ONE of the features most commonly associated with doing business in Africa is political risk. This is usually offset by mention of the big rewards that accompany such risk-taking. Risk assessment itself has become a growing business on the continent.
As African countries diversify their economies and globalise, the risks of operating in them are not only transforming but are becoming more diverse, complex and, in some cases, unpredictable.
Trade experts say that, as trade barriers fall, nontariff barriers quickly take their place and are more insidious as they are difficult to foresee and surmount. Likewise, as governments increase economic freedom through reforms and policy adjustments, there are often unintended or negative consequences, which may be fixed using yet more policies and, frequently, new regulations.
Mostly, engagement with the private sector on these barriers is limited despite the private sector being the main target of regulation and new policies, which can have major implications for long-term planning and corporate growth in African markets. War and political instability account for a significant portion of perceptions of political risk, certainly from outside the continent, given the high-profile coverage of such events by media.
Africa will witness 17 elections this year; each has the potential for political instability — or worse, as Côte d’Ivoire exemplifies — with potentially large opportunity costs for the countries concerned. Côte d’Ivoire, a large economy, has lost a decade to civil war during which much of Africa has prospered due to the commodity boom.
I asked the president of the African Development Bank last year what he considered Africa’s biggest future challenge: political and governance risk, he said, without hesitation. A few weeks later, violent regime change took place in the streets outside his office in Tunis, the bank’s temporary home.
At the time, the bank had been awaiting the outcome of the upcoming Ivorian election as it was considering relocating to its original base in Abidjan. However, as revolution erupted across Tunisia, almost simultaneously Côte d’Ivoire descended into violence over electoral disputes.
Politically driven violence in Côte d’Ivoire was more predictable than that in North Africa, many have argued, given its state of civil war for about a decade. Ironically, long dictatorships may be good for business given continuity of relationships with leaders and deals done to safeguard investments. But there is an inherently high risk in a power transfer, particularly where succession planning is nepotistic, dynastic or absent — not uncommon in Africa.
The basis of African conflict is often ethnic and sectarian differences dating back generations and, increasingly, political battles over state control and resource ownership. There are more insidious drivers of conflict building up now, such as rapidly rising inflation.
Although overt political risks grab the headlines, a recent survey by the Multilateral Investment Guarantee Agency shows that the biggest political risk concerns of multinational corporations in developing countries are not war, civil disturbance, terrorism or even expropriation — but breach of contract and adverse regulatory changes, regarded as at least five times more risky for business than conflict.
Political instability has consequences for investors but there are avenues for outside parties to intervene in solving these kinds of problems, whether regional, continental or international. Much more difficult to change, it seems, are internal issues over which government officials have total control. Breach of contract and regulatory changes are not expensive or time- consuming to fix, but what is required is something that is often in short supply: the political will to make changes that might fly in the face of entrenched interests, often of certain officials themselves.
It is necessary for Africa to build a culture of engagement with the private sector and other relevant parties to ensure regulations and policies do not have negative unintended consequences. Most importantly, dealing with these risks requires the development of strong institutions to ensure continuity of policy and systems, particularly when the political battles sweep away officials, parties and even governments.