Can Africa’s Services Sector Break the Development Trap?

By Danilo Desiderio

Africa’s demographic surge presents both an extraordinary opportunity and a formidable challenge. By 2050, the continent’s least developed countries will need to absorb nearly 2 million new workers annually into productive employment.

Whether they succeed or fail will depend largely on an underappreciated question: can the services sector become a genuine engine of structural transformation?

In 2025, the United Nations designated 44 countries as Least Developed Countries (LDCs), with 32 located in Africa. The UNCTAD Least Developed Countries Report 2025 examines this critical juncture, revealing that services now account for nearly half of GDP in many LDCs.

Yet the sector’s expanding footprint has not translated into widespread prosperity. The central question remains whether services can evolve from a safety valve for surplus labor into a dynamic force for sustainable development.

The Urgency of Africa’s Employment Challenge

The numbers are staggering. The combined population of LDCs is projected to reach 1.95 billion by mid-century, with the working-age population expanding by 76 percent.

Countries like the Democratic Republic of the Congo will see 1.9 million new labor market entrants each year, Ethiopia 1.8 million, and Tanzania 1.4 million. Generating productive employment at this scale represents one of the most pressing development imperatives the continent has ever faced.

Current outcomes, however, remain sobering. Despite services’ growing share of economic output, most workers in African LDCs remain trapped in low-productivity, informal activities that ensure subsistence rather than sustained advancement.

In 2024, average per capita income growth across LDCs stood at a meager 1 percent – and not a single LDC achieved the 7 percent annual growth target enshrined in Sustainable Development Goal 8.

The Services Paradox: Growth Without Transformation

The structure of services exports reveals why expansion has not delivered transformation. In African LDCs, exports concentrate heavily in travel and transport, with tourism alone comprising roughly one-third of total services exports.

While tourism generates foreign exchange, it typically produces limited local value addition and weak spillovers to the broader economy – a pattern economists describe as “enclave development.”

More troubling still, LDCs are being systematically sidelined in the fastest-growing segment of global commerce: the digital economy. Collectively, they account for merely 0.16 percent of global digitally deliverable services exports – the lowest share ever recorded.

This widening digital divide threatens to permanently relegate African LDCs to the periphery of 21st-century economic activity.

Pathways to Transformation: Lessons from Early Movers

Yet the report identifies encouraging national successes that illuminate what targeted policy intervention can achieve. Ethiopia has engineered remarkable growth in services exports, which accounted for more than 65 percent of total exports in 2023–2024, propelled largely by the strategic expansion of Ethiopian Airlines.

Rwanda has positioned itself as a regional services hub through the Kigali International Financial Center, attracting substantial investment in technology-based services.
Meanwhile, Togo and Djibouti are leveraging their coastal geography to develop maritime logistics platforms and strategic transport corridors.

By positioning themselves as regional gateways for landlocked economies, they aim to capture value from transit trade, port services, and related logistics activities – transforming geographic advantage into economic opportunity.

Beyond the Buffer: An Integrated Strategy for Services-Led Growth

Building on these experiences, UNCTAD argues that African LDCs must fundamentally reconceive the role of services in their development strategies. Rather than treating the sector as a residual “buffer” that merely absorbs low-skilled labor, governments should pursue integrated approaches combining investment in physical and digital infrastructure, human capital development, and regulatory reform.

Critically, this strategy must strengthen linkages between services, manufacturing, and agriculture. Modern services – from logistics and finance to information technology and business process outsourcing – can raise productivity and foster innovation across all sectors when properly integrated into value chains.

Regional Integration and Its Limits

The African Continental Free Trade Area (AfCFTA) emerges as a potentially transformative platform for scaling trade in services and securing market access for smaller, more vulnerable economies. By reducing barriers and harmonizing standards across the continent, the agreement could enable African LDCs to leverage regional markets for economies of scale.

However, the report makes an essential acknowledgment: regional solutions alone will not suffice. Even when AfCFTA protocols are fully implemented and domestic reforms completed, fundamental structural constraints will persist.

Limited technology access, persistent financing gaps, and small domestic markets will continue to constrain the ability of LDCs to scale services, raise productivity, and integrate into global value chains.

The Imperative of Global Cooperation

This reality underscores an uncomfortable truth about Africa’s development trajectory: external engagement remains indispensable. Global cooperation – through enhanced trade preferences, technology transfer, and concessional finance – is not merely complementary to domestic reform and regional integration; it is essential for overcoming structural barriers that individual countries and even continental agreements cannot address alone.

The international community faces a choice. It can treat the demographic expansion of Africa’s LDCs as someone else’s problem, accepting the risks of persistent poverty, irregular migration, and political instability.

Or it can recognize that Africa’s transformation represents a shared opportunity – and shared responsibility – requiring coordinated action across national borders.

A Transformation Within Reach

The services sector’s potential to drive structural transformation in Africa’s least developed countries is real but not inevitable. Success will require governments to move beyond passive accommodation of surplus labor toward active cultivation of productive, high-value service activities.

It will demand investment in both hard and soft infrastructure – from fiber-optic networks to vocational training programs. And it will necessitate international partnerships that provide the technology, financing, and market access that African LDCs cannot generate independently.

The demographic dividend Africa anticipates could easily become a demographic disaster without concerted effort. But with the right combination of domestic reform, regional cooperation, and global support, the continent’s burgeoning workforce could yet become the foundation for sustained prosperity.

The question is not whether services can drive transformation – it is whether policymakers will make the choices necessary to ensure they do.

Danilo Desiderio serves as the CEO of Desiderio Consultants Ltd in Nairobi, Kenya, specializing in African customs, trade, and transport policies. He is a customs and trade expert at the World Bank and a senior associate to the Horn Economic and Social Policy Institute (HESPI).