Starting in the 1980s, steps in the production of industrial and consumer goods have become more distributed across firms located in different parts of the world. Lower logistics and information exchange costs, global and regional trade agreements, differentials in labor costs, and better global rules governing trade have together contributed to this phenomenon of globalized value chains. Countries in Asia and Latin America which were tightly integrated into global value chains (GVCs) have reaped significant benefits in terms of productivity improvements, job creation, and poverty reduction. However, the benefits have not been equally divided, neither among countries nor among populations within countries that have been thought to benefit. Countries in Africa which had weak links into GVCs or were mostly operating at the lower end of the value chain providing primary raw materials have not benefited as much from this trade-led growth.
The last decade, and the last few years in particular, have seen a slowing—and in some instances a reversal—of the growth of flows in GVCs. The World Development Report 2020 (WDR2020) released on Wednesday highlights the economic benefits from GVCs and reminds us that protectionism and policy uncertainty around the world is now putting many of these benefits at significant risk. WDR 2020 also highlights key areas where greater cooperation in trade, regulation, and stricter enforcement of environmental and labor standards are required for maintaining and sustaining the gains created through GVCs. It presents some ideas through which the gains from participation in global value chains could be spread more evenly across society, both in industrialized countries and low- and middle-income countries (LMICs).
AFCTA and the RVC optimism in Africa
At a time when the global trend for GVCs appears gloomy, a noteworthy and commendable development is occurring in Africa (1) with the signing of the African Continental Free Trade Area (AfCFTA). So far Africa’s trade mostly been primary material flows to Asia, EU and North America with very low levels of trade between countries in Africa. Apart from a few exceptions, firms in Africa have not achieved economies of scale in manufacturing, as they have not benefited from the synergies and complementarities with firms located in other countries in the region. With the exception of recent apparel manufacturing units in Ethiopia and Kenya, firms in sub-Saharan Africa are rarely integrated into global production networks. AfCTA offers a tremendous opportunity to integrate Africa’s firms into global supply chains and create new regional supply chains. UN’s Economic Commission for Africa (UNECA) forecasts that a fully implemented AfCTA will boost trade between countries in Africa by 15 to 25 percent (2). Simulations by the International Monetary Fund (IMF) also show that AfCFTA may significantly increase Africa’s ranking on the Global Competitiveness Index (3).
Some of the themes required for AFCTA’s success are similar to areas highlighted in the WDR2020 for global cooperation. The launch of WDR2020 provides an opportunity to bring together development finance institutions and multilateral development banks to examine these areas in greater detail and create programs for financing and technical advice for AfCTA’s success. Well-developed regional and global value chains in Africa are important not only for the economic gains from production of industrial and consumer products as laid out in WDR2020, they are also crucial for the long-term sustainability of social sector programs in health, nutrition, and education which depend on medicines, health products, food and books.
Ideas for action by global and regional development agencies
Shaping the logistics and transport market: High logistics costs between countries are one of the biggest barriers to firms in Africa finding a place in global value chains or upgrading their place in the value chain. We often assume that the costs of transport between, and within, countries in Africa are high due to poor infrastructure and roads. However, in reality, it is the political economy of the freight logistics industry that leads to higher costs (4). Formal and informal logistics industry protectionist schemes, poor access to capital, and other forms of entry barriers prevent more efficient firms from entering the logistics market. In most countries there are many transport service providers and market entry for new players is expensive and prohibitive. As a result, the incumbents face little pressure to enhance their productivity. The market structure in other core and auxiliary parts of the logistics industry is also highly sub-optimal, with either too much fragmentation or too much concentration. New digital technologies and two-sided platforms have the potential to lower logistics and coordination costs and bring in new forms of competition to the logistics industry. Some have already started operating in sub-Saharan Africa, even though at relatively small scale. Priority lending windows by development finance institutions to firms which can reduce logistics costs and strengthen regional value chains (RVCs) will help invigorate the ecosystem for RVC development.
Generating robust and up-to-date market information: Firms decide where to locate intermediate good and finished product factories and how to organize the interfaces along the global supply chain based on demand projections for the different markets, labor and transportation costs, human capital, and production economics (e.g., cost curves as a function of production volumes for each individual process step or component that goes into the product). Managers of global firms (and high productivity regional firms) depend on granular, high-frequency data to make such decisions. Over time, specialized for-profit entities may emerge to provide such information services for firms across the regional value chains. In the interim, it is worth exploring if such entities can be incubated/accelerated using social impact/development capital.
Rigorous research to guide global and regional policy dimensions: Ideally, activities in the value chain will be distributed in different countries driven by economies of scale, specialization, cost and availability of labor and capital. While there has been considerable research on factors of comparative advantage that drive a firm's choice to locate a certain stage of production in one country vs another, there is limited contextual and empirical understanding of this for Africa. Technical analysis of regional value chain formation drivers and study of RVC governance approaches will help regional and global development banks to structure investments and policy reforms targeted towards development of specific RVCs.
Integrating firms in Africa at higher levels into global value chains and helping to create strong regional value chain is a huge opportunity for economic growth, poverty reduction, and social sector sustainability. But realizing this vision will require early investments in a few areas by global and regional development banks. Coordination across 54 country government on a variety of policy issues is never easy. Reconciling national development priorities with regional objectives has sometimes proven to be difficult. AFCTA has strong political momentum and provides a clear window of opportunity to improve regional value chains and better integration in global value chains. WDR2020 is a terrific reminder that we need to act promptly to integrate countries in Africa into the global economy, more strongly and equitably, before this opportunity passes.
Signé L., “How Africa is Bucking the Isolationist Trend.” Foreign Affairs 2018. Available at: www.foreignaffairs.com/articles/africa/2018-05-23/how-africa-bucking-isolationist-trend
United Nations Economic Commission for Africa (UNECA). 2018. “African Continental Free Trade Area: Towards the Finalization of Modalities on Goods.” Addis Ababa.
Abrego, L., M.A. Amado Garfias, T. Gursoy, G.P. Nicholls, and H.P. Saiz, 2018. “What Can be Expected from the African Continental Free Trade Agreement: Estimates from a General Equilibrium Model”. IMF Working Paper
Teravaninthorn, S. and Raballand, G. (2009) Transport prices and costs in Africa: A review of the international corridors. Washington, DC: World Bank
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.