The Mediocrity of Innovation in South Africa’s Digital Economy

It’s a Lot More Dangerous than It Sounds

By Fazila Farouk

My interest in the digital economy peaked sharply in the early 2010’s following the re-emergence of AI, which fuelled considerable excitement about the prospect of digital innovations transforming our lives. This excitement was, of course, also tempered by automation anxiety when for the first time we found ourselves contemplating the threat of AI cannibalizing well-paying middle-class jobs. But a decade later, everything feels different. We’ve come a long way from fretting about robots taking our jobs. These days we find ourselves in the aftermath of a pandemic that turned us all into fully fledged app enthusiasts who digitally hack our way through our days. And while concerns about technological unemployment have resurfaced following the release of generative AI such as ChatGPT, for the most part, we’ve all come to accept and embrace the innovations of our time having lived through the miracle of digital platforms enabling continuity in our lives during the COVID pandemic. In this respect, the post-lockdown era can indeed be hailed a post-luddite era.

However, now that the urgency of fast-tracking pandemic era technologies has passed, it would be to our benefit to take a step back and reflect on the nature of digital innovation in South Africa (SA). For a country encumbered by deep social divisions rooted in a particularly odious history, this means not just focusing on our country’s economic development, but also contemplating its implications for much needed post-apartheid socio-economic transformation—the lack of which has led to a shocking result in SA’s most recent national elections. In this respect, it goes without saying that SA has not addressed the fundamental structural problems concerning its economy, which is not delivering to the broad base of its Black population.

There is Nothing Groundbreaking about Digital Economy Innovations

Many commentators bemoan the fact that thirty years of democracy have not resulted in a realignment of SA’s economy towards more redistributive outcomes. What’s less talked about is the fact that recent years have also borne witness to the rapid digitalisation of the South African economy, which adds an additional layer of complexity to its structural failures. In this regard, there are some foundational problems with rapid digitalization, which, if left unchecked, look set to create an economy that will continue to produce what leading MIT economists Darren Acemoglu and Pascal Restrepo refer to as “so-so technologies” that don’t really add value to society because their overall benefits are weak. Arguing that most of the digital innovations of our time are driven by questionable objectives, Acemoglu and Restrepo contend that they produce mediocre outcomes. The evidence they present is  “self-checkout”  and “automated customer" services as examples of typical consumer facing digital innovations that have emerged to dominate the economy in recent years. In their view, these and similar innovations have displaced labour without increasing productivity and/or adding value to customer experiences.

Technological innovations, by contrast, are meant to boost productivity through the efficiencies they introduce, simultaneously enhancing both competitiveness and living standards as a result of increased worker output. At least that’s what conventional economic theory tells us. However, this, as  Acemoglu and Restrepo note, has not been the outcome in relation to digital economy innovations. Instead, in addition to the debateable value that they’re adding to our economies, for the most part, contemporary digital innovations are also contributing to growing inequality by increasing labour market divisions, as the wide-ranging literature on precarity scholarship in the platform economy highlights.

There are, of course, a host of other more complex problems associated with the dominant innovation of our time, i.e., artificial intelligence (AI), which those arguing from a human rights perspective contend is riddled with racial and gender biases. However, returning to the question of socio-economic impact, digital innovations emerging from SA’s tech start-up sector resonate with the findings presented by Acemoglu and Restrepo. In this respect, SA’s tech start-up sector is not known for ground-breaking digital innovations. Instead, most of the outputs emerging from the sector can be classified as application innovations. This is in contrast to high tech or ground-breaking innovations that could be considered significant scientific breakthroughs. Add to this a dearth of digital economy innovations with any meaningful social impact or environmental sustainability imperatives.

Deconstructing the Digital Economy 

What qualifies me to make such claims about SA’s tech start-up sector? Well, I’ve spent the past few years taking a deep dive into SA’s digital economy as part of my PhD research. Thankfully, the days of slaving over my thesis are over, but in the process of conducting my research I made some interesting discoveries about SA’s digital economy, which support the claims of scholars such as Acemoglu and Restrepo as well as others who highlight rising inequality as a problem that is emblematic of the dominant innovation model. Of greater concern, however, is the fact that outcomes for SA are somewhat worse than those for the rest of the world given the deep and overtly racialised socio-economic divisions in our society.

My particular interest in the digital economy was spurred by curiosity about what effect the Fourth Industrial Revolution (4IR) was having on unemployment and inequality in SA. But while I was initially concerned about AI cannibalising human jobs, my study’s actual point of departure was to get to grips with the manifestation of the digital economy in SA. This is because I was intrigued by the 4IR as a phenomenon, which has become the putative definition of the digital economy. Due to its origins in the powerful World Economic Forum (WEF), the 4IR dominates global discourse. In SA, this led to President Cyril Ramaphosa establishing a Presidential Commission on the 4IR that was tasked with making digital policy recommendations.

Accordingly, my quest to gain a better understanding of the 4IR led me to the tech start-up sector, which I saw as the source of innovations that would reveal the manifestation of SA’s digital economy. This resulted in a study involving the systematic collection of data from 120 tech start-ups to learn about their innovations and how they were funded (got to follow the money). I turned my attention to start-ups located in the country’s main technology hubs, Cape Town and Johannesburg, which were launched in the heyday of 4IR fervour. This is what I discovered.

A Skewed and Concentrated Innovation Trajectory Focused on Extracting Value

SA’s digital economy has a skewed and concentrated innovation trajectory with investors and entrepreneurs exhibiting a preference for consumer facing digital products that extract value from the economy. In this respect, SA’s start-up sector predominantly focuses on financial innovation (fintech) and e-commerce products (on-demand goods and services). A significant 60% of my sample were either fintech or e-commerce platforms. A further 15% engaged in software development as a service to other consumer facing or commercial businesses. In other words, 75% of my sample skewed towards fintech, e-commerce and software development in that respective order.

My sample was large, which gives it statistical power. In this respect, my study produced the empirical evidence to support a widely noted phenomenon by the business and tech media, which is that fintechs are the most common type of start-up in SA. In fact, they comprised more than a third of my sample. This skewed nature of innovation continues within the fintech ecosystem itself where “payment platforms” dominate as the most common type of start-up in the sector. This lack of originality even surprised the authors of a Rand Merchant Bank report who appeared confounded by the dominance of payment platforms, which they associated with a lack of creativity amongst SA’s fintech entrepreneurs. However, while the authors of this report may be disappointed by what they perceive to be a lack of creativity, a critical analysis of the structure of the South African economy, i.e., the financialization of the economy as well as the fact that it is built on neoliberal tenets, reveals that this herd mentality in the digital economy is, in fact, driven by predatory capital.

The economist Gerald Epstein defines financialization as “the increasing importance of financial markets, institutions and motives in the world economy”. In SA’s digital economy this finds expression in the dominance of payment platforms, which sometimes also intersect with insurance platforms (insurtech) in a nexus of financialised value extraction through digitalised point-of-sale transactions that instantaneously combine “profit generation” and “rent extraction” in a single purchase. In this respect, payment platforms guarantee returns to investors and entrepreneurs who pursue innovations that support businesses, which grow by increasing the volume of their trade, leading to an increase in financial transactions. This increases the efficiency of the financial transaction in terms of its ability to extract value. From this vantage point, it is clear that generous investments in payment platforms are driven by the profit maximisation rationale and not by a lack of creativity, as some analysts have mused. The strong showing of e-commerce platforms as the second most popular type of start-up in SA also comes into view in this arrangement as the pervasiveness of payment platforms also exposes the merging of fintech and e-commerce as a dominant digital innovation model in the country. Related to this, I found a glut of last mile courier services (delivery apps) in SA’s e-commerce sector. As far back as 2018, there were 14 such apps operating in the country, and while my research has not examined the post-COVID era, I have no doubt that this number could have only increased.

For venture capitalists and entrepreneurs, these mediocre innovations are low hanging fruit in an economy driven by efficiency targets that privilege value extraction. This is in contrast to digital innovations that target environmental sustainability or social impact objectives. 

Market Driven Digital Innovation Is Not the Answer for South Africa

The poor showing of start-ups driven by social and environmental missions can be attributed to the neoliberal approach embraced by digital economy incumbents who favour the market as the driver of innovation and development. What I encountered in the start-up sector is a strong belief in the pursuit of profit as a growth engine for the digital economy. It is this strongly held view that cements the relationship between investors and entrepreneurs in an arrangement that excludes development objectives, social inclusion and environmental goals, as these are not considered profitable pursuits. Meanwhile, a common argument that is deployed to defend the profit motive as the driver of development is that a rising tide lifts all boats.

Consequently, what we find in the start-up sector is an obsession with developing digital solutions that increase productivity and efficiency for profit maximisation. Often this translates into an obsession with automating tasks in an effort to reduce costs, thereby increasing profits. But as, as Acemoglu and Restrepo argue, the outcome of this preoccupation with automation technologies is insufficient productivity driven by the “wrong kind of AI” that has a “displacement effect” on jobs. Similarly, Eric Brynjolfsson and Andrew McAfee, another pair of MIT economists, note a “great decoupling” between economic growth and job creation consequent to contemporary digital economy innovations. The situation is compounded by the mediocrity of the innovations emanating from the digital economy, which produce downgraded jobs for victims of technological unemployment. Think Uber drivers, amongst a host of other platform workers that find themselves at the sharp end of precarity in the gig economy. 

What’s most worrying about the dominance of mediocre innovations and the downgraded jobs they produce for South Africans is the fact that our Presidential Commission on the 4IR - in the absence of examining how innovation intersects with inequality in the digital economy - has come out strongly in support of the capital market as a catalyst for start-up innovation. What SA needs instead is a diverse approach to innovation that explores alternative industrial and economic development models that are responsive to social and environmental objectives. Think platform co-operatives, hybrid for-profit/non-profit companies and/or government itself demonstrating more confidence in its abilities by embracing the role of an entrepreneurial state for social impact innovation. For a developing country with deep social and economic divisions, failure to grasp the inequality inducing consequences of a market driven approach to innovation will only lead to greater strife for the majority of South Africans.