Digital Dreams, Economic Realities and the Limits of Shortcuts
FEATURED BLOG
Digital Dreams, Economic Realities and the Limits of Shortcuts
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By Tito Mbathi
Sept, 2024
Leapfrogging refers to the ability of less developed regions or countries to bypass traditional stages of technological and economic advancement through the adoption of more modern technologies. In doing so, they are able to skip over less efficient methods of growth that were previously employed by the Global North. In terms of economic development, leapfrogging has come to define countries moving directly from the primary sector towards services, in the process avoiding the cultivation of a manufacturing base. This has been consistently peddled as a viable, or even ideal path for economic development, but the reality has proven to be quite different.
The Relationship Between Growth & Employment
In the never-ending quest for economic growth, job creation is often overlooked. This has led to policies targeting growth without accounting for its core drivers, i.e. employment. There is a clear correlation between economic growth and employment, measured by employment elasticity, a metric which quantifies the responsiveness of employment to value added growth. A relatively high employment elasticity indicates that increases in economic growth are associated with substantial gains in employment. Understanding the relationship between growth strategies and employment elasticity is necessary for policymakers in less developed nations, where the allure of leapfrogging must be balanced against the imperative of creating robust, sustainable employment opportunities.
Employment elasticity serves as a critical indicator of an economy's capacity to translate growth into job creation. The African Development Bank posits that an elasticity of at least 0.7 is necessary for GDP growth to positively impact both employment and labor productivity. This is an aspirational figure for policymakers, but the reality across the continent presents a complex picture. Most African nations exhibit elasticities ranging from 0.41 to 1, with many skewing towards the lower end of this spectrum. While low employment elasticity can indicate higher labor productivity, it also signals a diminished capacity to generate employment opportunities relative to economic expansion. This is especially prevalent in societies reliant upon extraction without value-addition, where opportunistic individuals are able to reap the rewards of this growth sans the job creation necessary for wider societal development.
The Myth of Technological Leapfrogging
Building on this understanding of employment elasticity, it becomes clear why the concept of leapfrogging has gained such traction among policymakers and development experts. The allure of bypassing traditional stages of economic development through technological innovation offers a tempting shortcut to address the pressing need for job creation and economic diversification. However, the efficacy of such a strategy in achieving sustainable, broad-based growth remains a subject of debate. Proponents argue that innovations like mobile banking and solar power allow countries to skip over the need for extensive physical infrastructure, however, this optimism may be misplaced. While digital technologies provide many benefits, they cannot substitute for the fundamental drivers of economic development.
More importantly, leapfrogging fails to address the need for a diversified economic base and local manufacturing capacity. Innovation depends on industrial development to build infrastructure and capabilities - these cannot be leapfrogged. Without a strong manufacturing sector, countries struggle to create enough jobs to absorb growing populations. Digital services and apps cannot replace the employment potential of labor-intensive manufacturing. The apparent success of tech startups in frontier markets often masks their limited impact on job creation and broader economic transformation. African startups frequently feel compelled to vertically integrate across the value chain due to weak local ecosystems, limiting their ability to scale. True economic development requires building diverse productive capabilities across ecosystems, not just adopting new technologies.
Jobless Growth: A Cautionary Tale
India's experience offers a cautionary tale about the limitations of leapfrogging and the importance of employment elasticity. Despite its booming IT sector and reputation as a global tech hub, India has struggled with "jobless growth" - a phenomenon where GDP increases but employment generation lags significantly behind. This disconnect is reflected in India's low employment elasticity, which dropped from 0.44 in the 1970s-80s to just 0.01 in the 2000s, meaning that every percentage increase in GDP leads to an increase of just .01% in jobs. The country's attempt to leapfrog from an agrarian economy to a service-led one, bypassing large-scale manufacturing, has resulted in a lopsided economic structure. While a small, highly skilled workforce thrives in tech and services, the vast majority of India's labor force remains trapped in low-productivity agriculture or informal work.
The challenge of low labor productivity is echoed across Africa, with Nigeria standing as a prime example. However, unlike India's jobless growth, Nigeria's challenge lies in the quality rather than the quantity of jobs. Unemployment officially stands at just 4.1%, belying the fact that about a third of the country's population lives in poverty. This dichotomy stems from the prevalence of low-productivity, informal work that keeps people technically employed but unable to escape poverty. Only 11.8% of employed Nigerians hold wage jobs highlighting the scarcity of quality employment opportunities.
The experiences of both countries provide lessons for development strategists:
The pursuit of GDP growth or low unemployment figures alone can mask deeper structural issues in an economy.
The quality of jobs created is as important as their quantity.
Leapfrogging strategies that neglect the development of the secondary sector risk creating an economic structure incapable of generating widespread, quality employment.
It is clear that technological advancement alone cannot drive inclusive growth; without a strong manufacturing base and attention to employment elasticity, leapfrogging may exacerbate inequality rather than support broad-based development.
Rethinking Development Strategies
The concept of leapfrogging is chimeric at best, but more likely insidious, offering a seductive narrative of rapid development that obscures the necessity of a strong economic foundation. It promises technological shortcuts to prosperity while neglecting the fundamental drivers of job creation and broad-based growth. Policymakers must prioritize strategies that enhance employment elasticity and promote inclusive economic growth, rather than pursuing digital mirages. True development demands patient investment in infrastructure, education, and productive capabilities - elements that cannot be bypassed through technological leaps alone. Only by building a solid economic base can nations hope to achieve sustainable and equitable progress.
Tito Mbathi is an Associate at Botho Emerging Markets Group