Structural Transformation in MENA and SSA: The role of digitalization

The paper focuses on two challenges of digitalization for structural transformation in MENA and SSA, one particularly relevant for SSA countries, the other for MENA countries. For SSA on the way to account for half of the growth in the global labor force over the first half of the 21st century, the most pressing challenge is that automation presents a threat for employment. Digital technologies (digitech) could rob SSA from its demographic dividend enabled by rising wages in China. For MENA countries where manufacturing has largely failed to take off, the digital transformation where ‘value creation shifts from capital to knowledge’ presents an opportunity for structural transformation. Successful digitalization would then allow MENA countries to achieve a service-sector led high-productivity growth structural transformation. For countries in both regions, improving digital skills to close the growing digital gap will be necessary. Digitalization is only starting across developing countries and is barely visible in the data and estimates reported in this paper. The paper covers evidence on three aspects of digitalization. First, disparities in digitalization across countries in both regions may be increasing in a digital world increasingly data-driven. New technologies entering the exports of firms participating in GVCs present a threat for low-income countries through two channels. First, the new technologies are biased towards skills and other capabilities, reducing the comparative advantage of unskilled labor-abundant countries, like those in SSA. Second, this bias makes it harder for low-income countries to offset their technological disadvantage with their labor-cost advantage. Next, the paper documents the weak performance of services in SSA and MENA, a sector that has become the engine of structural transformation. SSA and MENA stand out for having registered the slowest average labor productivity growth in services across regions over 1995-2018. Great differences in the state of national data infrastructures are observed across both regions, a signal that many countries are not ready for cross-border e-commerce, an essential ingredient of the digital transformation. It reports on firm-level evidence establishing causality between exports of software-intensive services exports and the quality of data infrastructure. Third the paper shows that trade costs have remained higher and participation in supply chain trade lower than in most other regions. New econometric estimates suggest that an increase in telecom subscriptions is associated with a direct elasticity of GVC participation of 0.4 and an indirect effect of 0.25 through a reduction in trade costs. In sum, ‘this time may be different’ because the labor displacement effects of automation may not be accompanied by reinstatement effects observed during past episodes of widespread technological change when jobs were created to implement the new technologies. The complementarity between humans and machines observed in previous spells of technical progress may be threatened by the continued growth in automation and robots. MENA and SSA countries should also prepare for regulation of cross-border e-commerce by, among others, weighing the costs and benefits of data localization measures that can provide consumer protection and give an advantage to local firms. For African countries engaged in the AfCFTA, negotiations on protocol for e-commerce in phase III provides a unique opportunity for African countries to collectively establish common positions in e-commerce that would help guide their structural transformation.