How smaller businesses can help Africa thrive

International investors, representatives of international and regional organisations, and African leaders from government and civil society, who attended the World Economic Forum on Africa in Abuja, Nigeria last month are seeking to translate the region’s economic promise and youthful demographics into employment opportunities and poverty reduction.

Sub-Saharan Africa is a rare bright spot in a still-sluggish world economy, with the International Monetary Fund projecting 6% output growth this year. A decade of expansion has been driven by peace, better economic governance, investment and high commodity prices. But make no mistake: it has not just been about resources. Some of the best performing countries are not rich in natural resources, such as Rwanda, Ethiopia and Burkina Faso. Services such as retail and communications, together with agribusiness and manufacturing and exports, have driven growth more than is generally recognised. Business incubators and accelerators are spawning technology start-ups from Accra to Dar es Salaam.

That said, Africa faces daunting challenges. The extractive sector propels growth in several countries but does not directly create many stable jobs. By 2050, the continent’s labour force will be bigger than that of China or India. Creating jobs for hundreds of millions of labour market entrants will mean the difference between a demographic dividend and a social time bomb. Africans don’t just need more jobs; they need better jobs. Prosperity hinges on getting people out of subsistence agriculture and marginal self-employment into more productive activities.

Growth without diversification, technological improvement, and increased productivity is easily reversed: all it takes is a dip in commodity prices. This is where trade and SMEs fit in. Trade demands competitiveness. Exporting firms are more productive, and pay higher wages than their domestically focused counterparts, especially in places like Sub-Saharan Africa. If firms manage to thrive in world markets, they tend to increase their productivity even more.

A key subject at the Abuja summit was the bottlenecks that prevent existing and yet-to-be-founded firms in African countries from exporting value-added goods and services, and think about how best to encourage investment and hiring in modern, tradable sectors.

Just take a look at the success story that is M-Pesa .The impending launch in Europe of this mobile money transfer service that has transformed the way banking and business are done in East Africa, is more than a feel-good story about a Vodafone technology pioneered in one of the world’s poorest regions being imported to one of its richest. M-Pesa is a powerful example of the gains to be had when the development community works together creatively to empower people and businesses in developing countries. From a modest pilot project focused on microfinance repayments, M-pesa – ‘pesa’ means ‘money’ in Kiswahili – has grown to the point that an estimated one-third of Kenya’s $44 billion annual economic output now flows through it. M-Pesa has turned mobile phones into both offices and banks.

Responsive governments committed to improving the broader trade facilitation and business environment can help companies of all sizes by improving infrastructure: roads, transportation, ports, information and communication technology, and electricity. For enterprises to capitalize on opportunities to grow, they need access to finance. This can be difficult for SMEs that are too big for microfinance institutions but too small to interest commercial lenders. Meeting export markets’ health and quality standards, together with the dizzying array of private voluntary standards, is especially tough for smaller firms, although the rewards for compliance can be considerable. The recent World Trade Organization agreement on trade facilitation should cut customs-related red tape which weighs heavily on SMEs, making it easier and cheaper to bring goods across borders.

The International Trade Centre works to internationalize SMEs in developing countries. Some of our work is with governments to improve policies and to strengthen their institutions in trade and export development. The rest of our work is with the private sector: creating free intelligence tools to help them learn about conditions in potential markets; assisting them to connect to value chains; helping with product branding; and tackling non-tariff measures.

In our experience, modest, targeted interventions can yield substantial rewards. Facilitating contact (and contracts) between Southeast Asia and Western and Central Africa yielded over $150 million in deals for cashews, rice, and cotton in the space of a few years. Bringing experts from Bangladesh spinning mills to the United Republic of Tanzania to train cotton farmers and gin operators on how to reduce contamination, led to higher prices for the farmers and better raw material for the mills. Connecting women in rural Burkina Faso to a rising star in Italian fashion meant more sales than ever for their traditional prints which helped Stella Jean’s high-end customers do some good while being fashionable.

Governments, African business, foreign investors, and civil society groups have an opportunity to pool their ingenuity and their resources to find innovative new ways to strengthen the African private sector and help SMEs access capital and markets.

The broader development community can support the private sector to improve productivity and generate jobs which can free people from unemployment or the drudgery of subsistence labour. Prioritizing the private sector will require some development policy experimentation. The policy makers and policy takers at the Abuja meeting could take a lesson from M-Pesa’s success where small risks can have huge payoffs. They can think about how they can work together to help the continent’s biggest job creator: its immense ecosystem of micro, small and medium-sized enterprises. Empowering the African private sector to tap into value chains would bolster prospects for growth and job creation.

Author: Arancha González is Executive Director of the International Trade Centre, Geneva

Image: A staff member of on-line retailer Jumia, pushes a cart loaded with goods at the company’s warehouse in Lagos April 10, 2014. REUTERS/Akintunde Akinleye