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Wednesday, April 27, 2011

The obstacles to Import-Export business investments in Cape Verde

The economy of Cape Verde suffers from a poor natural resource base and lack of water which hampers agriculture. Naturally, the economy is thus service oriented with commerce, transportation and tourism accounting for 75% of GDP.

The Cape Verde government has done a stellar job in managing the economy, and has made the right calls by encouraging significant investments in Tourism for example. But given the constraints, most products must be imported since they are not manufactured there.

So a natural question is whether and how investments in Import and Export can be encouraged. Either activity increases jobs and improves the quality of life. Let's take imports for example. If I import goods into Cape Verde, I would have to employ people to move the goods and generate sales in the market. I also increase the available choices and competition for goods of this type. So everyone wins. But if the importer cannot make a profit, then no investments will be made in this type of business.

IMPORTS INTO CAPE VERDE

There are a number of egregious and debilitating obstacles for US Importers:

  • Paperwork and red tape: There is just way too much inefficiency in the process. Clearly, import control laws are absolutely necessary and in the interest of Cape Verde. But it is the execution of wading through this morass that makes it daunting. For example, to obtain an import license for particular goods coming into Praia, one must visit no fewer than 5 or 6 separate government locations for various required documents and approvals. Often, you are directed to one location only to be told to go to a different location, whereupon you are directed back to the original location. You are then stuck between two government agencies pointing at each other. It is hilarious when you think about it, but for a small business owner to whom time is money, it is no laughing matter and will simply not be tolerated.
  • Time spent waiting: This is the way of life on an island. Everyone expects that it could take time between starting a process and reaching the desired objective. However, when the reasons for delay are arbitrary, or if the time required is unreasonably long, the small business owner will move on to other more efficient countries. I'll give you a personal example. I needed one government agency to sign off on an application. I was told that the only person who could sign the document was away on vacation for three weeks. Meanwhile, I was being charged fees by the same government because the goods I was trying to move into the country were sitting on the dock awaiting this person's signature. This delay cost me a couple thousand dollars. No foreign investor would put up with such nonsense. Maybe once.
  • Tariffs on freight: Importing goods into Cape Verde attracts customs tariffs. This is understandable as the government  must generate revenues. In any event such costs are passed on to the consumer. And as long as all businesses pay the requisite tariffs, then everyone is on a level playing field. However, importers also pay a tariff on the cost of shipping the goods from the point of origin into Cape Verde. This puts American importers at a huge disadvantage for importing the identical products. For example, let's assume there is a 20% tariff on 1000 widgets that costs $10,000. Now let's say it cost $5,000 to ship the widgets from America. Then an American importer would pay the tariff on $15,000. That tariff is $3,000 (20% of $15,000) and the cost to get the widgets into Cape Verde is $18 each ($15,000 + $3,000 divided by 1000). Now let's say it cost $2,000 to ship the identical widgets from Europe. In this case, the European importer has a cost of $10,000 plus $2,000 freight plus $2,400 tariff, or $14.80 per widget. The US importer would not stand a chance. He is already penalized by the higher cost of shipping on which the government turns around and penalizes him further.

What could be done about this? Obviously, inefficiency in government procedures is a huge culprit. Either the processes need to be streamlined, or there should be an assignment of a government chaperon with the authority to clear the pathway to assist US investors. Certainly, this cannot be done for every investor, but for sufficiently large investments something could surely be done. For example, there is absolutely no reasonable excuse that a serious, large investor should be placed on hold while some government bureaucrat is off enjoying a vacation.

As far as charging tariffs on the cost of freight - this is an insurmountable barrier for the US importer. While there are ways to compete on a product-to-product basis - the US importer may find the same widgets could be produced cheaper in the US than in Europe by using a different manufacturing method, the only other way to deal with the tariff on freight is to import goods where the cost of the goods far exceeds the cost of shipping. But this literally means being restricted to importing only expensive American goods that can be packed into a container space. An example might be Apple iPads. There may be no market in Cape Verde for goods in that price range.

It is simple math - unless the government removes this barrier (or keeps the playing field level), you are unlikely to ever see an abundance of high quality, reasonably priced US products on the Cape Verde market. If you do, they will not be coming from America. Instead they will be coming from US company manufacturing plants in Europe. A good example is Chevrolet cars. They don't get shipped from the US to Cape Verde, that's for sure.

EXPORTS FROM CAPE VERDE

So what about encouraging US investors to export products from Cape Verde to the US? The US Congress passed the AGOA (African Growth and Opportunity Act) over a decade ago. This law waives all tariffs on certain manufactured goods that are exported from Cape Verde (as well as other zones in Africa) and imported into the US. But no US investors have taken advantage of this in Cape Verde. Why?

The answer is simple. Despite the apparent pricing incentives, there is no investment incentive to do so! What do I mean by this? Here's the logic:
  • Since Cape Verde has few natural resources, it means the US investor must IMPORT some or all of the raw materials and components to be used to manufacture the desired product in Cape Verde. For sure, the labor is relatively cheap. But see the points made above about US investors facing huge disincentives and insurmountable odds when importing products into Cape Verde.
  • The red tape and time inefficiencies will raise effective production costs through the roof.
  • It would be virtually impossible to make a fair return on investment in such a venture.
  • Capital and investment dollars move very quickly to where they can be efficiently and profitably deployed.
  • These reasons all but guarantee that virtually no investments will be made under AGOA in Cape Verde, ever. That money is going to some other country. Cape Verde loses.

It is a sad state of affairs. Cape Verde has a ready, educated workforce that is among the best in Africa. There is ample land for building factories and other infrastructure that support new industries engaged in exporting products from Cape Verde.

But Import-Export investment opportunities in Cape Verde do not appear to be a good deal for US small business investors who have the money to engage. Only if and when these issues are cleaned up, will Cape Verde experience the movement of US capital seen by other third world countries whose economies have benefited from massive inflows of US capital.

Cape Verde might take a page from many of the Caribbean countries with a similar profile that have benefited from US capital investments in their Import-Export industries. But I'm not going to hold my breath. Instead, perhaps the largest opportunity is in the area of Tourism. That is the subject of a separate blog post.

1 comment:

Michael Stark said...

For any place to grow, imports and exports are very significant as they help flourishing the economy

Import Export Business

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