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Thursday, July 14, 2011

The ease of doing business in Cape Verde

You're probably familiar with the philosophy of the "ease of doing business."

Most investors, entrepreneurs and business people have come up through the school of hard knocks. You've either been guilty of offenses against that philosophy and learned the hard way that not being easy to do business with almost guarantees failure, or you may have been on the receiving end of a clueless business you've dealt with that resulted in a frustrating experience. You probably showed your displeasure by not ever doing business with that company and moreover, you likely warned all of your business associates about the clueless company. The lesson learned from this by every successful business owner is that the easier you are to do business with, the more business you will do ... and vice versa.

It's one of the keys to business growth. And so it is with national economies. The easier it is to do business in a given country, the greater the amount of economic activity. It's pretty simple when you think about it. Anything that gets in the way of transacting business retards growth.

The ease of doing business is the oil that greases the engine of a national economy. A well-oiled engine not only runs faster, it also runs more cost effectively. It's that simple.

The truth about investing in Cape Verde is that the country is still in the midst of the learning process. I have personally experienced the bureaucracy and inefficiency. Here is an interesting anecdote about doing business in Cape Verde. It is the story of a government bureaucrat who had been in his particular role for over two decades. The sum of his accomplishments over his term was exactly zero - which is being quite generous in the assessment. He presided over endless disasters, was accountable to no-one and built himself a little fiefdom. Everyone wondered why no problems were being solved within this area. Yet, he was allowed to persist in his post.

The challenge is this - people in government preside over portfolios that directly affect the economic lives of hundreds of thousands of the citizens they serve. When the citizenry are relatively poor, the bureaucrats are viewed as lords or even gods - such is the power vested in them by the people. And the appointees appear to believe that they are in fact lords over the portfolios entrusted to them. To bring the discussion full circle back to the "ease of doing business", these "lords" see themselves as being in control of your business destiny. They prove their deity to you by becoming obstacles in the way of economic freedom: deliberate obfuscation, unnecessary or senseless rules, chains of approvals, stamps, signatures, required formats and formalities, control of the length of time that it takes to accomplish things - these are all part of the tools of the trade of bureaucracy. So they are in fact lords and gods of economic gridlock because that is exactly what happens under their domain.

So where does Cape Verde stand with respect to all of this? The reality is that it is not as easy to do business there as it is in other parts of the world, but it is well regarded in sub-Saharan Africa. The good news is that things today are many times better than they were just five short years ago.

The International Finance Corporation, a division of the World Bank, produces a report called Doing Business that ranks countries across the globe in terms of the ease of doing business. Doing Business analyzes regulations that apply to an economy’s businesses during their life cycle, including start-up and operations, trading across borders, paying taxes, and closing a business.

According to the Doing Business 2011 Report, Cape Verde ranked 132nd out of 183 countries which represents an improvement of 10 places on the list since 2010. This means Cape Verde falls just above the bottom quarter of all of the countries in the world.

Where Cape Verde has made significant improvements through reforms is in the ease of starting a business, registering property and taxes. For example, Cape Verde created a "one-stop" business service called Casa do Cidadão which allows entrepreneurs to register a business in a period of one day. And this can even be accomplished over the web.

This replaced an antiquated process that involved running from one location to another across the city, waiting in interminably long lines, having to make photocopies of various items rather than the agency making its own copies or scanning whatever originals you provide, paper and more paper everywhere, stamp duties that are only valid with a literal physical stamp and various maneuvers which the average person would consider to be overwhelming red tape.

The improvement in starting a business via Casa do Cidadão has been so significant that literally thousands of new business registrations have been issued over the online facility in the past couple years including to Cape Verdean emigrants who are not even physically in the country! It is a testimony to the power of technology.

Even so, Cape Verde ranked only 120th out of the 183 countries in terms of ease of registering a business.

To put Cape Verde's degree of competitiveness in relative perspective, I have once again made a comparison to the Caribbean (CARICOM) nations for the same reasons I did so in showing Cape Verde's relative rank in degree of Economic Freedom. The Caribbean nations are a much better gauge of performance because they are more similar to Cape Verde in terms of population, size of economy, resources and the cultural history that influenced every aspect of those nations' growth and development. It also gives Cape Verde a realistic target at which to aim.

Below is a table showing the results of the comparison.

Cape Verde ranks 12th out of 14 just ahead of Suriname and Haiti. So where is Cape Verde doing well and where can it improve relative to the Caribbean countries in terms of ease of doing business and attracting FDI? Cape Verde ranks well in ease of doing Import-Export and in the enforcement of contracts. The import-export arena is quite ironical because Cape Verde exports little and has a massive trade deficit. In other words, it is very easy to import into Cape Verde. Perhaps this is an area where it should be less easy to do business relative to exporting from Cape Verde but that is a story for another day!

Another area worth pointing out is taxes. Cape Verde's tax rates are in the lower range relative to its counterparts in CARICOM. In addition, Cape Verde provides substantial tax incentives to new businesses in certain sectors such as tourism and renewable energy.

But the picture also points out that even if Cape Verde ranks well relative to sub-Saharan Africa where there are few role models for Cape Verde, the stark reality that there is a lot of room for improvement relative to the rest of the world and certainly relative to the Caribbean. Potential investors in Cape Verde would be well advised to seek out help from those who have blazed the trail ahead of them and overcome the bureaucracy or have established strong local connections and know their way through the ropes.

Bahrain - Ranked #28
The Cape Verdean government should also be aware that other countries aren't simply sitting around twiddling their thumbs. In a competitive world, those who are easiest to do business with will win the minds and hearts of investors along with substantial FDI (foreign direct investments).

Cape Verde should set specific targets for where it rank relative to CARICOM nations in terms of ease of doing business and should examine the best-in-class practices among those nations in the respective areas of facilitating business development.

Furthermore, some improvements will cost exactly nothing - cutting red tape simply means eliminating as much bureaucracy as possible - and may even save money besides saving interested investors precious time. Thus, while the Doing Business report can analyze processes, regulations and numbers, they do not take into account what it's actually like for the entrepreneur on the ground. So a high score in any particular area may not reflect the frustrations of physically moving through the process. Things that on paper appear as if they should take hours or days may instead take months - this cannot be captured by theoretical analysis.

A huge improvement can thus be achieved by addressing the simple things that discourage potential business entrants and investors. The example I hear of the most is where a bureaucrat is the sole point of sign-off on a certain process or is the only person who can provide certain information, but leaves the office on government matters, for a coffee break or a vacation ... while the entire world awaits their return. Their schedule becomes your schedule. Another example is where you must go to various physical locations across the city or country - yes, even from one island to another - to complete a procedure and heaven forbid, the sole individual between you and the end result you seek has not left on vacation. These effects are not captured by Doing Business.

The moral of the story is that in a competitive global economy where capital flows to the most accessible opportunities, no country can afford to be perceived to have business policies and procedures run by officials who have apparently obtained a Ph.D in Business Prevention from Red Tape University. Such heads should be first on the red-tape chopping block.

The countries in which it is easiest to do business will be the ultimate winners of the hard earned capital of foreign investors.


Milla Riipinen said...

Awesome.It seem that it is really good to have a business in Cape Verde. :) thanks for sharing.

Angelo said...

Thanks for your comment, Milla. Having a business in Cape Verde can be very good ... you just have to be prepared to stay the course and knock down the obstacles to achieve your business goals there.

Jamie said...

Very useful for me, thank you

Angelo said...

Thanks for commenting Jamie. Very soon, we will be publishing the most comprehensive guide to investing in Cape Verde. It will fill the gap of information that is clearly needed by investors. Look out for it.

Vishenda said...
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