Reaping the Benefits of Global Value Chains: New Avenues for Africa
According to the 2013 United Nations Conference on Trade and Development World Investment Report, the value of global trade is currently estimated at US $20 trillion. Trade in intermediate goods and services that are incorporated at various stages of production accounts for two-thirds of global trade.
The development activities-based production processes have gradually led to a network of borderless, globalized production systems. These complex networks (global or regional) are referred to as global value chains (GVCs).
While developed countries have a strong foothold in GVCs, developing countries are now increasingly participating in these networks. The share of developing countries in global value added trade increased from 20 per cent in 1990 to over 40 per cent in 2012. However, many African countries are still at the initial stages of gaining access to GVCs beyond natural resource exports and successfully joining global production networks. As a result, Africa still accounts for a limited share of world income generated from GVC, highlighting the need for new strategies to enable better access to value chains. The dominance of extractive industries contributes to a large part of Africa’s exports, averaging at 72 per cent between 2010 and 2012. However, the underdevelopment of the processing end of extractive industries continues to place Africa at the bottom of GVC. Thus, Africa accounts for only 14 per cent of value added from exports compared with 27 per cent in Asia and 31 per cent in developed economies.
Value gains from Africa’s traditional exports tend to be skewed towards developed countries (value addition in consuming countries is greater). This is especially true of unprocessed natural resource exports. For example, while Africa is the world’s largest producer of cocoa beans, 90 per cent of the crop is exported raw or roasted and packaged and sent to the U.S. or Europe. This denies Africa of the most profitable part of the confectionary market value chain – the processing of the cocoa into chocolate. While Africa possesses only 18 per cent of global cocoa grinding capacity, three multinational companies – Cargill, Archer Daniels Midland (ADM) and Barry Callebaut – grind 40 per cent of the world’s cocoa every year. Growers in West Africa are estimated to receive only 3.5 to six per cent of the final value of a chocolate bar, depending on the percentage of cocoa content.
Realizing this apparent disadvantage, some African countries have made significant strides to expand grinding capacity to place them higher up the ladder of the global confectionary market estimated to be worth US $84 billion. For instance, Côte d’Ivoire provided incentives to major grinders in terms of tax breaks on foreign investment to locate processing facilities in the country and has been able to attract Cargill, Olam and ADM. This has led to a broader network of input sourcing and promises to create avenues for domestic firms to strengthen linkages and learn from the biggest players in the market.
The growth of the apparel sector has had a central role in Lesotho’s economy. Lesotho has benefited from two distinct value chains emanating from differing investment incentives and inter-firm linkages between Taiwanese and South African owned textile firms. This has led to differing production and distribution networks. The first group follows a global strategy involving long run production for export to the United States through the AGOA initiative and has fairly developed access to global sourcing and merchandising networks. In contrast, the second group is composed of firms pushed out of South Africa due to high cost and labour market rigidities. This group of firms is small, has shorter run production goals often with quick response to excess demand, and supplies more complex products with moderately higher fashion content to South African retailers. By capturing gains from both regional and international value chains, the apparel sector now accounts for 18 per cent of Lesotho’s GDP, nearly 70 per cent of total manufacturing production, 70 per cent of total merchandise exports, and employs nearly 50 per cent of the workforce.
Similarly, one of the largest shoe exporters in China – Huajian – has set up a factory in Ethiopia (2011) as part of a plan to invest US $2 billion over 10 years in developing manufacturing clusters focused on shoemaking for export. The company has the potential to create 100,000 jobs over the period and will integrate local input manufacturers to global supply chains.
The medium-term goals of African countries should be to place themselves higher up the GVC in order to reap gains from trade. Countries need to carefully weigh the costs and benefits of policies to promote global value-led development strategies. This requires carefully tailored measures that are integrated to each country’s overall development strategy. Some of the main measures to consider include:
- Promoting policies within the broader development framework – Policies aimed at supporting private-sector development in manufacturing and primary input processing could be useful. Countries that see benefits in processing agro-industrial exports should actively promote them.
- Attracting FDI and building productive capacities in local firms – Countries should work to make sure that the above pattern coincides with an influx of processing FDI and should engage in institutional reforms to attract foreign investment. An important benefit expected from FDI is the stimulation of local entrepreneurship through backward linkages, labour markets and human capital, or technology and knowledge spillover. Moreover, FDI facilitates skill creation particularly in export-oriented activities with stringent requirements for efficiency and quality.
- Encouraging manufacturing – Reaping the benefits of global value chains requires moving into higher value-added activities. The creation of supply-chain linkages between foreign and local firms in formal manufacturing fosters the emergence of local manufacturing firms capable of subcontracting tasks and subsequently competing with foreign firms. For instance, a recent study shows that the average domestic firm, supplying to a foreign multinational in the country is positively associated with product innovation, while buying from a multinational is positively associated with labour productivity.