Africa’s 500 million person question — Part 2

In Part 1 of this series, we highlighted Africa’s big challenge: creating jobs for 500 million people by 2050. We covered how the continent’s reliance on extractive industries — good for foreign exchange but bad for job creation — has held back broad-based growth and why it hasn’t followed the manufacturing-led path of the Asian Tigers. Our main conclusion was that the key task is figuring out a new economic model (or models) to match Africa’s expanding, working-age population — A model that creates demand for labor using technology and creativity to repackage it in a way world markets can absorb.

So, what could that growth model look like? That’s the core question we tackle here in Part 2.

Charting an entirely new path that no other economy has followed is, to say the least, ambitious. If manufacturing can’t be revived against formidable odds, Africa must find another sector that can shoulder the same load — creating millions of jobs that pay better than basic agriculture or low-end services. To do this, we should ask what made manufacturing such a powerhouse in the first place.

Manufacturing has some critical strengths that are hard to replace. It thrives on technology and capital investment, benefits from economies of scale and ecosystem growth, and sustains productivity improvements over time. Its biggest advantage is that its output is often tradeable as exports, allowing countries to tap into global markets and grow without being constrained by limited local demand (DFS Lab has written about the limits of local demand here).

Whatever model Africa pursues must meet five key criteria:

• High growth potential to absorb large numbers of low-skilled workers directly or via spillovers.
• Sustained long-term demand to support millions of jobs over decades.
• Efficiency gains by leveraging technology and scale to improve the sector.
• Ability to target global markets through export opportunities.
• Ability to move into ever higher value-added opportunities to grow wages over time.

Few, if any, existing economic models possess all these features, but we do see a handful of possibilities for models that could be expanded to meet this need — naturally, each approach comes with its unique challenges.

In past writing (see Break Bread to Make Bread and Fortune at the Middle of the Pyramid), we argued that VCs should focus on the largest value chains in African markets — sectors like food and FMCG that dominate consumer spending — because they have the scope to deliver venture-scale returns. Here, we expand that thinking to include new opportunity areas that meet the criteria above — especially those that tie into export value chains.

These four opportunity areas include:

• Expanding what is tradable (especially, though not exclusively, in services)
• Turbocharging export-led agriculture
• Reshuffling the deck for manufacturing
• Enabling labor migration

Opportunity #1: Expanding what is tradable

One of the most exciting opportunities we see (and a unifying theme for the next two opportunities) is expanding what is exportable using technology. The focus is on sectors that absorb lots of labor while offering the long-term potential for productivity growth through agglomeration, scale, learning, and capital — essentially replicating the key advantages of manufacturing. Scaling these sectors by tapping into the global export market seems like a promising direction.

John Page at Brookings Africa Growth Initiative advocates for investment in “smokestackless industries,” non-manufacturing sectors with manufacturing-like properties. These include advanced agriculture and horticulture (e.g. fresh-cut flowers or tea), tourism, outsourced business services, and ICT. Notably, Africa’s ICT sector grew at an impressive 11% annually from 2010 to 2020, making it one of the fastest-growing tech ecosystems globally. This growth highlights the continent’s capacity to leverage digital innovation to expand exports and integrate into the global economy. An additional bonus is that these sectors are less likely to face headwinds from global climate policies, given they don’t pollute as much as manufacturing.

While Page focuses on growth through existing tradable non-manufacturing sectors, we see an even bigger opportunity: expanding what is tradable via technology. This could mean improving trade and logistics or transforming traditionally non-tradable services into export-ready opportunities (think: creative industries, IT, or business process outsourcing).

Thankfully, global trends are in our favor. While goods trade as a share of world GDP peaked in 2008 and has since plateaued, services trade has steadily grown. Modern services — like telecommunications, IT, and business services — now make up 20% of world trade, doubling their share since 1990. Advances in digital technology are breaking down barriers, making it easier to deliver services across borders. Whether telemedicine, translation, or software development, digital platforms have created new pathways for emerging markets to plug into the global economy.

Fortunately, trade barriers for services are lower than for goods and falling faster, giving emerging markets a leg up. Intermediate services — such as professional consulting, IT outsourcing, and technical services — are growing rapidly, with emerging economies increasing their share of global exports at nearly twice the pace of developed countries. With Africa’s abundant, low-cost labor, the opportunity to compete globally is tangible. For perspective, a Colombian worker in a “tele-workable” job earns $2.20 an hour on average compared to $25 for the same role in the US. Imagine the cost-saving potential if African workers could tap into similar markets.

Our portfolio has already started to move in this direction with Terminal (advanced, cross-border logistics), Kafresh (patented spray to preserve high margin Ag exports during transport), Matta (largest marketplace in Africa sourcing minerals for export) and Chargel (cross-border transport marketplace), along with Turnstay, a hospitality and tourism platform that manages payments globally at a fraction of the cost of the usual Visa and Mastercard models. Similarly, HustleSasa, a culture and events platform, exports African culture worldwide.

Expanding what is tradable is pivotal for us and provides a unifying lens through which we view the next two trends discussed below.

Opportunity #2: Turbocharging export-led agriculture

Currently, African agriculture remains deeply underdeveloped.

Africa has 60% of the world’s uncultivated arable land yet contributes less than 5% to global agricultural exports. Depressingly, recent research shows that agricultural yields have even declined over the past few decades, going from bad to worse. Basic processing is often outsourced to other regions after raw agricultural outputs (e.g. grains) are exported, only for the finished products (e.g. cooking oils or packaged foods) to be reimported at higher prices. Efforts to improve smallholder farmer yields through countless programs from international donors and local governments have a poor track record, as they often focus on smallholder farmers in isolation rather than the infrastructure to support them or the packaging and production layers of the value chain, which offer greater long-term growth potential.

While agriculture is often viewed as a low-productivity sector, could focusing on high-value agricultural exports help create some much-needed jobs?

In his book How Asia Works, Joe Studwell argues that Asia’s manufacturing boom was enabled by earlier agricultural reforms that empowered smallholder farmers. These reforms allowed farmers to significantly expand productivity and yields — often over 100%. Studwell and John Page advocate for a similar approach in Africa. Page believes Africa could dominate in advanced agriculture (like organic produce or farmed fish) and horticulture (such as tea or cut flowers).

But what role could technology play here?

There’s potential to unlock growth by boosting the processing parts of the value chain and shifting toward higher-margin, specialized agricultural exports for wealthier markets. We’ve found a few exciting opportunities. For instance, KaFresh has developed a patented organic spray that extends the shelf life of fruits and vegetables by weeks, significantly improving the export potential of high-end horticulture products like avocados. Another example is Yola Fresh, a farm-to-table supply chain platform in Morocco that integrates fragmented agricultural networks and improves efficiency. These examples demonstrate the vast potential for digital commerce solutions to accelerate the agriculture value chain and connect them more effectively to export markets.

We will continue to watch this space with an optimistic (if slightly jaded) eye.

Opportunity #3: Reshuffling the deck for manufacturing

While some analysts have dismissed manufacturing as an easy win, we see no reason to abandon it completely. Manufacturing accounted for 11% of Africa’s GDP in 2023, down from 17% in 1995 (Fig. 3). Improving on this or making the existing sector more efficient is possible. The key barriers — trade and logistics inefficiencies, weak manufacturing input supply chains, human capital deficits, and a challenging business environment —basically distil down to the observation that costs (for workers, transport, electricity, etc) are too high relative to the quality. So anything that can improve efficiency could help move the needle for manufacturing.

Training and other human capital interventions are often the first suggested solutions, but our observation — drawing from the Asian growth story — is that skills-building and educational attainment typically follow sectoral growth as lagging indicators rather than acting as leading indicators capable of jumpstarting stalled growth.

We see greater potential in applying technology in supply-side marketplaces and cross-border and trade logistics platforms to enhance value chain efficiency for sourcing inputs and selling outputs. Our portfolio already includes a few examples, including Matta, a marketplace aggregating chemical supply inputs; Terminal, which turbocharges export shipping logistics for small firms; and Chargel, which optimizes cross border freight and logistics.

Earlier, we highlighted the potential of exporting high-value, processed agricultural goods to wealthier global markets. Yet, there’s an equally compelling opportunity in boosting intra-African trade, where significant gaps remain — current intra-African trade levels lag far behind those with major partners like China and the EU. A promising initiative to bridge this gap in intra-African trade and stimulate demand for manufacturing output is the African Continental Free Trade Area (AfCFTA), which aims to establish a single market for goods and services across 54 countries, covering 1.3 billion people and a combined GDP of $3.4 trillion. If successfully implemented, AfCFTA could significantly boost intra-African trade, enabling manufacturers to access larger markets and achieve the scale needed to compete globally. However, we approach AfCFTA with cautious optimism. While the potential is enormous, current implementation bottlenecks and regulatory hurdles could delay its impact by a decade or more.

Opportunity #4: Enabling labor migration

Africa has a growing labour surplus, just as the rest of the world faces a growing labour shortage. These twin problems could be mutually resolved. The export avenue, represented in the other three opportunities we explore in this piece, is shifting the production of goods and services to Africa to create jobs in Africa. Another alternative is enabling more African workers to migrate to regions with job opportunities.

Recent work by economists Lant Pritchett and Charles Kenny highlight the potential of labour-based migration. They point out that while Africa and other developing regions have abundant young workers, richer countries are quickly ageing out of their demographic dividends and will soon face critical shortages in working-age populations. Both researchers show that this imbalance will soon reach historically unprecedented levels and predict it will need to be addressed through regulated migration programs. High-income countries already have some initiatives to attract workers — some targeting specific skills gaps, others addressing broader labor needs. As the labor shortage worsens in the coming years, Kenny foresees these countries expanding such programs and issuing work visas for numerous temporary and seasonal migrants. He argues that these migration waves will generate remittances and eventually drive back-migration, creating economic benefits for both sending and receiving countries.

The forces Kenny and Pritchett describe are real, significant, and likely to persist for decades, making them important to factor into our thinking. That said, we see substantial headwinds against this model. Resistance from native-born populations in wealthy countries tends to spike in response to large-scale immigration, creating political and social challenges. African policy makers may dismiss the opportunity pejoratively as “brain drain”. Additionally, African migrants may compete for migration opportunities with Asian, Latin American, and Eastern European countries, which often have closer cultural, linguistic, and educational ties with wealthier nations.

Despite these challenges, the economic pressures driving labour-based migration will continue to grow. We’ve already begun investing in this trend through our investment in NALA, a powerhouse in the remittances space that is helping to connect Africa’s population to its global diaspora.

Cybernetic commerce and the role of AI…

So those are big opportunity areas we see, but how to approach them? And what role will digital technology, and AI in particular, play in all this? We’ll be writing more on both these questions in the future. For now, we’ll just say that we believe AI can play a big role in all of the above but especially expanding what is tradable — if (and this is an important if) the technology is deployed cybernetically, to augment people, rather than replace them. This is key in Africa where capital is dear but where people are plentiful and wages low. We call this concept “cybernetic commerce” where we use technology to augment workers, people, small businesses, and existing informal markets rather than fully digitize and replace. My partner Stephen Deng has written about this extensively (here and here).

So, circling back to where we started, Africa’s biggest asset should be its growing population — 500Mn of whom will join the workforce in the coming decades. If those 500mn people are fighting for space in the global services market against an infinite army of AI-based machines, the opportunities to grow will be limited. But if technology is deployed to augment the population and help them join the global economy, we see huge upside potential. This is the unifying question for us — how to connect African businesses to world markets to expand, grow, and create many higher-wage jobs. This key question will drive much of DFS Lab’s thinking for the coming years.

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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 Judge School of Business, 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.