Digitalization as a driver of structural transformation in African LDCs

05 September 2022

By Paul Akiwumi, Director Division for Africa, LDCs and Special Programmes, UNCTAD

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© 2018 Ground Picture/Shutterstock | Hand with transparent smartphone and earth hologram

The transformative role of technology

Digitalization’s importance for developing countries, including the 33 African least developed countries (LDCs) has become increasingly evident during the COVID-19 pandemic. Despite the growing role of digital technologies since the onset of the pandemic, many African LDCs have not been able to fully benefit from the quick development of the digital economy due to existing barriers like weak skills development or a lack of necessary supportive infrastructure.

A country’s level of digitalization plays a role in supporting value creation through the development of productive capacities. In turn, this value creation leads to improvements in areas like education, research and development and scientific advances, which further contribute to the full utilization of productive capacities.

A burgeoning tech sector in Africa?

Despite the challenging conditions to enhance the use of technology for many African LDCs, some notable progress is being made across the continent. 2021 was a record year for tech startups in Africa, with nearly 2.15 billion USD in investment capital directed to the sector. This amounts to a 206% increase over 2020 investment figures according to data from the research group Disrupt Africa’s African Tech Startups Funding Report.

FinTech enterprises – financial firms that leverage digital technologies and increase digitalization to provide financial products and services  –  received nearly half of this injection, with 1.04 billion USD. Moreover, diversification has been the trend in the African tech ecosystem over the past 7 years, with new firms specializing in digital payment systems, crowdfunding, peer-to-peer consumer financing, peer-to-peer business lending and invoice trading entering the market. The African tech startup ecosystem is also growing, as new firms broaden the market to include specialized services notably in FinTech, AgriTech, and HealthTech.

Growth in Africa has also been seen in financial advisory services, trading and personal finance management. Within the FinTech sector itself, there is significant diversity in terms of the products and services being offered. Paytech, lendtech, banktech, insurtech, digital currencies and systems like blockchain are taking off.

Though Nigeria, Egypt, South Africa and Kenya, the so called “big four” continue to attract the vast majority of funds, startups in other developing African countries, including Morocco, Tunisia, Ivory Coast and Zimbabwe are emerging. While they still constitute a small share of Africa’s overall tech startup ecosystem, some African LDCs have taken explicit steps to invest in the development of modern, knowledge and technology-based services. For example, the expansion of FinTech in Uganda and Rwanda is gaining momentum.

Uganda’s Eversend offers a multi-currency e-wallet, while also providing financial services such as money transfers, currency exchange, virtual debit cards, and stock trading. It has expanded its operations to both personal users and business clients in Uganda, Kenya, Nigeria, Rwanda, Ghana, and Nigeria. Another notable example, Yo! Uganda Limited, offers technology-based solutions to businesses such as Yo! Payments, the company’s mobile payments aggregation service.

The Government of Uganda through the Bank of Uganda has also taken policy action to nurture and regulate the country’s fledgling FinTech sector. Uganda’s Regulatory Sandbox Framework was created following the country’s National Payment Systems Act, 2020 and serves as a tailored regulatory test environment for new, innovative products, services or business models. Moreover, it creates a controlled operational space, with regulatory oversight.

To further support digitalization in Uganda, and other African LDCs, it is necessary to enhance both the availability of technology, for example by developing the e-commerce infrastructure and improving its accessibility and governance. Furthermore, it is important to develop inter-sector linkages and foster the creation of new or deepen existing value chains at regional and international levels.

Going beyond basic financial inclusion

The challenge of financial inclusion and digital financial inclusion even more so, remains a major hurdle to development in African LDCs.  This is true for the financial services available in the world’s 46 LDCs, and particularly true for the 33 which are in sub-Saharan Africa.

Economic development is almost impossible without financial inclusion, and Africa is lagging behind other continents in terms of financial inclusion. For the continent, financial inclusion is largely synonymous with sending and receiving mobile money, accepting payments, agency banking and remittance payments, among other transactions.

There is a need for a well-functioning financial infrastructure in Africa and the LDCs that empowers individuals and businesses to engage more actively in the economy. For emerging technology firms, careful consideration should also be paid to financial assistance in the form of debt versus equity investments. For small, knowledge-intensive firms to grow, tailored and alternative financing mechanisms are needed, such as venture capital and business angels funding. These innovative funding models are increasingly emerging outside the traditional banking system through the use of Internet platforms or websites to connect businesses in need with investors.

With the support of the African Development Bank and other international donors, the Africa Digital Financial Inclusion Facility (ADFI) was created as a blended finance facility to accelerate digital financial inclusion across Africa, focusing efforts on digital infrastructure, policy and regulation, digital innovation and capacity building.

How to catalyze services trade as a driver of economic growth and prosperity in Africa

The newly published UNCTAD Economic Development in Africa Report provides a detailed assessment of the potential role of services in enhancing export diversification and economic transformation in Africa. The findings focus on the dual role of financial and other business services as a supplier of key intermediate inputs and a source of important independent value chains.

While limited productive capacities in most African LDCs account for the low utilization of key services inputs, structural barriers undermining the performance of trade in services must also be considered. Key factors in this regard include the high cost of trade in services, protectionism, infrastructure and equipment issues, low levels of digitalization and technology, difficult access to financial services, poor regional integration and a limited competitive environment.

The key to Africa’s development is therefore the expansion of knowledge-intensive services – like technology-based services and FinTech- and link them to the productive sectors of the economy. But Fintech and startups alone will not be enough. While 28 percent of Sub-Saharan Africans were connected to the internet through mobile phones in 2021, up from just 13 percent in 2014, significant gaps remain between regions and within regions and countries themselves.  Moreover, a large usage gap in the region exists, with 53% of persons living in an area with a mobile broadband network- over half a billion people – but do not use mobile internet services. Significant gender and rural-urban gaps persist. Beyond mobile internet coverage, access to fast, reliable and high-bandwidth broadband to sustain businesses and productive processes across the continent remains variable.

Productive capacities can also play a key role in harnessing the transformative power of digitalization for development. On the one hand, stronger domestic technological capacities are key to increasing productivity and competitiveness. On the other hand, productive capacities also play an important role in integrating digitalization in various sectors. As argued in a forthcoming piece by Akiwumi and Borgatti, the use of digital technologies such as digital platforms, mobile applications, and services, plays an important role in supporting value creation through the use of productive capacities at the domestic level. A strong national commitment to developing and implementing digitalization and digital economy strategies (including through the formulation of national plans or programmes) that account for various national and regional conditions should be developed. Moreover, it would be important to ensure that national plans and digitalization priorities are supported by appropriate human and financial resources to ensure their proper implementation.

To enable the transformation into a services-driven economy, countries must address gaps in basic infrastructure provision and meet the need for reliable and affordable energy for productive purposes. The same can be said for efficient cross-border infrastructure – roads, rail, and linkages to air and sea freight – to support trade opportunities.  At the same time, reliable energy and tech infrastructure, including components—hardware, software, and networking components needed to support a digital work environment require an educated and mobile workforce to maintain and update the hard and soft infrastructure powering the delivery of advanced services. This could be good news and a promising opportunity for the continent’s growing young population.

In particular, productive capacity development will play a pivotal role in achieving the economic and social objectives of African LDCs because it can foster structural transformation, diversification, and employment generation. Underutilization of existing capacities is high and widespread, and the development of new ones is hampered by weak infrastructure, particularly information and communication technologies, energy, and transport. By developing productive capacities, African LDCs will be better positioned to enter and compete in new international markets in goods and services, especially in more sophisticated value-added sectors, which leverage technology and innovation to go beyond primary commodities.

The development promise of digitalization – closing the tech divide

Despite some notable examples of progress, the science, technology and innovation (STI) gap between least developed countries (LDCs) and the rest of the world remains a major hurdle to their development. This was recognized by the international community in the Istanbul Programme of Action, and support for the transformative role of STI in the fight against multidimensional vulnerabilities and to achieve the SDGs was re-emphasized as one of the six pillars of the recently adopted Doha Programme of Action.

For developing countries, the real challenge is access to and the uptake of proven technologies. This, however, requires going back to basics in many countries by developing the capacity to identify, adapt and utilize tech solutions developed elsewhere. For African countries and African LDCs in particular, the technology to solve problems has already been developed. In many cases, results could be achieved simply by developing the capacity to find, adapt and adopt proven, off-the-shelf technology developed elsewhere. This could help African LDCs integrate and scale up the deployment of technologies and innovations.

A call for action

The transformative potential of financial technologies in Africa is impressive, but a supportive business environment and regulatory ecosystem should be in place to harness its promise. For knowledge-intensive services, including financial technology to be effective drivers of development and structural transformation, they should be embedded in a supportive enabling environment. A dedicated regulatory framework should also be developed to focus on improving digital infrastructure and reliable, and affordable access for all. It should support the innovation of new financial and technology-based products, simplifying the registration of digital identifications and intellectual property and establish a standing, well-resourced regulatory body.

Governments play a central role in ensuring the appropriate legal and regulatory frameworks are in place and operational. In this regard, a coordinated approach at the continental level, through the governance of the African Continental Free Trade Area (AfCFTA) will be essential for FinTech and other knowledge-intensive services to deliver on their transformative promise. African countries should reinforce regional coordination, under the umbrella of the AfCFTA, and advance policies and strategies for increasing higher value-added services exports.

Yet, the FinTech industry should also proceed with caution. Rising interest rates, increasing inflationary pressure and the threat of an economic slowdown are casting some shadows over the FinTech industry’s bright outlook, leading some major international players to cut jobs.

The time for coordinated policies and collaboration from governments, the private sector and the international community is now to help accelerate the continent’s inclusive growth and sustainable development. Governments and the international community need to guide new and emerging technologies so that they support sustainable development in Africa and indeed all LDCs and leave no one behind.

First published by United Nations LDC Insight