South Africa: The Rule Of Law In Africa: Enforcing Governance Or Scaring Off Foreign Investors?

Last Updated: 1 March 2016
Article by Kenny Chiu and Rita Chen

Most Read Contributor in South Africa, September 2018

In the era of globalisation, the degree of economic liberalisation is more pervasive than ever before. With the acceleration of market integration, even relatively regressive regions of Africa are enjoying the fruits of globalisation. An important factor in the expansion of globalisation is the rapid advancement of legal development, and, indeed, many developing nations in Africa, such as Ghana and Tanzania, have legal systems on par with developed countries and thus have a higher degree of cohesion due to the rule of law.

However, enforcing the rule of law in Africa against the backdrop of globalisation has not been without challenges. In 2015, the Nigerian Communications Commission fined Africa's largest telecommunications company $5.2-billion for its failure to register every subscriber's personal information and to unsubscribe unregistered SIM cards (a particularly important task to assist the Nigerian government in the crackdown on terrorists). Similarly, in 2013, in nearby countries such as Ghana, thousands of Chinese nationals were deported on suspicion of illegal gold mining in the region.

At the same time, foreign investors are expressing frustration with the slow pace and bureaucracy involved in being granted mining licences. West Africa traditionally relied on oil exports as its economic pillar; however, with the current global economic slowdown and depressed oil price, the revitalisation of manufacturing and other industries is necessary to attract foreign investment.

West African leaders and companies are largely aware that the advancement of technology and respect for the rule of law are the two fundamental factors that could accelerate their economic growth and provide foreign investors comfort and security when investing in their countries. Making efforts to uphold the rule of law, such as enhancing the ability and efficiency of law enforcement, and preserving the authority of the law, is a natural process, but is not without challenges.

Amid the current international economic crisis, it is disturbing when the enforceability of the law becomes questionable. The question that needs to be asked is: Is it possible that the rule of law in many African countries could be dissuading foreign investment? The issue of legal enforceability is a widespread concern of many investors and we believe it is prudent to analyse this problem.

Firstly, in terms of the market economy, a comprehensive framework of law and regulations in a country is a move towards modernisation, and the effectiveness and authority of the rule of law can only be maintained by strong and fearless law enforcement. Whether in a period of rapid economic growth or economic downturn, the government must assign great importance to the function of law, as this is crucial to protect market players and their rights, whether they are foreign, state entities or private enterprises. In creating fair rules and establishing a fair market environment for enterprises to participate in economic activities, increasing strict law enforcement is fundamental to the healthy development of the economy.

Secondly, in many parts of Africa (Nigeria in particular), strict law enforcement is a reflection of the important essence of the rule of law. If the law is not implemented, this will lead to a decline in legal efficiency. In relation to the rule of law in developing West African states, strengthening law enforcement is an important measure to further the implementation of the rule of law.

As an illustration of the importance of contract enforceability and the rule of law, the World Bank Group recently gathered and analysed comprehensive quantitative data to compare business regulation environments across economies and to encourage economies to aim for more efficient regulation. The World Bank Doing Business 2016 report ranks frontier economies like Ghana high on the index in terms of ease of doing business and the enforceability of contracts. In measuring contract enforceability, the report measured the time and cost to resolve commercial disputes through local first-instance courts, the quality of judicial processes indices, and evaluating whether each economy had adopted a series of good practices that promote quality and efficiency in the court system.1

Finally, it cannot be entirely ruled out that it is possible that some countries are appropriating the name of the rule of law to protect their local industry and workers, and thereby discouraging foreign investors and foreign capital. In the West African bloc, economic structures are relatively singular, as petroleum resources have always been the pillar of the national economy and the law may be developed to protect the industry it relies on to survive. The key to this discussion, however, depends on whether a country's legal system is designed to promote foreign investment, such as through protective measures, exemptions or priority access provisions, and the efficacy of their implementation. However, should there be selective law enforcement and the reduction of a favourable business environment, this could undoubtedly discourage foreign investors.

In a survey conducted by MergerMarket2, changes in the regulatory environment and transparency in Africa are identified as the largest concerns relating to investment, while cultural and organisational differences may result in a lack of trust and less flexibility between these countries and foreign investors. In order to deal with this effectively and to continue investing in Africa, investors should take time to familiarise themselves with local laws and actively pursue risk-mitigation measures to ensure that they are acting in line with law-abiding business practice.

In the era of globalisation, Africa should create favourable investment conditions and actively share in the dividends of globalisation by establishing legal frameworks that encapsulate equal, reasonable and non-discriminatory law enforcement, in order to mitigate any effects that could negatively impact investment and prejudice the continent.

Footnotes

1. Doing Business 2016, The World Bank Group. http://www.doingbusiness.org/data/exploreeconomies/ghana#enforcing-contracts

2. Deal Drivers Africa – A comprehensive Review of African M&A 2014, MergerMarket

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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