What is the role of technology as 500 million African youth reach working age over the next 30 years?
The text above represents the vision statement page of the website of a fictional venture capital firm I invented, “Strawman African Venture Capital Fund” (SMAVC Fund). Though entirely made up, its vision statement will likely sound familiar to many readers. SMAVC Fund’s optimistic perspective reflects a widely touted narrative in the African venture community that the ongoing wave of population growth in Africa will only create massive economic opportunities for all.
This optimistic future is a viable possibility, and the one we hope to achieve. Still, there are other potential futures in which job and economic opportunities don’t keep up with population growth, leading to a reversion to subsistence economics and survival strategies.
For investors (and for decision makers in general), we need to keep our optimism but also be realistic and nuanced to understand the challenges and headwinds if we want any hope of success.
So, which future will emerge for Africa?
No one can claim to know for sure. To explore these questions, we’ve written a two-part piece that we are posting on our Medium page, where we will examine the economic forces and trends that could push Africa toward one future or the other. Here we give you a flavor of part one and encourage you to read the deeper analysis on our blog. We’ll post the second part and hope you will follow along. Here is a summary of part 1 in broad strokes.
The big population boom everyone is talking about.
The data shows that Africa faces an urgent challenge: creating good jobs for the 500 million people entering its workforce in the coming decades. Yes, many African countries’ populations are facing a “demographic dividend.” This is the economic term for when large youth populations age into the workforce, get jobs, and see incomes rise, economic surpluses grow, and more women join the economy.
Dependency ratio – the ratio of working-age persons (15–65 years) to older or younger non-working dependents from 1963-2100
But this happy scenario assumes those working-age people get jobs. Right now, most don’t. Three-fourths of job market entrants in Sub-Saharan Africa are self-employed or work in informal microenterprises, roughly 20% earn wages in services, and only 4 to 5% secure salaried jobs in industry.
Is Africa headed for a “Demographic Dividend” or a “Demographic Markdown”?
If we don’t create more jobs, the demographic dividend will fizzle and turn into a “Demographic Markdown”. At DFS Lab, job creation is one of the core tenets of our long-term strategy. We want to invest in sectors and value chains where massive long-run growth is possible, especially ones that can give economic opportunities to hundreds of millions of people and create the conditions for a thriving population. But this isn’t easy. Extractives and mining (a go-to for many African countries) put very few people to work, and manufacturing (a go-to globally for jobs-based growth in Asia and elsewhere) has not taken off.
We begin by examining the reasons why the continent has yet to replicate the manufacturing-led growth achieved by the Asian Tigers, and is in fact falling behind. Topping the list are higher-than-expected labour costs, poor infrastructure, slow-moving value chains and port infrastructure, and a sometimes challenging policy environment.
We surmise that Africa now faces the task of developing a unique economic model that can keep pace with its rapid population growth and expanding working-age population.
Alternatives to manufacturing-led growth would (logically) need to emerge from the agricultural or services sectors. Yet, as we’ve seen, it’s not obvious how to make these options work. Historically, few countries have reached middle-income status through growth driven solely by agriculture or services.
A quote from economist Dani Rodrik sums it up:
“If African countries do achieve growth rates substantially higher than what I have surmised, they will do so pursuing a growth model that is different from earlier miracles based on industrialisation. Perhaps, it will be agriculture-led growth. Perhaps, it will be services. But it will look quite different than what we have seen before.”
Our first piece concludes that there’s no doubt Africa needs to reinvent its growth model. It must find pathways that replicate the productivity-boosting features of export-led manufacturing that powered the Asian Tigers, Latin America, and Eastern Europe, though it may not have the option to rely on manufacturing itself. At DFS Lab, we believe the key lies in leveraging technology to drive bold initiatives that expand exports and cross-border services to reach markets beyond Africa’s borders.
If you want to dig deeper into these issues, click here to read our full Medium Post.
Then, come back next week for the second part of this series, where we identify four opportunity areas where we believe VCs should focus their efforts over the next decade to capture venture-scale returns and create jobs for Africa’s 500 million people!
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Jake Kendall is a researcher, investor, and policy expert focused on Africa’s digital economy. He is currently co-founder and managing partner at DFS Lab, a Research Fellow at Cambridge University, and teaches at Sciences Po, with past roles spanning the Gates Foundation, World Bank, academia, and two years as an aquaculture extension agent in rural Zambia.