Can Africa become the “office” of the world?

In knowledge-based societies, manufacturing does not play anymore a primary role in economy like it used to do in the past. Many economists have questioned the model of industrialization that most of developing and less developed countries are following today. Dani Rodrik for instance warned that the rush to industrialization by the latecomers in the development process, so to catch up with industrialized ones, requires huge investments in skill and capital development that, in turn, need the mobilization of significant financial resources, and above all... they need time. They therefore suggest to explore alternative development models leapfrogging manufacturing and go straight to a service-based economy. This is actually what happened in Africa, where in the last two decades most of workers have moved from low-productivity sectors like agriculture to services, differently from Asia, where they mainly shifted to industry. Some African nations have definitevly focused on the service sector to promote their growth: this is the case of Rwanda. This is often indicated as a paradox of the African development experience. Has it worked? No. But...

Times are changing, and what it did not work so far can work in future. Indeed, with the latest technology developments, services can now be sold beyond the national borders, reaching individuals and businesses in other countries.

In Bad Samaritans, Ha-Joon Chang warns that it is difficult to develop a service economy before having created a “hard core” manufacturing sector first. We can agree on this point. But when he points out that the demand for services tends to concentrate in the same place where the service is offered we are not convinced at all.

You don’t go overseas for a haircut he argues. Yes, but again, times have changed. You certainly do not go abroad for a haircut, but you may decide to travel to another country for a hair transplant if the cost differential with your country of establishment is lower. And if you don’t need a hair transplant, maybe you may need a dental care, or a cosmetology treatment. And what about tourism? You get the point.

The reality is that, due to the technological advancements, services no longer require proximity between producers and consumers. Today, most of services are tradable exactly like goods, and also scale economies can be achieved, provided that they are: 1) cost effective; and 2) of high quality. A study from the World Bank conducted a few years ago argues that latecomers to the development scene can benefit much more from services sectors than from manufacturing, like in the case of sub-Saharan Africa, where the service sector has shown a growing dynamism in recent years, representing today almost 47% of the total of its economic activity by value. Unfortunately, the results in terms of absorption of occupation have been very low. The manufacture sector absorbs more labor than the service (and agriculture) sectors, this is factual. Africa needs to develop an industrial base, no doubt about that.

But can African countries shift to high-productivity service sectors by de-regulating and incentivizing them in a way that it fosters the growth of a competitive supply able to reach consumers from other extra-continental jurisdictions? In our view, the answer is: YES!

Read a short version of this post on the Habari Network.