Competition Policy

base—most countries in the region are not ready to exploit the opportunities offered by the internet (McKinsey Global Institute 2013). The challenge is even more pronounced when considering their readiness as measured by their ICT skills base.

Thus, African countries should invest in building and expanding digital infrastructure.1 Additionally, such efforts must involve developing complementary digital skills (through dynamic education policy and training programs), enforcing targeted reforms in ICT sector regulation, enabling firm and industry capabilities to facilitate the adoption of digital technologies, providing incentives for digital entrepreneurship, and promoting widespread adoption of digital technologies in public services.2 Policy should also aim to address other supplyside constraints such as access to connectivity infrastructure and other complementary infrastructure, including electricity.

Policy interventions, therefore, will be required to build up strong enabling sectors in logistics, digital infrastructure, finance, and energy. Such interventions should improve the logistics sector and help provide a wide range of lowcost and high-quality services, expand the provision of reliable and affordable ICT services, facilitate access to finance through development of the banking sector and establishment of secondary markets, and target investment in power generation capacity as well as improve its affordability and accessibility, especially for business enterprises.

Competition Policy

Lessening or Eliminating Barriers to Entry for Domestic and Foreign Firms

The manufacturing experiences of Sub-Saharan African countries such as Côte d’Ivoire and Ethiopia suggest that young firms are the main drivers of job growth. This evidence makes entry and exit barriers central to defining the policy agenda for job creation and growth reform. In most of the region, restrictions on firm entry are pervasive. There is strong evidence that entry regulations hamper entry, especially in industries that naturally should have high entry (Klapper, Laeven, and Rajan 2004). Policies that ease the multitude of entry barriers to new firms could yield large gains by raising aggregate productivity, maintaining market discipline, and expanding job creation. Hence, policies that promote competition should be central to industrialization strategies in the region. The possibility of entry by itself provides a market selection mechanism and fosters greater competition between new entrants and existing firms as well as among the new entrants. Evidence from China and other East Asian economies shows that the creation and selection of new firms in the nonstate sector has been the most important source of productivity and output growth in the manufacturing sector.3

Eliminating regulatory distortions that restrict entry has been shown to be instrumental in many countries. In India, the elimination of compulsory industrial licensing, called the license raj, which regulated firm entry and imposed output capacity constraints, led to aggregate productivity gains. Most of the reallocation gains are attributed to new entrants in deregulated industries during the early postreform period and incumbent firms in the later period (Alfaro and Chari 2014). Regulatory reforms that make it easier to start a formal business are associated with increases in the number of newly registered firms and higher levels of employment and productivity. Conversely, economies with cumbersome regulations and administrative procedures for starting a business are associated with fewer legally registered firms, greater informality, a smaller tax base, and more opportunities for corruption and tax evasion compared with economies with more efficient regulations.

Easing Capital Requirements and Access to Credit

In several Sub-Saharan African economies, the capital requirement—money entrepreneurs must deposit to start a business—is still a major obstacle to starting a business (Djankov 2009). In 2013, 13 economies in the region had minimum capital requirements exceeding 200 percent of income per capita, reaching a high of 528 percent in one country (World Bank 2013). In economies with high minimum capital requirements, small and medium-sized firms have less access to bank financing (World Bank 2013). Hence, the reduction or elimination of capital requirements would reduce the costs of entry for new firms. In addition, if capital requirements are prohibitively high, potential entrants may be less inclined to formalize their enterprises.

Another constraint that potential entrants face is limited access to finance. Although access to finance is improving in some countries, manufacturing firms in the region indicated that factors such as the complex application procedure, unfavorable interest rates, and high collateral requirements are major bottlenecks to accessing finance for the operation of their businesses. The effects of these obstacles tend to be worse for domestically owned firms, small and medium enterprises, and nonexporting manufacturing firms. Lack of access to finance caused by distortions in allocation or overall financial underdevelopment is a major constraint to the entry of new firms, particularly smaller firms, and should be remedied.

Reforming the Ownership and Structure of State-Owned Enterprises

State-owned enterprises (SOEs) and other large firms with state connections often enjoy favors that may introduce market distortions that limit the prospects of entry for new firms.4 An indirect policy approach consisting of reforming and restructuring SOEs could improve SOE performance while reducing the distortions that impose barriers to the entry of new firms and