Saturday, December 4, 2021

Africa ready for trade, investment and beneficial partnerships

Despite the continent’s promise, though, obstacles to success linger, as job creation still has not caught up  with the growing youth labour force, gaps in good and inclusive governance remain, and climate change as well as state fragility threaten to reverse the hard-fought-for gains of recent decades.

Writing in the 2020 Foresight Africa: Top Priorities for the Continent 2020 – 2030 research report, Brahima Coulibaly, Senior Research Fellow and Director, Africa Growth Initiative, Brookings Institution acknowledged that despite the myriad challenges the Africa continent faces, he remains hopeful that “Africa will rise to the challenges of the next decade through renewed determination and a great sense of urgency…to tackle forthcoming, but surmountable obstacles to a prosperous continent by 2030”.

According to the report, structural change is taking place in Africa, but with a pattern that is distinct from the historical experience of industrialized countries and contemporary East Asia.

Export-led manufacturing is playing a much smaller role in the structural transformation of Africa’s economies. In fact, on average, the share of manufacturing in Africa’s gross domestic product (GDP) has fallen since 1980.

Instead, services – some with quite low productivity – absorb the bulk of African workers leaving agriculture and moving to cities. These changes reflect the impact of technological progress, a changing global marketplace, and natural resource endowments on Africa’s industrialization prospects.

At the same time, reductions in transport costs and progress in information communications technology (ICT) have created services and agri-businesses that share firm characteristics with manufacturing.

Like manufacturing, they are tradable and have high value added per worker. They have the capacity to for learning and productivity growth, and some exhibit scale and agglomeration economies. Importantly, “between 1998 and 2015, services exports grew more than six times faster than merchandise exports across Africa”.

Notably, firm capacities – the tacit knowledge and working practices embodied in the firm – play a central role in determining productivity and quality. For lack of a better term, we call these “industries without smokestacks (IWOSS) to distinguish them from traditional “smokestacks” industries.

“A number of these IWOSS have become increasingly important in Africa, including agro-industry and horticulture, tourism, some business services – including ICT based services – and transport and logistics”, states the report.      

To examine if the growth of industries without smokestacks offered an opportunity to address the youth unemployment challenge, South Africa was chosen as the pilot case study where a multi-year project was undertaken to assess the employment creation of IWOSS in Africa.

Like in many countries across Africa, “South Africa’s current growth path has failed to provide sufficient jobs for the low-skilled unemployed”. The post-apartheid South Africa economy has been characterized by an eroding primary sector and a stagnant manufacturing sector – a concerning trend indeed.

Instead, there has been a shift toward services sectors, with finance, transport, construction, and other services experiencing employment growth. Notably, the financial and community services sectors have accounted for over half of the increase in employment between 2000 and 2019.

The report further states that “the shift toward services without manufacturing growth is characteristic of much of Africa. But South Africa is an outlier among other African countries. Elsewhere in Africa, the shift toward services has been largely characterized by a shift into low-productivity services, often in the informal sector.

“In South Africa, financial and community services are relatively high-productivity sectors. At the same time, though, the shift towards formal sector services has not generated the volume and types of jobs needed to reduce unemployment and inequality”. 

In short, while the shift to services may offer South Africa an opportunity for the type of structural transformation previously anchored by growth in manufacturing, this achievement depends, importantly, “on the type of services”. 

Of the 8.9 million formal private sector jobs in South Africa in 2019, IWOSS sectors account for over two-thirds (68 percent), over double the share of non-IWOSS sectors. The largest employing IWOSS sectors are financial and business services (23 percent of IWOSS employment) and trade (16 percent). Tourism accounts for nine percent in the formal private sector.

The report further notes that in the absence of growth in the manufacturing sector, then, South Africa already appears to be on a path of structural transformation characterized by a shift toward industries without smokestacks..

With the objective of the research centering around widening of options for structural change and job growth in Africa, the study observes that “efforts to grow IWOSS can have similar or better outcomes on employment as efforts are to expand manufacturing in South Africa, as IWOSS sectors are more labour-intensive than manufacturing and the economy overall”.

Indeed, projections from the preliminary results indicate that “over the next decade or so, IWOSS sectors can generate three and half times more new formal sector jobs than non-IWOSS sectors”, in addition to further projections that “efforts to expand IWOSS may have employment outcomes that a more inclusive than those achieved from increasing growth in manufacturing and other non-IWOSS sectors”.

“While IWOSS presents opportunities for the employment of low-skilled individuals, without a concerted effort to address current skills gap, the full potential of these sectors will not be realized”, the study decries further lamenting that “because productivity in services has an important impact on productivity levels across the economy, enabling competition through regulatory reforms is essential”.

Removing barriers to foreign entry in services can increase competition, reduce costs, and extend access to a broader range of differentiated services. For most countries in Africa, regional and global export markets represent the best opportunity for IWOSS.

To offset the costs to first movers, African governments need to develop a package of trade and exchange rate policies, public investments, regulatory reforms, and institutional changes aimed at increasing the share of non-traditional exports in GDP – put differently, governments need to mount an East Asia-style “export push”.

While most African governments have focused on using special economic zones (SEZs) to promote manufacturing, SEZs are relevant to services and agro-based industries as well.

“By addressing these constraints to the growth of IWOSS and manufacturing, governments are not forced to choose between an “industrial policy” focused on manufacturing to promote tradable services and high-value agriculture. Both can achieve structural change and growth”, concludes the research study.

The study also laments that “while the world is well into the Fourth Industrial Revolution (4IR), education systems have not kept pace. Young people are often not learning the skills they need to succeed in the 21st century and interact with the changing world, such as digital literacy, problem solving, and critical thinking”.

The study further decries that despite widespread recognition of the importance of these skills for the future in education, “very few education systems have adopted this reality. On the African continent, where 60 percent of the population is under age 25, the teaching of 21st century skills will be necessary for Africa to transform itself into a continent of growth and opportunity. If young people do not learn how to use and create with technology, they are sure to fall further behind”.

How can Africa harness the power of technology when only 24 percent of Africans have access to the internet? Despite gains in internet access over the last several years, “the region has lagged behind the rest of the world in internet usage”.

The research study further reckoned that “educations systems need to equip their students with basic proficiency and, going further, enable students to create with technology” and that “education systems can foster the development of skills for the future through computer science”, as it helps students understand how computers work, use algorithms to create computer programmes and applications, and work with their peers to solve complex issues.

“Given that computers are all around us and technological advances are disrupting every industry, knowing how to use them will be beneficial to anyone, whether or not they wish to become a computer scientist”, the research advises.

It is further acknowledged that the 4IR characterized by the fusion of the digital, biological and physical worlds, as well as the growing utilization of new technologies such as artificial intelligence, cloud computing, robotics, 3D Printing, the Internet of Things, and advanced wireless technologies, among others, have ushered in a new era of economic disruption  with uncertain socioeconomic consequences for Africa.

“However, Africa has been left behind during the past industrial revolutions. Will this time be different?”, it is asked and answered that “so far, it does not appear that Africa has yet claimed the 21st century, as it lags behind in several indicators essential for a successful digital revolution”.

Improvements in Africa’s ICT sector have largely been driven by expanding mobile digital financial services. The region had nearly half of global money accounts in 2018 and will see the fastest growth through 2025.

Artificial Intelligence (AI) and block-chain are also attracting interest in Africa, as they have the potential to successfully address social and economic challenges there. And there are so many other areas in which the 4IR technology can be transformational.

In recent years, the ICT sector in Africa has continued to grow, a trend that is likely to continue. Of late, mobile technologies and services have generated 1.7 million jobs (both formal and informal), contributed to $144 billion of economic value (8.5 percent of the GDP of Sub-Saharan Africa), and contributed $15.6 billion to the public sector through taxation.

Digitalization has also resolved information asymmetry problems in the financial system and labour market, “thus increasing efficiency, certainty, and security in an environment where information flow is critical for economic and job creation”.

The research study warns that “failure to recognize and capitalize on 4IR opportunities, conversely, will impose considerable risks on African stakeholders. Without attempts to move beyond existing models of innovation, entrepreneurship, and digital growth on the continent, Africa businesses risk falling further behind, exacerbating the global “digital divide” and lowering their global competitiveness”.

It is suggested that going beyond the existing models requires discipline in governance to allow an endogenous innovative environment. At the same time, institutions must protect the market through consumer protection laws and regulations that encourage competition.

It is reported that by 2030, Africa’s potential workforce will among the world’s largest, and so, paired with the needed infrastructure and skills for innovation and technology use, the 4IR represents a massive opportunity for growth.

Indeed, the 4IR is dramatically changing global systems of labour and production, requiring that job seekers cultivate the skills and capabilities necessary for adapting rapidly to the needs of African firms and automation more broadly.

Already, Africa’s working population is becoming better educated and prepared to seize the opportunities provided by 4IR: For example, the share of workers with at least a secondary education is set to increase from 36 percent in 2010 to 52 percent in 2030.

Africa has yet to harness the full potential of its agricultural sector, and the 4IR technologies provide an opportunity to do so. Farming alone accounts for 60 percent of total employment in Sub-Saharan Africa, and the food system is projected to add more jobs than the rest of the economy between 2010 and 2025.

Farm labour and income is especially important in SSA, where on-farm activities represent almost 50 percent of all rural income in countries like Ethiopia, Malawi, Nigeria, and Tanzania.

Information on competitive pricing, monitored crop information, disease prevention tips, and disaster mitigation support has the potential to transform the agriculture sector to improve income, production, and demand throughout the continent. Furthermore, as incomes rise across the continent, growing consumer demand for food and beverages will coincide with business-to-business growth in agro-processing.

According to the report, the 4IR presents significant opportunities as well as challenges for Africa. The key issue for policymakers is how to position their economies to benefit from the revolution while managing the challenges that it presents.

“As innovation is at the heart of the 4IR, reinforcing state and institutional capacity to drive and support innovation and create an enabling business environment is essential for success”, states the report adding that “a major regulatory challenge involves increasing cyber-security”.

Most African countries lack a comprehensive legal framework and institutional capacity to address cybercrime. Instead, efforts to prevent cybercrime are appearing at the more local level or are implemented by private sector actors themselves.

For example, between 2015 and 2016, there was 73 percent increase in Information Security Management System-certified companies, from 129 in 2015 to 224 in 2016, with the majority in South Africa, Nigeria, and Morocco.

The research study further acknowledged that “adequate infrastructure development will drive and sustain economic transformation in Africa. With lower transport and communication costs, countries with suitable agro-ecological conditions can produce high-value products.

“Closing the internet connectivity and access gap with advanced economies will enable more African countries to enter service export markets. Small-scale manufacturers in Africa may also become more competitive with access to digital platforms for research, sales, and distribution”.

It is anticipated that to make the most of the 4IR, “African governments and entrepreneurs need to recognize new niches for industry and leverage them to achieve sustainable, inclusive growth, and take decisive steps to close the gaps in digital skills, infrastructure, and research and development”.

Africa needs a digital transformation for faster economic growth and job creation. The World Bank estimates that reaching the AU’s goal of universal and affordable internet coverage will increase GDP growth by two percentage points per year.

Also the probability of employment – regardless of education level – increases by 6.9 to 13.2 percent when fast internet becomes available, as it facilitates firm entry and boosts productivity and exports.

As such, digital technologies offer a unique opportunity for African countries to significantly transform various sectors of their economies. However, “this potential cannot be fulfilled unless Africa addresses its sizable deficits in digital infrastructure”.

The research further bemoans that African countries spend about 1.1 percent of GDP on digital investment against advanced economies that spend an average of 3.2 percent. Thus, “business-as-usual is not an option, as it will continue to widen the digital divide and rive further marginalization of Africa”.

On the bright side, the region has shown a readiness to embrace full digitalization. It has seen the highest rate of increase in internet use and connectivity in the world over the last two decades and is home to a young and dynamic population.

Over the same period, the number of internet users in Africa has increased more than 116-fold, from 4.5 million to 523 million, while that in the rest of the world did not even double. Young Africans in particular are capitalizing on new technologies to launch startups and to find solutions to the continent’s problems.

Successful technological innovations, ranging from mobile banking services in Kenya to delivery of life-saving medications by drones in Rwanda, are widespread and “those successes need to be scaled up to the continental level”.

The research study further observes that “the goal of digitally transforming Africa is achievable. The total cost of this initiative is estimated at between $80 billion and $100 billion over 10 years, with more than half of the investment coming from the private sector”.

The challenge, however, is not just to mobilize public resources, but rather, the biggest challenge is to put in place policies and institutions that encourage the private sector to invest. Second, the needs of the digital economy should not distract from work to deal with Africa’s other needs, especially investment in human capital, energy and transport.

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