The Future of Work in Africa: Eight Opportunities for Development Finance Institutions

Africa’s current job market is not providing enough jobs, and the available jobs are not of sufficient quality for Africans to live a life of dignity, free of poverty. Africa’s future work will still be impacted by present challenges, but there are also several new opportunities across different sectors – fueled by the transition to digital and green economies, increased continental trade, and the potential of Africa’s women, youth, and its informal sector.

The report Shifting and Accelerating DFI Investments for More Decent Jobs in Africa, commissioned by ACET and ONE, identifies eight opportunities for DFIs to support future quality and green jobs on the continent:

1. A MODERNIZED AGRICULTURAL SECTOR IS CRITICAL TO CREATING THE NUMBER OF JOBS NEEDED, BUT QUALITY MUST BE IMPROVED

Direct investment in agriculture accounts for just 6% of the five bilateral DFIs’ portfolios, despite all stating this as a priority sector[1]. Agriculture accounts for the largest share of employment in Africa, particularly in rural areas, with numbers employed expected to rise despite the sector’s relative decline[2]. To combat the challenges of poor quality employment, relating to low productivity, climate change adaptation, informality, and gender inequality, the future of agriculture in Africa must be different. The focus should be on utilizing pioneering new technologies and business models, improving the productivity of farms[3], raising labor standards, and adapting to climate change. Giving women equal access to farm inputs could raise crop production by up to 19%[4]. Studies show that the top three reasons for inadequate private sector engagement in African agriculture are access to affordable finance, development of the value chain, and infrastructure access — all of which DFIs play a role in solving[5].

2. MANUFACTURING CAN CREATE STEADY JOBS, BUT THE SECTOR REQUIRES SIGNIFICANT INVESTMENT

Africa has the agricultural and mineral inputs required to boost manufacturing, and future improvements in transport, power, and export infrastructure. Relative wages are also becoming lower than the rest of the world, providing an opportunity for expansion of the sector. African countries have already seen success in the use of Special Economic Zones, which could provide an avenue for future growth of manufacturing and exports on the continent. Realizing these opportunities requires greater and more targeted investment. Africa’s manufacturing output has the potential to double to almost $1 trillion per year by 2025, with roughly half that production remaining on the continent and the rest exported to other world regions[6]. Modern industry provides relatively well-paid jobs for large numbers of unskilled or undereducated workers — particularly those who are not integrated in the formal economy. Despite the manufacturing sector maintaining a relatively stable share of output, information and communications technology (ICT) based services, tourism, and transport are outpacing the growth of manufacturing in many African countries[7]. Insufficient human capital, higher costs, and access to markets have been just a few of the areas that have held African manufacturing back[8]. If the AfCFTA is successful, the manufacturing sector is estimated to create an additional 14 million stable, well-paid jobs[9].

3. AFRICA’S DIGITAL SECTOR CAN PROVIDE QUALITY JOBS IF HIGH-RISK INVESTMENTS ARE MADE NOW

Africa’s digital economy is growing, and is expected to reach $180 billion by 2025 (5.2% of GDP) and $712 billion by 2050 (8.5% of GDP)[10]. Digitalization has huge potential to create new jobs and boost the productivity of existing ones. A subsection of the digital economy will employ iWorkers, who rely on e-commerce platforms for work such as delivery and taxi services. These workers could make up 10% of Africa’s workforce by 2030[11]. Just a 10% increase in email use raises the number of full-time workers in a firm by 12-14%[12]. Creating digital jobs disproportionately helps youth and women, but is generally concentrated in large cities, meaning that greater effort is needed to safeguard rural inequality[13]. Digitalization also improves the productivity of MSMEs, again raising wages. Some point to the risks around the displacement of jobs, but the evidence is mixed, with fast internet connectivity having large positive impacts on sub-Saharan African job creation, without displacing low-skilled jobs[14]. Tackling barriers to creating jobs through digital transformation will be critical. These relate to skills matching, physical infrastructure, legal and regulatory environments, as well as concentrating on rural digitalization[15]. Only one out of five African countries have a legal framework for digital security, and 11 countries have adopted substantive laws on cybercrime[16]. The digital infrastructure is also insufficient, and inputs such as reliable power are needed. 80% of the $7 billion received for digital infrastructure in 2018 was from the private sector[17]. This is an area in which DFIs can and should invest.

4. MSMES AND THE INFORMAL SECTOR WILL DRIVE JOB CREATION, SO QUALITY MUST BE SAFEGUARDED AND MONITORED

The informal sector is the main gateway to job markets for the vast majority of Africa’s working-age population, employing 75% of graduates aged 15-29[18]. It is estimated to create 90% of new jobs in Africa[19]. Many of these jobs will be through MSMEs, which hold the key to unlocking mass employment opportunities. Yet concerns remain around the quality of informal sector jobs, and their impact on existing inequalities. The sector earns less money, with some estimating they are just 20-25% as productive as the formal sector. The workforce is 66% female and, along with agriculture, often employs people living in extreme poverty[20]. Financing must happen alongside an improvement in the productivity of the sector, including upgrading the skills of workers, especially youth and women, and facilitating a move to formalization in the future[21]. DFIs investing in MSMEs must therefore monitor and report progress and safeguards. To unlock more jobs, the primary challenge faced by MSMEs is a lack of access to affordable finance. MSMEs in SSA have an unmet financing need of $331 billion per annum[22]. In Africa, for the 20-30% that can access bank lending, interest rates start at around 20% and can reach 50% if taken from an informal money lender[23]. DFI lending to financial institutions helps provide access to this finance through financial institutions, enabling them to provide it at a cheaper rate.

5. TARGETED DFI INVESTMENT IS KEY TO UNLOCKING PRODUCTIVITY GAINS ASSOCIATED WITH GENDER PARITY

Accelerating progress toward gender parity could boost African economies by the equivalent of 10% of their collective GDP by 2025[24]. This also has spillover effects on education, health, and economic opportunities for children, through the allocation of household resources. Opportunities for women’s gainful employment overlap greatly with other areas and include agriculture, the AfCFTA, and digital and green jobs. Agricultural productivity gaps between female and male farmers in six African countries ranged from 23% in Tanzania to 66% in Niger after accounting for differences in plot size and geography. However, the coronavirus pandemic also demonstrated the vulnerability of women in the workforce, making social protection and other measures vital to unlocking their productivity potential[25]. There have been improvements in the use of a gender lens in DFIs’ operations, yet it is unclear whether investments in process changes are leading to beneficial gender-related outcomes. For instance, a Centre for Global Development (CGD) survey found that half of the DFIs assessed do not systematically incorporate gender scores into each investment approval decision by the investment committee[26]. DFIs’ investments must be targeted toward expanding investment impacts towards women, and processes should be implemented to ensure systematic incorporation of gender scores into investment processes, to reduce existing significant gender gaps in the economy and across society.

6. ADDRESSING THE SKILLS MISMATCH IS CRITICAL TO YOUTH ACCESSING DECENT JOBS

Youth unemployment is one of the biggest unrealized opportunities facing Africa today. In 2016, youth unemployment in North Africa was more than three times higher than adult unemployment[27].  Africa’s youth are well-positioned to capitalize on the digital and green transformations that are already underway. AfDB sees Africa’s youth opportunities in agriculture, industry, and ICT, and the support of the private sector finance in achieving this. Preparing Africa’s youth to create and take job opportunities involves addressing supply-side factors such as overcoming educational and skills mismatch and inadequate training. 45% of youths feel their skills don’t match local labor markets, 28% of youth feel underqualified, and 17% even feel overqualified[28]. On the demand side, firms employing 20 or more are most likely to cite inadequate skills as a constraint to business growth, as well as export-oriented firms, which has implications for new trade opportunities[29]. Only 1 of the 10 DFIs in the sample tracks jobs for youth in their investments. As the largest and most critical challenge facing Africa’s labor markets, DFIs must not only include, but prioritize this in their impact assessment, to ensure their investments help tackle it.

7. GREEN TRANSITION OPPORTUNITIES MUST BE HARNESSED

The Paris Agreement states that the world should be at net zero emissions by 2050. Each country has developed its nationally determined contributions (NDCs) roadmap to reach this goal[30]. The transition to a low-carbon economy would lead to net job creation worldwide, and Africa has a great opportunity to capture many of these. Green jobs will be characterized by nonroutine thinking and higher dependence on formal education, work experience, and on-the-job training. Many future green jobs are in agriculture, where climate technologies will need to be leveraged to boost agricultural productivity, or in manufacturing where greener products will be produced. Job creation will also be in the circular economy, such as recycling plastic and converting food waste into fertilizers and other products[31]. Other industries that are linked to supporting the green transition, such as mining cobalt, lithium, copper, manganese, nickel, and zinc, will provide better-paying jobs as their prices increase with demand[32]. Just half of the 10 DFIs assessed track how much of their portfolio is allocated to green or climate finance generally, although their definitions vary. None track green jobs. The IRIS+ indicators provided by GIIN use the ILO guidance to create a green jobs indicator, which DFIs can use as a starting point to begin tracking and better understanding this critical component of Africa’s future jobs[33].

8. EFFECTIVE IMPLEMENTATION OF THE AFCFTA WILL FACILITATE ACCESS TO A WIDER MARKET FOR MSMES AND DRIVE DEMAND FOR LABOUR

The African Continental Free Trade Area (AFCFTA) is the largest free trade area in the world. It has the potential to bring 30 million people out of poverty and raise the incomes of 68 million others living on less than $5.50 per day[34]. The AfCFTA will have a range of benefits that can improve the quantity and quality of work as businesses access a larger market for selling their products and benefit from increased competition. Whilst there will be winners and losers, the manufacturing sector, in particular, will see strong job growth, with energy-intensive steel and aluminum manufacturing jobs alone increasing by 2.4 million[35]. Increased business competition enhances productivity and increases wages. Compared with a business-as-usual scenario, implementing AfCFTA would lead to an almost 10% increase in wages by 2035, with larger gains for unskilled workers and women. Sectors that typically employ more women, such as recreation, are set to create more jobs, and therefore disproportionately benefit women[36]. Implementing AfCFTA requires innovative mobilization of long-term capital for increasing intra-African and global trade. This would require the creation of a viable, sustainable, effective, and standardized continental infrastructure and systems, coupled with governments’ support in the removal of policy barriers to achieving the objectives of AfCFTA. DFIs are well placed to mobilize the private capital needed to do this.

Read the full report: Shifting and Accelerating DFI Investments for More Decent Jobs in Africa