The danger of the innovation narrative becoming a distraction in Africa

M-Pesa: feeding the Africa innovation narrative
M-Pesa: feeding the Africa innovation narrative
Image: Reuters/Noor Khamis
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In some striking ways Africa is the most “stable” economic region of the world. (Whilst most of our comments could apply to Africa as a whole, for the most part we are concerned with Sub-Sahara Africa).

Since 1960, many of the parameters that define the continental economy have remained in a fixed ratio to comparative global indicators. Whether it is share of global GDP, world trade, or foreign direct investment (FDI), Africa’s share usually hovers around the 2% mark (FDI has inched up to 2.9% however).

Critical observers usually insist the main source of this “stability” is actually “stagnation”. They point to the fact that Africa “missed” the first two waves of economic transformation, almost completely: the agriculture revolution (in some parts of the world, like India, usually called the “green revolution”) and the industrial revolution.

There is now intent focus on not missing the “next wave of global growth”: the asymptotic innovation wave. Innovation cycles can be described as “asymptotic” if they induce phase shifts when social and economic resource constraints force a particular innovation curve towards its limits. This current asymptotic growth wave is largely driven by the digitalization of all industries, which in turn is driving a convergence across what were once thought of as very distinct domains of economic activity. Whilst Africa has improved its “consumption” of digital products (e.g. the boom in mobile subscriptions and digital payments), its production of digital products has not kept pace. Its share of global patent filings, licensing & other royalties’ income, and contribution to IT standards and protocols worldwide, has remained consistently below 1%.

Whilst African countries cannot be said to have missed the boat yet, they are currently not showing evidence of using their early gains to radically unsettle production models and increase their share of the global growth boon that has been underway for nearly a generation now.

But what is the nature of “global asymptotic innovation” to begin with?

Firstly, we’re familiar with the second-order acceleration of the digital economy. For example: the biotech boom is being transformed by data analytics and ever smarter algorithms, making the biological industries increasingly informational. When any industry becomes informationalized, its scaling power grows aggressively.

The onset of artificial intelligence now threatens to remove some of the last institutional barriers to “informationalization” and “digitalization”. Barriers such as education, culture and law. Once machines acquire cognitive capabilities currently only accessible through human mental effort, it would no longer be sound to regard institutional barriers like education as critical in determining how fast industries can transform.

A company in California can build a “teaching system” and ship it to Malawi to review surgical practices. This tendency of emerging technologies to “curve around” limits are precisely why they present new risks and opportunities, depending on how an economy is oriented.

In 2018, Africa’s posture as a growing consumer of innovation is reflected most starkly in its importation of talent and “innovation capital” from around the world as it tries to catch the current boat of radical change. In this respect, Africa does differ significantly from the experience of other regions that have succeeded, unlike Africa, in integrating into global growth waves. Asia rapidly converted the first waves of FDI into home-controlled industrial systems, and today the fastest growing venture capital funds in the region are home-domiciled and controlled. Africa’s trajectory, on the other hand, appears very different.

My own analysis of multiple reports about the flows of venture capital in Africa (put at $560 million by the most generous estimate) establishes that at least 98% of the resources come from overseas. At least 92% of funding went into ventures driven majorly by senior management or directors that are neither citizens of African countries and/or do not live permanently in Africa. In the same vein, shareholding and equity also tend to be held overseas to the same degree.

Africa is thus importing considerable amounts of capital (including social capital), skills, and management talent from overseas to maintain its early gains in the current growth wave. Is this consumption boom inducing sufficient changes in the structure of the African innovation system to impact the real economy, expand production and eventually lead to exports, which are always critical for long-term economic transformation?

The record is mixed.

The attempt to use imported capital and capacity to transform supply chains and market behaviour, primarily using e-commerce, has already faced serious setbacks, leading to a decline of activity by almost 80% since 2015. Human capital solutions, reflected in e-hiring activity, has also dropped precipitously as has the pace of growth in e-learning.

Fintech, long the masthead of African innovation, is on the other hand booming. Despite Africa trailing the Philippines by nearly seven years and despite the humble beginning of relying on a basic framework first tested in a DFID-funded experiment in London, Safaricom succeeded in heavily Africanising what became M-Pesa, catapulting the continent into the lead worldwide as far as growth in fintech activity is concerned.

In the process of attaining global significance, however, 85% of all recurrent investment in the new African digital economy has had to be plowed into fintech and fintech-related innovations, with virtually nothing going into genomics, bioinformatics, industrial firmware, SCADA solutions, or nano-informatics, and very little going into e-health, edtech and gov-tech outside revenue mobilisation solutions. In sum, with virtually nothing going into those systems and solutions likely to impact industrialization.

State of innovation in Africa

So what is the state of innovation in Africa today? This is a loaded question, that needs unpacking through a synthesis of the key points made above.

The “innovation narrative” has made Africa attractive to international capital providers. And I use “capital” here broadly to refer to both monetary and human capital. In that sense alone, innovation has put Africa on the “global map”. A development that at least positions the continent on the starting line to run the asymptotic global innovation marathon that has just got underway.

Imported capital, however, concentrates resources only in those arrangements that can be managed transnationally. This has largely been in the form of special purpose vehicles in Mauritius or Delaware, cloud-based platforms, and jet-setting corporate boards. The same processes that led to the heavy concentration of innovation activity in a few cities and demographic groups in the US and Europe has started very early in Africa. Only eight countries out of 54 are involved consistently (Kenya, Ivory Coast, Nigeria, Ghana, South Africa, Cameroon, Senegal, Uganda). And only about six industries out of 64 potential growth poles have been targeted (fintech, e-Commerce, agri-data, biometrics, solar-leasing, ridesharing). In short, just as “innovation capital” constitutes just 1% of total inflows overall, the innovation surface area being targeted is only 10%.

But that does not mean that the current “innovation narrative” is a distraction occluding our gaze from more critical risks and opportunities in infrastructure, macroeconomic stability and governance.

The truth is that development in the global economic periphery has always been import-intensive and concentrated. But whereas in past economic transformation waves, Africa’s performance in both consumption and production was unremarkable by global standards, the continent’s innovation absorption trends, however dependent on high net imports, in the current growth cycle has been out of the ordinary, to the point where it now accounts for 10% of new global fintech innovation activity.

Purely for the reason that the activities we are going buck the historical trend in a “stable” continent, I feel confident asserting that Innovation in Africa thus far is looking more like a spark than a distraction.

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