Unlocking Africa’s potential for a growing services sector
Africa’s services sector holds tremendous economic promise. It contributes almost half of the continent’s output, and a number of African countries have emerged as services-oriented economies. Indeed, growth in services has been vibrant in Africa, at more than twice the average rate for the world during 2009–2012. The sector’s performance has undoubtedly contributed to Africa’s growth trajectory of the past decade.
The services economy in Africa is a vital source of income and employment. In some countries, as much as two thirds of the workforce is engaged in services. Overall, the services sector in Africa accounted for one third of formal employment during 2009–2012; including the informal sector would greatly increase this figure. Furthermore, as Africa’s middle class continues to grow, and given current population and urbanization trends (Africa’s population is forecast to double by 2025), this sector is expected to expand.
Equally important is the sector’s contribution to Africa’s trade: African services exports and imports totalled $271 billion in 2012. Though Africa is a marginal player in global services trade with an export share of only 2.2%, the services sector represents an important source of export revenue that should be further exploited if Africa is to assume a role as a global player in services trade.
Services also have a vital role to play in the context of Africa’s development strategy, be it based on the exploitation of its natural resource base (African Development Bank et al., 2013) or on the labour-intensive light industry and manufacturing (Harrison et al., 2014; Lin and Rosenblatt, 2012). For either approach to succeed, exploiting the services potential of Africa will be critical to sustainable development. Indeed, as the most dominant sector in many African economies, services need to support the process of structural transformation, characterized by a shift from low- to high-productivity activities, and a declining share of agriculture in output and employment, as well as an increasing share of manufacturing and modern services in output.
There are some dynamic emerging sub-sectors within the services sector with the potential to generate growth, trade and employment opportunities, which have yet to be tapped. For instance, logistics and distribution could greatly benefit Africa’s agriculture (including agribusiness and food trade) and manufacturing sectors. Therefore, African policymakers need to place greater emphasis on moving towards the provision of more sophisticated services where there is greater value addition and which offer opportunities for technology transfer and linkage development with other sectors of the economy.
Some services sectors are also considered to be the backbone of economic activity and have a bearing on social development. In particular, infrastructure services – encompassing transport, telecommunications, water, energy and financial services – are of critical importance to economic development and could contribute to addressing Africa’s physical infrastructure deficit, inclusive growth and better social welfare. Infrastructure services also provide and support basic services (i.e. electricity, gas and potable water), which will be critical to the achievement of future post-2015 sustainable development goals. Lastly, infrastructure services are essential to the development of other service sectors, including tourism, distribution (wholesale, retail), information and communications technology (ICT) services, and business process outsourcing services. For infrastructure services to contribute successfully to the economic and social development of Africa, the institutional and regulatory environment must be supportive.
The continent is already tapping into some of the opportunities the services sector has to offer. For example, some African economies have been developing their services industries with relative success and are supplying services across Africa. Known examples of emerging regional services are the financial and banking services industries of Mauritius and Nigeria, the commercial and cargo air transport industry in Ethiopia and South Africa, the educational services industries of Uganda and Ghana, the telecommunication services of Egypt and the port services industries of Djibouti and Kenya.
Challenges for the services sector
Major challenges persist, however, especially as Africa seeks to move away from consumption-based growth to more durable sources of growth. The continent will need to shift away from relying on subsistence and non-tradable services to services which generate greater value addition and growth. Equally, some countries have managed to develop their services beyond national confines and are supplying these services to other African countries. Africa is showing immense potential in some of the services sub-sectors that contribute to trade in goods and, through these sub-sectors, the continent has an opportunity to link to global value chains. Therefore, a key policy question is how Africa can translate services-led growth into durable employment and greater value addition for its development. The policy analysis outlined in UNCTAD (2015) to address this question can be recast in six main messages.
Potential for growth and structural transformation
First, the services sector has the potential to become a significant driver of sustained economic growth and structural transformation in Africa. This would, however, require policies to be aligned to build complementarities between the services sector and other sectors of the economy, especially manufacturing. Several services are likely to exert positive spillover effects on other sectors of the economy (e.g. ICT, finance and infrastructure, but also distribution and logistics). Africa must make greater efforts to link these services and industries; that is, to prioritize those services that are relevant for a value chain that is strategically important to a certain country. (For example, Botswana has generated higher benefits from its diamond industry since it promoted downstream linkages with cutting and polishing activities; similarly the Nigerian oil industry has created some strong upstream linkages with exploration, project and construction services.) A precondition for this requires a proactive policy response from African governments, with measures tailored to support businesses in the services sector and forging public–private partnerships.
Cost of service provision
Second, services provision remains suboptimal and is delivered at a high cost. Various regulatory and policy shortcomings prevail, which explain these inefficiencies and impede Africa from fully capitalizing on its services sector potential. For Africa to better harness the potential of its services economy, regulation of and policies for infrastructure services need to better target existing market failures including issues of accessibility, quality, affordability and competition. Indeed, because infrastructure services have a strong bearing on the cost structure of many of Africa’s exports, including commodities and manufacturers, improving the quality and quantity of such services will enhance the continent’s competitiveness. This is all the more important if the continent is to achieve structural transformation.
The need for state support
Third, for Africa to build on established intra-African trade – which has a more sophisticated composition than its commodity exports to the rest of the world and a higher intensity of services component – the link between human capital and high value-added services (i.e. having good software developers, well-trained financial expertise, etc.) needs to be better supported. This requires stronger state intervention in developing technical training systems and subsidizing higher education. Without this state support, it will be difficult for most African countries to exploit “knowledge-intensive trade” opportunities and to insert themselves as service suppliers into both higher value global and regional value chains for goods and services.
Regulation of the services trade
The fourth message relates to the regulatory challenges and opportunities of liberalizing services trade. Although African countries have made efforts to regulate services trade at the national, regional and global levels, a policy disconnect prevails between these three levels, hampering Africa’s opportunities to tap into the benefits of greater services trade. Policymakers and negotiators at these three levels need to cooperate and engage to bridge this divide, so that Africa may better harness the benefits of greater services trade and market integration.
Regional integration and services
The fifth message places emphasis on the potential role of services enhancing existing regional integration efforts and processes. In order to boost the prospective benefits of greater intra-African trade, the continental free-trade area (CFTA) negotiations need to incorporate services trade. The impact of a continent-wide free-trade area will only be meaningful for Africa if services are opened up in parallel with trade in goods.
Enhancing productivity and enterprise development
Finally, the informal sector ranges from 50 to 80% of GDP in Africa (UNCTAD, 2015), which inhibits enterprise development and the continent’s services trade potential. Specific measures are required to support the formalization of informal service providers with a view to enhancing their productivity. This can be achieved, for example, through the modernization of transport and logistics value chains by addressing the efficacy and fairness of the tax system, lowering corruption and regulatory burdens, providing small business support services, improving access to credit for small firms and enforcing compliance with regulatory frameworks to improve the efficiency and accountability of public institutions.
UNCTAD’s policy recommendations for harnessing Africa’s potential
In addition to these key messages, UNCTAD suggests specific policy recommendations on how to better harness Africa’s services trade potential and the related developmental, employment and growth benefits. The main policy recommendations are discussed below.
From a non-exhaustive mapping exercise of existing services trade policies in the African continent at the national, regional and global levels, it became apparent that a disconnect between these three levels exist, which needs to be bridged if Africa is to harness the benefits of greater trade in services. The following policy recommendations are aimed at bridging this hiatus in a practical manner:
Make use of multi-stakeholder consultations for policy processes at all levels
Efforts to align the different levels of policy will require political will, considerable resources and a sensitization and advocacy agenda. African member States and regional economic communities have a number of tools available (such as multi-stakeholder consultation processes, inter-ministerial and parliamentary coordination groups and working parties, focus groups, and surveys) to inform and support these policy processes. This exercise needs to start early on, at a policy design stage which embraces multi-stakeholder approaches and consultation.
Increase efforts to operationalize and implement existing African Union decisions and institutions on trade
National and regional efforts to transpose African Union decisions must be doubled up, as evidence on the ground suggests that part of the disconnect between policies and reality lies in the absence of operationalization and mainstreaming of services trade into existing policy instruments, including monitoring and evaluation. The national mapping of the services policies exercise suggests that there is a poor formulation of a services development strategy at both the national and regional economic community levels, which could trump any efforts at the continental level to develop a pan-African strategy for services. In parallel, existing institutions, such as the High-Level African Trade Committee, need to be vested with sufficient resources and autonomy to implement a services trade agenda that is coherent and coordinated at the three policy levels.
Include services trade in any CFTA negotiations strategy
In order to boost the prospective benefits of greater intra-African trade, the CFTA negotiations need to incorporate services trade. The impact of a continent-wide free-trade area will only be meaningful for Africa if services are opened up in conjunction with liberalizing trade in goods, especially as many services are critical trade enablers and have the potential to create important backward and forward linkages in the services economy that give rise to employment and growth opportunities.
As Africa becomes increasingly integrated into global financial markets through foreign banking, there are several potential pitfalls that African policymakers and regulators need to both consider and avoid when exploring opportunities to harness greater capital flows towards improving productive capacity and economic diversification for a transformational agenda in the continent. African policymakers must improve the prudential regulation of the sector.
Address structural impediments to financial services
An imperative for realizing the benefits of a prosperous and efficient financial services sector is that Africa tackle critical structural impediments that burden financial sector development, growth and inclusion. These impediments include poor infrastructure, monopolies and inadequate regulation of the sector. Many African member States still need to introduce policies which foster greater domestic competition and address financial market concentration. Greater financial sector diversification and competition through better regulation could also reduce the impact of external shocks. Measures to help banks deal with regulatory hurdles that constrain access to finance might include making more state benefits available electronically and providing official identification cards to make it easier for banks to verify the identity of potential customers, thereby easing access to financial services for the unbanked.
In tackling the chronic undersupply of financial services in rural areas, regulation can also be instrumental in tackling financial market information asymmetries and moral hazards while supporting government efforts to improve financial inclusion, integrity and stability. Major possible reform areas include improving property rights regimes; using the extensive rural branch networks of State and development banks to extend access quickly and relatively cheaply to rural financial services; developing regulatory systems that engender confidence in the role of non-bank financial institutions in rural savings mobilization and as channels for rural payments and transfer of remittances; diversifying the supply of financial products and services in the banking sector; and regionalizing financial markets through legal harmonization and cross-listing at the regional level.
Align regional and multilateral regulatory frameworks for financial services
Africa could also benefit from improved regulation by ensuring there is greater consistency in the regional and multilateral frameworks that already exist for financial services. For example, prudential regulation appears to be overlooked in many African GATS schedules of commitments; this is an area where African countries wishing to regulate the entry of foreign banks should be able to exercise discretion on the basis of their prudential regulation. In addition, countries which are yet to liberalize their financial services sector have to make sure they use the flexibilities the system has to offer, by inscribing prudential carve-outs as most-favoured nation (MFN) exemptions. The definition of these carve-outs will require greater coordination between trade policymakers and central banks as well as other financial sector authorities and stakeholders.
Furthermore, greater efforts to align the sector with existing regional regulation, such as the protocols covering aspects of financial sector integration and/or investment, such as the Arab Maghreb Union, EAC, ECOWAS and SADC, will be required. As the continent makes greater progress in regional integration, here too, the formulation of carve-outs will be required to cater to financial integration and the emergence of a regional banking sector.
The above-mentioned disconnect is counterproductive, especially with respect to regulatory issues, and frustrates deeper regional trade. For instance, financial services regulatory frameworks in some countries (e.g. in a regional economic community) are contrary to regional financial services and investment protocols which are supposed to be binding on member States of that regional economic community. A national strategy or plan that incorporates financial services must be aligned to regional plans, as per the country’s regional economic community membership, and also to global issues.
The services sector has the potential to contribute to structural transformation, economic growth and development in Africa if concerted efforts are made to tackle sectoral informality, generate more formal jobs and implement development strategies. African countries should aim to exploit the potential complementarities and linkages between the services sector and other productive sectors of the economy. Policies should also facilitate the insertion of African services suppliers into global value chains and regional value chains in both goods and services.