From a labor productivity standpoint, the average Sub Saharan African economy is only 8% as productive as high-income countries, according to research from the World Bank (page 5). In effect, this means that the average worker in a wealthy country, like the United States, France, and Norway, is more than 12 times as productive or efficient as the average worker in Sub Saharan Africa. This is important because a region’s productivity is a good gauge of its economic performance, growth potential, and income level.
Source: World Bank, McKinsey
This depressingly low productivity explains why both household incomes and government revenues are painfully low in Sub Saharan Africa. Fewer than five million people in Sub Saharan Africa live on more than $1,500/month and approximately 60 million of the 1.5 billion people on the continent live on more than $300/month.
Source: Pew Research Center
Unfortunately, since the 1990s, this trend of low productivity, low incomes, and pervasive poverty has not improved by much. GDP per person (output or productivity per person) hasn’t increased by much in Sub Saharan Africa since 1990.
Source: Chart copied from The Economist
Many factors impact a region’s productivity level. From a region’s infrastructure and policies to its quality of education and its ability to access finance for local firms, productivity is a confluence of many different components.
I have been thinking about low productivity from an entrepreneurial standpoint and how investing in ecosystem entrepreneurship in Africa can boost the continent’s productivity.
First, a definition of two types of entrepreneurship: micro-entrepreneurship and ecosystem entrepreneurship. These two types are not exhaustive but are important to illustrate the importance of ecosystem entrepreneurship on the continent.
Micro-entrepreneurship, also known as survival, necessity, or safety net entrepreneurship, describes a phenomenon where a person engages in entrepreneurship often out of necessity. This form of entrepreneurship is and often remains small, owner-managed, and devoid of growth capital and technology that can help the entrepreneur to scale the business. It is also limited to local and existing markets. Activities include petty trading, small scale farming, tailoring, artisans, taxi drivers, food vendors, hairdressers, and other similar activities. Micro-entrepreneurship is pervasive in Africa.
Estimates suggest there are more than 40 million micro-enterprises in Africa, most of which are part of the informal economy. Realistically, there are more like 100-200 million, considering the continent’s population. As illustrated in the chart above, the average micro-enterprise in Africa is significantly less productive than the average large firm. As such, the billions of dollars of microfinance flowing into Africa is supporting low-productivity businesses in a low-productivity economy. Ecosystems entrepreneurship can turbocharge the work of millions of micro-entrepreneurs.
In contrast to micro-entrepreneurs, ecosystem entrepreneurs create an interconnected network of people, resources, and organizations necessary to solve a specific problem that creates value for a specific group of people in society. These entrepreneurs are often motivated by inclusion, access, and empowerment of other people or micro-entrepreneurs. They often provide products and services, at scale and at low cost, to a majority of the citizenry. Their activities include mass production, marketing, distribution, financing, standardization, specialization, and others. They reduce the cost of production and effectively increase productivity. In doing so, they increase incomes for people and improve affordability. Consider Amul.
Amul, a dairy organization based in India, is one of the largest in the world. The organization currently supports more than 3.6 million farmers, working in 18,600 villages, responsible for generating more than $7 billion in revenues annually. Amul provides a ready market for its dairy farmers, transportation and logistics support, processing, veterinary service, distribution, storage, and other support services to the millions of farmers in its network.
As a result of Amul’s work in India, the average Amul farmer can earn up to 80% of the price of the final product where roughly 30% is typical. From 2010 to 2017, Amul quadrupled the income of its farmers. Amul currently exports close to $200 million in dairy products annually, pays between $100 million to $200 million in taxes, and invests significantly in business infrastructure services to grow the dairy industry in India.
Source: Author’s illustration
Providing microfinance to micro-enterprises is a step in the right direction to help small businesses in Africa grow. However, no amount of microfinance will be able to transform an unproductive economy into one that is more productive so more and more people can increase their incomes. Investing in ecosystem entrepreneurs that can provide specific services to micro-entrepreneurs can turbocharge an economy’s productivity. This, in turn, will cause incomes to rise and affordability to increase.
