By Getachew T. Alemugetachew T. Alemu
Decades have passed since indices, rankings and comparisons have become the norms in economic analysis. The variabilities that economies have and hence the difficulty of embracing its multiple layers in a given analytical framework has made ranking very popular. Complementing this rather academic demand is the growing need for policymakers to know how their nation is faring relative to other countries.
One area where ranking and utilisation of indices is popular is investment. Various global indices, which differ in their methodology and approach, try to rate the attractiveness and competitiveness of the economy for investment. Of these, the popular ones are the Doing Business Rating of the World Bank, the Global Competitiveness Report of the World Economic Forum (WEF) and the Global Economic Rankings on Economic Freedom by Heritage Foundation.
There also are rankings looking into specific aspects of the economy, such as innovation, gender parity, labour market participation, leadership and financial inclusion, just to name a few.
Each of these rankings involves huge efforts of data collection, cleaning, standardisation and analysis. Hence, the number of countries included in any ranking will be defined by availability, accessibility and acceptability of data. It is, therefore, common to see contentions between governments and the ranking organisations on the representativeness of the data employed for ranking.
It is common knowledge, for example, that there has been serious disappointment from the side of the Ethiopian government on the competitiveness ranking of Ethiopia by the World Economic Forum (WEF). I recall Hailemariam Desalegn, while he was a foreign minister, expressing his government’s disagreement with WEF’s ranking at a side event to the 2012 World Economic Forum in Africa, held in Addis Abeba.
The case has been similar, for long, with the Human Development Index (HDI) of United Nation’s Development Program (UNDP), although this index is not directly related to investment.
Of course, beyond data, debates around objectivity, exclusivity, comprehensiveness, political neutrality and fairness surround these rankings. But, for lack of better instruments of generalisation, comparability and ease, these rankings are widely used both in policymaking as well as investment advisory circles.
And Ethiopia has been one of the countries that have been ranked in the abovementioned three indices. Over the years, the nation’s ranking has fluctuated.
According to the latest Doing Business ranking, Ethiopia stands at 161st out of 190 countries. It scored 47.7 out of 100 in 10 major categories of indicators. Compared to its ranking of 111th in 2008, 124th in 2012 and 159th in 2015, the country’s doing business state seems to be going down.
Unlike the linear decline in doing business, the time-series data in the Global Competitiveness Index of the WEF shows that the nation’s journey is disproportional. Out of seven, the rating for Ethiopia in 2017 was 3.77, 3.28 in 2008, 3.76 in 2012 and 3.6 in 2015.
One could find a similar volatility in the economic freedom rankings of Ethiopia. Its score in 2017 remains 52.7 out of 100 (where 100 represents complete freedom). The nation scored 52.5 in 2008, 49.4 in 2013 and 51.5 in 2015.
As it is the case with other countries, these indices just tell part of the story about the reality of investing in Ethiopia. The devil is in the detail, as the saying goes. My frequent interactions with investors and participation in various national level studies related to the investment sphere in the country have helped me see that the story is beyond what is depicted in these global indices.
For starters, information about how to invest in Ethiopia is a rare commodity. Information packs created by the Ethiopian Investment Commission (EIC), Ministry of Foreign Affairs (MoFA), Ethiopian embassies and consulates, and other stakeholders, such as Chamber of Commerce, are generic.
Little could one find in the form of analyses of risks, including the level of political uncertainty, the structure of policy making, updated macroeconomic analysis, policies in critical areas such as land acquisition, the nature of the competitive sphere and so on. Due to this information gap, investors are forced to spend money to buy advice on investing in Ethiopia.
To the dismay of many, the advice sold by many international consulting firms lack understanding of the local context. By and large, the analysis involves a round-up of mainstream media reports. The only added value in this advice is the artful graphical presentation and smart marketing surrounding it.
On the one hand, this package misses information generated and distributed in the local language. On the other hand, whatever is provided is not backed by a detailed understanding of the economic, political, social and cultural context in which each of the reported events occurs. Of course, we should not forget that many events go unreported.
Regardless, as it is better than nothing, investors often buy these advice packages. No doubt, however, that they will see the marginal value of that advice package once they arrive in Ethiopia.
In looking at the various indices and rankings, one would be forced to think that the regulatory and policymaking structure in the country is organised. But, the fact is that it is not.
Policymaking in the country is not sufficiently organised. Integration between various government agencies is weak. Whereas confusion over mandates is prevalent, practice dominates clear policies and procedures. There also is much left to individual discretion. Systems instilled in various agencies are not complementary.
Operationally speaking, the skills and knowledge base at various public agencies that investors deal with are low compared to the international standard. There is less flexibility in translating policies. Long overdue presumptions often make the engagement challenging. And the culture of accountability is, by far, non-existent in most of the agencies.
If there is one invariable feature of policymaking in Ethiopia, it is unpredictability. Many fronts of the regulatory framework move at the same time. There is constant change in the regulations governing various aspects of investment. Not only are the multiple edges fluid and dynamic, but they move in separate directions. One sees less of convergence in the mobility of the regulatory fronts. As such, investors operate in an environment that involves consistent contemplation of changes.
An essential building block of investing is availability and quality of complementing services. By complementing services, we are talking about products or services that fall out of the main production process of an investor. These could be security, financing, cleaning, medical facilities, gardening and beautification, consulting, packaging, moving and delivery, transit and forwarding, marketing and promotion, event organisation, transporting, accountancy and auditing, catering and so on.
An agreeable fact about the state of these services in Ethiopia is that they are not matured enough. Hence, they do not operate with the sense of urgency and level of quality that an international investor would like to have. In most of these cases, sectoral consolidation is far off. Thus, most of them exist in the form of small companies with limited alternatives to service provision. Often, the expectation is that the investor has to adapt to their provisions instead of the other way round.
An even more onerous task for an investor is understanding how the Ethiopian market operates. In many fronts, the Ethiopian market has not yet consolidated. It still involves multiple layers of players, with most of the players being small and medium-sized operators. Often, there are various market pathways for a given product. Formal and informal chains exist in parallel. Sometimes, making a distinction between the two is difficult.
Generally speaking, the market is hierarchical. Intermediaries have a considerable influence in the market. Dominantly, contracts are not formalised. Trust is the primary driver in many of the market pathways. Mostly, there is a cultural or social linkage between operators of a given market pathway. Hence, the modus operandi will be defined by the values, norms and traditions of the network of operators.
Though unconsolidated, the market has enormous flexibility. It also has a sufficient level of creativity and adaptability. Yet, investors have to be cautious as the line between legal and illegal practices of the market is very thin.
One could easily see that the Ethiopia of the various indices and rankings is very far from the real Ethiopia. There is so much about investing in Ethiopia that could not be told through rankings. Hence, investors have to be cautious in handling investment rankings published by various organisations. But at the same time, ranking organisations have to try hard to embrace some level of agility in their approach to tell the full story of investing in a given country.
Getachew T. Alemugetachew T. Alemu (Getupfront@gmail.com), an Investment Consultant and Former Op-ED Editor At Fortune, Argues That There Is More to Investing in Ethiopia Than the Reports Suggest.
Read More News Here Source link