Speeches & Transcripts November 30, 2017

Innovation in Africa

Good afternoon everybody. Allow me to first thank Professor Justin Lin, Director of New Structural Economics, Dean of Institute of South-South Cooperation and Development (ISSCAD) and Honorary Dean of the National School of Development, and a former colleague of mine, for this wonderful invitation. Let me also thank Professor Jun FU, Academic Dean for ISSCAD and all the faculty members for your generous hospitality.

Dear students, 

It is an honor and great pleasure to be here at the Institute of South-South Cooperation and Development. I would like to express my profound gratitude for this unique opportunity to address you today and for the warm hospitality you have extended to me and my delegation. I am humbled by your invitation to speak at this prestigious university, which boasts so many distinguished graduates.

On a personal level, China has influenced my youth. My late father was among a group of post-independence lawyers advocating on the global stage for the rights of “third world countries” and, in the mid 60’s, he had the opportunity to meet Mao Zedong. The picture of my father with Chairman Mao was in his office his entire life. I grew up hearing his stories about China and why he was convinced that China would become one of the most advanced nations in the world. What he saw there is also what I later discovered and learned from China:  First, China thinks long-term. Second, China is pragmatic; and third, it has the ability to adjust quickly to an ever-changing environment.

The discussion on Innovation we will have today has a lot to do with these fundamental principles.

Why innovation?

Today I’d like to speak about skills and innovation, key factors for growth and development. There has been much talk recently about the importance of skills. The World Bank just released its major annual report, the World Development Report, entirely focused on how we can improve the quality of education. Today, an unprecedented number of African children complete primary school. However, most of those students don’t leave primary school with the skills that they need, either in mathematics, reading, or higher order skills.

There are lot of reasons that youth want to acquire skills and education: after all, a good education can help you appreciate life more deeply. But a central reason – usually THE central reason, particularly in poor countries – is that they want jobs. They want good jobs. And we know, globally, that good education helps youth to get better jobs. Globally, an additional year of schooling tends to increase earnings by 8 to 10 percent, and those numbers are higher for women. Likewise, education also helps economies to grow faster: Countries where students can demonstrate higher ability have higher growth rates over time.

But right now, across the developing world, there simply aren’t enough jobs for the young people coming out of school, regardless of the quality of the education. Low- and middle-income countries around the world will need 520 million new jobs for youth coming out of school by 2030, and our current estimates are that 460 million will be created. All things remaining equal, that means 60 million young people without jobs. Within Africa, more than 50 percent of employment will still be in agriculture as of 2020. Currently, agricultural jobs pay poorly due to low productivity, which suggests that workers don’t have promising job alternatives.

This means that new jobs will need to be created. Currently, a lot of that job creation looks like the creation of microenterprises, small businesses that employ just one or two people. We need more. And the way to create more is through innovation. Innovation is absolutely key to African stability and growth in the coming decades.

Some principles of innovation

75 years ago, the economist Joseph Schumpeter coined the term “creative destruction.” He referred to a process of “industrial mutation,” in which new processes push out (or “destroy”) the old ones. Innovation drives that process, it underlies economic growth, and it is a crucial element to “how countries achieve prosperity.

Countries that are further from the development frontier – low and middle-income countries – have a unique opportunity to benefit from innovation. Firms in Bolivia and Burundi should be able to take advantage of innovation in China, Sweden and Singapore and experience extraordinary growth while investing far less, adapting innovations rather than coming up with them.

Yet, despite these potentially high returns, most developing countries invest far less in innovation proportionately than their rich counterparts. Understandably so, one can argue, when the budget is tight and the needs are dire. However, this seems like a massive lost opportunity. There’s an old joke in economics, where an economist is walking down the street and see a $20 bill. The economist’s friend turns to her and says, “Look, a $20 bill!” The economist keeps walking, saying, “That’s impossible. If there were a $20 bill on the ground, someone would have picked it up.” In other words, economists tend to believe that if there is a profitable investment opportunity, then someone will take advantage of it. Yet – coming back to innovation – developing countries aren’t taking advantage of the innovation opportunity, where adopting or adapting existing innovations can result in high returns at low cost. Why not? Xavier Cirera and Bill Maloney at the World Bank call this the “the innovation paradox.” Some of the reasons they propose for this paradox line up with the differences between China and many of the countries in Sub-Saharan Africa.

Innovation in China

Let me talk briefly about innovation here in China. Obviously, many here in the room know more about this than I do. But a quick overview will set the stage for what’s happening in Africa.

The drivers of previous growth in China will no longer work. Three and a half decades of growth were predicated on a few fundamental factors: market-oriented institutional reforms, low wages, and a large working-age population. But both the reward and the price of development is that wages have risen. The working-age population has been shrinking for the last five years. With the global financial crisis of 2008, external demand for Chinese products is weaker. As one set of researchers put it, “China’s firms have to make a tough choice: in, out,” down, or up. In other words, firms had to move inland for lower wages, outsource, close down. Or innovate and upgrade.

Many firms have opted to innovate. The annual growth rate in patents granted to Chinese corporations between 2005 and 2014 was 38 percent, more than double the growth in Korea and almost 50 percent higher than India. Furthermore, spending on research and development in China has risen dramatically over the last 20 years, from well below the OECD average to now exceed it, despite the fact that average income in China is much lower than the OECD. Over the same period, the share of researchers among the population nearly tripled.

Of course, there is still room to improve. Despite high rates of growth and the fact that China now gets far more patents than India or Brazil, it is behind Korea, Japan, or the United States; but maybe not for long! But on the whole, it seems like China has seen the returns to innovation and is investing heavily.

Why innovation in Africa is different, and how it is the same

The countries of Africa are much further from the development frontier than China. So, by economic theory, they should be able to gain even more from investments in adapting and adopting innovations. And yet investments in research and development are lower in Africa than anywhere in the world. What’s missing? The resolution to the “innovation paradox” lies in complementarities. In other words, without certain other factors in place, countries cannot realize the enormous promised gains from innovation. If a firm invests in innovation but cannot import the machines that they need to implement the innovation, then the returns will be low. If a firm invests in innovation but has insufficient trained workers or engineers to implement it, then the returns will be low. And finally, if a firm invests in innovation but lacks the management capacity to take advantage of it, then the returns will be low.

Before China really started expanding in innovation, it had years of solid industrial growth, building a firm stock of physical capital. It also had strong investments in human capital, with a broad investment in basic education and growing investments in higher education. It even scores quite on measures of management.

But many African countries struggle with each of these elements. And of course, capital and management don’t come from nowhere. They are dependent on a range of underlying economic policies: the cost of doing business, the protection of intellectual property rights, and trade policies, among others. We see that the returns to innovation are dependent on these other factors.  

To increase innovation capacity, African countries can invest in three aspects of innovation policy needs. The first include managerial and organization capabilities. These come first because they allow organizations to adopt existing innovations and piggyback on the advances that rich countries make, capturing exactly the returns that the economist Joseph Schumpeter predicted nearly a century ago. A second part of that first step is to start collaborative projects with higher performing countries (like China). The second step involves building technological capabilities, so that countries make adapt and create more of their own innovations. And the third step involves investing longer term in technological programs. Most African nations need to invest in all three steps. In a survey of management practices across firms in many countries, the four lowest participating countries were all in Africa, and they weren’t Africa’s poorest nations, which didn’t even participate. They were countries like Ghana and Tanzania and Ethiopia. Other countries, like Kenya and Nigeria, did better but still below India and significantly below China, which places between Chile and Argentina on management scores.

Of course, there are examples of innovation in Africa, and despite low average investment in innovation. We cannot forget that. A good example is mobile money, whereby people with a mobile phone can deposit, transfer, or withdraw funds without even having a bank account. It was first introduced in South Africa and the Philippines, but Kenya and Tanzania were two the countries that really saw a rapid rise in mobile money usage, all in the mid-2000s. As of 2015, more than 222 million mobile money accounts were registered across Africa, and African countries account for more than half of all mobile money services worldwide. And mobile money has had a sizeable economic impact. When poor households experience a negative economic shock, those with mobile money accounts are more likely to receive transfers from friends and family, and the amount they receive is higher. In the face of a negative health shock – when someone in the household falls ill – mobile money users spend on medical expenses without reducing spending on food, unlike non-users. In Kenya, access to mobile money has lifted nearly 200,000 households – about 2 percent of the population – out of poverty. It has also helped users – especially women – to move out of agriculture and into business.

Mobile money is an innovation where the principal complementary service was access to cell phones, which is very high in many African countries. Mobile money doesn’t require smartphones, but those are growing as well, expected to reach 700 million across the continent in the next few years. Companies are innovating with health, education, and agricultural technology – helping farmers to access crop prices and helping adolescent girls to access information on sexual health. These technological innovations are often what first jumps to mind when we think of innovation.

But there is another model of innovation, one that may be more relevant to many African countries. A good example of it takes us back to the northern European nation of Norway, more than 100 years ago. In 1870, Norway’s income per capita was well below the European average, but by 2001, it was one-quarter higher than the European average. Like many African nations, Norway discovered and took advantage a great deal of natural resource wealth. In the 1960s and 70s, they discovered oil and gas deposits. They also export fish and basic metals. Innovation in Norway mirrored these economic developments, with innovation in each of these fields. For example, in the oil and gas sector, production took place under unprecedented levels of hazardousness with the cold weather, and new processes were developed to manage that; in the fishing industry, Norway demonstrated new forms of disease control. In the early years, much of the investment in innovation came from foreign investors. Continuing to today, levels of research and development in Norwegian firms are relatively low. Rather, firms in Norway tend to seek out innovations from other firms, research institutes, and universities, to see if solutions to their challenges already exist and can be adapted.

To summarize, Norway’s history of innovation had a few key characteristics. First, it built on sectors where it had a comparative advantage, which at least initially consisted of natural resource sectors. Second, it did more adoption and adaptation of innovation rather than original development. Third, it drew on international investors. Clearly there are lessons for African nations here, and there may be lessons for China as well.

It makes sense for African nations invest in sectors where they have comparative advantage. Many African countries would like to become the next China, with a strong manufacturing sector. But for the most part, manufacturing has been slow to grow across Africa. In low-income countries on the continent, manufacturing now makes up only about 7 percent of output. A weak business environment, together with relatively high labor costs, suggest that manufacturing will not be the principal engine of growth on the continent.

So where should African economies innovate? Much of Africa’s strong growth over the last two decades has been driven by the production and sale of natural resources, whether it’s oil from Nigeria and Cameroon, copper from Zambia, or iron from Mauritania. A natural source of innovation – following Norway’s model – would be improving the productivity of those sectors, moving higher on the value chain. So rather than merely exporting petroleum, Nigeria would be making and exporting petroleum jelly. Rather than merely exporting agricultural products, Kenya would be processing those products and exporting processed foods. But that requires innovation: It requires investing in the creation of new technologies, certainly, but also in the adoption and adaptation of existing technologies for improving these industries.

Some of that innovation is already taking place. Take agriculture, for example. In Sudan, satellite images are being used to gather information about crop performance and then share that with farmers by way of their mobile phones. In Nigeria, drones are being used to map out areas for potential future rice cultivation. These innovations integrate new technologies with agriculture, Africa’s most long-standing industry.

How do Chinese investments in Africa link to innovation?

Of course, China is a significant investor in African economies. Some of that investment comes through trade, with China importing oil, iron, copper, zinc, and other products from African nations. China’s investments are growing, in relative terms, where most countries invest more in high-income economies than low-income economies, China had – as of 2013 – more investment in Africa than in the U.S., reversing the normal pattern of investment. So Africa makes up a relatively high proportion of Chinese investment.

And beyond trade and investment, China of course provides aid to Africa. Seven of the 10 highest recipients of Chinese foreign aid are African nations. Furthermore, Chinese aid has an impact on other donors, who tend to give more flexible aid to countries that are also receiving aid from China. Beyond economic gains, these investments have generated largely positive feeling towards China: In a global survey from 2015, 70 percent of African respondents had a favorable view of China, versus just 41 percent with a favorable view of Europe.

Deals between China and Africa are more concentrated in East and southern Africa, in part because of closer proximity to China, but also because of more developed infrastructure. Much of that infrastructure – including ports – has been financed with loans from China. Two examples include the Standard Gauge Rail project, which starts in Kenya, and the Karuma Hydroelectric power project in Uganda. These infrastructure investments are examples of China increasing the productivity of investments by simultaneously investing in complements. Want to trade with East Africa? Lend them money to improve their infrastructure, so the costs of trade fall.

But as Chinese firms continue to innovate and increase the quality of their services, China has the opportunity to further invest in innovation in Africa, just as foreign investors did in Norway over the course of the last century. By using lending and aid to help African nations to improve the productivity of their industries and move higher up the value chain, there is an opportunity for a win-win. If African nations can process oil and copper at a higher level, then Chinese firms can further specialize in technological advances and high-level services. Some of this is already happening, but where it isn’t, there may be a $20 bill lying on the sidewalk – or, in other words, there may be unrealized opportunities for high-return investments.

Last thoughts

Today and tomorrow: The story of innovation encompasses two elements: (1) Increase the productivity of the economy at its current stage; and (2) Structurally transform the economy. This has, from a policy standpoint, practical implications. What share of a country’s income should be invested in increasing the productivity of the economy of today and what is the share that needs to be invested to prepare the country’s economy to tomorrow’s challenges, thereby taking advantage of the upcoming technological changes?

The experience of China has been very interesting. While investing in processes that allowed labor intensive sectors to increase their productivity, China has invested in sectors where labor quantity is less essential. China has become one of the largest producers of robots and invested heavily in high speed computers. Specialists are telling us that, with the increasing role of artificial intelligence and the development of quantum computing, a new era is coming. The application of quantum physics principles on computing will have huge implications on operating systems, cyber security, big data, block chains and others applications. China is already at the forefront in all these sectors. The next language and/or operating system that will be used by billions of people might be made in China. This would be a huge structural transformation!

What’s the lesson for Africa?  Because of budget constraints, should African countries only focus on technology adoption or should they anticipate huge technological changes and help create the technologies of tomorrow? This has practical implications for policy-makers.  R&D is not a luxury. It is long-term planning. African PhD students or researchers working on artificial intelligence and quantum computing to accelerate the structural transformation of their economies will invent the future.

Africa does not have the same level of domestic savings as China. Therefore, foreign cooperation, south-south cooperation, and stronger trade links with China will be key. China has a tradition of supporting developing countries and this support implies an accelerated economic transformation of African economies that will lead to the creation of quality jobs, higher incomes, lower inequality and larger share of local content in the exportation structure.

Regional cooperation matter: Because of their low level of savings, African countries have no option: if they want to follow a long-term innovation policy, they must join forces and remove all the non-tariff barriers that are impeding regional trade and slowing down the creation of regional value chains. This is what our African Centers of Excellence are trying to accomplish.

Another important lesson is that there is no innovation without failure: Innovation requires an environment in which failure is a source of learning. China has very much internalized this Schumpetarian principle. Africa, however, doesn’t have an adequate legal framework such as chapter 11 protection in the US. Investment funds are still too cautious. These are major challenges.

China is well along in the process of shifting from being a mere producer to becoming a producer-innovator. Most of our African nations are at a much earlier stage in the process, and can, therefore benefit from Chinese investment in African innovation and also from Chinese know-how. Students from China should come to Africa and share their experience and knowledge with firms and governments on my home continent. I am traveling to Shanghai shortly to discuss the conditions under which e-commerce and e-trade could be expanded in Africa, learning from the experience of companies such as Alibaba.

Innovation is really the key to sustained growth both in China and in the countries of Africa. Each new generation seeks to apply its skills in new, challenging jobs, that offer new opportunities. But innovation is the producer of those new jobs, whether they are ultimately found in a lab, in a factory, or even on a farm using the latest technologies. 

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