Doing Business in Africa: Benin
In this AFKInsider series, we explore the regulatory conditions that an entrepreneur is likely to face when setting up a business in sub-Saharan Africa. AFKI presents Doing Business in Africa: Benin.
Doing Business in Africa: Benin
Sandwiched on a thin strip of land between Togo and Nigeria, Benin is a small country in tropical West Africa that has had rocky post-colonial history since gaining independence from France in 1960. Once a relatively rich country due to profits derived from the African slave trade, decline set in during the 19th century due to the banning of the practice and the last slave ship left the country—bound for Brazil—in 1885.
Shortly thereafter the country was directly incorporated into the French colonial empire in 1892. Between then and independence nearly 70 years later the country was ruled in typical colonial fashion by the French—meaning agriculture was dominated by a white elite, infrastructure built to serve commercial agriculture geared to produce cash-crop exports to metropolitan France, the use of divide-and-conquer ethnic politics, and the creation of a small native elite linked to the French colonial government.
Within this milieu Benin’s first president—Hubert Maga—rose to power, first becoming a schoolteacher in the colonial administration then later an elected representative to the French Parliament. This experience served to position him to lead the country when independence came, and Maga emerged as a consensus candidate supported by rival ethnic political groups.
Inter-ethnic squabbling, however, quickly unraveled any sense of national unity once independence was granted and increasingly authoritarian rule set in. Eventually a three-man presidential council was formed to try to bring stability to the country’s increasingly tumultuous politics, but to little effect as instability in the form of coups, rumors of coups, and the lingering threat of communal violence created chaos.
Fatefully, Benin’s first republic was finally overthrown by a revolutionary military coup led by Mathieu Kérékou in 1972, who formally created a Marxist-Leninist regime in 1975.
Under socialism, Benin at least found a measure of political stability—if not economic prosperity—and received some aid from Moscow, which at the time was riding the high tide of anti-Western revolutionary sentiment in much of post-colonial Africa.
It was not enough to jump start any form of meaningful development, however, and the economy sunk into such penury and ruin in the 1980s that it would ultimately require the intervention of the IMF and massive assistance by the external donor community.
As in much the rest of Africa, the collapse of communism in Europe and the ending of Soviet aid was the final nail in the socialist coffin and what was laughably called Marxist-Beninism came to an end as Kérékou gracefully stepped aside to allow democratic elections and a transition to a market economy take place in 1990.
Since then Benin has been, if not a success, then not a failure, either. The unpopularity of economic reforms instituted by Kérékou’s successor as president— Nicéphore Soglo—ultimately led to the return of Kérékou in 1996, this time via the ballot box instead of military coup.
Kérékou was in turn replaced after two terms by Benin’s current president Yayi Boni—a former banker—in 2006. So far, Benin is a country where democracy seems to be taking root.
Ease of Doing Business
So how does all this influence business conditions?
According to the World Bank, Benin currently ranks 170th out of 183 countries on its Ease of Doing Business Index – a measure created by the Bank to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses. By way of comparison, the United States ranks 4th on ease of doing business, right after Singapore, Hong Kong, and New Zealand.
What does this ranking mean? Take, for instance, the Bank’s measure of how easy it is to start a business, which is depicted in Figure 1 below. From the figure one can see that the Bank defines business-creation costs as consisting of the time and money outlays involved in the series of legal steps necessary for the entrepreneur must take in order to legally establish an in-country firm. Using this framework, the Bank then tasks researchers to go through this process in order to establish in-country averages.
When this metric is applied to Benin, the Bank finds that Benin ranks 157th out of 183 in ease of starting a business, making Benin one of the more difficult places on Earth to start a legal commercial enterprise. To start a business in Benin one has to complete seven bureaucratic procedures that take a total of 31 days at a total cost of about $1,140, with a minimum capital requirement of $2,122 imposed by the government for the start-up.
Figure 1:
How the World Bank Measures Ease of Starting a Business
Using similar metrics for other aspects of business operations, the Bank has ranked Benin in a number of other areas. To obtain a construction permit, for instance, Benin does better and is ranked 125th out of 183 as it takes the completion of 15 procedures, which takes on average 320 days at a cost of nearly $1,875. While not insurmountable for many Westerners, it is nonetheless a steep proposition for most citizen of Benin.
Continuing in its assessment, the World Bank has determined that in order to obtain and register property, Benin does about the same as it ranks 129th out of, again, 183 countries measured. To register property in Benin, the Bank finds, it takes the completion of four bureaucratic procedures that takes, on average, 120 days and costs 11.8-percent of the property’s financial value in fees and other costs to complete. This makes Benin a moderately a fairly place in which to register property.
Benin unfortunately does not do better when it comes to obtaining credit, where it falls to 152nd out of 183—making the country one of the worst in the world in this area. Here, as depicted in Figure 2, the Bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges.
When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the Bank, the more available credit will be. When information on borrowers is significantly lacking – as is the case in most of Africa – legal protections for creditors must in turn be very strong. Benin does poorly because creditor rights are relatively weak and there is relatively little information on potential borrowers.
Figure 2:
How the World Banks Conceptualizes Credit Acquisition
When it comes to protecting investors and minority shareholders, Benin does about as well. Here, the country ranks 154th out of 183 countries, largely due to the difficulty of bringing shareholder lawsuits and the loose liability laws constraining directors and corporate executives. While some conflict-of-interest disclosures are required, there is otherwise very little to protect shareholders from executive malfeasance.
Benin unfortunately does even less well in the area of taxation. The World Bank estimates that pleasing the tax man in Benin requires a total of 55 payments over the course of a year which, in turn, takes up to 270 hours to complete and can consume up to 66-percent of a company’s profits. Accordingly, Benin’s tax burden is ranked 167th out of 183 nations, making it one of the worst in the world in this area.
When it comes to engaging in cross-border trade, Benin does better. In Benin, to import goods into the country one is required to have seven documents for customs officials to inspect. On average, it takes a total of 32 days to import goods into Benin with the cost amounting to $1,400 (excluding tariffs) per container shipped into the country.
The cost to export goods is roughly similar as Benin requires seven documents to be inspected by customs’ officials, while the total cost (excluding taxes) is $1,251 per container, with delivery taking up to 30 days from point of origin. Compared to global averages this nets Benin a ranking of 127th out of 183 on ease of engaging in cross-border trade.
Benin’s ranking plummets again when it comes to contract enforcement, where it ranks 177th out of 183 countries ranked on this issue by the Bank. On average, reports World Bank analysts, it takes a total of 42 legal procedures to take a contract from dispute to resolution, at the cost of 825 days spent in court or otherwise attending to legal issues. The financial cost of pursing a contract claim, says the Bank, typically accounts for 64.7-percent of the value of the claim.
Finally, in terms of closing or liquidating a business Benin ranks 118th out of 183 countries. Here it takes four years to close an estate or enterprise at a total cost of 22-percent of its value with an average recovery rate of 20.2 cents on the dollar.
Table 1 presents a summary of these rankings as well as Benin’s overall ease-of-doing business rating. All things considered, Benin is a difficult place to do business in. It does least bad, however, in the area of construction permits, registration of property, and cross-border trade.
Table 1:
World Bank Ease of Doing Business
Assessment and Rankings: Benin
Prospects
Benin, while a hard country to do business in and corrupt as in much of the rest of Africa, nonetheless has potential. Its democracy is a relatively stable one that only occasionally demonstrates tendencies towards violent inter-ethnic violence, and since the painful transition to a market economy in 1990 growth has been, if not great, then at least steady. While low-value cotton remains its principal export commodity and subsistence agriculture commands the labor of most of the population, Benin’s position in growing West Africa and link to France and through it Europe has given it an opportunity to develop as a nascent trade, transport, and service hub for western Nigeria and eastern West Africa.
Figure 3:
Benin Economic Growth,
Percent Increase, 2003 – 2013
What’s more, Benin’s small population means that it may be able to leverage both aid and growth more capably than its giant neighbor to the east—especially since democratic accountability, regulatory efficiency, and policy effectiveness is generally much easier to achieve in small countries than large ones. The country’s private sector is also in good position to exploit Benin’s potential to play an emerging role in global and regional supply chains. This is especially the case for textiles given its abundant production of cotton and easy access to both the European and Nigerian markets.
Still, for this to happen and for growth to take the place of aid Benin must embark on further reform to the rules and regulations that create its business environment. It takes scandalously long to register a legal business while contract enforcement and taxation are onerous deterrents to investment. Still, if this can be done and coupled with infrastructure improvement and a commitment to increase access to health and primary education, Benin will be able to go a long way towards its goal of becoming an emerging economy by 2025.
Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.