Authors: Ryan Short, Ceri Scott, Emma Green, Mark Schoeman, Korstiaan Wapenaar, Emma Ruiters, Chloe von Widdern, Amreen Choda
Affiliated organization: Gensis
Type of publication: Report
Date of publication: June 22nd, 2021
The digital economy in Africa
Africa has three latent opportunities that can become significant competitive advantages.
The first is an extremely young population. In 2020, 60% of Africans were younger than 24 years compared with just 16.6% in Europe. The second is bringing more women into more formal economic activity. By one estimate, improving gender parity could contribute another 10% to the combined African GDP by 2025. The third opportunity is the ability to diversify economies and take advantage of intra-African trade. Historically, intra-African trade has been weak partly because of a shared over-reliance on the same type of primary goods.
“Digital economy” refers to the use of digital technologies in the production, consumption and trade of goods and services. Digital technologies have been rewiring the global economy by disrupting ways in which information is generated and shared, production techniques, and the transport of products from producers to consumers. Even seemingly “physical” industries like tourism, hospitality, food and transport are being transformed by digital technology.
The digital economy in Africa has been driven by explosive growth in internet penetration, yet connectivity gaps remain. In the eight-country sample, between 1999 and 2019, the proportion of citizens with access to the internet grew from 1.2% to 36.7%. This phenomenal expansion – growing at a compound annual rate of 18.8% – is primed to continue, and will allow the African region to catch up to the BRICS countries (Brazil, Russia, India, China, South Africa) at 56% and South America at 66%. However, when compared with more developed markets like Europe at 83%, Africa’s connectivity gap is clear.
The predominant device for accessing the internet in Africa is the mobile phone. In Kenya 84.1% of the population use a mobile device to access the internet, in Nigeria 87% and in South Africa 73.4%. Unique mobile subscriptions reached 477 million in 2019 and will grow by nearly 200 million by 2025, with the mobile industry contributing ~9% to GDP by 2024. In the eight countries on average, 97% of social media users did so using a mobile phone. Yet in sub-Saharan Africa only 44% of the population have access to a smart phone, and only 26% of people are able to access the internet with a smart phone. The main barrier is the high cost of smartphones relative to average incomes. The total cost of basic mobile ownership per month (including the handset price, activation and connection price, and 100MB of data) is higher in sub-Saharan Africa than in any other region of the word – users spend on average the equivalent of 6% of income compared to an average of less than 2% in other regions.
Unlocking the digital economy will depend, in part, on scaling access to networks and lowering the costs of data.
The digital economy and SMBs
It is not easy to start and run a business in Africa.
The vast majority of businesses in Africa are small and informal and face four common barriers: poor access to finance and financial services; poor access to markets; poor access to information; and insufficient business resourcing. Resolving these blockages will drive development. As SMBs grow they absorb labour and add value to the economy. SMBs are also good for achieving inclusive growth. SMBs are notably more youth-friendly, and women-owned SMBs are emerging as one of the fastest growing SMB segments.
Digital tools solve some of the challenges faced by SMBs. Digital tools can connect businesses with new sources of demand. Digital tools also bring down the costs of starting, running and growing a business. They have been important to many SMBs during the COVID-19 pandemic, providing virtual access to markets, customers, resources and business management tools.
Over 300 unique digital platforms operate in Africa – largely delivered through mobile devices. These African innovations demonstrate the transformative power of technology.
Boosting economic diversity and intraAfrican trade
The introduction of the African Continental Free Trade Area (AfCFTA) agreement on 1 January 2021 aims to boost the continent’s low intra-continental trade. It presents an opportunity to connect 1.3 billion people across 55 countries and could lift 30 million people out of extreme poverty by 2035. The World Bank estimates that AfCFTA could deliver real income gains of almost US$450 billion (in 2014 prices) by 2035. Realising the benefits of the AfCFTA will require better market information. SMBs will need information on suppliers and customers in foreign markets, what they can sell and buy, and how to integrate into value chains. Social media platforms provide accessible and affordable channels for a range of market information.
There is a strong correlation between the digital evolution of an economy and increasing levels of trade. Studies have shown that better access to modern ICT and adoption of e-commerce applications stimulate bilateral trade flows at a number of levels.
Digital tools solve some of the challenges faced by SMBs. Digital tools can connect businesses with new sources of demand. Digital tools also bring down the costs of starting, running and growing a business. They have been important to many SMBs during the COVID-19 pandemic, providing virtual access to markets, customers, resources and business management tools
Market information and e-commerce are of little use unless there are tradable commodities and services. On average, growth across Africa remains driven by primary commodities and the extractive sector. African countries will have to diversify economies to produce goods that other African countries will want to import. Few modern economies have achieved development without the industrialisation of manufacturing. Manufacturing has a larger economy-wide impact (or multiplier effect) than any other sector. This has been notable in Ethiopia, the world’s fastest growing economy since 2015. Between 2004 and 2016, manufactured exports increased from $21 million to $389 million as Ethiopia’s textile and leather industries expanded.
Digital tools can assist with manufactured exports. The manufacturing sector accounts for 11% of surveyed SMBs. While most surveyed SMBs rate customer communication and raising brand awareness as the top benefits of the Facebook apps, surveyed SMBs in manufacturing rated the Facebook apps as most beneficial for accessing foreign markets, relative to other industries.
The services sector is also growing. Between 2000 and 2016, Africa’s services sector grew annually by 5.8%, which was higher than the world average. This was driven by activity in ICT services, transport services and tourism. On a global scale, service sectors tend to be more innovative, to improve worker productivity and are more value-adding than manufacturing in global value chains.
The World Trade Organisation predicts that the share of services in world trade could grow by 50% by 2050. With Africa’s manufacturing sectors facing fierce competition from Chinese and South-East Asian markets, the services sector could offer an alternative pathway for African growth.
Digital technology makes services more tradable. New technological developments have removed the need for physical proximity between suppliers and customers. In South Africa, the global business services sector (which uses ICT to trade business services internationally) has seen jobs growing at an unprecedented 24% a year since 2015, with a 35% job growth in 2019. This has been coupled with significant SMB growth throughout the value chain.
Unlocking the opportunity
SMBs drive economic growth and have the specific benefits of:
Creating economic activities that are more youth-friendly – helping to capitalise on the demographic dividend;
Creating more economic activity that is more women-friendly – helping to unlock human capital; and
Enabling economies to diversify and trade – and to take advantage of the opportunity provided by AfCFTA.
To unlock the opportunities, all SMBs should have access to the benefits that digital tools can provide. A number of fundamentals must be in place: access to affordable and fast internet connection, access to digital devices needed to use the internet, access to skills and know-how to productively and safely navigate the digital world, and access to digital tools and content.
The top two tiers are provided by social media and messaging platforms. It has been shown that platforms are already enthusiastically used in business across the eight sample countries. This derives benefits for the companies using them and for the economies in which they operate.
A drive to increase the awareness of the benefits of platforms, and educating users on the risks and rights related to transacting in the digital economy will be important. Companies that collect data through digital platforms need to be transparent about what data is collected and how it is used so that SMBs have more control over their data
However, the bottom three tiers need to be in place for all SMBs to accrue benefits. Problems with network connectivity and device access usually manifests in affordability constraints. SMBs can be locked out of the digital economy because of the high cost of owning digital devices and using the internet relative to low business revenues. The skills and knowledge tier manifests either as poor awareness of the benefits of using platforms, as missing skills or as low levels of trust in transacting digitally. These constraints are well documented in the digital inclusion literature and have been corroborated by the survey.
Addressing the cost issue
The cost of internet and digital devices remains relatively high for many SMBs. The 2019 Mobile Connectivity Index by the Global System for Mobile Communications Association (GSMA) scores global mobile internet adoption based on data cost, device costs, taxation on mobile ownership and income inequality. The median score for affordability in Sub-Saharan Africa is 37 and 46 for the eight sample countries (out of 100). This is lower than other developing regions: 47 in Latin America and the Caribbean, 50 in South Asia, and 59 in East Asia and the Pacific. Developed countries have considerably higher scores. The US, UK and Australia score 77, 83 and 86 respectively.
The price of 100MB of data is highest in Sub-Saharan Africa, representing about 6% of the average user’s income, compared with less than 2% in all other regions.
This could be addressed through interventions in two areas.
First, by reducing the costs for consumers of using the internet. The vast majority of Africans access the internet through mobile networks. Mobile network operators (MNOs) have made significant progress in expanding coverage of mobile networks across the continent but a commercially viable model of bringing networks to areas of low population density and low disposable income has yet to be established. This excludes many people living in rural areas. In addition, other types of internet service providers (ISPs) are becoming more common, using other wireless technologies (like satellites and point-to-point wireless) and fixed-line connections (such as copper wires and fibre cables) to provide internet connectivity. Many of these forms of connectivity remain unaffordable in lowincome areas with low-population densities.
Second, by bringing down the costs of owning and using mobile devices: The cost of investing in mobile devices can be a barrier for SMBs.
Addressing awareness, skills and trust barriers
The survey identified a number of perceptual barriers to the use of platforms by SMBs. On average across the eight sample countries, the statement “I do not trust that data on social media is private” is the third most commonly cited barrier to uptake of social media and messaging platforms by surveyed SMBs. For micro-enterprises in particular, digital platforms for business may be unfamiliar. Owners will remain sceptical of value relative to traditional face-to-face marketing and customer support.
A drive to increase the awareness of the benefits of platforms, and educating users on the risks and rights related to transacting in the digital economy will be important. Companies that collect data through digital platforms need to be transparent about what data is collected and how it is used so that SMBs have more control over their data. The private sector, including the Facebook Company, has a large role to play in removing these trust barriers, investing in digital education and improving trust and transparency in social media and messaging platforms.
Sub-Saharan Africa also underperforms relative to the world median of digital skills. The World Economic Forum ranks digital skills (including computer skills, basic coding and digital reading) in different countries on a scale up to seven. While the world median score in 2019 was 4.2, Sub-Saharan Africa’s median score was 3.7. Among the sample countries, Kenya ranked highest in the global rankings for digital skills at 49th out of 141 countries, while South Africa ranked the lowest at 126th.
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