Ideas & Debate

How we can improve ease of doing business

Informal businesses need support to scale and get incorporated into the formal system. FILE PHOTO | NMG
Informal businesses need support to scale and get incorporated into the formal system. FILE PHOTO | NMG 

Last week the World Bank’s Ease of Doing Business Report revealed that Kenya’s standing had improved by 12 places. It is now ranked 80 among 190 economies and is the top improver in Africa.

The last time Kenya was ranked this highly was in 2008 when the country stood at number 84. It is now the third highest in Africa with only Mauritius and Rwanda higher at 49th and 56th place respectively.

The report says the improvement was credited to five reforms in the areas of starting a business, obtaining access to electricity, registering property, protecting minority investors and resolving insolvency.

These improvements are important for several reasons the first of which is that the report is an important signaller for investors, particularly foreign investors.

Improvements in ranking are positive signals for foreign investors in particular. Some may argue that the report makes no difference to the ordinary Kenyan but the truth is that SMEs and informal businesses are tethered to larger businesses who often seek foreign investors.

Thus an indication that the investment climate has improved bolsters investment opportunities for large formal businesses who can pass business on to SMEs and informal businesses as suppliers, distributors or service providers.

The report is important because it gives an indication of how easy it is to start and run a formal business in Kenya. The easier it is to start and run a formal business in Kenya, the higher the chances are that informal businesses may take the path toward formalisation.

With about 90 per cent of employed Kenyans sitting in the informal economy, efforts to formalise are welcome as formalisation is associated with higher productivity and profitability, better compensation, better working conditions as well as business stability.

That said, there are areas not covered in the report, the first of which is that it does not give an indication of the business environment for informal businesses where most Kenyans are employed.

Informal businesses are affected by unique factors such as high vulnerability to corruption, lack of formal business premises, lack of supportive policy action and lack of access to credit and financing precisely because of their informality.

Kenya could take the report further by creating a process through which the business environment in which informal businesses function is also assessed and recommendations made for improvement.

Additionally, the report does not breakdown the business environment to the county level. While it may be out of the scope of the World Bank to do a comprehensive county investment climate assessment, Kenya needs it.

Thus a process ought to be developed through which the business environment at county level is assessed and rankings published.

Ranking counties will do two important things; first it will signal to domestic investors where they ought to invest.

Additionally, county ranking will create positive peer pressure between counties and catalyse a process through which county governments more firmly effect improvements in county business environments.

Thus as Kenya celebrates the gains made in the Ease of Doing Business ranking we should be cognisant of how the process can be pushed further to catalyse further improvements in the domestic business space.