The Paradox of Kenya’s Improvements in the Ease of Doing Business Index

Kenya climbed 12 places on the recently released World Bank, Ease of Doing Business Report 2018 to position 80.  Several indicators were noted to have marked significant improvements in the index, which is mainly based on domestic laws of a country, regulations and administrative requirements.

Starting a business in Kenya has gradually eased as the government has merged procedures required for a business to operate formally with the introduction of online processing of business registration.

The Kenyan government’s efforts towards achieving universal access to electricity through the Last Mile Connectivity program, has improved access to electricity by start-up businesses and enhanced the reliability of electricity by investing in distribution lines and transformers. The index also noted the decrease in the cost requirement of permits in the elimination of clearance fees required from the National Environment Management Authority (NEMA) and the National Construction Authority which ultimately translates to a decreased cost of capital required to start a business.

While the Doing Business Report paints an improved image of the business environment in Kenya, the Economic Freedom of the World Report released by Fraser Institute portrays a different picture for Kenya. In 2012, Kenya’s ranking in the Economic Freedom of the World report was 64, in 2017 the country had dropped to position 70.

The disparity in the trends of both indices shows the indifference by the government has for the factors that are responsible for a business environment.

A disproportionate amount of effort continues to be directed towards technical tweaks in the business environment whereas wider issues that make a business environment that make a business be, continue receiving a wide berth. Most notably among them, the rule-of-law in the country.

While ultimately helpful, tweaks to reducing the burden of business registration cannot be misconstrued to mean the entirety of the business environment. The business environment is a function of many other things, key among them non-discretionary rulemaking by the government and its agencies.

In this regard, Kenya fairs poorly, non-discretionary rulemaking by the government provides avenues for corruption, Kenya ranks at position 145 out of 176 states in the Transparency International’s Corruption Perception Index.

The Economic Freedom of the World report unearths flaws with Kenya’s legal system, property rights and limitations to international trade, which limit economic freedom.

Notably, on the latter, the two indices exhibit conflicting angles on international trade. According to the Doing Business Report, it is easier to trade across borders in Kenya today. This is attributed to improvements made to the electronic customs platform. Kenya has reduced import documentary compliance time by 24 hours. This has been achieved through implementation of a single window system, which allows for electronic submission of customs entries.

On the other hand, there still exist regulatory trade barriers to international trade. In the findings of the Economic Freedom Report, there are capital controls and controlled movement of visiting foreigners, which limits the freedom to trade internationally.

Kenya’s performance on the protection of property rights is notable. Registered property rights are necessary to support investment, productivity and growth as property owners with registered titles are more likely to invest in a country.

However, the legal system in Kenya has several loopholes. The Economic Freedom of the World Report rating on the legal system in Kenya is poor. The integrity of the system is questionable. The courts in Kenya are also found to be impartial.

In question is also the reliability of the police force in Kenya, which also partially contributes to high business costs of crime.

While on one side the business environment is green and attractive to investors, overpayments and demands for bribes exemplify factors that scare investors. Bureaucratic red tapes and inefficiencies in government departments limit the ease of doing business.

There is, therefore, the need to come up with policies geared towards curbing cases of bribery and demand for overpayments. Streamlined collection of payments and reduced number of procedures needed to set up businesses are examples of the measures that should be implemented to achieve economic freedom and close the gap with the leading economies in the specific indices.