Secretariat, Smart Africa
Development Co-operation Report 2021
Shaping a Just Digital Transformation
Development Co-operation Report
2. Case study: Regional integration can accelerate Africa’s digital transformation
Abstract
This case study outlines the importance of regional integration to help countries rise above the limitations of small markets to benefit from economies of scale and access to trade. It draws from the experience of Smart Africa, a regional body, to highlight how the creation of a single continental digital market can lower the risks and other barriers to investment and unlock business opportunities.
Key messages
African countries can realise socio-economic development through digital transformation by unifying their national markets into a single market that could be a major player in global trade, financial and technology flows.
National governments should work through regional bodies to harmonise policy, regulatory, financial and technological environments to increase the benefits and lower the cost and risk of investment in digital transformation.
Global monetary, financial and trading systems have not favoured Africa and other regions of the developing world. Contributing to the problem is the fragmentation of regional markets into small countries, whereas larger unified markets would offer economies of scale and diversification of risk, among other advantages. In Africa, regional co-operation and integration enhancing countries’ capacity to trade and reap the benefits of global exchange and financial flows are core to this effort.
Smart Africa is a platform for co-operation that supports its 32 member countries in developing harmonised policies and strategies for digital transformation. Implementing cross-border projects allows countries in Africa to interact and share best practices, such as by ensuring interoperability, coherent financial policies and buying technological capacity in bulk.
Unlocking business opportunities across sectors
Africa is one of the fastest growing consumer markets in the world. Household expenditure has grown at a compound annual rate of 3.9% since 2010, expected to reach USD 2.1 trillion by 2025 (African Development Bank Group, 2019[1]). Coupled with business spending, projections estimate USD 5.6 trillion in business opportunities on the continent by 2025, if structural adjustments can be achieved (Coleman, 2020[2]).
A single, continental, digital market can incentivise investment by reducing tariffs; harmonising legal, regulatory and tax regimes; rationalising payments systems; and reforming the financial sector and labour markets. The shared external tariff implemented by members of the East African Community (Burundi, Kenya, Rwanda, South Sudan, the United Republic of Tanzania and Uganda) – resulting in an increase of 0.45% in real gross domestic product (GDP) growth – demonstrates the gains that come from closer regional integration (Oxford Business Group, 2017[3]).
A single, continental, digital market can incentivise investment by reducing tariffs; harmonising legal, regulatory and tax regimes; rationalising payments systems; and reforming the financial sector and labour markets.
Technological advances can also enable regionally integrated supply chains, increase market access and reduce bureaucracy to increase cross-border trade, creating economies of scale. For example, the Council of African Regulators harmonised policy under the One Africa Network initiative to eliminate roaming fees across Africa. Pilot projects in East Africa demonstrate growth of approximately 800% in phone traffic (Nsengimana, 2018[4]).
Encouraging digital investment
A single digital market can also aggregate demand, and regional actors can encourage investment by the private sector. Individually, African countries have small economies. In 2010, the population of 24 African countries was less than 10 million people, of which 17 had fewer than 5 million inhabitants (Kanos and Heitzig, 2020[5]). The GDP of 29 countries was less than USD 10 billion, of which 18 countries had less than USD 5 billion.1 What’s more, the numerous national borders act as barriers to intra-African trade. Aggregating these markets can create economies of scale, reduce risk and make them more attractive to private capital (Figure 2.1).
Figure 2.1. Benefits of regional integration for Africa's digital transformation
Strengthening external trade
Finally, regional integration can strengthen the position of African countries vis-à-vis external trading partners. If the continent is to participate in the global trading environment and reach its full economic potential, it will require investment in infrastructure beyond the current capacity of governments. The private sector will need to be involved and will need instruments such as public-private partnerships to reduce risk and increase returns. As an example, combined negotiating power recently helped ensure that Africa’s data remain in Africa as opposed to being channelled through data centres in Europe or the United States, which helps improve service and reduce the costs of communication (Nhongo, 2020[6]).
Conclusion: Regional co-operation is key
Without concerted effort, African countries risk being unprepared for the digital revolution. Regional integration is critical to making technology and innovation central to the continent’s socio-economic development. While Africa’s scale can attract the necessary investment, expertise and digital services, fragmented national markets are less attractive than a unified market of 1.3 billion people. The continent thus needs a clear, inclusive and co-ordinated agenda to unlock digital investments.
Regional players can harmonise policy and interoperability for digital systems to put in place the building blocks for successful digital transformation. Regional bodies can bring together governments to demonstrate united political will to external stakeholders. On the ground, policies such as data protection and cybersecurity can be harmonised to create cross-border systems that transform Africa into a single digital market. Finally, regional bodies can be effective in bringing together governments and the private sector to raise financing to turn these intentions into reality.
References
[1] African Development Bank Group (2019), Integrate Africa, African Development Bank Group, https://www.afdb.org/sites/default/files/2019/07/05/high_5_integrate_africa.pdf.
[2] Coleman, C. (2020), “This region will be worth $5.6 trillion within 5 years – but only if it accelerates its policy reforms”, World Economic Forum, Geneva, https://www.weforum.org/agenda/2020/02/africa-global-growth-economics-worldwide-gdp (accessed on 17 November 2021).
[5] Kanos, D. and C. Heitzig (2020), “Figures of the week: Africa’s urbanization dynamics”, Africa in Focus, Brookings, https://www.brookings.edu/blog/africa-in-focus/2020/07/16/figures-of-the-week-africas-urbanization-dynamics (accessed on 17 November 2021).
[6] Nhongo, G. (2020), “Orange collaborates with Smart Africa and announces new investments in Africa”, press release, Smart Africa, https://smartafrica.org/press-release-communique-de-presse (accessed on 17 November 2021).
[4] Nsengimana, J. (2018), One Africa Network (OAN): Ending Africa’s Digital Exploitation, Smart Africa, https://smartafrica.org/how-westerners-benefit-by-ensuring-african-phone-calls-remain-expensive (accessed on 17 November 2021).
[3] Oxford Business Group (2017), “The EAC helps maintain growth in the region”, in The Report: Kenya 2017: Country Profile, Oxford Business Group, https://oxfordbusinessgroup.com/node/920441/reader (accessed on 17 November 2021).
Note
← 1. For more information, see World Bank Data at: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.