African Governments Must Look to Tech to Drive 21st Century Growth

Guest Contributor, Wednesday June 27th 2018

This post was written by Quentin Mareuse, an intern at the MEST Incubator Accra. 

Africa’s booming population, increasing urbanization, and abundance of high-growth economies have produced much speculation about the continent’s potential to drive global economic growth in this century. However, the enthusiasm has been tempered by more cautious prognosticators, who point out that recent high growth has been overly reliant on commodity exports, with profits often flowing straight into the offshore bank accounts of corrupt politicians rather than profiting ordinary people.

Indeed, the high growth rates experienced by many African economies in the 21st century do have their roots primarily in commodity exports. Nigeria, now the continent’s largest economy, grew at an average rate of 7% a year between 2005 and 2013, but this was largely due to a boom in the price of oil, which accounted for 95% of Nigeria’s exports. When oil prices tumbled in late 2014, Nigeria’s economy slumped dramatically, even going into recession in 2016. The story was similar for many economies across the continent, including Angola, Chad, and Mozambique.

Clearly, reliance on commodity exports does not constitute a healthy basis for economic development. It results in vulnerability to shocks and a dependence on the “commodity supercycle”, whilst a decline in exports usually has seriously negative ramifications for the rest of the economy. In 2015 the Nigerian Naira slumped, resulting in importers failing to pay their bills and a crippled (albeit small) manufacturing sector.

So how to resolve this overdependence on commodities? Development economists have long emphasized the importance of creating a strong manufacturing sector. This is what produced high sustained growth in Europe and North America in the nineteenth century, and in East Asia in the second half of the twentieth century. Although a promising route to growth that should be pursued, it is lengthy and will require active and prudent government involvement. Fortunately, there is another promising avenue for growth that African countries can seek: technology entrepreneurship.

A boom in the tech sector presents enormous opportunities for African growth for a good number of reasons. First, it can create significant employment growth. This applies not only to the tech sector itself, where successful startups such as Jumia, meQasa, and Flutterwave and dynamic tech hubs such as MEST have created thousands of jobs apiece, but also to other sectors of the economy where tech is having an impact.

Mobile money products such as Safaricom’s M-Pesa have produced entirely new industries (including African fintech and e-commerce) and revitalized old ones (such as media). This is especially significant since the continent’s main economic challenge (and opportunity) in the 21st century will be providing jobs for its booming youth population: the number of people aged 15-24 now stands at 226 million, and is expected to more than double by 2055.

Second, the African tech sector can spur innovation and increase competition. In fintech, for example, innovative solutions that allow payments to be transferred, savings to be managed, and better financial decisions to be made have disrupted traditional financial systems. Banks are under pressure to match this innovation by investing in, acquiring, or collaborating with fintech startups. Barclays has taken note of this pressure and recently ran a FinTech accelerator powered by techstars in South Africa and signed proof-of-concept agreements with seven of the ten startups that took part.

Third, they can create opportunities in diverse geographical areas, including those experiencing low growth and opportunity. MEST Africa’s own TroTro Tractor has made considerable headway in expanding tractor access in the traditionally poor and un-mechanized Northern Region of Ghana.

Finally, tech startups have great capacity for attracting foreign investment. As tech hubs, startups and founders on the continent have begun to gain serious traction, international appetite for investments in African tech startups has soared, with African VC funding reaching $560 million in 2017, up 53% from the year before. This trend seems to buck even downturns in the rest of the economy: as South Africa struggled through corruption scandals and low growth due to tumbling commodity prices in January 2016, Silvertree Capital, a leading tech investor in the country, announced its intention to invest $10 million into African economies, backing a growing tech-consuming middle class to produce a return on the investment. If tech can draw this kind of investment into Africa’s economy in spite of economic struggles, it is a sector worth backing with full force.

Perhaps most interestingly, tech startups are less reliant on government support than almost any other sector. The well-known shortcomings of many African governments (clientelism, rent-seeking, and ethnic politics, amongst others) have impeded the efficient management of industries that rely heavily on government such as commodity extraction. By contrast, the tech startup world, in which innovation and execution rather than access to resources are the determinants of success, can scale and succeed with little impediment from the state. This does not mean that African governments cannot promote startup growth. Indeed, the state has critical roles in developing the infrastructure and education on which the success of a tech sector relies, and governments across Africa have already made efforts to actively support their startup ecosystems.

There is clearly a whole lot of transformative potential on this continent. But for the “Africa rising” dream to become a reality, tech innovation really is our best bet.

Interested in learning about the economics of the Africa rising narrative? Check out our article on Eric Osiakwan’s African Economic KINGS!