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INNOVATION FOR GROWTH IN AFRICA, Speech by Dr. Ngozi Okonjo-Iweala, Managing Director, World Bank

Speech by Dr. Ngozi Okonjo-Iweala, Managing Director, World Bank

MIT- SLOAN SCHOOL AFRICA BUSINESS CONFERENCE

Friday, April 1, 2011

 

Thank you for inviting me to speak at the first ever MIT Africa Business Conference in MIT’s 150 years of history. Congratulations to the Sloan School, Dean Schmittlein, and the Africa Business Club for putting the conference together. Coming here is always like coming back home.

Like you, I am excited about all the focus and attention Africa is getting these days.  I am excited because the news from and about Africa has definitely taken a positive turn. It does not mean that we do not face any challenges in continent. But Africa is now the new frontier, an important growth pole for the economic recovery and an attractive business destination for capital. The perception gap is closing and there are serious investors who are seriously interested in Africa. It is now Africa’s time!

The challenge for Africa and for those working on and in Africa is how to make sure that this opportunity is fully exploited. We are all witnesses to what is happening in the Middle East and North Africa with its large youth population and the explosion to which it has given expression. If Sub-Saharan Africa does not pay heed, our own revolution may not be so far away. What then would it take for Africa to create the jobs needed to absorb the growing youth population, grow incomes and increase prosperity for all?

One of the main answers to this question is innovation. We all know that much of the growth in the emerging economies today is due to increases in total factor productivity and innovation in particular. For Africa to claim its place within the emerging economies, it must adopt and invent new ideas and technologies to create value. As James Garfield said, “ideas control the world”.

The pace of innovation would be a critical component of the African growth story over the next few decades. This is what I want to focus my talk on.  But first I would like to give you a brief summary of the growth prospects for Africa, next I will focus on innovation in Africa and the need for innovation especially in four key areas – agriculture, information communication technology, health, and the arts. I will talk about what policies and institutions are needed to foster innovation.  What are some lessons we can learn from others and finally what the World Bank is doing to support innovation in Africa and how institutions like MIT and the private sector can support this process. As I see it, MIT can be a strong driver in promoting innovation and growth in Africa.

Post crisis growth

Growth in Sub Saharan Africa rebounded strongly in 2010. GDP in Sub-Saharan Africa is estimated to have expanded by 4.7 percent in 2010, up from the 1.3 percent growth recorded in 2009 and just shy of its pre-crisis average growth of 5%.  Excluding South Africa, growth in Sub-Saharan Africa is estimated at 5.8 percent in 2010, up from 3.8 percent in 2009. Growth in the region was supported by both external and domestic developments. 

Africa is benefiting from the global recovery and a pickup in domestic demand. While resilience of domestic demand supported growth in 2009, the slow but certain recovery in the global economy bolstered growth performance in 2010. The external drivers of growth in 2010 included  increased commodity prices -- particularly for metal, mineral and oil exporters; increased inflows of foreign direct investment – the region attracted $32billion  in FDI in 2010, a 6 percent increase from 2008. Some countries are even seeing the return of tourists. Despite its heterogeneity most of Africa is growing once again.

Growing domestic demand has also reinforced growth prospects in Sub-Saharan Africa. Domestic demand has been supported in a number of countries by strong performance of the services sector, particularly in telecommunications, retail trade and transportation sectors. Some of these sectors have experienced rapid increases in productivity. Increased government spending on infrastructure-related projects also lent support to the construction sector.  And favorable weather conditions and government farmer support programs supported bumper harvests in the agriculture sector for some countries such as Malawi and Zambia. As a result, there is no strong outcry in Africa this time despite the rising and volatile global food price.

Growth is expected to remain strong in 2011 and 2012. With the continuation of the global recovery and strengthening domestic demand particularly in South Africa, the region’s largest economy, we expect growth in 2011 to be stronger coming in around 5.3 percent and 5.5 percent for 2011 and 2012 respectively.  Excluding South Africa – which continues to deal with capital inflows and exchange rate appreciation- growth is expected to be 6.4 percent in 2011 before settling at a 6.2 percent in 2012, making Sub-Saharan Africa excluding South Africa one of the fastest growing regions.

However, despite the positive outlook in Africa, the global economy is still struggling to fully recover and these are challenging economic times for all. The economic and financial policy challenges needed to restore growth are probably the largest the world has had to deal with since the First World War. 

So only being resilient in the crisis is not enough. We need to move from resilience to growth. Jeff Bezos, the founder of Amazon, once said, “…resilience - if you think of it in terms of the Gold Rush, then you’d be pretty depressed right now because the last nugget of gold would be gone. But the good thing is, with innovation, there isn’t a last nugget. Every new thing creates two new questions and two new opportunities.”  We need innovation to sustain growth.

Innovation to sustain growth

Innovation will play an important role in helping Africa and the rest of the world come out of the crisis faster. But Africa would have to do more on this front than it has done in the past.  The last Global Innovation Index of 2009-2010 published by INSEAD which measure the level of innovation in over 132 countries does not show Africa in a good light. The top five innovators in 2010 from this index were Iceland, Sweden, Hong Kong, Switzerland and Denmark. US was eleventh and Germany sixteenth. The first African country on the list, South Africa, comes at number 51 followed by Mauritius at 73, Mauritania 78, Kenya 83 and Botswana 86. In comparison the BRICS perform better.

Investment in research and development in Africa remains low. With the exception of South Africa, which invests 0.9 percent of its GDP in research and development, R&D intensity in the rest of Sub-Saharan Africa is generally less than 0.3% of GDP. Furthermore, the potential for private sector contributions to bridging financing gaps is hampered by the high business risk attributed to the costs of doing business.

In addition, the recent financial crisis has added another constraint. Financial markets and the banking sector have become very risk averse and capital is seeking safety in returns.  However what is clear is that for growth to recover we would need more innovation, more knowledge and more learning for countries to either move to the boundaries of their production possibility frontiers or expand the frontier.

So what do I mean by innovation? Joseph Schumpeter in 1934 defined innovation as the implementation of a new or significantly improved product (good or service), or process, a new marketing method or a new organizational method in business practices, workplace organization or external relations.

He also linked innovation to “violent bursts and catastrophes” which change the structure of society. This process of innovation a la Schumpeter is what is commonly known as creative destruction.  This may be the silver lining from the financial crisis.  Following the financial crisis many countries have turned their attention to the issue of innovation as a renewed source of growth.  For many the period prior to the financial crisis was one of rapid financial innovation which led to high and accelerated growth in many parts of the world including in Africa. 

The 2008 food, fuel and financial crises could be seen as an example of the creative destruction and catastrophe Schumpeter described. So while today 2008-2009 are referred to as the years of the crash this period may go down in history as the year which ushered in a new era of innovation. I would not get into the question of whether innovation is endogenous or exogenous. I would leave that debate to the prestigious economists of this institution and the other one!

So what opportunities are there for African growth? How does Africa respond to the post crisis innovation challenge? In my opinion there are a number of areas where Africa must quickly focus its energy to improve its productivity and accelerate growth; in the interest of time I would focus on four of them here, agriculture, health, information technology and the arts.

I would also like to spend some time listening to your views on how MIT can support this agenda. What innovations are you working on and how can they be applied to advance growth in Africa. You have Amy Smith from the D-Lab, who is doing very interesting innovation work at the grassroots level. I was taken aback by the cell phone charger the Lab invented that turns heat into electricity that allows people to cook and charge cell phones at the same time. It is simple, ugly, but it delivers! We are trying to work with her. Last year, President Robert Zoellick and I received a team of experts from MIT led by President Hockfield at the World Bank to discuss ways in which we could collaborate. It was an exciting visit and we both hope we can find opportunities to work together.

Back to Africa. How do we advance growth through innovation?

Agriculture is the dominant economic sector in Africa, comprising 30 percent of GDP and over 70 percent of employment. With the growing demand for food crops from emerging markets, agriculture has significant added growth potential.  We know that a $1 increase in agricultural value-added generates a $1.3-1.8 increase in the rural non-farm economy. Overall GDP growth originating in agriculture is two to four times more effective in reducing poverty than growth generated outside agriculture.

However, today cereal yields per hectare in SSA are on average only about 44 percent of observed levels in South Asia, and 25 percent East-Asia’s.  In addition to that the growth in yields is very slow. These gaps are opportunities.

Similarly, compared to other regions, fertilizer use in SSA is extremely low, while farmers in South-Asia and Latin-America used on average about 143 kg/ha, farmers in SSA applied only a mere 9.4 kg/ha in 2008.  The growth numbers are also very low

Africa also lags behind on the adoption and use of technology for farming.  In 2008 there were about 15 tractors per square 100 km of land in SSA, while there were 183, per square 100 km of land in South-Asia.  Although data on irrigation are hard to come by, best available figures suggest that 4 percent of the cultivated area in SSA is irrigated, compared to 40 percent in South-Asia. 

At current levels, yields in SSA are estimated at only 20 percent of potential, compared to about 65 percent in South-Asia and South-America, thereby suggesting large potential for increasing yields in SSA on currently cultivated areas.  If Africa could raise yields on key crops to 80 percent of the world average - similar to the achievements of other countries that experienced a green revolution in agriculture – it would see an increase in the annual value of its agricultural production by US$235 billion over the next two decades or more than 80 percent of current revenues (US$280 million in 2010) according to World Bank estimates.  Improvements in African agriculture would have a huge impact on growth and job creation.

This is why Africa needs to focus on innovation. As you all know, “you can’t do today’s job with yesterday’s methods and still be in business tomorrow.”

Africa needs to improve its product, process, organizational and marketing strategy in the agriculture sector. Africa has to innovate by adopting new technologies, using new seed varieties and improving the organizational structure of the sector. We also need to develop new ways of marketing our products.

The good news is that this is happening. Several exciting programs are ongoing in Africa to help improve farmer yields. New sustainable intensification programs in Ethiopia for example have increased the average maize yields from 1.8 tons per hectare to over 5 tons. In East Africa, breed improvement and other techniques has helped over 1.8 million farmers in achieve higher milk yields.

The adoption of new and improved agriculture production, process and marketing techniques is already bearing fruit.  Unlike in the food crisis in 2008 Africa has been more resilient in 2011. Cereal production in Sub-Saharan Africa is estimated to have increased by 5.5 percent in 2010, compared to 2008. This is part of the strong growth of today. I encourage you to read Professor Calestous Juma’s upcoming new book on agriculture innovation in Africa.

The next area I want to focus on is the health sector.

This is an area that deserves and needs a lot more of our attention. There is an industry waiting to be built in this sector.  Africa could become a pharmaceutical powerhouse creating jobs, growing our economies and protecting our women and children in particular – they are the most affected today.

Africa is home to 11 percent of the world’s population but it only consumes less than one percent of global health expenditure and it produces even less of the world’s medicines and other medical instruments. The World Health Organization estimates that 50 percent of Africans and Asians lack access to essential medicines.

However, from 1975 to 2004, only 1.3 percent of the 1556 new chemical entities registered were meant for use in tropical diseases and tuberculosis, even though these diseases account for 12 percent of the global disease burden.

Africa can produce more of its own medicines if it trains and retains the right scientists. Our scientists are working and innovating in labs across the world. So with the right legislation, leadership from governments, and a supportive scientific environment we can produce more medicines. This will create jobs, support growth and save lives.

We know for example that the direct and indirect impact of malaria results in an estimated US $12 billion annual income loss in Africa, which translates to a 1.3 % annual loss in GDP growth in malaria-endemic countries. The cost of lack of access to HIV preventive services and medicines is estimated at about another US $ 5.2 billion. This is about another 0.4 percent of GDP. Imagine if these resources were ploughed into building a competitive pharmaceutical industry.

In addition to having a unique type of problem, Africa also has a unique advantage and opportunity.  The continent’s rich biodiversity could provide most of the raw material needed to treat its people. In addition the growing interest in natural medicine – over 67 percent of new medicines introduced worldwide were from natural sources - means that Africa could develop a comparative advantage in this sector. However, to date only about 20 percent of Africa’s raw material has been subjected to standard scientific evaluation.  Who knows what miracle cures lie undiscovered in Africa’s forests and rivers?

Once again, the good news is Africa has a base to build on. In South Africa, Aspen Pharmacare today produces over 70 percent of the drugs produced on the continent. Recently Nigeria, Ghana and Kenya have also begun to produce their own medicines. However of the three countries, only Kenya produces significant volumes for regional export. Kenya is a good example of what could happen if countries invested in plant mapping.  Over the last five years Kenya’s exports of medicines has doubled.

Today, Kenya produces Artemisia from which pharmaceutical grade artemesinin and artemesinin based derivatives can be made. These products are sold to Novartis for the manufacturing of artemesinin products. 

More of this type of innovation is needed to accelerate growth on the continent. Based on the numbers I have provided this sector if developed could contribute over 2 percent of GDP to growth and those who move in early stand to reap significant profits. As the middle class grows on the continent the market for medicines would continue to grow as well.

The ICT sector

 

Now let me turn to a sector which we all know about and one of your panel sessions will cover.

Before I continue, let me give you a short quiz question? How many of you remember what the term “digital divide” stood for in the early 1990s? Well at the time there was widespread belief that the age of the computer and information technology would lead to an acceleration of growth in the developed countries while the developing countries would fall backwards because of their inability to access and use these technologies. Today nothing can be further from the truth. In many African countries technology has unleashed a new productive wave and is indeed closing the digital divide with the developed world. The challenge is how to deepen the impact of ICT in the rural areas.

Over the past five years growth in Africa’s mobile communications market has outstripped growth in the global mobile market by a factor of 2 to 1 and at the end of 2009 there were almost 450 million mobile subscribers. Internet usage growth has shown a similar trend.

The rapid increase in mobile phone users has unleashed the innovative potential of many on the continent. One of the most famous of these ICT related innovations is Kenya’s Safaricom M-Pesa project. For those of you have not heard of M-Pesa - where have you been I ask? Well M-Pesa is an innovative solution that enables customers to transfer money by phone. Initially M-Pesa, was designed to service the unbanked population of Kenya but is has become the most popular and convenient money transfer service due to its low transfer charges and availability among the rural population. Today, M-Pesa provides services to over 9 million customers across many countries in the region. We have invited its former CEO Mr. Michael Joseph to be a World Bank fellow to work with us to apply this technology and business model in other developing countries. It’s exciting that Africa now is exporting its knowledge and expertise to other countries. 

Last year, at the 2010 Maker Faire Africa, a forum which showcases Africa’s ingenuity, creativity and innovative spirit -- of the 60 competitors over 60 percent showcased new ICT related products.  The winner of the 2010 Maker Faire award for example was a company called Security Masters. They presented an improvised electric shock antiburglar security system that incorporates motion sensors, alarms, photo switches, and it even included an independent power back up system. (yes, power outages are still commonplace!) . All the tools used were homemade gadgets and from hardware stores.

Another contestant, Norbert a former bio-chemistry engineer from Uganda came up with a mechanical marvel: Traffic lights using LEDs and powered by solar, inspired by the lack of traffic lights in his area, plus the ineffectiveness of the ones that were there to work due again to lack of electricity. He is writing an eBook containing all the specs for this design.

Whive.com developed a social media platform to help Kenyans dialogue in their different local languages via the cell phone. This is critical for peace and reconciliation.  Currently they are working with Nokia, to bring up a Swahili/sheng translation in mobile phone.

The era of opportunity and innovation I think is just beginning.  As a continent, ICT penetration is still well below global averages, and African tele-density is bordering on 50% in a world where the 100% mark represents no barrier. Some countries, notably, the island states of the Seychelles and Mauritius, and South Africa, have already breached the 100% penetration mark.

The innovative potential for Africa is huge. In my own country Nigeria, the telecoms sector has attracted more than $12 billion worth of investment and is currently contributing over 2 percent of GDP. So even in Nigeria alone the growth potential is huge.  

A Bank Study done in 2008 showed that major improvements in information and communication technologies (ICT) added as much as 1 percentage point to Africa's per capita growth rate in 2001-2005 compared with 1991-1995, accounting for over half of Africa's improved growth performance observed between the two periods. Today these numbers are much higher.

The arts

Finally the other area I want to talk about is the arts. I have two trivia questions for you. First, what was the most famous invention to come out of the South African World Cup?

Well if you say the Vuvuzela or the Makarapa you would be right.  The Makarapa is the famous hat produced for the World Cup out of recycled plastic. This little innovation turned into a multi-million dollar business in June last year and employed a number of young South Africans who made hats to every football lovers design. Africa is the youngest continent today, which means it has a high youth population looking for jobs. The service industry can help address this issue while showcasing Africa’s art, telling our stories and celebrating our history.

Increasingly Africans are re-entering the arts space. As incomes rise there are more and more Africans willing and able to spend money on the arts including on popular culture. In Nigeria, South Africa and Cote D’Ivoire, there is an increasing number of film and documentary studios being set up. Today, Nollywood in Nigeria is the most prolific in the world, producing no fewer than 40 new movies every week. These movies are hugely popular across Africa and in other continents. Nollywood today is the third largest movie industry in the world by value and it is estimated that the industry employs over 200,000 people directly and provides another one million job opportunities indirectly. Most of those employed in the industry are graduates or school leavers with a lot of enthusiasm and imagination. This is a sector which could employ a large share of the youth population and could also have enormous indirect benefit for other industries such as the tourism sector. Of course, we should also continue to improve the quality of our movies.

But opportunities only favor the prepared mind. What policies and institutions are needed to foster innovation? What are some lessons we have learned?

With these four sectors I have tried to show you what opportunities exist in Africa for growth through product, process, organizational or marketing innovations. And I am sure you would agree with me that there are enormous. But Africa would only be able to benefit fully from these opportunities if the governments create the right incentive framework for innovation.  Africans need the freedom and space to think and innovate. For this to happen the following things must be in place; macro-economic stability, affordable and easy access to capital, openness to trade, the appropriate competition policy laws, a solid intellectual property rights and patent laws regime and an overall good governance regime.  

One of the most important ingredients for innovation in Africa is the need to improve the quality of education and especially tertiary education. We must improve the quality of our universities and vocational training schools. With the right supporting institutions, ideas can be nurtured and translated into action more rapidly.

In addition to strengthening our universities we also need to work on developing partnerships with other universities and the private sector. Experience from other developed and developing countries shows that the cluster model to innovation has been very successful; we need to build centers of excellence on the continent for different specialties. By cluster model I mean one where the public sector through the universities works with the private sector to support innovation by funding innovation labs or incubators in universities.

In many African countries there is a growing need for a dedicated space for experimentation and the development and sharing of new ideas. This concept would particularly benefit the generation of home grown ideas and techniques which respond to local needs either by adapting existing techniques or by developing new ideas. We can learn a lot from MIT on how to do this. What works and what does not. I am proud to say a group of us in the diaspora have actually tried to learn from MIT and other leading institutions to set up center of excellence in science and technology in Africa. A good example is the African University of Science and Technology-Abuja, a top-class graduate university training students in petroleum engineering, material science and other subjects. I invite you all to support it.

In addition to the development, support, and funding of higher education institutions, African governments would also need to develop specific policies to foster innovation. These include providing incentives for business to invest in research and development. We know from the East Asia experience that Foreign Direct Investment was a critical component of the technology adoption process. African countries would need to create a favorable environment for FDI. However in addition to this, countries must develop clear policies about what industries they can and need to support so they do not provide incentives to all sectors at a high fiscal cost to the country.

I want to emphasize in particular that innovations and the intellectual products in the continent need to be recognized, protected and better-linked to markets. Without a solid intellectual property rights regime and marketing mechanism, our inventors cannot receive appropriate recognition and compensation for their work.

The Regional Dimension

Africa’s approach to innovation must be a regional one. For some of the investments in agriculture, health and information technology to be possible, countries would need to pull together resources and skills. The need for a regional approach to the innovation problem is going to be critical. African leaders recognize the role of science and innovation in economic transformation. The Eighth African Union Summit held in January 2007 adopted a series of regional decisions on science and technology for development. The decisions are part of a growing body of guidance on the role of science and innovation in Africa's economic transformation. These decisions underscore the growing importance that African leaders are putting on science and innovation for development. They are also working together on the ICT front, the pharmaceutical and in agriculture front, sponsoring regional initiatives and projects. A few examples of these are Comprehensive Africa Agriculture Development Program (CAADP), launched in 2003 by the African Union and NEPAD to support increases in agriculture production and productivity and the Regional Communications Infrastructure Program, an ICT project to bring broadband to East Africa and the Yaounde Process to help develop tools and policies needed to develop the pharmaceutical industry.

This comprehensive and regional approach to issues has proved to be very successful in focusing the minds of the leaders and also focusing international attention on the issues.  This too is a welcome innovation not to be overlooked.

What is the Bank doing to support Innovation?

At the World Bank we have been helping countries adopt new technologies and learn from others for over half a decade now. For Africa, for example as part of our development Marketplace we have organized specific competitions such as the “Lighting Africa” competition in 2007 and one on health and nutrition. On the agriculture front, the World Bank is also supporting innovation. We are part of the Consultative Group on International Agricultural Research (CGIAR) and we contribute US $50 million a year to this program.  For Africa, the CGIAR has helped develop maize varieties used on 60% of maize planted in West and Central Africa.  Through our regional instruments we are supporting the development of more than 8,000 kilometers of fiber optic backbone, which together with the 69,000 kilometers invested by the private sector covers the bulk of regional requirements for this sector. 

Conclusion

In conclusion, with a clear and focused innovation strategy in these sectors Africa can add at least 2 percent to GDP growth annually and I may be underestimating. This means we can, all things being equal, get to 7 percent growth. There is no doubt in my mind that Africa has the potential to accelerate its post crisis growth and emerge from the crisis with a stronger growth momentum if it prioritizes innovation as one of the main issues to address over the short to medium term. That is why I am optimistic and you as business students, technology and science students, policy makers and the private sector should be too.  Investing in innovation would pay off over the long term, but Africa in partnership with all of us must focus on these investments now.  Africa must persist in its goal to support innovation by creating the right policy and economic space for this innovation to take place.

Innovation takes non-standard people to look into non-standard things. It starts with you and me.   

Thank you very much.

 





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