On the approaches to Lagos, the commercial heart of Nigeria, enthusiasm over the imminent inauguration of Africa’s biggest oil refinery is palpable.
The massive $25bn petrochemical project is being built by business magnate Aliko Dangote, Africa’s richest man.
It is expected to process 650,000 barrels per day, doubling Nigeria’s refining capacity. It is hoped that it will generate sufficient foreign exchange through exports to help redress the perilous state of Nigeria’s economy.
But one aspect of the project has fallen out of the headlines, despite its crucial importance for the people of Lagos. The Dangote refinery will boost Nigeria’s GDP, but will it also become a key employer in one of Africa’s most populous cities?
When construction started in 2016, the local press got quite excited about the refinery’s potential for job creation. Officials of Dangote Industries gave estimates of the number of direct or indirect jobs it would generate ranging from 100,000 to 135,000, or even 300,000. This fuelled hopes of a boom in job openings in a country where the unemployment rate stands at 33.3%.
But a closer look at the dynamics of employment in the oil industry calls for more realistic estimates. According to research company IBISWorld, an old refinery with a capacity of 200,000 barrels per day has approximately 3,000 employees. A new high-technology refinery with a capacity of 800,000 barrels per day would have approximately 1,000 employees.
These figures suggest that, considering the Dangote refinery’s production output and level of technology, it is unlikely to create more than 10,000 direct, permanent jobs. That will be a drop in the ocean compared to projected population growth in Lagos, which is expected to double to at least 32m inhabitants by 2050.
This example pinpoints a crucial question for the future of the continent. Africa has a demographic dilemma. Its population has quadrupled since 1960, and is projected to double again by 2050. If one of the biggest manufacturing projects on the continent cannot create enough work for the youth arriving on the job market, what are the solutions?
Rethinking Africa’s labour market
Dangote’s oil refinery might be just a start. The construction of more refineries along the Nigerian shoreline could ultimately have a positive effect on employment.
But what causes deep concern among development economists is that, in recent years, sub-Saharan Africa’s manufacturing sector has failed to absorb a large part of the available workforce, in contrast with the pattern in previous decades for regions such as South Asia and Europe.
More important, argues Turkish economist and best-selling author Dani Rodrik, is that Africa’s manufacturing sector has to stay up to date with production technology if it wants to compete internationally. As with the refinery, sectors that use high technology are unlikely to produce high employment.
This is worrying, considering that 60% of Africa’s population is under the age of 25, and millions are entering the job market every year.
Nigeria again provides a prime example of the problem. In the first decade and a half of the 21st century, the West African country’s GDP skyrocketed. Measured in current US dollars, it grew from $70bn in 2000 to $574bn in 2014, surpassing South Africa and making the country Africa’s new economic powerhouse.
This strong growth has not, however, turned into poverty reduction. Job creation has stagnated. The number of people engaged in the Nigerian manufacturing sector increased from 3.4m in 1990 only to 5m in 2018. In that year the agricultural sector is believed to have generated twice the value of the manufacturing sector and employed six times more people.
Even countries which have had a few industrial successes, such as Ethiopia or Tanzania, have not managed to generate significant numbers of jobs in the formal sector.
Jobs are heading north
“If we look at the absolute numbers, Africa’s manufacturing sector is very small. The biggest industrial economies in terms of manufacturing share in Africa, namely South Africa and Mauritius, have been stagnating for some years. They don’t grow any bigger,” says Wim Naudé, professor of economics at the University of Cork, Ireland.
A while ago, some were comforted by the theory that a rising Chinese middle class would turn the global value chain around: manufacturing activities would relocate to Africa, bolstering economic growth and employment. But governments, businesses, and investors across the continent are losing faith in this solution.
In fact, experts argue that the opposite is happening. Developed countries are “reshoring” jobs back to their territory. Some have been pushing for protectionist industrial policies, such as Biden’s $738bn Inflation Reduction Act. Reshoring can be profitable where technology becomes more affordable so that companies no longer have need of cheap labour from developing countries.
“There’s no real reason to create manufacturing enterprises in Africa. Foreign capital is not going to go to Africa’s manufacturing sector as it did with East Asia – because developed countries are not going to offshore anymore. They’re going to take companies from China back to the United States,” says Naudé.
Seeing opportunity in difficulty
Some see in this grim outlook the opportunity for a new dawn for Africa – if the continent can create a labour market of a kind never seen in other regions. Most countries that have developed did so using an export-oriented and labour-intensive manufacturing sector as a growth escalator. African policymakers must, the optimists say, create the conditions for a more educated, skilful, and entrepreneurial population that will create small and medium enterprises (SMEs).
If they fail to do so, the consequences could go beyond failing to meet the ultimate goal of poverty reduction. In conflict-sensitive countries, unemployment is often synonymous with increased rebel insurgency.
Social scientist Joseph Hanlon, senior lecturer in Development Policy and Practice at the UK’s Open University, says of recent jihadist attacks in Mozambique: “High youth unemployment and the loss of hope in the labour market are sure ingredients not only for fuelling despair but also for feeding into the insurgency and its promise of a ‘fairer’ society governed by Islamic law.”
Booming cities and the rise of informal jobs
Cities are attracting the bulk of African youth. Most of sub-Saharan Africa’s population does still live in rural areas. But education systems have improved in recent years: according to the World Bank, secondary school enrolment increased from 5% in 1971 to 43% in 2018. This has led many young people to flock to big cities in search of higher-paid jobs than their parents’ farming businesses can offer.
There is a near-consensus among development economists that cities in Africa will welcome the majority of job seekers. And, when asked about what he thinks are the sectors most likely to employ Africa’s youthful population, Rodrik has a fairly simple answer: “One way or another, the bulk of young jobseekers will have to find jobs in urban services.”
But the urbanisation process is at a very early stage of development for most countries. Cities in Africa are not yet the centres of production they should be and the informal sector is important.
“People are moving into urban areas despite the lack of jobs there. But once they are in the city, they need to survive, usually by getting something to sell on the street, and yet cities start creating lots of urban informality,” says Michael Danquah, a development economist and research fellow at the UN University World Institute for Development Economics Research (UNU-WIDER).
According to the World Bank, the informal sector accounts for 80.8% of employment in urban Africa, and practically all the youth – 95.8% of them – participate in the informal economy. The continuous struggle for African policymakers, therefore, is more about making informal jobs formal than tackling unemployment.
The employment bottlenecks
What might seem like a fairly easy way out – namely “formalising” all workers, providing a set of administrative tools and paperwork – is, however, not a magical solution. “Formalisation is not a silver bullet. Many sub-Sahara African countries have been trying formalisation programmes in recent years, but nothing has come out of it,” says Danquah.
One reason for the failure of these programmes is that the informal sector is very eclectic. And there is hardly anything the state can do for most workers in the lower tier of the urban services sector. “Whatever incentives you give them, to go formal will not necessarily increase their productivity,” says Danquah.
For those in the upper tier – who usually work for small family firms – many development economists argue that the key is to increase their productivity, which will eventually lead the firms to hire more people. “What is more important than making those firms formal is figuring out how to make them more productive,” says Rodrik.
African cities’ employment bottleneck is first and foremost a productivity bottleneck, meaning that the solution has less to do with creating new businesses than with making existing ones more productive, Danquah says: “It is not just about employment, but about making sure that the output per worker is increasing… When you can increase your productivity, you can increase your work revenues, which eventually will turn into more profits and an expansion of your workforce.”
Increasing informal businesses’ productivity is, however, an expensive process – which requires capital investment. A critical problem is that businesses in the informal sector are not attractive to investors. They cannot, for one thing, show any prospects for long-term growth. “Figuring out how to make firms in the informal sector more productive is a very tough issue – since most of these firms will not ultimately grow,” says Rodrik.
Cities and job seekers in Africa thus find themselves trapped in a vicious circle: employment is in the informal sector, but this does not attract capital and the reasons for that include its lack of productivity, which can increase only with initial capital investment.
Why do foreign investments not create jobs?
Foreign direct investment is nonetheless happening at a large scale on the continent – $72bn in 2021, an increase of nearly 1000% over the $7bn recorded in 2000. But the profits-driven nature of these investments means that they are concentrated in a few productive firms and sectors – such as construction, mining and financial services. These are industries that have contributed heavily to African countries’ GDP growth in the past decades. But some economists are sceptical about them having a positive effect on employment.
Peter Beck is the managing director of Delphi Research and Consulting, a consultancy based in Maputo, Mozambique. For the past ten years, he has been a close observer of Mozambique’s labour market. He has spotted several trends, despite the lack of accurate data.
From 2010 to 2020, he says, formal employment in Mozambique grew by about 300,000 a year – but more than half of these jobs paid only the minimum wage, which is worth between $80 and $100 per month depending on the industry. Despite the lack of reliable data, growth in formal employment seems to Beck to have occurred in construction, tourism and finance. Banking is a very productive sector with limited job creation. In contrast, construction offers very precarious and often temporary positions.
During the same period, Mozambique signed a $20bn investment deal with French oil and gas company Total for the development of an offshore gas field and a liquefied natural gas facility on the Cabo Delgado coast. Despite the size of the investment and its importance for Mozambique’s economy, the project has had a limited impact on job creation.
“Big mining and gas projects which have appeared in Mozambique in the past few years are very capital-intensive, thus not creating a lot of employment, or at least not the type of employment that the large majority of Mozambicans needs,” says Beck.
Training Africa’s next digital entrepreneurs
For the future, development economists identify two ways of solving Africa’s job bottleneck: investing in education to have more skilled workers, who would work in sectors into which foreign capital flows; or creating “a range of public inputs, such as credit, management training, technical assistance and marketing help that micro and small enterprises can take advantage of,” says Rodrik.
These solutions are not mutually exclusive. They require, however, a considerable amount of public spending, since many economic sectors lack the financial resources to flourish. A good sector to start with, and one that has been burgeoning in Africa for two to three years, is the digital economy.
Although capital is often missing, young people on the continent do not lack creative and entrepreneurial spirit. Multiple examples on the continent have shown that they are not only grasping the importance of new business models created by digital platforms, but are also proactive in transforming these into multi-billion enterprises.
Chipper Cash, Andela, OPay, Wave, Flutterwave, Interswitch, Esusu, Jumia, and Fawry – all are Africa-born “unicorn” enterprises valued at more than $1bn. And the list of successful startups goes on – last year, they together raised more than $4.8bn in funding, and Africa was the only region in the world to record positive yearly growth in startup funding.
“Africa is an extremely entrepreneurial continent. People are hard-working and have got lots of initiative. I’ve seen a lot of wonderful entrepreneurial initiatives around digital entrepreneurship in Africa in the last 20 years,” says Naudé.
Governments, however, have been slow to ensure training for the next generation of data scientists and developers.
Progress has been made in changing the regulatory environment to facilitate the creation of business – Tunisia and Senegal, for example, have introduced startup laws. But business figures complain that universities still do not offer the curriculum that will offer jobs to future generations. “If you’re a data scientist in Africa and you want to learn machine learning, and you want to create a startup using AI, you go to one or two institutions mostly, or to private initiatives,” says Naudé.
“Most state universities tend still to be teaching the kind of literary studies and other kinds of stuff from 20, 30, 40 years ago. The things that are necessary today, such as vocational training, engineering, AI, data science, mathematics – these still tend to be extremely neglected,” he says.
As governments still lag in terms of digital education, successful startups are trying to make up for it by investing in graduate programs.
The Artificial Intelligence (AI) startup DeepMind, which was acquired by Google for $500m in 2014, has recently opened a pan-African “AI for Science” Master’s programme in partnership with the Cape-Town-based African Institute for Mathematical Sciences. The initiative is designed to benefit only African citizens and residents, and the 40 successful candidates will receive a full DeepMind scholarship.
It is not only foreign startups that are promoting such initiatives: African startups are also becoming increasingly involved in their countries’ education systems. Last month, Karim Beguir, founder of international AI decision-making startup InstaDeep, was granted the role of Tunisia’s ambassador for talent and innovation by the country’s prime minister, Najla Bouden. This came shortly after German biotechnology giant BioNtech acquired InstaDeep for $562m.
But empowering the young generation of African digital entrepreneurs should not only come through private-sector donations and successful African startup founders’ initiatives, says Naudé. Creating jobs in the digital economy demands concrete long-term strategies in education and infrastructure.
“This is where most African leaders get it completely wrong. They see the technology as this disembodied thing that’s like a magic wand that you just absorb and learn more about, and then it benefits your country. But the economy doesn’t work that way. How it works is that digital technology changes business models, and it is business model innovation that’s making a difference,” says Naudé.