Sunday, January 1, 2017

Disruptive innovation: The most viable strategy for economic development in Africa

Without question, Africa is the poorest region in the world. The chart below shows the growth of gross domestic product (GDP) per person – an imperfect but widely used measure – for Africa and the rest of the world. Not only is the rest of the world six times richer than Africa, GDP per person has grown at a faster rate. These numbers are significant because they do not simply represent the macro-economic realities that governments in African countries must manage; they also translate to the circumstances in which millions of people live their lives. The numbers translate to the additional 50 million people in Africa living in extreme poverty today than did in 1990. They translate to the millions of babies, children, and mothers that die annually because they cannot afford life-saving medication. They translate to skyrocketing unemployment which reduces the barriers to youth involvement in terroristic activities. The numbers are very significant.

Source: Human Progress retrieves data from the World Bank, OECD, Harvard University, etc. See

But perhaps of even more significance is the demographic transformation that Africa is experiencing, and will continue to experience over the next several decades. Now home to 1.1 billion people, by 2050 the United Nations estimates that Africa’s population will reach 2.48 billion; by 2100, 4.39 billion people, a majority of whom will be youth.

When the slow pace at which Africa is developing is combined with the demographic transformation, contrary to the sentiments of many optimists, the future does not look bright. But it can.

Disruptive Innovations Targeted at Non-Consumption
No country has developed in sustainably without investments in disruptive innovations. There are two types of disruptive innovations, low-end disruptive innovation and new-market disruptive innovation. I write about the new-market disruptive innovations, which are targeted at non-consumption, a circumstance where a majority of people in a society are unable to afford a particular product due to cost, time, or skill constraints. These innovations transform the existing complicated and expensive products to simple to use, more affordable products, thereby making them more accessible to a larger set of people in society, such as M-PESA, the mobile money platform in Kenya. They serve as the engine of economic development in a society.

Can Africa Spur Disruptive Innovations

It is tempting to discount the possibility of executing disruptive innovations in Africa because of the many obstacles to innovation on the continent, including poor infrastructure, the difficulty of doing business, and the very low incomes on the continent. But when these obstacles are framed as opportunities, innovators can build truly disruptive companies.

In fact, it is precisely because these obstacles exist that disruptive innovations can thrive in Africa.

Nollywood and Noodles

Nollywood, Nigeria’s film industry, has taken many in the world by storm. While Hollywood’s revenues dwarf Nollywood, it is difficult to overlook Nollywood’s impact in Nigeria. The industry, according to a UN report, is now worth approximately $5 billion, employs more than one million people, and generates around $800 million annually. Nollywood has been able to thrive precisely because it is a disruptive innovation targeted at the average Nigerian citizen unable to purchase, watch, and perhaps relate to Hollywood movies. The innovators in Nollywood have keyed into the vast non-consumption of movies in Nigeria, and Africa, and have created relevant and relatable movies that have given birth to a booming industry.

When Haresh Aswani decided to start importing Indomie Noodles into Nigeria in 1988, the decks were stacked against his company, Tolaram. Nigeria was ruled by a military government, GDP per capita was only $256, and 78% of people lived on less than $2 per day. But Aswani began importing noodles into Nigeria and since then, has built 11 factories that manufacture many of the inputs for the noodles. The company directly employs approximately 10,000 people and hundreds of thousands indirectly. A packet of Indomie Noodles costs roughly 18 cents, a product affordable by the majority of Nigerians. Tolaram has begun expansion plans into other African countries. Where many see obstacles, the company sees opportunity.

The Rebirth of an Old Idea

Investing in disruptive innovations is not a new strategy for creating prosperity. The United States, many European countries, the Four Asian Tigers, and many other rich countries followed this strategy with great success. The returns from their investments were then invested in infrastructure, education, healthcare, and in building institutions. It is tempting to spend billions of dollars on infrastructure, institution building, education, healthcare, and other development indicators that are correlated with prosperity. But a closer look at rich countries today shows that investments in disruptive innovations came first. Africa should thus follow suit.

Governments should support entrepreneurs whose business models are targeted at non-consumption. By doing this, they will inevitably create jobs for many people, as was the case with Nollywood and Indomie Noodles. This, will ultimately lead to unfettered prosperity in Africa.

Agribusiness can help to unlock the true potential of Africa

The challenges faced by small farmers are similar across the developing world – pests, diseases and climate change. Yet in Africa the challenges are even greater. If farmers are to survive at current rates (let alone grow), they need to have access to high-yielding seeds, effective fertilizers and irrigation technologies. These issues threaten the region’s ability to feed itself and make business-growth and export markets especially difficult to reach. Other factors include the rise in global food prices and export subsidies for exporters in the developed economies, which leave African farmers struggling to price competitively.
Organizations such as The International Finance Corporation (IFC) provide and mobilize capital, knowledge and long-term partnerships in agribusiness. It has provided over $25 billion in financing, mobilized investments from partners and provided advisory services across the continent. Connecting the private sector with global and regional NGO’s and the public sector is one of the most important steps. Of the $3.7 billion invested in Sub-Saharan Africa in 2015 by the IFC, $1.8 billion came from other investors.
Modernization of technologies, innovative technologies and widening access to markets is central to turning such huge sums of money into results. In Kenya, a mobile app called M-Farm allows farmers to directly send messages requesting guidance and data on crop prices. It also helps farmers to connect directly with food suppliers; thus reducing reliance on middlemen and market buyers. Cutting costs in this way can go some way to mitigating the impact of subsidized exports from the developed economies.
In Ethiopia, access to simple market knowledge has also helped small food manufacturers grow. AfricaJUICE is the first Fairtrade certified fruit juice in sub-Saharan Africa and it has been able to expand through the provision of technical expertise and understanding global markets and industry practices. This assistance came from the World Bank, alongside equity financing of $6 million.
Agribusiness is growing fast, yet the true potential is stymied by limited mechanization, fragmented markets, price controls and poor infrastructure. For a sector that contributes 25% to Africa’s overall gross domestic product (GDP) and accounts for 70% of all employment, it is an industry that presents enormous opportunities to investors.

A woman farmer who works in the maize fields on the Canhumbuca Farm in Huambo, Angola. © Anita Baumann

For policymakers and investors, one of the hurdles is knowing how to find and identify those small-scale farmers or food manufacturers that have really strong commercial potential. In Angola, this challenge has been met by the creation of a state-backed organization called Fundo Activo de Capital de Risco Angolana (FACRA). It is a public venture capital fund that supports Angolan SME’s in agribusiness and other sectors in building, innovating and expanding their existing business. It opens doors for businesses that have the potential for growth and makes it significantly easier for investors to enter the Angolan market.
Aside from providing growth opportunities and support for market-entry, organizations such as FACRA also have a role to play in helping Africa to become self-sufficient in food and become a regional exporter. With 70% of the workforce already working in the sector, Africa already benefits from having a mobilized workforce. Honing in on communities that have such strong potential is one way of helping to support economic growth.
Like so much in Africa, things have to happen from the ground up, through investing in small projects and local communities. The financial and administrative burden for such initiatives very often fall on the government but the private sector has the ability to get involved at a local level too, if it can take a long-term view and work in partnership. The introduction of world-class machinery and support for the type of infrastructure needed for rural communities to succeed are two areas where foreign investors can take a stake through public-private partnerships (PPP’s) or direct investment.
Direct investment brings with it a range of financial incentives for foreign investors. Infrastructure linking rural communities to markets is much-needed. Mechanization is also particularly important in achieving greater production and capacity and so too are storage facilities and modern irrigation and water conservation technologies. These are all areas where investors can bring capital and technical expertise to an industry sector that has enormous economic potential.
As African economies continue to work against the tide of low oil and commodity prices, there is determination regionally and on the national level to achieve diversification and economic growth within the SME sector, not only in agriculture but all burgeoning sectors.
Agribusiness is especially important because of the scale of opportunity and the important role that it plays in supporting a wider value chain, job growth and economic diversification. Now is the right time for all African stakeholders, global bodies and private investors to come together and create an environment that helps Africa to feed itself and deliver economic growth for ordinary people, national economies and investors.

How can we help smallholder farmers seize opportunities in Africa?

Agriculture is at the heart of addressing poverty in Africa.
The recent End Poverty Day activities in Africa, which focused largely on agriculture, was also a reminder of how central the sector is to ending poverty and boosting prosperity.  Indeed, the different stakeholders I work with on a daily basis—which includes African governments, development partners, civil societies, the private sector and farmers—all agree: Agriculture is important to the future of Africa.
Much more than in any other region, agriculture is a major driver of African economies, typically representing 30-40% of GDP and 65-70% of labor force. Despite the fact that Africa is the most rapidly urbanizing region, agriculture will remain the dominant sector for many years in most African countries. The poverty impact from agricultural growth is higher relative to other sectors. Agriculture is important for growth, poverty and food.

It’s true that Africa’s agricultural transformation will be a complex, multi-sectoral agenda that requires different enabling factors, from sufficient financing and the right policies to the implementation of climate-smart agriculture. It’s also true that success depends on one crucial factor: the engagement of smallholder farmers. In short, Africa’s agricultural transformation will need smallholders to succeed.

Smallholder farmers continue to dominate African agriculture although some countries--for example, Ghana, Tanzania and Zambia--are experiencing a rise of medium-scale farms of between five and 100 hectares as part of the region’s broader economic transformation. Smallholder farmers still control the largest areas for production.  They employ 70% of the work force, farm most of the land, and are home to most of the poor – so the most obvious way to make agricultural growth pro-poor is to engage with huge numbers of small farms.

However, smallholder farmers face two major challenges today. One is that they are at a major disadvantage in linking to modern value chains because of their low volumes of sales, poor market information and contacts, and limited ability to meet the high standard requirements of many high value markets. Because of their small size and reach, they are perceived to be high cost and high risk farmers by private agrodealers and financial institutions.

So how can people working in the agriculture sector support smallholder farmers?

First, there is need to provide supportive incentives and policy reforms for farmers and agribusinesses. For example, modern inputs and credit remain out of reach for many smallholders. Farmers could benefit from a package of inputs and credit. The issue of land tenure policy reform is critical. Between 10-45% of businesses describe access to land as major constraint.  There is need to build institutions that help farmers--including youth and women-- access land and engage in profitable commercial agriculture.

Work also needs to be done on scaling up investments in infrastructure and technology, particular technology that helps farmers produce more food. Neglecting to invest in agricultural research and the creation of many small, underfunded research institutions has caused setbacks that will need to be addressed. Africa also needs investments to develop agricultural education at all levels. Finally, Africa’s aging infrastructure cannot launch or sustain internationally competitive commercial agriculture without investment, especially in irrigation, roads, energy, and logistics, especially port infrastructure.

We also need to strengthen institutions to make markets work better for smallholder farmers. Some of these institutions would provide critical services such as access to finance, market intelligence, marketing and business development services—all things that the private sector currently has few incentives to provide. Finally, we need to focus on improving coordination and leveraging partnerships among the different key players including but not limited to multilateral and bilateral development finance partners, the private sector, the Consultative Group on International Agricultural Research and African national and regional institutions.

The challenges facing agriculture are great but we have reasons to be optimistic. Agriculture’s value added increased by 5.1% between 2000 and 2013. There’s no limit to what agriculture can achieve—in terms of feeding Africa, creating jobs, and helping to end poverty and boost prosperity. We have to work hard to make sure that smallholder farmers will be part of the work to meet Africa’s growing food and beverage markets –which are expected to top $1 trillion in value by 2030.