The Services Sector in Africa: A Key Driver of Growth and Development?


By Garth L le Pere

The importance of Africa’s service sector has not been adequately appreciated, especially since the continent’s economic growth trajectory has taken a different route over the last two decades. This is because the share of agriculture, industry, and manufacturing in GDP has been declining while by contrast, services trade has increased in terms of total employment and GDP, thus driving value-addition, and providing critical inputs for boosting other economic activities. At a time of increasing geopolitical volatility, complexity, and uncertainty as a consequence of the Covid pandemic and now the Russia-Ukraine war, the services sector will be an even more important and strategic component of growth across African countries’ economies: it makes direct and important contributions to their GDP, stimulates job creation, provides critical inputs for the rest of the economy, and significantly affects the investment climate. 

Many services provide key inputs to almost every major sector of business. For example, infrastructure services are linked to energy, telecommunications, and transportation; financial services facilitate transactions and access to finance for investment; health and education services contribute to a productive and healthy workforce; and legal and accountancy services make up the institutional framework that facilitates market transactions. Crucially, trade in services remains largely invisible and intangible, tied as it is to the national, regional, and international movement of people, information, money, and goods. 

The importance of services comes into sharper relief when considering the major impact that the Covid pandemic has had on African countries’ service sectors. Across countries all over the world—whether developed or developing—the impact has stalled economic growth. In Africa, it has been telling and profound: African countries’ overall GDP declined by 1.4 per cent, with smaller economies contracting by 7.8 per cent. Public revenue losses amounted to 5 per cent, with total merchandise exports declining by about 17 per cent. There have been massive losses in employment, including 20 million jobs lost in Sub-Sahara Africa’s travel and tourism sectors. 

The transformative role 

Compared to agriculture and manufacturing, the role of services in enhancing the continent’s structural transformation and overall competitiveness is incontrovertible. Comparatively, the growth of the services sector has important welfare gains for African countries such as the reduction of poverty, addressing gender disparities, becoming a robust and viable export sector, improving the dynamics of intra-regional trade, developing cross-border networks that benefit consumers and producers, and improving the integration of services as inputs to other export activities such as agriculture, energy, and manufacturing. 

As an imperative for a post-pandemic recovery, Africa’s structural transformation will in large part depend on how well its countries are able to operate in the context of both regional and global fragmented production chains since trade increasingly occurs through value chains made up of the combined flow of goods, services, investment, and information that are necessary to generate products in different locations. To make this possible, trade in services constitutes the connective tissue between country and global markets by providing essential platforms for broadening participation and improving competitiveness within such value chains. Improvements in logistics, ease of travel, and the revolution in ICT and electronic infrastructure have been of critical importance. 

Over the last two decades or so, Africa’s economies have become more service-based in line with other emerging markets such as China and India, albeit with high levels of informality which remains their serious structural weakness. The Chinese economy—once the “world’s factory”—has shifted dramatically into services. This development has been propelled in large part by the Fourth Industrial Revolution and digitalisation, such that services now account for 52 per cent of China’s GDP, a much higher share than manufacturing and up from 41 per cent in 2005. In India, services now make up almost 50 per cent of GDP, up from just 30 per cent in 1970, while in Brazil and South Africa the share of services in GDP is even higher at 63 and 66 per cent, respectively. 

We also cannot ignore the impact of technological change and digitalisation on the services sector—driven by the “new economy” of knowledge and innovation. The transformative impact of technology has been far-reaching, whether it be communicating with people, shopping, hailing taxis, making airline and hotel reservations, or watching movies. As such and even though a late starter, Africa is digitalising faster than any other region in the world. Digital technologies and ICT facilitate the trading of services across national borders, and indeed across regions. Thus, the intermediation role of the internet has become more significant in new service platforms such as e-commerce, e-business, and e-government which have resulted in positive greater productivity gains and efficiencies. 

These dynamics are indicative of the advantages offered. These include services industries that do not require high capital intensity levels; they have greater scope for mobility; they are more accessible to employees, especially women; they require less of a lead-time to be set up and to run effectively; and services create a tradeable marketplace for skills, expertise, and information across space and time. 

The Covid impact 

The pandemic has highlighted how supply chains and the inter-connected circuits of the markets and economic activity across the world fundamentally depend on services at national, regional, and global levels; furthermore, how these have been disrupted by the pandemic. In the first quarter of 2020, international services trade declined by -7.6 per cent year-on-year and by -7.3 per cent quarter-on-quarter, with travel being the worst affected sector at -24.4 per cent year-on-year and transport by -8.6 per cent. 

For Africa, low growth figures for 2020 caused by the pandemic undermine both the continent’s response-ability and the extent to which services trade could catalyze growth and development. From a sub-Saharan average of 2.4 per cent in 2019, growth declined between -2.1 per cent and -5.1 per cent in 2020. Furthermore, the pandemic directly affected the continent’s debt content and structure since countries had to borrow to underwrite and cope with the fiscal stresses that resulted from increased demands to fund gaps in public health and social welfare. To help make the point, in 2012, the ratio of general government gross debt to GDP stood at an average of 37 per cent. By 2020, in the case of 24 countries this had increased to 55 per cent, and 60 per cent in the case of 19 others.  This is indicative of the deterioration of fiscal balances and the extent to which the pandemic has added to economic distress. 

Assessing the Covid impact 

There are four different ways by which services can be traded across borders according to the WTO’s General Agreement on Trade in Services (GATS). Importantly, three of these modes of supply require proximity between buyer and seller. These are Mode 2 (consumption abroad such as tourism services); Mode 3 (commercial presence such as international banking services) and Mode 4 (movement of natural persons such as ICT professionals working abroad or intra-corporate transfers). Cross-border services trade in Mode 1 includes the entire range of services that are transacted through the internet, some of which have been able to continue as in working-from-home arrangements. However, the adverse effects of the pandemic and its social-distancing implications have been hardest felt across Modes 2, 3 and 4 because of the essential requirement of physical proximity between suppliers and consumers. 

Some perspective emerges if we consider that in 2019, the total value of global trade in services was expected to reach US$6 trillion (up from US$5.8 trillion in 2018, half of which flowed through Mode 3 transactions). This effectively means that almost half of the value of Mode 3 services was compromised by the pandemic, further compounded by the fact that several Mode 1 services provide complementary inputs into manufacturing and other services. The efficacy of deliverable Mode 1 services was affected by challenges of data security, client confidentiality, access to information and ICT. 

The importance of services trade for African countries’ economic recovery cannot be stressed enough but while additional health-related and quarantine restrictions were imposed on trade in services that require proximity between buyers and sellers, such restrictions ran the risk of becoming prohibitive as we have seen in South Africa. The preferential liberalisation of both goods and services will not only be salutary for enhancing regional value chains in Africa but could also serve as a buffer against macroeconomic turbulence caused by the pandemic as well as the disruptions to Africa’s wheat chain imports due to the Russia-Ukraine war. 

The importance of the digital economy 

The fast growth of the e-commerce sector and the digital economy in African countries suggests that incentive schemes should be part of government policy as an integral part of post-pandemic economic recovery. Restrictions on data have negative impacts on the productivity of a domestic business and on importing strategic services. Most digital benefits flow to sectors that make intensive use of data and use extensive online platforms such as computer services, financial and insurance services, ICT, and research and development. The challenge across Africa’s defective and deficient data environment is to increase network capacity, offer expanded data services at minimal cost, lower or eliminate the transaction costs on digital payments and mobile money transfers, and improve delivery and other logistics services. 

The conceptual and policy parameters of the African Continental Free Trade Area (AfCFTA) must form the basis for strategic continental e-commerce and digital eco-system that allows for liberalising and lifting restrictions on digital trade across Africa. This of course must be accompanied by investing in ICT infrastructure to address the huge digital divide and regulatory bottlenecks that still exist in many African countries. Such bottlenecks include spectrum licensing schemes that are poorly structured and which limit market entry as well as restrictions on foreign ownership, exorbitant taxes on digital services and equipment, weak cyber-security and data protection, and a lack of technical skills. 

Concluding remarks 

Across African countries, irrespective of their levels of development as well as prior to and after the pandemic, it is not industrial development nor a green agricultural revolution that could be a panacea to the continent’s multiple welfare and demographic challenges. Rather, it is services that will increasingly become the main fulcrum of productivity, competitiveness, job creation, poverty reduction, and improving living standards provided of course that critical policy interventions are made. Thus, negotiations for appropriate and workable policy, institutional, and regulatory cooperation will be a critical test for the AfCFTA’s Protocol on Trade-In Services at continental, regional, and state levels. 

The abnormality of circumstances caused by the pandemic and rising food insecurity due to the Russia-Ukraine war means that negotiations will also be further challenged by the need for effective stakeholder engagement, especially getting service sector organisations and platforms established and off the ground, properly constituted, and including their voices in the process of negotiations. The normative challenge is to build and develop a crisis-resilient and self-reliant Pan-Africanist order. As such and under current circumstances, services are the pivot not only for sustained economic growth but could also be the key driver of structural transformation of the African continent. 

Dr Garth le Pere is an Extraordinary Professor at the University of Pretoria

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