Industrialising Africa: The transformative potential of infrastructure

Good infrastructure contributes to economic growth by reducing costs and facilitating more efficient use of productive inputs. As such,rarely embark on economic development without first improving their infrastructure as it is also crucial to expanding market opportunities. Accordingly, the implementation of the will only reach its full potential if connectivity, both within and outside the region, improves so that firms can access reliable infrastructure to improve their competitiveness.

Most African countries have substantial gaps in infrastructural endowments. A recent report  claims that almost two thirds of the global population without access to electricity is in Africa. The African Development Bank (AfDB) estimates that US$ 130-170 billion are needed annually to bridge infrastructure deficits in transport, water, and electricity. However, most of this cannot be financed out of domestic resources alone. Nevertheless, the demand for infrastructure is no longer to the availability of traditional “hardware”, such as transport, electricity, and other utilities, but also to the provision of both new “hardware” and “software” to access the digital economy through a reduction in the costs of internet provision.

Recent efforts made by multilateral donors (such as the AfDB), bilateral partners (especially China) and by Governments through domestic resources mobilisation are certainly changing the infrastructure landscape. For instance, Ethiopia has largely improved its road network under the Road Sector Development Programme (RSDP), bringing in remarkable improvements like a four-fold increase in paved roads over the last 20 years. While Rwanda has expanded mobile network coverage with a rapid rollout of 4G internet now reaching the whole population.

Such investments offer an opportunity to evaluate the implications of improving infrastructure, and evidence is indeed rapidly being made available to assess some of the questions that matter the most for policy.

The transformative role of infrastructure

How can infrastructure support private sector development in Africa? Which types of infrastructure matter the most? What does the evidence say?

Most existing evidence is focused on how transport infrastructure fosters economic development. For instance, improvements in road endowment have been found to be crucial for large countries like India. Major investments in both local (rural) roads and highways contributed to the shift of agricultural workers towards modern activities, and—more broadly—to welfare gains because of improved resources allocation across firms.

A similar pattern can be also found in Africa, where improvements in existing road networks across the continent were found to support the growth of African cities. Country-specific studies further illustrate the types of transformation brought in by transportation improvements. In , improved market access generated by the RSDP shaped the structural transformation process. Better connected areas within the country experienced a shift of workers from agriculture to the services sector, indicating that transport infrastructure alone is not sufficient in promoting the diffusion of industrialisation at scale. It can, however, do so through an infrastructure bundle that includes electrification. The latter is in fact key to the productivity of modern industries, especially within manufacturing.

The transformative role of infrastructure is not necessarily confined to improving transport and providing electricity. More recent evidence is emphasising the potential impact of . Locations in Africa that were first connected to submarine cables experienced increases in employment – especially in high-skilled sectors – showing evidence of private sector development, including in industries with more intensive ICT use. Consistent evidence from areas with higher mobile internet (broadband) connection shows that it contributes to attracting quality foreign direct investments, while promoting skilled work and structural transformation, as shown in the cases of Tanzania and Rwanda.

How infrastructure affects private sector development

Firms improve their performance and tend to enter more and to grow larger if they are located in areas that are better served by different types of infrastructure.

Improving infrastructure has potential effects on the productivity of firms as better transport allows local firms to access more and better-quality inputs. Recent research in Ethiopia showed that improving roads facilitates gains for firms from better access to intermediate inputs that come with trade liberalisation. Only firms in locations with better access to the transport network are found to register efficiency gains due to the introduction of (new and better quality) imported inputs. Similarly, for firms in African countries located in areas where fast internet arrived first, an increase in productivity is found to be related to improvements in the composition of the workforce, thanks to higher training.

Infrastructures can also affect private sector development by pushing consumers’ demand. Lowering transport costs allow firms to explore new markets both within the country and overseas. Similarly, improving connectivity to the internet (through cables or mobile internet) allows firms to gain new consumers, including through exports and access to e-commerce, this may also benefit consumers. In countries like Ethiopia and Nigeria, the estimated cost of distance for consumers in remote locations is around four to five times that of the US, contributing to a welfare reduction. Decreasing trade costs through infrastructure building is thus, likely to improve demand from remote consumers. It is therefore not surprising that improvements in market access are found to be more important to smaller and remote cities in Africa. Also, better access to internet infrastructure gives buyers and consumers access to better market information, which can reduce price dispersion and uncertainty over product quality.

The way ahead

While existing evidence on the progress of infrastructure development in Africa is certainly promising, there are a few remaining issues for consideration. For instance, questions about the potential negative effects of some of the projects, including on regional inequality and the environment persist. In addition, for the correct implementation of the AfCFTA, it is important to ascertain the most effective way of linking countries within the region, and the associated costs. As granular evidence becomes increasingly available, more research to understand the full potential of infrastructure for long term development in the region can be expected.

The views expressed here are those of the authors based on their experience and prior research and do not necessarily reflect the views of the IGC.

IGC will be co-hosting a panel discussion on Industrialising Africa: Renewed commitment to inclusive and sustainable growth to mark Africa Industrialisation Week 2022.