The digital industrial revolution: will African countries sink or swim?

Karishma Banga argues that African countries should not only boost manufacturing but also adapt to the changing nature of manufacturing and prepare for the digital future

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VRThe digital economy is here, and is rapidly growing, ushering in the Fourth Industrial Revolution. Though definitions have evolved over time, it is broadly agreed that the digital economy describes a worldwide network of economic and social activities enabled by digital technologies, including mobile and communication networks, ‘cloud computing’, artificial intelligence, ‘machine learning’, ‘internet of things’ and ‘big data’. Such new and cutting-edge technologies have led to creation of ‘smart machines’, such as driver-less vehicles and cognitive robots, as well as widespread adoption of ‘smart platforms’ like Google, Amazon, Apple, Facebook and Alibaba.

Digitalization of the economy, through the increasing use of digital technologies, is changing the global landscape of manufacturing, presenting both challenges and opportunities in less developed countries. Often an alarmist approach is taken while discussing the future of manufacturing-led development in African economies, which have traditionally used manufacturing as a first step towards economic transformation and employment generation. However, considering that many African countries are yet to industrialize, digitalization may not directly impact them to the same extent as their developed counterparts. At the same time, it is important to not underestimate the power of technology to bring about disruptive change. It is essential for African countries to not only boost manufacturing but also adapt to the changing nature of manufacturing and prepare for the digital future.

How big is the digital divide?
Internet penetration – that is, the share of population with access to the internet – is often used as a proxy for digitalization, based on the assumption that internet is
the basic and necessary condition to digitalize. Internet penetration has grown by 5% in developed countries, compared to 15-20% in developing countries (World Economic Forum, 2015), and some sub-Saharan African economies have witnessed remarkable growth in internet penetration, particularly Ghana, Nigeria, Rwanda and Uganda. Yet developed countries still dominate the internet economy, with a staggering 78% share overall. In fact, the internet economy’s contribution to GDP in developed countries (3.4%) is more than three times the internet economy’s contribution to GDP in African countries. Moreover, of those countries with less than 10% internet penetration, most are African. These statistics suggest that the capability of African economies to be competitive in digitalized trade is low.

Globally, there is vast disparity in country shares in e-commerce across developed and developing countries: just six countries – China, France, Germany, Japan, the UK and the US – occupy 85% of cross-border e-commerce trade, of which all except China are developed nations. Developing economies are also lagging behind in deployment of ‘smart machines’ – devices with machine-to-machine and/or cognitive computing technologies. Data from the International Federation of Robotics shows that in 2015, around 75% of robot sales were concentrated in just five markets: China, Germany, Japan, the Republic of Korea and the US. Africa’s share in global robot sales was just 0.2% in 2014.

Challenges for developing countries
In the race to digitalize, many developing countries (with the exception of China) are clearly falling behind. This is likely due to prohibitive costs of capital in these countries and low ‘digital-readiness’ in terms of infrastructure and skills. Many African countries are still struggling to industrialize, and in some cases lack even basic infrastructure – for instance, a reliable power supply, roads, ports and telecommunication – showing the need to primarily invest in these areas.

While this suggests that the direct impact of the growing digital economy on African countries may be limited, digitalization can indirectly impact them by affecting global competition and changing the criteria of what constitutes an attractive manufacturing location. The emerging digital technologies may lower the costs of coordination and trading, thereby strengthening global value chains and enabling smaller firms to access international markets. But there are also risks of manufacturing activities being re-shored back to the developed world, as was the case with Phillips shavers and Adidas shoes. Moreover, goods in the digital economy are much more advanced and may require good infrastructure, research and development, and skilled labour at all points along the global value chain, leading to concentration of manufacturing in developed countries, and pressure on wages in less developed economies.

A central concern in the debate on digitalization is that of a ‘jobless future’. The International Federation of Robotics estimates that more than 2.5 million robots will be at work by 2019, indicating a 12% growth in deployment of robots between 2016 and 2019. McKinsey’s 2017 report estimates high percentages of jobs in African countries that will be automated away– 52% in Kenya, 46% in Nigeria and 50% in Ethiopia. However, recent case studies suggest that low- and middle-income economies need not be alarmed; if we break down occupations into tasks, with distinct levels of automatability, then the share of jobs that can be automated away falls to 2-8%. That said, these estimates do not account for the ‘potential’ jobs that may be lost by never being created, and the sizeable number of informal jobs in many developing and less developed countries.

Adapting to the changing nature of manufacturing
1. Boost manufacturing

Using the window of opportunity in less-automated sectors

The impact of technology depends on the type of technology employed, and varies across countries and sectors. There are some sub-sectors in which technological change has been slow until now – such as food, beverage and tobacco products, basic metals, wood and wood products, paper and paper products, and other non-metallic minerals. These sectors present opportunities for LDCs to undertake local production and regional trade.

Using a dual-track approach to industrialization
Countries should look to develop agro-processing and attract investment in higher value-added export-based manufacturing activities. A move towards services can also serve as an alternate path to development. Beyond improving the investment climate, effective policies include improving firm capabilities, innovations systems and direct financing opportunities.

2. Digitalize manufacturing

Become digitally-ready

Analysis by the Supporting Economic Transformation programme on the future of manufacturing in sub-Saharan African countries suggests that both technological progress and digitalization increases labour productivity. But, while the impact of technological progress is higher in low-income and sub-Saharan African countries, rendering support to convergence, the impact of digitalization is lower in these economies. Moreover, the impact of technological progress on productivity increases as a country digitalizes, but this impact is also lower for low-income countries and sub-Saharan African countries. These findings may indicate a significant difference between low-income countries and high-income countries in ‘digital-readiness’. Further results confirm that the impact of both technological progress and digitalization increases as the work-force becomes more skilled, highlighting the importance of becoming digitally-ready by investing in skills development.

Skills for the future
Data is key to examining the sectors into which the labour force should move in the next few years. Previously, skill development strategies focused on moving from agriculture to manufacturing in less developed countries, and from manufacturing to services in more developed economies. On the future of work, the Graduate Institute’s Prof. Richard Baldwin suggests that with the rise of digitalization and consequently ‘tele-migrants’ and robots, soft-skills such as managerial skills,  team-building skills and teaching will become more important. Although the pace of change in adoption of 3D printers has been relatively slow, as 3D printers become more affordable, design capabilities will become important. This can create important opportunities for developing economies to leverage their design and creative skills in the growing digital economy. The spread of 3D printers to developing economies can also lead to de-centralization of manufacturing and customized production on demand.

With an expansion of the ‘digital labour-force’, work may become increasingly precarious. To ensure that workers are not treated as digital commodities, it is important to re-orient social protection in the digital economy to follow people, rather than companies.

- Karishma Banga is a  Senior Research Officer at the Overseas Development Institute (ODI)


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