Countries with private sector dominance have shown the most impressive and sustained high rate of economic performance. Faced with this new private-sector led realism, the Sub-Saharan Africa (SSA) region has fast been adopting longer term structural adjustment and sectoral reforms to create more appropriate incentives and a private-sector led development as the basis for achieving sustained economic growth. To date, to many SSA countries, increasing private sector investment remains a policy objective.
A March 2019 Botswana Institute for Development Policy Analysis (BIDPA) titled “The Impact of Business Regulatory Quality on Private Sector Investment in Botswana” concluded that “increasing private investment remains a policy priority in Botswana due to its fundamental role in the economic development and in reducing unemployment and poverty”.
The study, undertaken and authored by Kedibonye Sekakela, a BIDPA research fellow found that “less has been achieved so far with regard to increasing private sector investment. Thus, private sector investment remains low”.
The study however acknowledged that regulatory environment plays a significant role in boosting private sector investment when the capacity and efficiency of the administrative personnel improves. The results are in accordance with conventional knowledge that the quality of regulation is profoundly affected by the institutional context in which it is imposed.
In Botswana, the private sector investment and development is recognized as the main vehicle for inclusive growth. From its early stages of development, the country implemented various policy instruments to stimulate private sector investment and one remarkable achievement so far, has been its prudent macroeconomic management.
Although macro policies are unquestionably important, there is a growing consensus that the regulatory environment also play a major determinant of private sector investment and economic growth in Botswana. It is however lamentable that there has been no research that analyzed their impact on economic outcomes such as growth, productivity and investment.
Following the success of market liberalization programmes in some developed economies, and the evidence of the failure of state-led economic planning in developing ones, the World Bank in 1995 acknowledged the redefining and narrowing down of the government regulation to ensure an undistorted policy environment in which efficient markets could operate.
Deregulation is widely adopted, often as part of structural adjustment programmes, with the aim of reducing the “regulatory burden” on the market economy. Nonetheless, the objectives of regulation in the context of developing countries are likely not to be simply concerned with the pursuit of economic efficiency but with wider goals to promote sustainable development and poverty reduction.
Regulation is not without transaction costs it has been noted. The costs can be classified into two: the costs of directly administering the regulatory system, which are internalized within government and reflected in the budget appropriations of the regulatory bodies; and the compliance costs of regulation, which are external to the regulatory agency and fall on consumers and producers in terms of the economic costs of conforming with the regulations and of avoiding and evading them.
Undertaken studies have shown that regulations, if applied effectively, reduce transaction costs and uncertainty by establishing a stable (but not necessarily efficient) environment, thereby promoting efficiency. This in turn, facilitates investment in human and physical capital, technological innovations and advancement, private sector development, all of which contributes to economic growth.
In other words, effective regulatory framework is associated with increasing levels of real income per capita since they shape overall condition for investment and growth. Executed poorly, regulation can stifle creativity in learning and limit opportunities for all citizens. Countries with good regulatory reforms enables markets to function effectively by providing a stable environment for investment and thereby sustaining the process of a market-led economic development.
The effects of regulatory environment on growth outcomes are profoundly affected by the institutional context in which it is imposed. Thus, the ultimate impact of that regulation may have on growth outcomes is likely to be affected by the country’s level of institutional development. These institutions include a free political environment, a competitive market mechanism, a functioning financial system, adequate transport and communication channels and efficient public services, among others.
On the role of macroeconomic environment on investment, it is observed that the level of economic activities captures the aggregate demand conditions in the economy. Rising demand or economic prosperity would imply that businesses in general see rising profits, increased sales and cash flow, and greater use of existing capacity.
This may lead to further growth of the economy through the stimulation of consumer incomes and purchases. Other structural factors playing a key role in explaining investment behaviour, particularly in developing countries, include the public investment and financial development.
Public investment could be, by either complementary or a substitute to private sector investment. For instance, public spending on infrastructure or goods that raises productivity of private investment could be complementary. On the other hand, stronger public investment while possibly beneficial to some ancillary sectors is; “on balance, more likely to crowd out private sector investment”.
The crowding out may occur when the public investment is competing for scarce physical and financial resources and for the provision of goods and services. It may also occur when the private sector finance public investments through the accumulation of debt that is not sustainable.
A key determinant of private sector investment is trade openness as it is also a crucial enabler of investment and economic growth as it provides new market opportunities for domestic firms, stronger productivity, and innovation through competition.
It is also observed that “there is no country especially smaller countries that have developed successfully in modern times without harnessing economic openness particularly to international trade and investment”. Studies have shown that trade openness stimulate private sector investment.
The Sekakela study also found that: “Private sector investment responds positively to increases in corporate credit in the short term but not responsive in the long term”. Economic activities support private sector investment positively but to a lesser degree.
On the policy front, the study advises government to deepen its efforts towards creating a market friendly environment and also capacitate bureaucrats as they play a catalytic role in the process.
