Africa needs an entrepreneurial boom

The dearth of entrepreneurs has long been a binding constraint on Africa’s economic development. To remedy it, African governments should foster business environments that ensure a level playing field and coordinate their actions at the regional and continental level.

By Hippolyte Fofack

CAMBRIDGE – For decades, Africa has been the world’s most commodity-dependent continent. At the same time, it has become overly reliant on imports from the rest of the world: intracontinental trade accounts for only 15% of total African trade, compared to 60% in Asia and 70% in the European Union. Worryingly, imports of manufactured goods into African countries have grown by more than 25% over the decade ending in 2022.

The continent’s import dependency can be explained primarily by the dearth of African industrial entrepreneurs. And Africa’s projected population growth and burgeoning middle class suggests that this dependency will only grow in the medium term, with significant implications for macroeconomic stability, unless local actors begin driving innovation and creating new products and services to meet the needs and desires of domestic consumers.

The problem, however, is not sustained import growth per se, especially when the rise of global value chains and increasing fragmentation of production have reduced the power of exports as a driver of short-term demand. Instead, the main issue is that African countries are participating in global value chains largely through backward activities, systematically exporting natural resources and primary commodities and importing manufactured goods, an imbalance that drains wealth away from the continent.

For African fossil fuel-producing countries, the carbon-intensive “round-tripping” model of exporting crude oil and importing refined petroleum has been costly, resulting in immense deadweight losses and foreign-exchange leakages.

In Nigeria, for example, the opening of a much-anticipated oil refinery could save the country $26 billion annually. Moreover, in an era of hyper-globalization when intermediate goods account for 50% of global trade, African countries’ high level of forward participation in global value chains has scuttled prospects for structural transformation and shrunk the continent’s share of global trade to around 3%.

It has also perpetuated the unhealthy correlation between growth and commodity-price cycles, resulting in increased exposure to global volatility and persistent structural current-account deficits. While limited access to finance has been cited as a binding constraint on African economic development, what if the chronic deficit of entrepreneurs is equally limiting?

After all, entrepreneurship, which improves competitiveness and business efficiency to lower prices for consumers, has become a leading driver of innovation and growth in many countries in recent decades. And Africa lags behind in this area: in the latest edition of US News and World Report’s Best Countries for Entrepreneurship, the continent’s highest-ranked country, South Africa, places only 44th.

One top-ranking country on that list, which includes some of the world’s wealthiest and most complex economies, is Singapore. Recently, companies based in the city-state have pursued major growth opportunities across myriad sectors and industries in Africa, highlighting the continent’s entrepreneurship deficit. The Tolaram Group, for example, created the instant-noodle market in Nigeria, producing 4.5 billion packets annually and generating almost $1 billion in annual revenue.

Compared to more diversified and higher-ranking countries like Singapore, where tight labor markets have pushed unemployment to natural rates, a shortage of industrial entrepreneurs may be doubly costly for Africa, where persistent widespread poverty and high unemployment fuel insecurity and migration pressures.

For example, the unemployment rate is at Great Depression-era levels – above 30% in two of the continent’s largest economies, Nigeria and South Africa. In other countries, economic informality – think of street vendors hawking imported toothpicks, candles, cell phones, and batteries – has become a form of disguised unemployment.

An increase in entrepreneurship on the continent would generate wealth more sustainably, expand employment, and reduce migration flows. In many African countries, industrial entrepreneurs, in particular, could help diversify sources of growth, improve the current-account balance, and broaden the tax base.

This, in turn, would expand countries’ fiscal space, improve debt sustainability, and gradually ease the constraints associated with capital scarcity. Moreover, when the rules of origin for the African Continental Free Trade Area (AfCFTA) are finalized, they will serve as an “industrialization passport” enabling made-in-Africa goods to circulate duty-free.

This would provide local entrepreneurs with a much-needed boost to operationalize continental trade integration and enhance Africa’s economic dynamism. But to take full advantage of the economies of scale and the growth opportunities provided by the AfCFTA – most notably the drastic reduction of risk associated with investing in smaller markets – African entrepreneurs need the support of entrepreneurial states.

Fostering business environments that ensure a level playing field for all participants, together with policy coordination at the regional and continental level, would go a long way toward increasing Africa direct investment and stimulating the development of robust regional value chains. African policymakers must also implement financial reforms to eliminate the credit rationing that has long undermined entrepreneurship.

Finance is the lifeblood of business; yet, expressed as a percentage of GDP, domestic credit to the private sector has remained very low across Africa, especially in Sub-Saharan Africa, where it averaged 37.1% of GDP in 2022. By contrast, the GDP share of domestic credit to the private sector in the ten countries that US News and World Report ranked as being the best for entrepreneurship ranges from 83.6% in Germany and 129.5% in Singapore to 175.9% in South Korea and a whopping 216% in the United States.

In addition to providing easy access to capital, the most successful and enterprising countries share other important attributes: technological expertise, highly skilled labor, well-developed infrastructure (both physical and digital), transparent business practices, and comprehensive legal frameworks. They are also globally connected and fully integrated into value chains, often as manufacturing powerhouses. According to an African proverb, it takes a village to raise a child.

Likewise, it will take a host of industrial entrepreneurs and proactive entrepreneurial governments to transform African economies and improve their global engagement with the rest of the world. Supporting local entrepreneurship is the surest path to a more self-reliant and prosperous continent.