Services such as telecommunications, electricity and banking play an important role in many economic activities. The poor quality of many services in sub-Saharan Africa has serious implications for the productivity of firms. This in turn limits the potential of economic growth for poverty reduction.

While physical goods can be imported from other parts of the country or the rest of the world, firms tend to rely on locally produced services inputs in telecommunications, banking and electricity distribution. Yet, access to reliable services varies substantially within sub-Saharan Africa. The resulting difficulties firms face might be expected to affect their performance. A paper from the World Bank investigates the relationship between the productivity of African manufacturing firms and their access to service inputs, focusing on telecommunications, electricity and financial services.

Unreliable telecommunication services make it difficult for firms to communicate and coordinate with clients and suppliers, and cause staff time to be lost in the process. Difficulties in obtaining credit or other shortcomings in banking services can prevent a firm from making the most of investment opportunities that enhance productivity. They can also create unnecessary financial problems. Inadequate power provision often disrupts production process and cause productive assets to remain idle, decreasing productivity. Such barriers undermine the domestic and global competitiveness of firms.

The authors use information on firm inputs and outputs to calculate the productivity of firms. As measures of service effectiveness for telecommunications, energy, and banking, they use: the time required to obtain a new (landline) telephone connection; the number of days with power cuts (electricity outages); and the time taken to process domestic and international transactions, along with the amount of credit offered to firms. The authors use the variation stemming from regional differences in services quality within countries to control for unobservable country characteristics, such as geography, the quality of institutions or other policies.

Results from 10 sub-Saharan African countries shows:

• Good telecommunications are associated with higher performance. If Zambia had South Africa’s telecommunications, firm productivity would improve by 13.2 percent.
• Firms in regions with more frequent power outages are less productive. Many use generators to avoid disruption, which has higher costs.
• More efficient banking systems are associated with higher productivity. If Zambian banks were as efficient as South African banks, firm productivity would increase by 5.8 percent.
• Firms in regions where it is more difficult or costly to get loans perform less well.

If all three service sectors are taken together, there is a clear positive correlation between efficiency in telecommunications and banking sectors, and better firm performance. These results are inconclusive for the electricity sector, however.

The authors conclude that:

• The severity of physical conditions can only explain part of the deficiencies in services provision in African countries. Service sector policy plays a major role.
• Getting services policy right, through competitive private sector involvement, must be an essential element of any growth enhancement and poverty reduction programme.
• The role of political constraints, in particular political elites that benefit by blocking policy reforms to inefficient public service monopolies, should not be underestimated.

Source(s):
‘Service Inputs and Firm Productivity in sub-Saharan Africa: Evidence from Firm-Level Data’, Journal of African Economics (forthcoming), by Jens Matthias Arnold, Aaditya Mattoo and Gaia Narciso, 2008
‘Services Inputs and Firm Productivity in Sub-Saharan Africa: Evidence from Firm-Level Data’, World Bank Policy Research Working Paper 4048, World Bank: Washington, DC, by Jens Matthias Arnold, Aaditya Mattoo and Gaia Narciso, 2006 (PDF) Full document.

Funded by: Department for International Development (UK)

id21 Research Highlight: 10 March 2008

Further Information:
Jens Matthias Arnold
Organisation for Economic Co-operation and Development
2, rue André Pascal
75116 Paris
France

Tel: +33 145248722
Fax: +33 145248500
Contact the contributor: jens.arnold@oecd.org

Organisation for Economic Co-operation and Development

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