On average, close to 80 percent of total employment across Africa is in the informal economy, which is generally defined by the International Labour Organization (ILO) as activities that are not covered by formal arrangements. This consists of a wide range of jobs, from a home-based worker such as a seamstress to a street vendor to independent, self-employed small-scale producers and distributors of goods and services.
There are numerous drawbacks to such a high reliance on informal economies. Informal work can be unsafe and unhealthy, but even in good circumstances a worker’s employment status can be insecure, and productivity and incomes are often low. Furthermore, workers often lack access to productive resources such as finance and land, which combined with low skills, confines them to jobs with less potential for higher earnings and improved wellbeing.
On the macro level, an overreliance on informal employment can stunt economic transformation. Creating jobs in the formal sector is important, but even with extraordinary job growth it would only generate a relatively small number of jobs for Africa’s growing workforce. Most new entrants to the labor market, particularly the less skilled, will need to create their own livelihoods in the informal sector in the foreseeable future.
Therefore, the bigger challenge facing governments is not only how to create more productive jobs but also how to improve the productivity of the 80 percent of the workforce in informal employment. This will require addressing the competency and skills challenges in the workforce (supply side) as well as constraints in the business environment (demand side) to creating more productive opportunities. However, countries face several global and regional trends that complicate this challenge. Chief among them: population growth and rapid technological change.
As noted in Part 1 of this series, Africa has yet to experience the demographic transition that propelled rapid economic growth in East Asia and other transformed regions. For example, in 2018 the average total fertility rate, which measures the average number of children per woman, in Africa was still 4.7; globally, the number was almost half that at 2.4.
A lower fertility rate means that the working age population increases while capital dilution is reduced, which also holds back structural changes in employment—the shift from low to high productivity work, or informal to formal sector jobs. A one percentage point increase in growth of the working age population rate results in a 1.4 percent increase in GDP per capita.
Sub-Saharan Africa (SSA) will have to create productive jobs at an average of about 20 million each year until 2035—a fast pace to absorb new entrants into the labor force, especially given the rapid evolution in technologies that are changing the nature of work.
The ultimate impact of these advancements, often called the 4th Industrial Revolution, or 4IR, on Africa’s labor market is not yet known, but ample research exists to provide a general understanding. For example, previously pessimistic reports of catastrophic job loss to automation have been revised downward in recent years. McKinsey’s latest estimates suggest automation may have a smaller impact in African countries than in advanced countries: 5 percent of work activities could be displaced in Kenya, 8 percent in Nigeria, and 13 percent in South Africa.
Rather than sizable job loss, structural adjustments to new technologies may pose the greatest challenge to countries trying to harness their workforce through more productive—and less informal—employment. But this also presents unparalleled opportunity to help transform African economies and unleash new opportunities.
Within a decade, the region’s working age population is expected to reach 600 million, with a youth share of 37 percent, which will be even larger than that of China. The key is ensuring the supportive infrastructure exists, including the right skills and access to technologies, as well as the right job creation strategies, to better enable Africa’s young workforce to move from lower productivity work to higher productivity work.
Creating decent jobs in line with future expectations requires policies and strategies that increase productivity, absorb labor, and enable workers to move from traditional to modern jobs and sectors. As such, five potential pathways with high potential for job creation can be identified: (1) agriculture-driven transformation, (2) exports-oriented manufacturing, (3) a modernized services sector, (4) tourism, and (5) the creative industries.
Increasing productivity and output in a modern agricultural sector would sustain agro-processing and a host of services upstream and downstream from farms, creating jobs and boosting incomes across country economies. For example, rising incomes, urbanization, and growing food consumption in cities provide enormous opportunities for agribusiness. The World Bank projects the value of food and beverage markets in SSA will grow from $313 billion in 2010 to $1 trillion by 2030. Expanding employment in off-farm activities and agriculture-related manufacturing provides many productive jobs, including for workers leaving farms who are prone to end up unemployed or working informal jobs in cities or towns.
A more productive agriculture sector will attract more young people, rejuvenating a sector dominated by aging farmers. Attracting youth into agriculture is particularly important given that rapid urbanization is putting pressure on already stretched resources in cities and leaving rural areas with skills gaps. In addition, a modernized farm system can also attract young people to become service providers to the sector and spur a vibrant fabrication sector.
The impact of 4IR-related job losses should be minimal in this sector, which is likely to be energized by technology innovations that upgrade all stages of agricultural value chains. Precision agriculture can increase productivity at farm level using “big data” and autonomous vehicles to optimize application of inputs, while technology platforms can help develop new business models particularly amenable to increased youth participation. Examples include enabling farmers to “buy” mechanization services by connecting them to service providers.
However, to create jobs and raise productivity in African agriculture, considerable attention needs to focus on land access. Policies and regulations must also create an enabling environment for the business of farming—and agribusiness in general—to be profitable; in particular strengthening market linkages for smallholder former to access markets at lower cost.
Export-oriented manufacturing not only can be labor intensive, it can spur productivity gains throughout the economy as exporters compete with foreign firms and adopt foreign products, processes, and technologies. Africa’s expanding middle class and regional markets, as well as relocation of manufacturing out of other regions, should create new opportunities.
However, the prospect of Asian manufacturing moving to Africa as labor costs rise in Asia—a long held belief as a driver of transformation—is gradually fading or is at best a very problematic job creation strategy. Additionally, new products emerging from 4IR require advanced digitization infrastructure and skilled labor along the whole value chain—areas in which African countries are lacking. Yet, there are numerous sub-sectors on which African countries can focus that are less automated: construction, food processing, wood processing, garments, and leather production, among others. These areas leverage African advantages in labor, land, and natural resources and also offer opportunities for labor-intensive, market-focused local manufacturing—particularly goods traded regionally.
With the right policies and strategies, however, mastering traditional manufacturing makes it easier to jump into more complex digitized manufacturing. Examples include prudent macroeconomic policy, streamlined regulation, and reduced trade costs to help export-orientated businesses get established and grow. Access to finance is key, particularly for smaller and younger firms that are reliable sources of innovation and productivity growth.
More integrated regional markets would also greatly improve the chances of attracting foreign investment, particularly for smaller countries. The African Continental Free Trade Area agreement, when fully implemented, should play an important role here, not only in facilitating the movement of goods but also people—and thus, jobs.
Although highly informal, services is the fastest growing sector in terms of job creation and value added to GDP in most African economies, forecast to increase by 3.8 percent on average each year until 2030. It is also, perhaps, the sector that would benefit most from 4IR due to the potential for more jobs.
While there are no reliable estimates of the job-creation potential of the sector, the key is to improve productivity, particularly in its large informal sub-sector. For example, the information and communications technology (ICT) sub-sector is relatively small and highly- skilled, accounting for around 1 percent of the workforce in developing countries. But indirectly, ICT will be a powerful force for job creation and productivity as inputs into businesses—consider 3D-printing, software development, or mobile systems for payments and orders.
The Kenya-based company M-Pesa is now the biggest money transfer system in the world. The M-Pesa platform allows people to pay for all kinds of services and is rapidly formalizing the informal sector by bringing many transactions online. Mobile phones have also brought banking, insurance, and other financial services to many previously excluded people, particularly women and youth.
These modern services, which are being driven by new technologies, share many characteristics with manufacturing: they are tradable, have higher productivity, can absorb large numbers of moderately skilled workers, and benefit from economies of scale. Thus, in addition to the focus on light manufacturing, which has traditionally been at the core of most African countries’ industrial policies, increased attention should be given to new service industries being spawned by 4IR innovation. In this context, targeted reforms and interventions, particularly skills development, will be crucial to becoming globally competitive.
Tourism is one of the assured pathways to economic transformation due to its capacity to generate jobs and create linkages with other sub-sectors. One World Bank study found that a $250,000 investment in the tourism sector in Zambia produced 182 full-time formal jobs—nearly 40 percent more than the same investment in agriculture. Including jobs supported indirectly by the tourism industry, the sector’s total employment contribution is expected to grow by more than 40 percent between 2018 and 2028.
Tourism is an important source of jobs in countries such as South Africa, Kenya and Senegal, but very much under-developed in many countries in Africa despite the wide variety of cultural and leisure attractions. But the sector is already benefiting from technological innovations that are expanding job opportunities. Virtual reality tools are boosting marketing efforts by allowing people to “sample” destinations. New sharing platforms such as Airbnb are broadening travel markets, particularly among young people. And big data and social media provide opportunities for micro-targeting and marketing tourism at the individual level.
All African countries are at different stages of development, requiring different solutions for supporting tourism. But there are few areas all countries should consider in developing a policy package to generate jobs, including: easy and safe access for tourists; adequate and transparent procedures for allocating land; innovative infrastructure solutions, such as renewable energy; and getting taxes right to maximize the economic benefits of tourism.
Creative economies represent one of the more resilient and fastest growing sectors in Africa. Only recently recognized as a bona fide economic sector, it covers all arts and crafts and their product outputs, as well as sports, leisure parks, gaming software, culinary arts, and even creative endeavors that happen in traditional organizations, such research and development. The sector is huge; UN research has pegged its global value in excess of $2.2 trillion.
However, Africa’s share remains small despite significant cultural and artistic resources, due in part to limited supply capacity, obsolete policies, and regulations and under-investment, particularly in infrastructure. Nevertheless, the potential in Africa is immense. In Nigeria, the movie industry is now the second biggest employer after agriculture, employing close to 300,000 people directly and over 1 million indirectly.
Research shows that when the creative and media industries join with digital technology, they become an essential source of jobs for the whole economy. Developing Africa’s creative economy could trigger a value chain between artists, entrepreneurs, distributors, and support services across multiple sectors to provide more modern jobs, especially for youth and women.
Governments can support creative industries through measures that define and enforce property rights, invest in necessary infrastructure—including technology—and support innovative and effective financial services in partnership with the private sector.
Each year, 10-12 million youths, many educated, enter the workforce, yet only 3 million formal jobs are created. As a result, young graduates either face low earnings in the informal sector and underemployment, especially in rural areas, or for those who can afford it, a typically protracted period of job search.
Creating enough productive and fulfilling jobs in Africa will rely on transforming economies. Governments will also need to work in close collaboration with the private sector, as it is entrepreneurial firms, both large and small that will spearhead the creation of employment and the production and distribution of goods and services that drive transformation.
However, the relatively small size of the formal sector means limited job opportunities for the influx of youth entering the workforce. Many will end up in the informal sector, but again opportunity can be seized. According to the African Development Bank (AfDB), 1 in 5 members of Africa’s working-age population start their own businesses—the highest rate in the world.
Transformation strategies should include policies to encourage entrepreneurs and boost their productivity, particularly in sectors that align with countries’ comparative advantages. The AfDB recommends such policies follow all the development phases of a business, from seed to expansion and be based on country-specific context. That’s not to suggest informal employment should be the goal of job creation strategies, but it must be addressed alongside efforts to increase productive employment.
Given the slow pace of Africa’s demographic transition, the move from lower productivity work to higher productivity work is likely to lag behind other aspects of transforming economies. Governments can help accelerate the process by targeting high-potential pathways for productive jobs, such as the five profiled in this article, and by ensuring youth populations are equipped with the foundational knowledge and skills they need, which is the subject of the next part of this series.
The articles in this series are based on the ACET research paper The Future of Work in Africa: Implications for Secondary Education and TVET Systems, prepared by Edward K. Brown, Senior Director Research and Advisory, ACET, and Helen Slater, Senior ACET Fellow. Additional research support was provided by George Boateng, Amanda Aniston, Diana Dadzie and John Dadzie. The paper was commissioned by the Mastercard Foundation for the report Secondary Education in Africa: Preparing Youth for the Future of Work, published August 2020. For more details on the report, read about the virtual launch here or visit the Mastercard Foundation website.