1. African Economic Outlook 2017: Industrialisation and Entrepreneurship
Mario Pezzini
OECD Development Centre Director and Special Advisor to the OECD Secretary General on Development
Milano, 22 June 2017

2. Outline of presentation
1. Macroeconomic Prospects and outlook
Africa´s Growth resilience tested
Domestic demand main driver of growth
Regional comparisons – Role of structural diversification
Persisting challenges – Financing and domestic resource mobilisation
2. Entrepreneurship and Industrialisation
Structural transformation remain a challenge
New industrialisation strategies tap all high-growth sectors and businesses
Targeted entrepreneurship policies complement industrialisation strategies
Improving skills (including managerial ones), business clusters and access to finance to unlock Africa’s entrepreneurial potential

3. The Macroeconomic Outlook

4. Africa’s Growth Performance, 2013-2018
Slowdown continued in Particularly hit is Nigeria.
Growth estimated at 2.2% in 2016 down from 3.4% in 2015
But the outlook is positive with growth projections of 3.4% and 4.3% in 2017 and 2018 respectively

5. More diversified regions will be more resilient in 2017
GDP growth 2.2%
GDP growth 3.5%
GDP growth 3.4%
GDP growth 5.7%
GDP growth 1.9%
North Africa
West Africa
Central Africa
East Africa
Africa
3.4%
Recovery in oil prices brightening outlook for 2017 and 2018
Expected recovery in oil prices from USD 43 per barrel in 2016 to about USD 55 per barrel in 2017 and the rise in other commodity prices in general, is boosting Africa’s growth outlook
But oil price recovery may not persist if US shale production continues to increase
May also be depend on commitment from the OPEC to agreed output cuts
Southern Africa

6. Private consumption is driving growth
Drivers of growth in Africa,
Domestic demand contributes about 60% of GDP growth in Africa
Africa’s growth resilience is boosted by improving business environment
A number of African countries rank above the average competitiveness index of Latin America and the Carribean and the South East Asia of 4.0 and 3.6

7. Remittances and FDI make 60% of financial flows, but aid decreases
External inflows to Africa,
FDI to Africa returned to a growth path in 2016
FDI are diversifying into services and manufacturing & New destinations emerge
Africa recorded its lowest total portfolio inflows since 2008, at USD 6.5 billion in 2016
Sources: Adapted from African Economic Outlook data, IMF (2016a), OECD (2016) and World Bank (2016b).

8. Domestic revenue mobilisation still falls short of needs
The tax revenue mix in Africa,
Resource-rich countries were most affected by the fall in domestic revenue mobilisation
Conversely, non-resource-rich countries have increased their revenue mobilisation
Sources: Africa Economic Outlook data.

9. Industrialisation and Entrepreneurship

10. 4 MAIN MESSAGES
1. Structural transformation remain a challenge in most African countries
2. New industrialisation strategies tap all high-growth sectors and businesses 3. Targeted entrepreneurship policies complement industrialisation strategies 4. Improving skills – including managerial ones, business clusters and access to finance will unlock Africa’s entrepreneurial potential
New industrialisation strategies tap all high-growth sectors and Entrepreneurs
Targeted Entrepreneurship policies complement industrialisation strategies Improving skills, business clusters and access to finance can unlock entrepreneurs’ potentials

11. STRUCTURAL TRANSFORMATION REMAIN A CHALLENGE
Message 1
STRUCTURAL TRANSFORMATION REMAIN A CHALLENGE

12. Africa’s structural transformation challenge: huge sectoral productivity gaps

13. Message 2
New industrialisation strategies NEED TO tap all high-growth sectors and businesses

14. Africa’s industrialisation will not only depend on manufacturing
Africa’s manufacturing is now picking up, but its share of GDP has long declined
Industrialisation in Africa was seen as means for economic diversification and to achieve high and inclusive growth. But past efforts have not been very successful:
Low size of manufacturing sector (11%) vs. LAC (14%) and E. Asia (23%)
Negative trend led to concerns about Africa’s “premature” de-industrialisation
Africa’s extractive industries are larger than manufacturing sector
New global context gives Africa new opportunities to compete and industrialise:
The rapid growth of African markets from 1 to 2 billion people between today and 2050, underpinned by the continent’s fast urbanisation by the mid-2030s, the emergence of a middle class.
Costs are rising in China and that Asian emerging countries are moving up the technological ladder, leaving opportunities for less sophisticated competitors.
Trade in services are also growing fast, which enable Africa to specialise in new niches.  Industrialisation now also includes services.

15. New strategies harness the new industrial revolution
The current Fourth Industrial Revolution is impacting Africa’s industrialisation through three major technologies: (i) robotics, automation and artificial intelligence; (ii) additive manufacturing (e.g. 3D-printing) and (iii) the Industrial Internet and data analytics. Looking forward, the fourth industrial revolution is making entrepreneurship and innovation more affordable and de-localised.
New technologies open up possibilities for new sectors to emerge.
New technologies facilitate small-scale manufacturing to be more efficient. 3D-technology
New communication technologies can help firms participate in global trade.
New technologies also offer ways to fill Africa’s infrastructure gap through innovative method of delivering public services.
Africa has already made a head start in several areas.
Kenya and Nigeria are more advanced in mobile banking than many OECD countries. Sub-Saharan Africa has over 222 million mobile money accounts, more than all other developing regions combined (GSMA, 2015).
Cape Town, Lagos and Nairobi are emerging as hubs for global start-ups, especially in sectors such as financial technology and renewable energies .  
Historical experience has shown that it is almost impossible to predict which companies or sectors will florish in the future  we need to avoid picking winners  we need to create enabling environment for domestic entrerpreneurs

16. New strategies to target all businesses African young SMEs create many jobs
Sizes and ages of formal enterprises in 38 African countries
Entrepreneurship has proven successful in creating employment. Analysis of formal enterprises in 38 African countries from the World Bank’s Enterprise Surveys shows that small young firms with fewer than 20 employees and less than 5 years of experience account for the largest share of net job creation, at 22% (Figure above).
Even if Africa can replicate the industrial growth of East Asian country, the majority of people will still work as self-employed workers (Fox and Thomas, 2016). This is due to demographic growth, the number of new entrants to labour market increase from 20 to 30 million people a year between 2015 and Hence the new industrial strategies need to focus where the majority of people will work.
Source: Adapted from Ayyagari, Demirguc-Kunt and Maksimovic (2014)

17. The share of new entrepreneurs is highest in Africa (22%), but mostly in non-tradable services
Sectoral composition of early-stage entrepreneurship in Africa,
Africa has the world’s highest share of new entrepreneurs in the active population
The largest share (55%) of entrepreneurs are now working in non-tradable services. Retail trade, hotels and restaurants typically requires lower skills level and have fewer barriers to entry. It also has a relative quick turnover and do not require long-term investment. In contrast, in OECD countries, about 1/3 of entrepreneurs operate in professional services and high-tech industry.
African women are 3% less likely to involve in early-stage entrepreneurial activity than their male counterparts; and this gender gap is similar to the global median (Figure 6.6). The gender gap varies across African countries however. This gap is highest in Tunisia, Libya, Egypt and Burkina Faso.
They work mostly in retail trades as well.
Female entrepreneurs face a number of additional constraints: related to financing, skills, social restriction and redustributive pressure
Few African entrepreneurs are truly innovative. Less than one-fifth of African early-stage entrepreneurs offer new products or services to the market. This lack of innovation has been attributed to smaller market sizes and markets’  weak functioning related to skills, financing, infrastructure and business environment.
Source: Calculations based on GEM (2017)

18. Message 3
Targeted Entrepreneurship policies complement industrialisation strategies

20. Policies should target opportunity-driven entrepreneurs
Prevalence of opportunity-driven & necessity-driven entrepreneurs in Africa
The figure shows that in Africa:
Africa opportunity-driven entrepreneurs account for 44% of new entrepreneurs while a third of new entrepreneurs do so because they cannot find other jobs. This latter group has very limited potential for growth.
Releasing the potential of entrepreneurship for industrialisation requires a dual approach:
Governments need to create a supportive environment for opportunity-driven entrepreneurs to grow in sectors aligned with their countries’ comparative advantages. Policies should support efficient market dynamics rather than individual entrepreneurs. Developing high-growth firms can help move the underutilised labour market participants into formal employment.
Policies should refrain from subsidising unproductive entrepreneurs. Instead, they should focus on improving their skills and access to the labour market, so that they can find waged employment.
The large heterogeneity across African countries call for a tailored approach to the local conditions
In some countries, such as Egypt and South Africa, local entrepreneurship is weak with much lower share of people working as entrepreneurs than global standards.
Source: Calculations based on GEM (2017)

21. Entrepreneurship policies complement industrialisation strategies
Opportunity-driven entrepreneurship
25 African countries currently have a national strategy on industrial development. Many countries have both industrialisation and entrepreneurship strategies, yet the synergies between these two policies have not been exploited. They often have different objectives and under different lines of command with little cross-coordination.
Many industrialisation strategies have either focused on capital-intensive sector (such as in South Africa) or focused on attracting FDI without much linkages to local production network. Consequently, they have limited spillovers to the local economy, and will not generate the jobs needed to address population growth.
Entrepreneurship has often been looked at to create job and their roles in innovation and growth are often overlooked. Consequently, they have mostly succeeded in boosting self-employment with limited potential for growth.
The synergies between the two strategies need to target on entrepreneurs with high potential
Therefore entrepreneurship policies can generate more value for money and contribute more to industrialization by adopting a more targeted approach. At the same time, industrialisation strategies need to focus on private domestic actors who have the potential for scales.
New approaches such as grant and business support competition, public procurement, supporting association of entrepreneurs can help identify the most promising entrepreneurial activities to support.
A good example is Morocco’s Plan for Industrial Acceleration , which lays out special measures to support entrepreneurship growth through five pillars: creation of self-entrepreneur status, direct support to entrepreneurs, social security, financing and taxation. Direct support includes entrepreneurship coaching, personalised coaching, financing and digitalisation.
Entrepreneurship policies

22. Message 4
improving skills, business clusters and access to finance can unlock Africa’s entrepreneurial potential
African entrepreneurs face many constraints – and many of them are cross-cutting and inter-dependent. A holistic approach is needed to tackle all existing constraints.
Access to finance and infrastructure (electricity) stands out as the main constraints for doing business in Africa (Figure).
In the context of the new new industrial revolution, skill will become increasingly important.
 the next three slides will focus on address these three key issues: skills, clusters and access to finance

23. Common operating constraints for African firms
Constraints on firms can be lifted by improving skills, business clusters and access to finance
Common operating constraints for African firms
African entrepreneurs face many constraints – and many of them are cross-cutting and inter-dependent. A holistic approach is needed to tackle all existing constraints.
Access to finance and infrastructure (electricity) stands out as the main constraints for doing business in Africa (Figure). 18% of SMEs in Africa cite access to finance as the main constraint to doing business in Africa, and 15% have severe problem with electricity. This rate is higher than the equivalent for developing countries.
Moreover, research has emphasised the importance of skill development in enhancing competitiveness for the new industrial revolution.
 the next three slides will focus on address these three key issues: skills, clusters and access to finance
Source: Adapted from Enterprise Surveys ( the World Bank.

24. Improving skills is key for high-potential entrepreneurship
Share of students in secondary education enrolled in vocational programmes
It is necessary to improve the labour market relevance of formal education, apprenticeship, vocational training and managerial capabilities.
On average, only about 2 to 6 per cent of educational budgets are devoted to skills development.
Equip entrepreneurs and workers with the skills needed to boost the competitiveness of firms and modernise the economy.
Build on local context and carry out continuous impact evaluations.
Boost professional training and skills development curricula through increased funding and involvement of private sector in design and delivery phases.
Formalising informal experience can help entrepreneurs and workers acquire more experience and grow their firms
The majority of young people in Africa lack the general qualifications to enrol in skills development programmes
In Ghana, apprenticeships represent up to 90% of basic skills training
Entrepreneurial skills can also be improved through return migrants who bring the experience from working abroad. Policies could use this potential by providing enabling conditions for returnees who are starting a business.

25. Policies can strengthen industrial clusters to help small firms grow
Comparative advantage
Public goods
Business linkages
Cluster-driven industrialisation
Clusters enable resource-constrained governments to prioritise and address multiple constraints holistically
Clusters, industrial districts, SEZs can become “pilot testing grounds” for public policy, given their delimited administrative borders and relatively higher density of entrepreneurs and firms
In Germany, average R&D costs fell by 19.4%, while the likelihood of a firm becoming an innovator increased by over a percentage point from 4.6% to 5.7% (Falck et al. 2010) .
Three policy areas for cluster development:
Industrialisation strategies need to provide public goods to empower these existing ecosystems
Policy should take stock of a cluster’s and region’s comparative advantage:
Some clusters such as Suame Maganize in Ghana and Otigba in Nigeria provide a dynamic ecosystem that provide many tailored service to local firms. Governments can focus on these clusters.
In Ethiopia’s horticulture industry, firms within a cluster had higher output value, profits and productivity
Local governments or other subnational entities could have a more active role in policymaking and fostering dialogue between public and private sectors.
Morocco’s Tangiers automotive cluster, the government established two training facilities and subsidised 20% of the cost of training courses provided by the private sector. Local government work closely with the private sector in tailoring the training curriculum.

26. Improving access to finance calls for targeted policies
Proportion of working capital financed by banks (%)
Financing for young and innovative firms is difficult:
African firms are 19% less likely to have a bank loan, even after controlling for firm characteristics
SMEs are respectively 30% and 13% less likely to obtain bank loans than large firms (see graph)
Increase in the supply of credit to firms can be supported by policies to improve investment climates and by diversification of financial instruments and market agents
For example, Credit guarantee schemes (CGSs) could encourage banks to lend more to firms. The African Guarantee Fund for Small and Medium-sized Enterprises (AGF) is an example of that. The credit guarantee scheme has benefited more than 1 300 SMEs, generating over 11 000 jobs.
In certain cases, direct financing and support to high-growth African firms can help realise their potential.
A recent large-scale national business plan competition in Nigeria provides evidence of this approach. Each winning entrepreneur was awarded approximately USD 50 000. Winning led to greater firm creation and survival rates. The winners’ firms enjoyed higher profits and sales than the others and an increase of over 20 percentage points in the likelihood of employing 10 or more workers
Governments and development partners need to leverage the potential of private finance.
For every USD 1 dollar they extend directly to the private sector, USD 2-5 of additional private sector investment is mobilised
Initiatives such as Boost Africa, jointly launched by the AfDB, the European Investment Bank and the European Commission, allow mobilising private capital through initial public investments.

27. Industrial strategies depend on governments’ capacities
Some African countries have a great capability to implement industrial policy effectively, yet this is not the case for all. Particularly, middle-income African countries such as Botswana, Ghana, Mauritius and South Africa rank very highly on all four dimensions, even better than some other Asian competitors.
However, some other countries, especially conflict-affected ones, have less capability  there industrial policies may misallocate resources and strengthen the power of rent-seeking groups
African governments can gradually upgrade and improve their capabilities as they pursue industrialisation: examples are South Korea and Taiwan:
South Korea and Taiwan all started out their industrialisation efforts in the 1960s with very weak capacities and imperfect governance (Chang, 2007). Nevertheless, these governments focused on building capabilities progressively and kept their check and balance systems in place. They facilitated governmental “learning by doing” during the process of implementing industrial policy to accumulate relevant knowledge and organisational capabilities
Better involvement of subnational governments in industrial strategies can improve policy implementation.

28. Thank you! Merci! Grazie!