Africa’s digital multiplier

Photo ParisTech Review / Editors / January 9th, 2014

The African digital boom has already begun. Between 2008 and 2012, while demand for bandwidth has augmented fivefold globally, in Africa, it has been multiplied by 20. Equipment rates are catching up as well. As for the economic impact, McKinsey estimates that the contribution of the Internet to the annual GDP of Africa could rise from $18 billion in 2014 to $300 billion in 2025. Yet, all the countries are not addressing the digital wave with the same attitude. What will really make a difference will be the ability to find the right ingredients and the right catalysts to enable the development of varied ecosystems. It is by no means about copying and pasting development solutions that have already been tested elsewhere, but rather, taking specific situations into account, to set the stage for the flourishing of burgeoning capacities.

Africa is back on track. While it is not reaching the double-digit growth recorded in China during the 1990-2000 decade, African growth, halfway through the 2010s, is robust. In fact, the African Development Bank is expecting a 5.3% growth in 2014, following 2013’s 4.8%. However, this is an averaged performance given that significant and sometimes abysmal disparities remain between certain countries.

By 2050, according to France’s National Institute of Demographic Studies (INED), Africa will be home to about a quarter of the world’s population with just over 2.4 billion people – twice as many as in 2013. Economic growth, therefore, is a vital necessity. To support this demographic bomb, Africa needs a growth of at least 6% over twenty years. However, this is by no means guaranteed. The current growth rate is a bare minimum and the continent remains on the razor’s edge. African growth, thus, needs new multipliers. Should it find them, it could dominate the world economy in 2050, alongside two other giants, China and India, to form what futurists are already calling “Chindiafrica.”

Digital infrastructure to support growth
But things will largely depend on infrastructure improvements, which remain one of the continent’s major weaknesses. An improvement that is all the more necessary as growth leads to urbanization: concentrated human population which requires modernization and rationalization. Africa is one of the world’s least urbanized areas. However, by 2030, the majority of its population will live in cities. And yet this urbanization can turn into a great opportunity, provided that the necessary investments are made – starting with roads, so that, quite simply, agricultural commodities make it to the cities in good condition.

As soon as 2020, according to the African Development Bank’s forecasts, 128 million urban households will have discretionary income, that is to say the opportunity to invest in innovative products and services. This is great news. Because today, investing in digital infrastructure seems to be the most promising lead for Africa, particularly because it adapts better than other options to the currents gaps where road networks and fixed telecommunications networks are concerned.

Africa is the youngest continent in the world, with more than 200 million individuals in the 15-25 age bracket – the very cohort which is using new technologies the most. Demographics alone are therefore going to create millions of new internet users before 2020. And they will be “mobile internet users” first. Africa already caught up with developed countries in terms of mobile phone equipment.

Penetration rate of mobile phones and users number (source: RoyceFund)

As for Internet access, more than half of African urban consumers are already equipped with connected devices. The price of the simplest smartphones has fallen below $100 per unit, which, according to the Deloitte consultancy, allows us to think that smartphone penetration in Africa could jump from 2-5 % in 2014 to a staggering 30 % in 2020. At least 300 million new units will be sold in Africa in the next decade.

Nigeria, the most populous country in the continent with over 160 million inhabitants, of which about 113 million were mobile subscribers at the end of 2012, is going to be a laboratory of sorts. The number of smartphone users is expected to skyrocket from the current 5.6 million to over 35 million by the end of 2017, according to research by the firm Informa Telecoms & Media. The Chinese electronics giant Lenovo, for instance, is launching a smartphone in Nigeria so as to be able to directly interact with consumers, bypassing the telcos, as would be the case for example in South Africa.

So the African digital boom has already begun. According to data updated between 2008 and 2012 by TeleGeography, a U.S. consulting firm, while demand for bandwidth has augmented fivefold globally, in Africa, it has been multiplied by 20. That very same African demand is to experience the highest growth in the world between 2014 and 2019: an annual increase of 51%, that is to say a much higher rate than those expected for Latin America and the Middle East (37%). Given the fact that sub-Saharan Africa has been lagging behind the most, it is precisely the one region which is expected to catch up the most vigorously, with a bandwidth growth of 71% in Angola, 68 % in Tanzania and 67% in Gabon. In addition, the continent will benefit from the modernization and expansion of the submarine cable systems that are connected to Africa: WACS in the West, EASSy in East Africa and SAT-3 for the South Atlantic area. And the price of bandwidth will drop accordingly. In 2019, says the same study, the price of a 10 Gigabits per second wavelength between Johannesburg and London should be less than a quarter of its 2012 price.

The digital multiplier
The question remains regarding how this technology boom will translate in economic terms. Why should the digitization of Africa lead to faster growth? First reason: when a country goes “online,” both its public services and its businesses become more efficient. In fact, productivity gains are by no means limited to web-based companies: experience shows that, quite the contrary, 75 % of the economic impact of digitization goes to companies that are not “pure players” of Internet.

In a global survey of 4800 SMEs entitled “Lions go digital: the Internet’s transformative potential in Africa,” published in November 2013, McKinsey, one of the most influential strategy consulting firms in the world, has found that whatever the sectors, companies using Web technologies have grown twice as fast as others, generating more export revenue and creating more jobs. Internet also brings considerable value to consumers. Online prices are on average 10% cheaper due to the transparency provided by search engines, and tens of billions of dollars have been conquered in purchasing power.

McKinsey estimates that the contribution of the Internet to the annual GDP of Africa could rise from $18 billion in 2014 to $300 billion in 2025. Yet, all the countries are not addressing the digital wave with the same attitude. The McKinsey Global Institute (MGI) classifies the “lifeblood” of Africa – 14 countries representing 90% of Africa’s GDP – in four categories according to their ability to take advantage of the digital revolution: the “leaders,” the “followers,” the “emerging players” and those “punching below their weight.” The ranking is based on an index organized around five criteria: the presence of a national strategy for information technology and communication (ICT), the level of infrastructure, a healthy environment for business, the country’s financial capital and lastly, the presence of skilled labor with good technological skills. On average, the index of the African countries selected in the benchmark is 37%, against 50% in developing countries and 66% in developed ones.

Nonetheless, McKinsey’s African hit parade is not immediately evident. The excellent scores from Senegal and Kenya (with, respectively, 3.3% and 2.9% for their iGDP – Internet contribution to GDP), the only two “leaders” in the ranking, are attributable to the national strategies of both countries. Senegal was one of the first African countries to invest in fiber optics and to promote the deployment of Internet cafes. Kenya stood out by its ability to develop mobile services, particularly in the banking sector (see our recent ParisTech Review article: Mobile banking: will Kenya export its revolution to India? Both countries have also been pioneers in the digitization of education, civil service and health care, whereas Morocco and South Africa, two of the largest economies in the continent, are only “followers” as they are lagging behind regarding their ICT strategy. As for Angola, Algeria and Ethiopia, they are far below their potential. Across the continent, the Internet represents 1.1% of GDP, against 1.9% in developing countries and 3.7% in developed ones.

Concerning Internet’s impact on the African economy, McKinsey forecasts that it will primarily transform six chief sectors.

Agriculture: considerable efforts are being made in Africa to increase the production, value and social impact of agriculture, which in some countries accounts for over 40% of GDP. Internet can accelerate these efforts by providing farmers with expert information on weather, seed selection, pest control, resource management and finance. Internet facilitates access to market and increases the farmer’s leverage to fix prices. The East African stock market for example provides a virtual agricultural trading platform as well as business intelligence data. And in Nigeria, the mobile Internet has made it possible to implement a new system for the allocation of agricultural subsidies, which is less vulnerable to corruption. In total, McKinsey has estimated that the Internet could bring some $3 billion in annual gains in agricultural productivity.

Image (c)

Financial services: despite the performance of some countries in mobile payment, most notably Kenya, more than 75% of adults in sub-Saharan Africa do not possess a formal bank account. Yet, the Internet can be a tremendous accelerator for financial inclusion by reducing transaction costs and providing remote financial services. More than 60% of Africans could have access to banking services in 2025 and over 90% could have a mobile wallet. Revenues deriving from mobile financial services could rise from less than a billion dollars in 2013 to 19 billion by 2025. With productivity gains between 8 and 10 billion dollars over the period.

Education: children in Africa are still under-educated. However, new digital tools can bring significant progress in access to lessons, teacher training and learning. Public expenditure on education could be made more effective through a partnership with NGOs facilitating access to smart terminals. Productivity gains could reach an estimated 30 to 70 billion $ over the 2013-2025 period. MOOCs, which don’t appear in the McKinsey study, could very well become game changers, not only by disseminating knowledge, but also by curbing the brain drain, an all too famous mechanism whereby students sent abroad to study tend to stay there.

Health: Internet can at once improve the efficiency of health expenditure, reduce the cost of chronic disease by 10% to 20%, curb counterfeit drugs traffic by 80%, and be a great time-saver for medical and paramedical staff. The potential gains that could be derived from the introduction of health care technologies are considerable: they range between 84 and 188 billion dollars according to the study. And the social and economic impact will be even greater. Remote diagnostics and telemedicine could alone solve 80% of the problems faced by rural clinics. Internet will allow for widespread automation and the centralization of patient admissions, health records, and supply chains, both in public health systems and in private hospitals.

Retail: today, except in South Africa, the retail sector is underdeveloped. E-commerce will support the growth of the middle class on the continent. By 2025, e -commerce could capture 10% of retail sales in the larger countries, that is to say some $75 billion per year. The expected productivity gains range from 16 to 23 billion dollars.

Government: The Internet is a powerful tool to improve transparency and to automate the collection of tax revenues. By 2025, half of all African ministries could be automated and online. The expected productivity gains range between 10 and 25 billion dollars.

It is essential to note that these high hopes are well founded, given that other continents have already preceded Africa on the path to digitization. And as Lionel Zinsou recently pointed out in an interview with ParisTech Review, Africa, regarding its foreign trade, is currently benefitting from improved terms of trade that allow it to import technology owing to its commodity exports. “We are witnessing a decline in the prices of manufactured products, which are still mostly imported. Compared with ten years ago, for a given quantity of cotton or diamonds you can now buy more machine tools, agricultural and urban equipment to develop infrastructures… As a whole, the continent has had a trade surplus for many years. The double movement of rising prices for local products and decreasing prices for imported goods results in a significant effect in terms of purchasing power.” Smartphones and communication infrastructures are relatively cheaper today, which allows Africa and Africans to equip themselves more quickly and easily and thus, as Zinsou said, to incorporate the technology into the continent’s economy. In other words, to import productivity.

Of course, the Internet is no magic wand. It performs in the manner of a catalyst for growth: without directly intervening, it enables new interactions and cross-fertilization. In China, India and Brazil, it has contributed to more than 10% of the total GDP growth over the last five years. We now know that the digital maturity of a country is strongly correlated with a significant increase in real per capita income. And the rapid digitization of Africa already has noticeable effects.

Still, the continent is diverse and each country, each region is faced with specific problems, as a function of population density, the level of development, economic specializations, or existing infrastructure. What will really make a difference, for policy makers and more widely for any stakeholders who work along with them, will be the ability to find the right ingredients and the right catalysts to enable the development of varied ecosystems. Without, of course, omitting the capacity of local players to find their own way. It is by no means about copying and pasting development solutions that have already been tested elsewhere, but rather, taking specific situations into account, to set the stage for the flourishing of burgeoning capacities. And for this, technology is not enough. But it can indeed give wings to innovators eager to change the world or, more modestly, to seize market opportunities.

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