from companies, trusts and other legal entities.

To make the private sector relevant to Africa, the WEF should fully get behind efforts to counter illegal financial flows and deal with multinational corporate tax avoidance, including countering profit-shifting activities and the race to the bottom in corporate taxation.

• Cilliers is head of African futures and innovation, and Du Plessis is executive director at the Institute for Security Studies.