Biases in entrepreneurship and industrial policy in Africa

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By Wim Naudé, Professor in Business and Entrepreneurship in Emerging Markets, Maastricht University, Dean of the Maastricht School of Management, The Netherlands, and Research Fellow at the IZA Institute for Labor Economics, Bonn, Germany


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shutterstock_415121221.jpgAfrica has failed to industrialise. At the same time, millions of young people are seeking jobs. Put one-and-one together and the answer seems to be that if these labour market entrants become entrepreneurs in industry then they can in one stroke create jobs and help Africa industrialise. Yet, optimising the nexus between entrepreneurship and industrialisation requires overcoming some vexing policy biases. These can be categorised as biases of over-estimation and biases of under-estimation.

First, industrialisation’s job-creation potential is often over-estimated. The world is in a Fourth Industrial Revolution (4IR) driven by technologies such as the Internet of Things, automation, additive manufacturing and big data analytics (see Naudé, 2017). These technologies are causing the loss of low-skilled routine jobs, of which Africa has a disproportionate share. It’s estimated that up to 66% of all jobs in developing countries are at risk. Relatively poor African countries such as Ethiopia are at a particular risk of having around 44% of current jobs susceptible to automation. The 4IR is furthermore leading to a ‘re-shoring’ of manufacturing back to advanced economies. This is to the detriment of low-wage labor in African and other developing countries. As Culey (2012) points out: How important is low-cost labor when you don’t actually need labor?

Second, the dangers of entrepreneurship are under-estimated. Most businesses are small and micro-enterprises that do not create many jobs, that do not grow and that fail within a few years (Nagler and Naudé, 2017). Although problematic, this is perhaps the least of the dangers (Naudé, 2011). More of a concern is the danger of government capture and destructive entrepreneurship such as looting, people smuggling, poaching and outright war (Brück et al., 2013). Consider two recent examples (unfortunately there are many more). First, a study on the relationship between African leaders’ birthplaces and the destination of Chinese-funded industrial projects found that when leaders hold power, their birth regions receive substantially more funding from China than other subnational regions (Dreher et al, 2016: p.1). Second, state capture by entrepreneurs has contributed to the destruction of the textile industry in northern Nigeria. Millions of garments with the Made in Nigeria label are illegally smuggled across the Niger border, with the complicity of local politicians/entrepreneurs (Burgis, 2016). The garments are in fact not made in Nigeria.

Third, Africa’s educational gaps are under-estimated. The most serious constraint to African industrialisation is lack of skills (Naudé, 2017). Africa accounts for less than 1% of the world’s scientific research output. Only 29% of all Sub-Saharan African research between 2003 and 2012 was in science, technology, engineering and mathematics, fields of critical importance for the 4IR. Moreover, this research declined by 0.2% annually since 2002. Less than 25% of tertiary education enrolments in Africa are in science and engineering. South Africa, until recently the largest economy in Africa, has one of the world’s worst education systems (The Economist, 7 Jan 2017). Investments in education are still considerably eroded in Africa by the ravages of illness, war, crime and discrimination.

Finally, the effectiveness of policy makers to promote entrepreneurship and industrialisation is over-estimated. Governments generally lack the resources, know-how and data to promote and regulate industry, especially in high-tech sectors. Matters, however, are made worse as Africa’s governance effectiveness seems to be deteriorating. Of the 49 Sub-Saharan African states, 30 had seen a worsening in government effectiveness between 2000 and 2012; fully 35 out of the 49 had seen a decline in the control of corruption (Taylor, 2016:13).

These policy biases of over-estimation and under-estimation will need to be taken into account in any new industrialisation strategy. Policy makers should take caution against the tendency to bury their heads in the sand through over-optimism for entrepreneurship and under-investment in education, health and safety.


To read more about this topic, explore the African Economic Outlook 2017: Entrepreneurship and Industrialisation.   



References

Brück, T., Naudé, W. and Verwimp, P. (2013). Business under Fire: Entrepreneurship and Violent Conflict in Developing Countries, Journal of Conflict Resolution, 57: 3-19 Available at: https://ideas.repec.org/a/sae/jocore/v57y2013i1p3-19.html

Burgis, T. (2016). The Looting Machine: Warlords, Tycoons, Smugglers and the Systematic Theft of Africa’s Wealth. London: William Collins.

Culey, S. (2012). Transformers: Supply Chain 3.0 and How Automation Will Transform the Rules of the Global Supply Chain, The European Business Review, Nov. Available at: http://www.europeanbusinessreview.com/transformers-supply-chain-3-0-and-how-automation-will-transform-the-rules-of-the-global-supply-chain/

Dreher, A., Fuchs, A., Hodler, R., Parks, B.C., Raschky, P.A., and Tierney, M.J. (2016). Aid on Demand: African Leaders and the Geography of China’s Foreign Assistance, Centro Studi Luca D’Agliano, Working Paper no. 400. Available at: http://aiddata.org/sites/default/files/wps3_aid_on_demand_african_leaders_and_the_geography_of_chinas_foreign_assistance.pdf

Nagler, P, and Naudé, W. (2017). Non-Farm Enterprises in Rural Sub-Saharan Africa: New Empirical Evidence, Food Policy, 67: 175-191. Available at: https://ideas.repec.org/a/eee/jfpoli/v67y2017icp175-191.html

Naudé, W. (2011). Entrepreneurship is not a Binding Constraint on Growth and Development in the Poorest Countries, World Development, 39 (1), 33-44. Available at https://ideas.repec.org/a/eee/wdevel/v39y2011i1p33-44.html

Naudé, W. (2017). Entrepreneurship, Education and the Fourth Industrial Revolution, IZA DP no. 10855. Bonn: IZA Institute of Labor Economics. Available at: http://legacy.iza.org/en/webcontent/publications/papers/viewAbstract?dp_id=10855

Taylor, I. (2016). Dependency Redux: Why Africa is not Rising, Review of African Political Economy,43 (147): 8-25. Available at: http://www.tandfonline.com/doi/abs/10.1080/03056244.2015.1084911?journalCode=crea20

The Economist (2017). South Africa has one of the world’s worst education systems, The Economist Magazine, 7 January. Available at: https://www.economist.com/news/middle-east-and-africa/21713858-why-it-bottom-class-south-africa-has-one-worlds-worst-education