By Tabea Lakemann, Research Fellow, GIGA Institute of African Affairs and University of Göttingen, and Jann Lay, Acting Director, GIGA Institute of African Affairs, and Head of GIGA Research Programme Growth and Development
Learn more about this timely topic at the upcoming
17th International Economic Forum on Africa
Economic development and a sustained, broad-based increase in living standards on the African1 continent are critically connected to the capacity of African economies to create decent jobs at a rate that keeps up with the rapid growth of the workforce. This, in turn, depends on the ability of African governments to develop innovative, tailor-made strategies towards private sector development taking full advantage of countries’ comparative advantages. Private sector development strategies require governments to recognise the significance of informality and to look beyond industrialisation — to the service sector — for private sector growth and job creation.
The potential of informal firms
On average, the informal economy is estimated to make up almost 40% of GPD in Africa.2 Informal firms are typically much smaller than formal ones, but even when controlling for size, they are on average less productive, less likely to access external finance and have less educated managers.3 At the same time, heterogeneity between informal firms is considerable. Some firms exhibit very high marginal returns to capital, and between 28% and 58% of informal entrepreneurs in West Africa are identified as “constrained gazelles” with low capital stocks, but some unrealised growth potential.4 Many informal firms thus have the likely potential to provide an improved livelihood to their self-employed owners and family members engaged in the business.
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African entrepreneurs are a key driving force for the continent’s emergence. 80% of Africans view entrepreneurship as a good career opportunity. Take African start-ups. They pioneer social innovations. Thanks to the fintech industry, for example, the diaspora can connect with their relatives and directly finance their health expenses, as in the case of ![Africa-Idea-[Converted]](https://oecddevelopmentdialogue.files.wordpress.com/2017/09/africa-idea-converted.png?w=254&h=254)
Over the last decade, Africa has witnessed the emergence of a dynamic start-up scene in some of its countries. The district of Yaba, in Lagos, Nigeria is one example. In Yaba, young educated people are supported by a network of incubators, accelerators and other support facilities. This entrepreneurship cluster has taken advantage of the nearby presence of many Nigerian higher education institutions, such as the Yaba College of Technology, the University of Lagos, or the Federal Science and Technical College for students and facilities.
The manufacturing sector has traditionally been seen as an engine for development due to its high propensity for productivity gains. Worryingly, recent evidence suggests that this has not been the case in Africa.
Africa 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.
For decades, access to electricity has been a serious challenge in Africa. It still is. 600 million Africans are not connected to an electrical network. African businesses cite electricity amongst the two most severe constraints on their operations (
