THEMATIC EDITION Global Value...

Global Value Chains and Africa’s IndustrialisationAfrican Economic Outlook 2014

The full report is available at:

www.africaneconomicoutlook.org

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AFRICAN DEVELOPMENT BANK GROUP

THEMATIC EDITION


ThemaTic ediTion

Global Value Chains and Africa’s Industrialisation

African Economic Outlook 2014

AFRICAN DEVELOPMENT BANK

DEVELOPMENT CENTRE OF THE ORGANISATIONFOR ECONOMIC CO-OPERATION AND DEVELOPMENT

UNITED NATIONS DEVELOPMENT PROGRAMME


Photo credits: Cover design by the OECD Development Centre.

Corrigenda to the African Economic Outlook may be found on line at: www.africaneconomicoutlook.org/en.

© African Development Bank, Organisation for Economic Co-operation and Development, United Nations Development Programme (2014)

The opinions expressed and arguments employed in this publication are the sole responsibility of the authors and do not necessarily reflect those of the African Development Bank, its Board of Directors or the countries they represent; the OECD, its Development Centre or the governments of their member countries; or the United Nations Development Programme.

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2 African Economic Outlook - Thematic Edition © AfDB, OECD, UNDP 2014

The African Economic Outlook 2014

The annual African Economic Outlook (AEO) is an essential reference for monitoring the economic, social and political developments of the continent. The 2014 edition contains the following:

• an overview of Africa’s performance and prospects in five chapters,

• three chapters on the theme “Global Value Chains and Africa’s Industrialisation”,

• one- to two-page summaries of individual country notes for each of the continent’s 54 countries,

• a rich statistical annex. The complete AEO content, including the full-length country notes, can be accessed

free of charge on the website:


This AEO 2014 Special Thematic Edition

This complementary edition to the AEO 2014 gathers the complete AEO analysis on global value chains and Africa’s industrialisation. It combines into a single document the thematic chapters and the relevant sections of 53 of the 54 country notes (only the Somalia note does not cover this theme).

Contact us:

African Development Bank [email protected]

OECD Development [email protected]

United Nations Development [email protected]

3African Economic Outlook - Thematic Edition© AfDB, OECD, UNDP 20142

http://www.africaneconomicoutlook.org

mailto:[email protected]



Acknowledgements

The African Economic Outlook (AEO) was prepared by a consortium of three teams from the African Development Bank (AfDB), the OECD Development Centre and the United Nations Development Programme (UNDP). The Outlook benefited from the overall guidance of Mthuli Ncube (Chief Economist and Vice President, AfDB), Mario Pezzini (Director, OECD Development Centre) and Pedro Conceição (Chief Economist and Head of the Strategic Advisory Unit, Regional Bureau for Africa, UNDP). Willi Leibfritz was the Co-ordinator.

The AfDB team was led by Steve Kayizzi-Mugerwa, Charles Lufumpa, Abebe Shimeles and Beejaye Kokil. The AfDB task manager was Anthony Simpasa. Key team members included Ahmed Moummi, Adeleke Salami, Anna von Wachenfelt and Lauréline Pla. The team at the OECD Development Centre was led by Henri-Bernard Solignac-Lecomte, while the team at the UNDP was led by Angela Lusigi.

The chapters on global value chains and Africa’s industrialisation were drafted by Jan Rieländer with key inputs from Carolin Helmreich, Bakary Traoré, Keiko Nowacka, Eoghan Molloy, Maria Roquete, Kjartan Fjeldsted, Sarah Goerres, Koon-Hui Tee, Gaëlle Ferrant and Luca Maria Pesando. Caroline Lesser, as well as Annelies Goger, Andy Hull, Stephanie Barrientos, Gary Gereffi and Shane Godfrey contributed with background papers. Salem Berhane, Dan Moran and Keiichiro Kanemoto provided data and support.

These chapters drew heavily from the knowledge of international experts invited to the AEO 2014 experts’ meeting in Paris on 29 November 2013: Tilman Altenburg (German Development Institute), Stephanie Barrientos (University of Manchester), Tidiane Boye (UNIDO), Richard Carey (Former Director, OECD/DCD), Julius Gatune (African Centre for Economic Transformation), Mark Henstridge (Oxford Policy Management), Raphael Kaplinsky (The Open University), David Laborde (IFPRI), Megha Mukim (The World Bank), Anthony Pile (Blue Skies Holding Ltd.), Roberta Rabellotti (Università del Piemonte Orientale), Isabelle Ramdoo (ECDPM), Xiaoyang Tang (Tsinghua University), Joseph Wozniak (ITC), as well as Koen De Backer, William Hynes, Przemyslaw Kowalski, Sébastien Miroudot, Annalisa Primi, Virginia Robano, Colin Webb, Trudy Witbreuk and Norihiko Yamano (OECD).

In collaboration with the partner institutions and under the overall guidance of the AfDB regional directors and lead economists, all AfDB country economists have contributed to the country notes. In several cases, they collaborated with economists from the OECD Development Centre and/or UNDP. The notes were drafted by Tarik Benbahmed and Hervé Lohoues (Algeria), Joel Muzima and Domingos Mazivila (Angola), Daniel Ndoye and El Hadji Fall (Benin), Peninah Kariuki, Fitsum Abraha and Sennye Obuseng (Botswana), Tankien Dayo (Burkina Faso), Sibaye Joel Tokindang and Daniel Gbetnkom (Burundi), Heloisa Marone and Adalbert Nshimyumuremyi (Cabo Verde), Richard-Antonin Doffonsou and Lisa Simrique Singh (Cameroon), Kalidou Diallo (Central African Republic), Claude N’Kodia (Chad), Alassane Diabate and Riad Meddeb (Comoros), Nouridine Kane Dia and Ginette Mondongou Camara (Congo, Rep.), Séraphine Wakana and Ernest Bamou (Democratic Republic of Congo), Pascal Yembiline, Bakary Traoré and Luis Padilla (Côte d’Ivoire), Audrey Emmanuelle Vergnes (Djibouti), Charles Muthuthi (Egypt), Gérard Bizimana, Glenda Gallardo and Lauréline Pla (Equatorial Guinea), Magidu Nyende and Luka Okumu (Eritrea), Admit Wondifraw Zerihun, Haile Kibret and James Wakiaga (Ethiopia), Gérard Bizimana and Bakary Dosso (Gabon), Adalbert Nshimyumuremyi (Gambia), Eline Okudzeto, Wilberforce Aminiel Mariki, Gregory De Paepe and Kordzo Sendegah (Ghana), Olivier Manlan (Guinea), Yannis Arvanitis (Guinea-Bissau), Walter Owuor Odero and Wilmot Reeves (Kenya), Edirisa Nseera and Alka Bhatia (Lesotho), Patrick Hettinger and Janice James (Liberia), Sahar Taghdisi Rad (Libya), Jean Marie Vianey Dabire and Simplice Zouhon Bi (Madagascar), Peter Mwanakatwe (Malawi), Abdoulaye Konaté and Bécaye Diarra (Mali), Marcellin Ndong Ntah and Souleman Boukar (Mauritania), Martha Phiri and Asha Kannan (Mauritius), Samia Mansour and Vincent Castel (Morocco), Andre Almeida-Santos, Luca Monge Roffarello and Manuel Filipe (Mozambique), George J. Honde and Ojijo Odhiambo (Namibia), Daniel Ndoye and Mansour Ndiaye (Niger), Barbara Barungi (Nigeria), Edward Batte Sennoga and Bernis Byamukama (Rwanda), Flávio A. Soares Da Gama (São Tomé and Príncipe), Khadidiatou Gassama, Toussaint Houeninvo and Bakary Traoré (Senegal), Susan Mpande and Asha Kannan (Seychelles), Jamal Zayid (Sierra Leone), Ahmed Dualeh (Somalia), Wolassa Lawisso Kumo, Jan Rieländer and Omilola Babatunde (South Africa), Joseph Muvawala and Frederick Mugisha (South Sudan), Yousif M.A. Bashir Eltahir, Suwareh Darbo and Kabbashi M. Suliman (Sudan), Albert Mafusire and Fatou Leigh (Swaziland), Prosper Charle, Rogers Dhliwayo and Josef Loening (Tanzania), Carpophore Ntagungira (Togo), Philippe Trape, Mickaelle Chauvin and Hatem Salah (Tunisia), Vera-Kintu Oling, Alexis Rwabizambuga and Alex Warren-Rodriguez (Uganda), Peter Engbo Rasmussen, Kambaila Munkoni and George Lwanda (Zambia), Mary Manneko Monyau and Amarakoon Bandara (Zimbabwe). The work on the country notes greatly benefited from the valuable contributions of local consultants.


Table of contents

Introduction ............................................................................................................................................................................................ 6

PART ONE: Global value chains and Africa’s industrialisation ........................................................................... 7

Chapter 1. Global value chains in Africa: Potential and evidence ...................................................................... 9

Chapter 2. How ready is Africa for global value chains: A sector perspective ........................................41

Chapter 3. What policies for global value chains in Africa? .................................................................................67

PART TWO: Country notes .........................................................................................................................................................85

Algeria .......................................................................... 86Angola ........................................................................... 88Benin .............................................................................. 90Botswana .................................................................... 92Burkina Faso ............................................................. 94Burundi ........................................................................ 95Cabo Verde ................................................................. 96Cameroon ................................................................... 98Central African Rep. .......................................... 100Chad ............................................................................. 101Comoros ..................................................................... 103Congo, Dem. Rep. ................................................. 104Congo, Rep. .............................................................. 105Côte d’Ivoire ............................................................ 107Djibouti ....................................................................... 109Egypt ............................................................................ 110Equatorial Guinea ................................................ 112Eritrea .......................................................................... 113Ethiopia ...................................................................... 115Gabon .......................................................................... 117Gambia ....................................................................... 119Ghana .......................................................................... 122Guinea ......................................................................... 124Guinea-Bissau ........................................................ 125Kenya ........................................................................... 126Lesotho ....................................................................... 128 Liberia ......................................................................... 130

Libya ............................................................................. 132Madagascar ............................................................. 134Malawi ........................................................................ 136Mali ............................................................................... 137Mauritania ............................................................... 138Mauritius ................................................................... 139Morocco ...................................................................... 141Mozambique ........................................................... 143Namibia ..................................................................... 145Niger ............................................................................. 147Nigeria ........................................................................ 148Rwanda ....................................................................... 150São Tomé and Príncipe .................................... 152Senegal ....................................................................... 154Seychelles ................................................................. 156Sierra Leone ............................................................ 158South Africa ............................................................ 161South Sudan ............................................................ 163Sudan ............................................................................165Swaziland ................................................................. 167Tanzania ................................................................... 169Togo .............................................................................. 171Tunisia ........................................................................ 173Uganda ....................................................................... 175Zambia ........................................................................ 177Zimbabwe ................................................................. 179


Introduction

This thematic edition of the African Economic Outlook 2014 (AEO) looks at how Africa can make the most of global value chains to implement its industrialisation agenda, while at the same time avoiding getting stuck at the lowest end of value chains. The choice of this theme largely stems from the findings of the last three AEO thematic chapters: Africa’s emerging partners (2011), promoting youth employment (2012), and structural transformation and natural resources (2013). Each of them points to a specific challenge:

The competitiveness challenge. The phenomenon of shifting wealth – the centre of the global economy moving East and South – has played a key role in Africa’s recent growth episode: Brazil, China, India, Turkey and many other countries have emerged as significant investors in the continent and as dynamic markets for African export products. Yet their rise has also led to much stiffer competition in the global market.

The employment challenge. Every year 13 million young Africans join the labour market. Africa’s total labour force is projected to reach 1 billion by 2040 making it the largest in the world, surpassing both China and India. Education and skill levels are improving, but the majority of Africa’s workforce remains low-skilled. In many countries informal work continues to account for more than half of total employment. The challenge is particularly acute for young people, who often are poor despite being employed or because they remain outside the labour market altogether. In several countries, wage employment – the best job category – accounts for less than 15% of youth in the labour market. To turn the youth bulge into an opportunity, African countries must create 100 million jobs every ten years, including for young people with few skills.

The structural transformation challenge. Structural transformation entails the rise of new, more productive activities and the movement of human and financial resources from less productive activities to these newer ones, raising overall productivity. The growth of Africa’s economies over the last decade has been impressive and has been driven by more than just natural resources, which accounted for one third of Africa’s growth. Structural transformation has taken place: Africa’s labour productivity increased by close to 3% during the 2000s, with almost half this attributable to workers moving to new activities with higher productivity. However, this transformation has not been enough to make a sufficient dent in employment or poverty. Africa thus needs to accelerate its structural transformation towards a type of growth that produces more jobs.

In order to put in place the policies that will stimulate the development of competitive firms in job-creating activities, policymakers need i) to be aware of what the new rules of the game in international trade mean for African economies, ii) to assess those economies’ strengths and weaknesses in that context and iii) to consider the policy options best suited to their country’s endowments and their own national strategy. This AEO 2014 thematic volume, complete with individual case studies for all 54 African economies, aims to help them in that endeavour.


PART ONE Global value chains

and Africa’s industrialisation


www.africaneconomicoutlook.org/en/theme

Global value chains (GVCs) are driven by firms that optimise their

sourcing strategies through the separation of production stages.

GVC integration could accelerate structural transformation in Africa

if combined with upgrading. Trade in value added serves to measure

global value chains. Africa so far captures a small but growing share

of them. Productivity gains from value chains have been easier to

achieve than employment growth.

Chapter 1

Global value chains in Africa: Potential and evidence


1. Global value chains in Africa: Potential and evidence


In brief

Globalisation has changed the way goods and services are produced. The country-centric view of trade no longer reflects reality. Instead production networks, even for just a single product, span many countries, often the entire globe. We call these networks global value chains (GVCs) (see Box 1.1). They are driven by firms which use the advances in communication and regulation to optimise their sourcing strategies through geographic re-organisation and the separation of production stages. Global value chains offer new opportunities for structural transformation in Africa. Countries can integrate into global value chains at a specific stage, usually assembly in manufacturing and commodity production in agriculture. Ideally this leads to opportunities to upgrade through knowledge transfers, product differentiation and the addition of adjacent stages of the value chain. Measures of trade in value added – as opposed to traditional gross measures of trade – can provide insights into integration into global value chains and the benefits this entails. Africa so far captures only a small share of global trade in value added terms, but its total level of GVC integration is high compared to other regions. However, a good part of it is forward integration of Africa’s commodity exports as inputs in foreign manufacturing, which creates relatively little additional value added in Africa. In terms of gains from global value chains, export and productivity growth has been easier to achieve than employment growth. Success depends on a country’s ability to respond to external demand, as well as on the nature of the value chain and the lead firm.

Box 1.1. What is a global value chain?A value chain identifies the full range of activities that firms undertake to bring a product or a service from its conception to its end use by final consumers (Figure 1.1). At each step in the chain, value is added in some form or other. Driven by offshoring and mounting interconnectedness, the activities that make up the value chains of many products and services have become increasingly fragmented across the globe and between firms. Various tasks along the production chain can be carried out in distant locations, depending on the respective comparative advantages of different countries. The interconnected production process that goods and services undergo from conception and design through production, marketing and distribution is often referred to as a global value chain or an international production network (Gereffi and Fernandez-Stark, 2011; OECD, 2013).

Each stage carries, to varying degrees, opportunities for new local activities, jobs and corporate profits, as well as the associated new skills, technology and public revenues in the form of taxes. Successful integration into a value chain potentially allows a country to seize a bigger share of those benefits and accelerate its industrialisation process.

Figure 1.1. Stages in a generic value chain

Intermediateinputs

Primaryinputs

Packaging/shipping

Sales/marketing

End-use

Main product/service

Upstream activity

Research & development/design

Downstream activity

Aftersales

Source: Authors’ elaboration.



Global value chains allow for growing opportunities

How goods are traded has evolved along with the means needed to produce them. Respecting private standards and joining specific global value chains can improve African countries’ capacities, employment and social structures. A country’s position in a chain and its ability to upgrade its participation determine success, as do adequate services and governance, innovative entrepreneurs, and the requirements specific to the chain.

Modern transport and communication technology have rapidly expanded global value chains

International trade in goods on a large scale emerged with modern transport in the 19th century. Before the invention of fast large volume transport by train, steam ship or truck, each town and region had to produce most of what it consumed. From the middle of the 19th century onwards, transport enabled large volume trade; towns, regions and eventually countries began to divide labour and to focus on the production of some goods that could be consumed and sold while buying the rest elsewhere. As transportation costs have fallen, trade has continuously expanded (Baldwin, 2012).

Figure 1.2. Outsourcing and offshoring

LOCATIONHOME COUNTRY HOST COUNTRY

DOMESTICDIVISIONS/AFFILIATES

DOMESTICSUPPLIERS

FOREIGNAFFILIATES

FOREIGNSUPPLIERS

OFFSHORING

OU

TSOU

RCIN

G

FIR

M

OU

TSID

E FI

RM

W

ITH

IN F

IRM

Internationaloutsourcing

International

insourcing

Dom

estic

outs

ourc

ing

Vertical integrationabroad

In-firm offshoring

Global sourcing

Note: The geographic dimension or offshoring changes from left to right. Outsourcing or the organisational location of the activity within or outside the firm changes from top to bottom.Source: OECD (2013, p. 18).

Since the mid-1980s trade in final goods has given way to a global division of labour. New communication technology and rapidly falling trade and travel costs – thanks to trade liberalisation, containerisation and cheap air travel – have enabled the geographic dispersion of individual segments of a production process while still allowing for sufficient control and co-ordination (Baldwin, 2012). Today managers can be anywhere in the world within a reasonable time and at affordable cost, and communication technology allows for 24-hour work cycles spanning the globe.1

The increasing global division of labour is driven by firms which use the advances in communication and regulation to optimise their sourcing strategies through geographic re-organisation and the separation of production stages. For each operation and production stage firms have to identify: i) whether to undertake the task within the firm or outsource it to an independent supplier; and ii) whether to keep the tasks within the firm’s country of origin or to move it offshore, i.e. to another country. Figure 1.2 describes the four possible combinations of the organisational and geographical structure of production. These new sourcing strategies result in greater foreign direct investment




and intra-firm trade as well as vertical arm’s length trade with independent suppliers (Cattaneo et al., 2013; OECD, 2013). Today an estimated 80% of global trade is linked to multinational corporations (UNCTAD, 2013).

Services have become important in supporting global value chains. Goods and services are intertwined in global production networks. The OECD/WTO Trade in Value Added (TiVa) database reveals that the value created directly and indirectly by services as intermediate inputs represents over 30% of the total value added in manufactured goods (OECD, 2013; Figure 1.3). A significant share of these services relates to the actual operation of global value chains, particularly transport, logistics and warehousing, but also banking, insurance, business services, professional services and communications services, which are supplied at every stage of the production phase. These services play a crucial role for trade in goods by helping move components efficiently across borders (Lesser, 2014; OECD, 2013; WEF, 2012).

Figure 1.3. Services share of value added in manufacturing trade, all countries, 2009

0

5

10

15

20

25

30

35

40%

Distribution and repair Transport and storage Finance Business services Other

Mining Machinery, equipment Textile Transport equipment Food products Chemicals

Source: OECD, WTO and UNCTAD (2013).12 http://dx.doi.org/10.1787/888933033156

Furthermore, in a way similar to that of goods, services are being disaggregated and traded as separate tasks, thus creating service value chains. Knowledge-intensive services industries are at the forefront of this trend. Value can be captured and stored so that production of these services can be separated from consumption and scaled up, creating higher added value final services. Cross-border digital trade then enables these services to be used anywhere in the world, thus allowing for the development of service value chains in their own right. Although there has been little research to date on service value chains, such chains are seemingly being created in a variety of sectors, including banking, tourism, and possibly education and health services, as well as information technology and business processing services (Lesser, 2014).

Today global value chains, or international networks of production, span many countries, often the entire globe and are closely intertwined with shifting wealth and the rise of the South. Figure 1.4 illustrates this unbundling of trade, showing that intermediate goods have been the main drivers of the boom in trade since the 1990s, accounting for about 65% (USD 11 billion) of all imports in 2012, up from 57% and just USD 2.8 billion in 1995. During the same time the share of OECD countries in global imports of intermediate goods dropped from 75% to 60% while that of non-OECD countries picked up accordingly (Figure 1.5). Similarly the share of OECD countries in global manufacturing value added dropped from 80% to 60%.

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Figure 1.4. The unbundling of trade: The growth of trade driven by intermediate goods, 1992-2012

0

2

4

6

8

10

12

14

16

18

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Capital goods Final goods Intermediate goods

Global imports (USD billion)

Source: Authors’ calculations based on UN COMTRADE (2014).12 http://dx.doi.org/10.1787/888933033175

Despite their name, global value chains exhibit high regional concentration, which is shrinking slowly. Africa does not play a significant role yet. When measuring the linkages between major supply-chain traders, the strongest relationships can be found within the regional blocks of East Asia, Europe and North America (Baldwin, 2012). About 85% of global value chain (GVC) trade in value added takes place in and around these three hubs. While other regions remain marginal, their share has increased from only 10% in 1995 to 15% in 2011. Africa’s share in GVC participation increased from 1.4% to 2.2% during the same time (Table 1.1). At 2% Africa’s share of global imports in intermediate goods has remained the same since the 1990s (Figure 1.5).

Table 1.1. Share of trade in value added by region, 1995 and 2011 Region 1995 2011

Europe 57.5% 50.9%

East Asia 14.4% 16.2%

North America 13.1% 11.8%

Southeast Asia 6.0% 6.8%

Latin America 3.2% 4.2%

Middle East 2.0% 3.0%

Africa 1.4% 2.2%

Russia and Central Asia 0.9% 2.0%

South Asia 0.7% 1.7%

Oceania 0.9% 1.3%

Note: See section on measurements below.Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014).


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Figure 1.5. Global imports in intermediate goods reflecting the rise of emerging markets as production hubs, 1993-2012

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120.00

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.10

Non-OECD countries African countries OECD countries

Share of global intermediate imports

Source: Authors’ calculations based on UN COMTRADE (2014).12 http://dx.doi.org/10.1787/888933033194

This report assumes that the trend towards global value chains will continue as internationalisation is forcing multinational corporations to become more efficient and more flexible. Offshoring and outsourcing have allowed multinational corporations to combine the advantages of various locations and to become more efficient. While the core headquarter functions usually remain the home market of the firm, labour-intensive production stages are often moved to countries with a lower wage level, while marketing and distribution are placed in the market of final consumption. As more firms optimise their networks and become more cost efficient, others will be forced to follow suit. At the same time, the internationalisation of supply chains has introduced more uncertainties and a greater need for flexibility to react (Gibbon and Ponte, 2005). Maximising supply chain effectiveness can cut costs, but weakens the ability to cope with disruption. Hence, more than 50% of the chief executive officers interviewed in PwC’s Global CEO Survey 2013 want to diversify their supply chains and thereby render their operations more flexible (PwC, 2013).

However, this is not destiny. Nascent technological developments could lead to a slowing down of global value chain dispersion. The cost advantage of mass production over customised manufacturing has been among the major drivers of outsourcing and offshoring. Nascent production technologies, particularly in manufacturing, such as 3D printing and smart robotics bear the potential of reducing this cost advantage far enough to kick off a shift towards “re-shoring” of production activities towards the high-wage headquarter economies.

Global value chains offer potential for structural transformation

In a world of global value chains, countries are no longer the relevant frame of analysis, and imports of intermediate goods have changed their significance. Focusing on countries as the primary units of analysis and strategy implies that a country can successfully create the capabilities for producing complex goods that can compete in the global marketplace. Imports are then seen as signs of domestic weakness and exports as strength. However, as the competitiveness of firms depends on their ability to combine the strengths of different countries in a production process, a firm that works solely with domestic inputs can have a competitive disadvantage. Put differently, imports of

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intermediate goods are no longer a sign of foreign competitiveness, but a means for firms to access the most efficient inputs and thus produce more competitive goods (Cattaneo and Miroudot, 2013).

The standards and product specifications of lead firms are increasingly replacing prices and public trade standards as key determinants of GVC participation. The efficient functioning of international production networks requires the seamless combination of intermediate components from many different locations and often different suppliers. A faulty component or a product that does not meet the specifications provided by the lead firm can cause ripple effects and expensive hold-ups. Along similar lines, retailers in developed markets are under increasing pressure by consumers to certify the sourcing chain and innocuousness of their products in terms of social and environmental standards. For most firms, GVC standards in the form of product and quality specifications are therefore indispensable. Price becomes a second order criterion. Thus, while public measures such as tariffs and health and safety (phyto-sanitary) standards continue to play a role in global trade, they are increasingly secondary to private standards, often defined by the firms that control global value chains (Cattaneo and Miroudot, 2013; López González and Holmes, 2011).

African countries can now integrate into a value chain without having all the other steps of the chain in place. In the past, for a country to industrialise it had to develop the domestic capacity to perform all major steps in the value chains of complex manufactured products. Today, through linking into an international production network, countries can establish a specific section of a product’s value chain without having all the upstream capabilities in place (Cattaneo et al., 2013; Gereffi and Lee, 2012; OECD, 2013). These remain elsewhere and are linked through shipments of intermediate products and communication of the know-how necessary for the specific step in the value chain present in the country. The presence of high-tech goods in a country’s export basket therefore no longer implies the presence of a wide set of industrial capabilities, but merely the presence of the respective assembly operation.

Through participation in a value chain, countries and firms can acquire new capabilities that make it possible to upgrade, i.e. to capture a higher share of the value added in a global value chain. The development experiences of several Asian countries show how industrialisation depends on linkages and on innovations arising from knowledge spillovers. For instance, China integrated into global value chains by specialising in the activities of final product assembly and was capable of upgrading its participation by building a competitive supply base of intermediate goods (developing linkages) and by enhancing the quality of its exports. At the firm level, economic upgrading is defined as “moving up” the value chain into higher-value activities, which theoretically enables firms to capture a higher share of value in the global value chain and enhances competitiveness (Gereffi et al., 2005; Humphrey and Schmitz, 2002).

Economic upgrading must be linked to social upgrading to become inclusive. Social upgrading refers to expanding employment and improving employment conditions of the local workers in a given global value chain (Barrientos et al., 2011; Milberg and Winkler, 2013; Bernhardt, 2013).

Global value chains thus hold the promise of boosting employment and structural transformation in Africa. Structural transformation entails the rise of new, more productive activities and the movement of resources from less productive activities to these newer ones, raising overall productivity.2 Although Africa has experienced impressive growth and some structural transformation over the last decade,3 this transformation has not been enough to make a sufficient dent in employment or poverty (AfDB et al., 2013). Global value chains can allow Africa to set up the type of new and




more productive activities that are behind structural transformation. The 2013 edition of this report showed that Africa needs large numbers of low-skilled jobs in fields that are sufficiently close to existing capabilities to enable learning and effective linkages with the wider domestic economy (AfDB et al., 2013). Particularly basic manufacturing and agriculture-related GVC activities have this potential. In a survey for this report, 93% of responding experts on African countries considered global value chains to be an opportunity rather than a threat. The majority of respondents also view “job creation from new activities” as the top opportunity arising from global value chains and resulting in new trade patterns for African countries (Figure 1.6).

Figure 1.6. The greatest opportunities arising from global value chains and resulting new trade patterns

2 %

14 %

39 %

41 %

57 %

59 %

80 %

Increased regional trade

Possibility to leap-frog into specific activities without havingto develop vertically integrated industries domestically

Skill and technology spillover through interactionwith external suppliers and purchasers

Emergence of domestic higher value-added activities

Attracting foreign direct investment

Increased integration in international trade

Job creation from new activities

Note: Numbers reflect the percentage of respondents per item. The survey covered one expert for each country.Source: AEO Country Experts Survey (2014).12 http://dx.doi.org/10.1787/888933033213

China’s gradual changes might allow Africa to increasingly participate in global value chains. The Chinese population is expected to stop growing and wages are rising, eroding China’s attractiveness as a labour-intensive manufacturing hub. In recognition of these changes, China’s leaders have adopted the goal of rebalancing the Chinese economy towards consumption and a greater role for the service sector. This has ignited a shift in labour-intensive manufacturing investment away from China and towards other regions, especially South and Southeast Asia. The World Bank suggested in 2011 that China might soon have 85 million light manufacturing jobs to export (Lin, 2011; Chandra et al., 2012). Although it seems unlikely that these jobs will indeed be moved away from China, many international firms are looking outside of China, also towards Africa, for further expansion.

Success requires good conditions and targeted support

Where a country is located in a global value chain can affect the degree to which it benefits from the chain. Economies can be positioned upstream or downstream in global value chains depending on their specialisation, and their positions may change over time. Upstream economies produce the raw materials or knowledge assets at the beginning of the production process (e.g. research, design), while downstream economies assemble processed products or specialise in customer services. Activities such as research and development and design, but also certain services, tend to create more value added than assembly (OECD, 2013).

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Entering into a global value chain can reduce domestic value added but growth can follow if upgrading occurs. Lead firms strive to create global value chains that combine the advantages of different locations and African producers (and countries) must specialise in discrete segments of a chain to link into a global value chain. This implies that initially a lower share of the value added can be captured locally and that exports will show a higher foreign value as GVC participation increases. Upgrading is necessary for the share of value added captured domestically to climb again, as demonstrated in Figure 1.7 (Kaplinsky, 2013).

Figure 1.7. The global value chain upgrading wave

Time

High

Depthof value

addedin chain

Low

Building fullproductioncapabilities

Enteringglobal value

chain

Upgrading and deepeningcapabilities in global

valeur chain

Source: Kaplinsky (2013).

Without upgrading and the accumulation of new capabilities, however, GVC integration risks downgrading. The initial decline in the share of domestic value added need not be a problem, as long as the participation in a global value chain allows for high growth rates of the domestic activities and employment.4 However, in the long run local operations risk remaining confined to the low value-added segments of a global value chain if no activities generating more value added are created locally. Worse, downgrading, which describes the loss of value adding activities and employment or the worsening of labour conditions, can occur when previously existing adjacent links disappear before they can integrate into the global value chain. For example, many African countries produce both clothing and cotton but have lost their textile industries to Asian competition. Social downgrading can result from the destruction of employment or reduction of real wages due to GVC integration. It can also result from captive relationships between local value chain actors that lead to lower incomes for primary producers, such as fishermen who receive lower prices from buyers and middle men. In a survey for this report, African Economic Outlook country experts identified the biggest threats associated with global value chains in Africa as “being locked into low value-added stages of GVCs” and “foreign investors operating in isolation with only limited spillovers to the domestic economy” (Figure 1.8).




Figure 1.8. The greatest threats associated with global value chains and resulting new trade patterns

14 %

23 %

30 %

34 %

36 %

45 %

45 %

61 %

0 10 20 30 40 50 60 70%

Loss of regulatory control to multinational enterprises

Erosion of social and environmental standards (race to the bottom) to attract investment

Volatility of trade flows based on changes in strategies of multinational enterprises

Potential marginalisation due to exclusion from GVCs

Depletion and outflow of the country’s natural resources

Exposure to imported crisis due to greater connectivity

Foreign investors operating in isolation – limited spillovers to domestic economy

Being locked into low value-added stages of GVCs

Note: Numbers reflect the percentage of respondents. The survey covered one expert for each country.Source: AEO Country Experts Survey (2014).12 http://dx.doi.org/10.1787/888933033232

The potential for upgrading within a value chain depends on the capabilities and services in place. Increasing participation in most global value chains requires efficient logistics and low barriers to importing intermediate goods, reliable energy provision as well as a sufficient supply of workers with the right skills. Once a country has joined a global value chain at the production stage of a product, moving up the value chain in either direction (towards sourcing and research and development, or towards sales, distribution and marketing) requires a range of services that must be available at competitive prices and quality. This is particularly crucial for local small and medium enterprises which need access to the necessary range of services in order to concentrate on the value chain specific activity they do best.

The potential for upgrading also depends on the chain’s governance, i.e. the distribution of power within the chain. Governance refers to the “authority and power relationships that determine how financial, material and human resources are allocated and flow within a chain” (Gereffi, 1994, p. 97). Governance structures of value chains depend on whether the lead firm in the chain is primarily a buyer (and marketer) of products or a producer. Beyond this basic distinction, governance structures vary by the complexity of the information between actors in the chain; how the information for production can be codified; and the level of supplier competence (see also Chapter 2; Frederick and Gereffi, 2009; Gereffi et al., 2005). More open chains with low complexity such as clothing are easier to integrate into, but upgrading can be difficult as competition between providers at each stage is stiff and most value added is captured by the lead firm which controls distribution and marketing. More complex and information-intensive chains such as pharmaceuticals or automotive manufacturing are more difficult to enter into, but the potential for building relationship and transferring skills between local and international firms is significantly higher. Captive relationships need to be closely monitored as they often bestow highly asymmetric power on intermediary buyers. In Africa, captive governance forms are particularly prevalent in agricultural value chains.

Seizing the opportunities offered by global value chains requires competent and innovative entrepreneurs who are committed to the country. Entrepreneurs combine market knowledge with a vision of new ways of solving problems, either through new products or better processes. As this report shows, many opportunities for upgrading are to be found in product differentiation – making a similar, but slightly better product for a

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consumer base that is similar but has a higher willingness to pay. It takes entrepreneurs to see these opportunities and accept the risks involved with trying to seize them. For entrepreneurs to reap long-term benefits from global value chain participation they must be committed to developing in the local market even in the face of economic difficulties. Following the 2008 financial crisis, the Egyptian apparel industry was capable of sustaining its export levels owing to the fact that the industry was locally embedded. In contrast, the Jordanian apparel exports dropped more than 30% between 2008 and 2010 given its composition of footloose Asian investors (Azmeh, 2013 in Kaplinsky, 2013).

Using global value chains for development requires providing the best environment for value chains with the greatest identified potential. The objective of development policy can no longer be to create an industry that captures all stages of production but should be to identify the country’s best position in a global value chain and the most competitive supply of business functions (Cattaneo and Miroudot, 2013). Education and other basic services, infrastructure and an environment conducive to doing business are without question essential. The importance of a value chain lens, however, lies in appreciating the requirements for integrating into and upgrading within a specific global value chain; beyond the basics the necessary infrastructure, skills and services vary by chain. Dairy products for example require dense and reliable cold chains and collection structures; manufactures, textiles and many fruits necessitate efficient access to sea freight; whereas fresh-cut fruits, vegetables and flowers need efficient air freight.

Measurements show increasing participation in global value chains, with regional variations, due largely to the manufacturing sector

Conventional trade statistics have tended to give an ever more distorted view of world trade, as intermediate goods are counted each time they cross international borders. Measuring trade in value-added terms gets around that problem, but data on trade in value added have only recently started to be compiled. The share of foreign value added in a country’s exports – termed “backward integration” – and the share of a country’s value added in other countries’ exports – known as “forward integration” – are the main measures of a country’s participation in global value chains. Africa’s share of global trade in value added is small but growing. Africa is rather highly integrated into global value chains, albeit more as a source of primary inputs than as a production hub. But backward integration has been growing far faster than forward integration and faster than that of other regions. Southern Africa is the region most integrated into global value chains. Asia and Europe are the main source of foreign value added in African exports and Europe the main destination. Intra-African value added is more prevalent in the more integrated regions of Southern and East Africa. South Africa is the only country in Africa so far that is playing the role of headquarter economy in its region. The manufacturing sector is the most integrated into global value chains and agriculture the least. Financial intermediation and business services have the highest proportion of intra-African value added.

Africa’s participation in global value chains can be measured in terms of trade in value added and of backward and forward integration

Measuring GVC participation requires new approaches, as conventional trade accounting suffers from double counting. By measuring international trade in gross terms, conventional trade statistics often record intermediate inputs more than once along the value chain. Double counting of trade occurs when intermediate inputs cross borders and are then used to produce other goods for export, whether for further processing or final consumption. The simple example in Figure 1.9 illustrates this. In




the example Mali exports cotton at a value of USD 100 to Nigeria, where it is spun and woven into textiles. This adds a value of USD 100. The textiles are exported to Senegal for USD 200. Senegal then produces t-shirts, adding another USD 100 and exports them for USD 300 to the United States. Conventional trade statistics would show transactions worth USD 600 and Senegal’s exports worth USD 300, although only USD 100 of value added was created there, while USD 200 were imported. As trade in intermediate inputs is a large and growing part of cross-border trade flows owing to the increasing geographic fragmentation of production, a significant part of international trade is thus affected, giving a distorted picture of overall trade flows.

Figure 1.9. Traditional vs. value-added trade statistics – understanding double counting

Gross export: USD 300Senegal’s value added: USD 100

Gross export: USD 200Nigeria’s value added: USD 100

Gross export: USD 100Mali’s value added: USD 100


Measuring cross-border trade flows in terms of value added enables separating the domestic and foreign value-added content of exports, thus mitigating or eliminating the problem of double-counting. Measures of trade in value added reflect the value added embodied in a product and the origin of this value added. The foreign value added in a country’s exports refers to the amount of goods and services that a country imports from abroad to produce its own exports. Using the example above, Senegal would show clothing exports of USD 100 in domestic value added and USD 200 in foreign value added. Nigeria’s trade in value added would show exports of USD 100 of domestic value added and USD 100 of foreign value added.

Accounting for trade flows in terms of value added is data intensive. The OECD, World Trade Organization (WTO) and United Nations Conference on Trade and Development (UNCTAD) have recently created databases to compile such data. Value added accounting requires regularly updated national input-output and supply-use tables that are combined with data on trade flows to establish the use of supply in production and the subsequent value added by sector. The OECD-WTO TiVA database provides these data on the basis of the most recent available information for OECD countries and a number of developing countries; however, owing to data constraints, South Africa is the only African country covered in this database. The UNCTAD-Eora GVC database also uses available information but, to produce measures of trade in value added for all countries, interpolates for countries which do not have the necessary data. The UNCTAD-Eora dataset is used here to analyse Africa’s GVC integration. Box 1.2 gives an overview of recent data initiatives.



Box 1.2. Tools measuring international trade in value addedThe way international trade has traditionally been accounted for may no longer be sufficient. A growing body of work aims to net out the double-counting effect of global value chains on global trade, determine value added in trade and map how value added moves between countries along global value chains before the final consumption of end products. But measuring trade in value added is subject to significant methodological challenges and is still in its infancy. The table below summarises the characteristics of the main initiatives to measure trade in value added undertaken by different organisations to date:

Table 1.2. Tools measuring international trade in value addedProject Institution Data sources Countries Industries Years

Joint OECD-WTO Trade in Value Added (TiVA) initiative

OECD, WTO National I-O tables, complemented by BTDIxE, TIS and STAN industry databases

57 18 1995, 2000, 2005, 2008, 2009

UNCTAD-Eora GVC database

UNCTAD, Eora National Supply Use and I-O tables, and I-O tables from Eurostat, IDE JETRO and OECD

187 25-500 depending on the country

1990-2010

Asian International I-O Tables

Institute of Developing Economies (IDE-Jetro)

National accounts and firm surveys

10 76 1975, 1980, 1985, 1990, 1995, 2000, 2006

Global Trade Analysis Project (GTAP)

Purdue University Contribution from individual researchers and organisations

129 57 2004, 2007

World Input-Output Database (WIOD)

Consortium of 11 institutions, EU funded

National Supply Use tables

40 35 1996, 2009

Note: (I-O) input-output.Source: Authors’ elaboration.

These initiatives differ in terms of data sources, countries and years, as well as in their industry coverage and methodology. The joint OECD-WTO TiVA database is recognised as the most comprehensive effort to set a common standard for estimating value added in trade by emphasising methodology and statistical rigour but sacrificing coverage. In contrast, the primary objective of the UNCTAD-Eora Database is extended coverage in order to provide a developing-country perspective. To obtain this extended coverage, the UNCTAD-Eora database includes a degree of interpolation and estimation in some places to provide a contiguous, continuous dataset for the period 1990-2011. Given its focus on Africa, which is relatively absent from the OECD/WTO TiVA database owing to data limitations, this report makes primary use of the UNCTAD-Eora database.

The UNCTAD-Eora database uses input-output (I-O) tables to estimate the import-content ratio in exportable products and value-added trade. The value-added trade data are derived from the Eora global multi-region I-O (MRIO) table, which brings together a variety of primary data sources, including i) national I-O tables and main aggregates data from national statistical offices; ii) I-O compendia from Eurostat, the Institute of Developing Economies – Japan External Trade Organization (IDE-JETRO) and the OECD; iii) national account data (the UN National Accounts Main Aggregates Database; and the UN National Accounts Official Data); and trade data (the UN Comtrade international trade database and the UN Service Trade international trade database).




A macro view of trade in value added provides insight into a country’s level of integration into global value chains; backward and forward integration offer this macro view. Integrating into a global value chain means becoming part of an international production network in which intermediate inputs are sourced in many different locations and assembled in yet another country. Backward integration is the share of foreign value added in a country’s exports. It looks back from the perspective of a country’s exports across foreign inputs into local production (De Backer and Miroudot, 2013; López González and Holmes, 2011; OECD, 2013).

Forward integration is the share of a country’s value-added exports that are embedded in the exports of other countries. It looks forward from the country’s perspective at the flow of its exports around the world, specifically those other countries use to produce their own exports (De Backer and Miroudot, 2013; López González and Holmes, 2011; OECD, 2013). Returning to the example above, Mali’s exports of cotton and Nigeria’s exported value added embedded in its textile are both later embedded in Senegal’s exports of t-shirts and as such constitute part of Mali’s and Nigeria’s forward integration into global value chains. See Figure 1.10 for an illustration of backward and forward integration.

Figure 1.10. Illustration of backward and forward integration

Backward integration Forward integration


Combining backward and forward integration gives a measure of a country’s total GVC participation. Both concepts are expressed as a percentage of a country’s gross exports. Although GVC participation is roughly similar across African countries, large economies show lower values as they rely less on international trade production, whereas small open economies are more integrated in global production networks. Small open economies such as Lesotho or Mauritius source more inputs from abroad and produce more inputs used in global value chains than larger economies such as Nigeria or South Africa, where a larger share of the value chain is domestic. Nevertheless, total GVC participation is less related to country size than backward integration (foreign value-added content of exports), as it also looks forward at the use of inputs in third economies (OECD, 2013).

Income seems to follow a wave, leading from forward to backward to forward integration. Countries with low levels of development, here measured by gross domestic product (GDP) per capita, mainly export primary inputs into production processes such as agricultural base products, ores and base metals. To the extent which these products are embedded in the exports of the first importer, they account for a country’s forward



integration into global value chains. As a primary country develops and successfully integrates into global value chains at the production stage, it imports more intermediate products. Since these intermediate products are embedded in the country’s exports, they account for its backward integration into global value chains. As a country climbs further in the value chain through upgrading and establishing headquarter functions, it exports more intermediate goods with high value added, such as machine or electronics components that are assembled into final products in other countries (López González and Holmes, 2011; Baldwin and López González, 2013). Figure 1.11 shows this pattern.

Figure 1.11. The global value chain participation wave, 2011

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1.00

0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 45 000 50 000

y = 2E-14x3- 1E-09x2 + 2E-05x + 0.4238R2= 0.18759

GVC participation (backward and forward integration as a share of gross exports)

GDP per capita (constant 2005 USD)Note: Each point represents one country.Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014) and World Bank (2014).12 http://dx.doi.org/10.1787/888933033251

Africa’s participation in global value chains is growing, particularly in primary goods and in backward integration

Africa captures a small but growing share of GVC trade. Africa’s share in global trade in value added grew from 1.4% in 1995 to 2.2% in 2011. This represents an increase of almost 60%, whereas the established GVC regions in America, Asia and Europe saw a relative decline in their shares. Africa’s growth was also higher than that of Latin America and the Middle East, which play small roles in global value chains similar to Africa, but lower than South Asia‘s (Table 1.1).

Despite its low share of global GVC trade Africa’s total level of GVC integration is high compared to other regions, but more so for forward than backward integration. Figure 1.12 shows Africa in third place for overall participation in global value chains with about half of its gross exports either consisting of foreign value added or being used to create intermediate goods elsewhere that will be exported onwards. Only Europe and Southeast Asia, two dense and highly interlinked regions, are significantly more integrated into global value chains. In both regions, embedding foreign value added in a country’s own exports plays a more important role than exporting intermediates. However, only Russia and Central Asia, the Middle East and South Asia have lower values of backward integration than Africa.5 Africa’s low and so far constant share of 2% of global imports of intermediates equally points to its still marginal role in global assembly (Figure 1.5).


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Figure 1.12. Integration of world regions into global value chains, 2011

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Forward integration Backward integration

Share of total value added exports

Euro

pe

Southe

ast A

sia

Africa

North

America

East A

sia

Russia

and

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sia

Middle

East

Latin A

merica

South

Asia

Ocean

ia

Note: Backward integration is measured by the share of foreign value added embedded in a country’s exports. Forward integration is measured by the share of a country’s exported value added that is further exported by the importing country.Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014). 12 http://dx.doi.org/10.1787/888933033270

However, this seems to be changing as Africa’s backward integration has been growing faster than its forward integration and faster than that of other regions. Africa’s GVC integration increased by 80% between 1995 and 2011.6 Almost three-quarters of this growth was driven by backward integration. The growth of Africa’s GVC integration looks particularly impressive compared to that of Latin America or the Middle East which both saw their integration grow by no more than 25% over the same period (Figure 1.13). Only India has shown a higher growth rate among the country groupings examined here.

Figure 1.13. Growth of global value chain integration, 1995-2011

-0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2

Backward integration Forward integration

Russia and Central Asia

Southeast Asia

Latin America

Middle East

Europe

Oceania

North America

South Asia w/o India

East Asia w/o China

Africa

China

India

Growth 1995-2011Note: Backward integration is measured by the share of foreign value added embedded in a country’s exports. Forward integration is measured by the share of a country’s exported value added that is further exported by the importing country.Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014).12 http://dx.doi.org/10.1787/888933033289

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Volumes, sources and destinations of value chain trade vary across Africa’s regions and countries

Southern Africa is the leading region in Africa in terms of GVC participation; North and West Africa follow but are strongly driven by forward integration. With just above USD 100 billion in 2011, Southern Africa accounts for about 40% of Africa’s GVC participation, one-third of which is backward integration. North Africa accounts for 35%, but only a quarter stems from backward participation. West Africa accounts for 15% and has a profile similar to North Africa, with the use of foreign inputs in exports only making up a quarter of total participation. East Africa and the island states in the Indian Ocean together account for 6% of Africa’s GVC participation and have the most balanced profile with half forward integration and half backward (see Figure 1.14).

Figure 1.14. Integration of African regions into global value chains, 2011

0

20

40

60

80

100

120

Forward integration Backward integration

Value added exports (USD billion)

Southern Africa North Africa West Africa East Africa Central Africa Indian Ocean

Note: Backward integration is measured by the share of foreign value added embedded in a country’s exports. Forward integration is measured by the share of a country’s exported value added that is further exported by the importing country.Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014).12 http://dx.doi.org/10.1787/888933033308

In terms of backward integration, Europe and Asia are the main sources of foreign value added embedded in African exports. Intra-African value chains play a role in the more integrated regions of East and Southern Africa. Europe accounts for 40% of foreign intermediates embedded in African exports, Asia for 30%. For North, West and Southern Africa, Europe is the main source of intermediates, whereas Asia is the leader in East Africa and the Indian Ocean island states as well as in Central Africa. Backward participation between African countries is highest in East Africa, where it reaches 25%, followed by Southern and Central Africa, where intra-African GVC participation remains at about 15%. In North and West Africa, African products account for less than 10% of foreign value added embedded in exports (see Figure 1.15).


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Figure 1.15. Sources of foreign value added in African exports

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60

70

80

90

100

Latin America Middle East Asia North America Europe Africa

Central Africa East Africa Indian Ocean North Africa Southern Africa West Africa

Share of foreign embedded in African exports (%)

Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014).12 http://dx.doi.org/10.1787/888933033327

Indications are that South Africa is playing the role of a headquarter economy in its region, following the pattern observed in Asia, Europe and North America. Overall, South African use of intermediates from other economies in the region increased nine-fold between 1995 and 2011 (from USD 78 million to USD 686 million). In turn, South African intermediates embedded in the exports of other economies in the region increased five-fold in the same period (from USD 675 million to USD 3 487 million). Table 1.3 shows the share of intermediates sourced from regional trade partners for each country in Southern Africa in 2011. Botswana, Namibia, Swaziland, Zambia and Zimbabwe all source more than 10% of intermediates from South Africa.

Table 1.3. Backward integration matrix for Southern African economies, 2011 AGO BWA LSO MOZ MWI NAM SWZ ZAF ZMB ZWE

AGO 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

BWA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

LSO 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

MOZ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

MWI 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

NAM 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

SWZ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

ZAF 0.01 0.12 0.00 0.03 0.02 0.12 0.26 0.10 0.13

ZMB 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.01 0.00

ZWE 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Note: Rows represent exported value added. Columns represent imported value added that is then embedded in exports. Zeros indicate values of less than 0.01% of exports.Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014).

In terms of forward integration, Europe remains the main destination of African intermediates that are bound for global value chains. Africa plays a much smaller role as a destination than as a source. Asia is also less prevalent as a destination for African value added than as a source.

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Figure 1.16. Destinations of African intermediates for further exportation

0%

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50%

60%

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100%

Latin America Middle East Asia North America Europe Africa

Share of exported value added embedded in destination countries' exports

Central Africa East Africa Indian Ocean North Africa Southern Africa West Africa


The African average participation in global and regional African value chains masks a great deal of variety between countries. Five African countries — Lesotho, the Seychelles, Swaziland, Tanzania and Zimbabwe — are among the world’s top 30 countries in terms of GVC participation; 13 countries, predominantly located in Western and Central Africa, are among the bottom 30 globally.7 Six of the ten most integrated countries are located in Southern Africa. Figures 1.17 and 1.18 show the levels of backward and forward integration of African countries in 1995 and 2011: most countries increased both. Notable exceptions are Egypt and Mozambique whose exports contained relatively less foreign value added in 2011 than in 1995. Their forward participation, on the other hand, increased, indicating a move towards more resource exports.

Figure 1.17. Backward integration of African countries into global value chains, 1995 and 2011

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1995 backward integration 2011 backward integration

Africa

COGBDI

RWATC

DCAF

CODTZA

UGADJI

KENETHER

ISOM

SYCM

USM

DGTUN

MAR

DZAEG

YLBY

SDSSUD

ZWELSO

SWZAGO

NAMBW

AZM

BZAF

MOZ

MW

IM

RTTG

OSLE

GHABFA

CPVNERNGA

STPGIN

LBRSENGAB

MLI

BENCM

RGM

BCIV

Share of foreign value added in exports

Note: Backward integration is measured by the share of foreign value added embedded in a country’s exports.Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014).12 http://dx.doi.org/10.1787/888933033365


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Figure 1.18. Forward integration of African countries into global value chains, 1995 and 2011

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1995 forward integration 2011 forward integration

Africa

CODCOG

RWACAF

BDITC

DTZA

KEN ERIETH

UGASOM DJI

SYCM

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USDZA

LBYM

ARTUN

EGYSUD

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EGIN

GHAGAB

NGANERLBR

CMRM

RTCIV

SENTGOBFA

SLECPV

MLIGM

BBENSTP

Share of domestic value added embedded in other countries' exports

Note: Forward integration is measured by the share of a country’s exported value added that is further exported by the importing country.Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014).12 http://dx.doi.org/10.1787/888933033384

The manufacturing sector leads Africa’s integration into global value chains, ahead of business services and agriculture

Manufacturing shows the highest level of global and regional value chain participation, agriculture the lowest. Vehicle manufacturing leads in terms of foreign value added embedded in exports, reflecting the structure of Africa’s automotive operations as assembly hubs in the production networks of the large international car companies. This is the case mainly for Egypt, Morocco and South Africa. Other medium to high tech manufacturing in Africa follows a similar structure, given the high content of foreign value added embedded in the exports of electrical machinery and metal products. Although its share has been declining, mining and quarrying remains the sector with the greatest foreign value added in African exports in absolute terms, followed by petroleum, chemical and non-metallic mineral products. In 2011, these two sectors accounted for about a third of all foreign value added in African exports, down from about 43% in 1996 (Figures 1.19 and 1.20).

Among services, finance and business have the highest GVC participation rates and the highest share of African value chains. Africa’s high value added service sectors seem well integrated into global networks. Especially in finance, regional African value chains are of particular importance and the sector shows a much higher share of value added from other African countries in a country’s exports than any other sector, attesting to the strength of regional banking groups (Figure 1.20). Less sophisticated and more traditional service sectors such as the hospitality sector and trade show much lower rates of foreign value added in exports.

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Figure 1.19. Africa’s integration into global value chains by sector, 2011

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admini

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and h

ealth

Share of total value added exports USD millions

Note: Backward integration is measured by the share of foreign value added embedded in a country’s exports. Forward integration is measured by the share of a country’s exported value added that is further exported by the importing country.Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014).12 http://dx.doi.org/10.1787/888933033403

Figure 1.20. Regional value chain integration by sector, 2011

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Foreign African value added in exports (right axis) Share of foreign African value added in total exported value added (left axis)

Share of foreign African value added in African exports (2011) Amount of foreign African value added in African exports ('000 USD; 2011)

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Export and productivity growth has been easier to achieve than employment growth

Participating in global value chains is an important first step that must be turned into economic gains and social gains. This section proposes measures for those gains and analyses their relationship to GVC integration in Africa. It looks specifically at productivity, domestic value added in exports, employment and other social benefits.

Domestic export content and productivity have grown alongside global value chain participation in most African countries

Growth rates of domestic value added embedded in exports and productivity serve to measure economic upgrading. While GVC participation can be measured at any point in time, any measure of upgrading, which is a dynamic process, must consist of growth rates. The growth in domestic value added embedded in a country’s exports scaled by GDP is used as a specific measure of GVC upgrading. Growth rates of productivity at the national and firm levels are used as a standard indicator for economic development.

Most African countries experienced growth in domestic value added embedded in exports alongside growth in GVC participation from 1995 to 2011. Figure 1.21 shows the relationship between changes in GVC participation and domestic value added embedded in exports as a share of GDP. GVC performance can be plotted in four quadrants. Most African countries fall in the upper right-hand quadrant, i.e. they have increased their participation and the economic gains from this participation. The countries in the lower right hand quadrant are largely petroleum exporters that have seen some change in their participation but have not been able to increase GVC-related domestic value added as part of their GDP which is heavily determined by the price of oil. The correlation between GVC participation and growing domestic value added in exports was stronger in the 2000s than in the 1990s,8 suggesting that global value chains are becoming more important in world trade.

Figure 1.21. Linking global value chain participation to growth in domestic value added in exports as a share of GDP, 1995/97 compared to 2009/11

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Note: Domestic value added embedded in exports as a share of GDP is used here to measure how much a country has benefitted from GVC participation. Backward integration is measured by the share of foreign value added embedded in a country’s exports. Three-year averages are used for the base and comparison periods to account for year-to-year volatility.Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014).12 http://dx.doi.org/10.1787/888933033441

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Beyond the share of domestic value added in exports, however, backward and forward integration have opposite effects, reflecting widespread dependence on natural resources. Backward integration (the share of foreign value added in a country’s exports) links strongly with a number of measures of structural transformation as the following paragraphs will show. Forward integration (the share of a country’s exports that is transformed into further exports by the importer), on the other hand, shows negative links with measures of structural change and diversification, reflecting the negative impact of dependency on natural resources9 (see also AfDB et al., 2013; Rieländer and Traore, forthcoming). Going forward the analysis presented will therefore concentrate on backward integration.

African countries with a higher share of foreign value added in exports on average experienced higher productivity growth and positive structural change. In addition to the basic link with growing domestic value added in exports, GVC participation has also been linked to productivity growth in African countries. Following the methodology laid out in last year’s report (AfDB et al., 2013), Figure 1.22 depicts compound annual productivity growth for the countries for which these data were available, compared to the share of foreign value added embedded in their exports. This suggests that a larger share of foreign value added in exports on average comes with higher annual productivity growth. The relationship with the structural change term, i.e. the share of productivity growth driven by movement of labour from the less to the more productive sectors of an economy, also seems to be linked to the foreign share of value added in exports.10

Figure 1.22. Compound annual productivity change (range of different years per country during the 2000s) and foreign value added in exports in 2011 in Africa

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Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014), productivity data from McMillan and Rodrik (2011) and AfDB et al. (2013).12 http://dx.doi.org/10.1787/888933033460

The share of foreign value added in exports is also strongly positively related to diversifying and discovering new export items. Diversification is strongly correlated with GDP per capita levels (Imbs and Wacziarg, 2003; Klinger and Lederman, 2006; Cadot et al., 2012) and a key driver of structural transformation (AfDB et al., 2013; Rieländer and Traore, forthcoming). Measures of export diversification and discoveries of new products are strongly correlated to a country’s measures of GVC participation.

Analysis suggests that the gains made at national level do not follow a clear pattern at the sector level. Although the relationship between GVC participation and growth


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of domestic value added is overall positive at the national level, this is not reflected in sector level results. Most countries show no clear link between the expansion of a sector’s GVC integration, measured by the share of foreign value added in the sector’s exports, and growth in the domestic value added generated by the sector; this is the case particularly in manufacturing, but also in services. In agriculture the relationship between the change in backward integration and the change in domestic value added seems to be negative (Figure 1.23). This pattern suggests that African countries do benefit from global value chains at large, but that the opportunities for upgrading and growth differ by country and value chain.

Figure 1.23. Growth in backward integration into global value chains and domestic value added in exports by sector, 2000/02 compared to 2009/11

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Even in countries that show success with GVCs, linkages between firms and sectors that are integrated into global value chains and the rest of the economy are not straightforward. Tunisia, one of the best performers in Figure 1.21, is a good example. It has thriving export sectors in textiles and apparel, electrical machinery, business services and tourism that are well connected to European production networks and markets. However, owing to strict regulations separating the offshore and onshore sectors, most of these activities operate in isolation from the broader local economy, limiting the potential for further upgrading and employment creation (Box 1.3 and Tunisia Country Note in this report). Cabo Verde has been able to boost its integration into global tourism value chains, increasing this sector’s share of GDP to 20%. However, few linkages exist between the resort-style hotels and the local economy because of an unfavourable geography and the isolated operation of the hotel complexes (Cabo Verde Country Note).

Box 1.3. Tunisia: Successful but limited by insufficient links between participators in global value chains and the rest of the economy

Benefitting from its geographic and cultural proximity to Europe, Tunisia has progressively strengthened its relations with the EU, its main industrial partner and main client. The association accord signed in 1995 established, over time, a free-exchange zone between the two sides, which took effect on 1 January 2008 for industrial products. The start of the national programme for upgrading industry at the end of the 1990s allowed Tunisian industries to become more competitive for better integration into global value chains. In this context, major international donors set up branches in the country and/or developed subcontracting agreements, leading to greater Tunisian participation in the world economy. In 2013, there were 2 614 wholly exporting enterprises, the source of 323 262 jobs. Two sectors are particularly significant in this regard:11 textile and clothing since the 1970s and, more recently, the electrical, engineering and electronics industries. If textiles are declining somewhat as a result of international competition, notably from Asia, the electrical, engineering and electronics sector has seen major evolution over the last 15 years, with the development of automotive and aeronautics component activities. The sector’s exports increased by an average of 18% per year from 2000 to 2012. Since the early 2000s, the development of information and communication technologies has allowed the rise of new service activities and greater integration of Tunisia into GVCs. Call centres have developed, as have other forms of outsourcing to a lesser degree (outsourcing of accounting services, for example).

This progressive integration into GVCs has fostered growth in Tunisia, contributing to the creation of many jobs and exports. In 2012, the textile sector accounted for 22% of exports, and the electrical, engineering and electronics sector more than 36%. However this development model is running out of steam and its impact on the Tunisian economy appears limited today. The jobs created involve activities with little value added and therefore with unskilled personnel. And the location of the majority of exporting enterprises near logistical export zones (ports and airports) has accentuated regional disparities.

The low management-staff ratio has not been beneficial to technology transfers and the rise of value chains, limiting the development of these activities. Imported inputs constitute a significant portion of Tunisian exports, although this varies according to the products involved, and the exports mainly consist of intermediary products. According to a study by the AfDB (2012), the level of sophistication of Tunisian exports has been declining for several years.12 Finally the constraints of the 1972 law on companies that export their entire production strongly limited their impact on the rest of the economy, the local market being barely considered as a client or potential supplier.

Source: Tunisia Country Note in this report.




Social benefits have been more elusive and dependent on economic benefits

Employment, including vulnerable employment, and wages can denote social upgrading at the macro level. Case studies (Goger et al., 2014) can shed light on the specific effects of value chain governance on the outcomes of social upgrading and elements such as working conditions, workers’ rights and discrimination.

It has been difficult for African countries to increase employment through participation in global value chains alone; gains in domestic value added in exports are necessary. Unfortunately, comprehensive employment data on the impact of global value chains on employment only exist for a few African countries. Those countries show13 no relationship between employment gains and GVC participation. However, a positive relationship emerges between employment and gains in domestic value added in exports. Countries which increased the domestic value added embedded in their exports as a percentage of GDP also successfully increased the domestic employment linked to global value chains. The same relationship holds at the global level. In other words, employment has increased only in countries where GVC participation has significantly raised domestic value added for exports (see Figure 1.24).

Figure 1.24. Economic and social upgrading in Africa and the world, 1995/97 compared to 2009/11

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Note: Grey markers represent non-African countries.Source: Authors’ calculations based on UNCTAD-EORA GVC database (2014).12 http://dx.doi.org/10.1787/888933033498

Despite the weak link with employment, backward integration into global value chains is linked with other measures of social progress. Countries with a higher share of foreign value added in exports suffer less from inequality (Gini coefficient) and have a higher share of women in the labour force (see Box 1.4).

However, case studies suggest that social gains from GVC participation have been limited in Africa by several important factors, such as gender imbalances, skills deficits, increasing informal employment and unequal power relationships within value chains. In fruit, flower and vegetable value chains for example, the fact that most of the workforce is composed of women14 places additional barriers to social improvements. In general women face tougher barriers to social upgrading than men owing to lower comparative wages, a higher propensity for casual work, sexual harassment, less access to training and education, and stereotypes of patriarchy (see also Box 1.4). Additionally, increasing informal employment is problematic because informal workers have much less access to decent work, secure employment, and social protections than formal workers. The fact that the African workforce is largely unskilled and lack access to training programmes further prohibits social gains.

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Box 1.4. Tackling gender inequalities in women’s labour force participation to boost productivity and quality of global value chains

Global value chains reflect gender inequalities and discriminatory social norms. While women’s presence is critical at different stages of global value chains, their opportunities for economic empowerment are limited owing to a gendered division of labour and the low economic value attributed to their contributions (Barrientos, 2013). Women are often relegated to low-skill and low-wage employment, as informal or seasonal workers or as unpaid domestic workers (World Bank, 2013). Women producers dominate in export-oriented agricultural global value chains. Women represent 90% of producers in Senegal’s fruit and vegetable industry and 75% in Kenya’s banana industry (FAO, 2011), but they represent a minority in the management, distribution and marketing sections of the chain. Discrimination against women’s access and control of land and economic assets also limits female agricultural producers’ access to tools, technology or credit (Coles and Mitchell, 2011). Gender gaps in education, literacy and skills explain the higher concentration of women in the lower-value segments of the chain; social norms and perceptions also influence the gender-segregation of tasks and the low value attributed to them (Coles and Mitchell, 2011).

Women face a dual challenge of upgrading within a chain and alongside a chain. First, the unequal division of care and domestic responsibilities reduces women’s opportunities to undertake skills training or join business networks, key to upward mobility within a chain. Second, women’s lack of access to decent work and relegation to lower-skill jobs make them vulnerable when a GVC upgrading increases demand for high-skilled labour (Barrientos et al., 2004). While companies may benefit from short-term competitive gains from women’s vulnerable employment, incentives to better value their contribution and to invest in their skills can support long-term upgrading objectives and maximise the use of existing human capital.

Gender equality can increase GVC sustainability and productivity. In the cocoa-chocolate industry in Ghana, women are responsible for the fermentation and drying of pods that, while undervalued, are critical for increasing quality and quantity, as well as the sustainability of production (Barrientos, 2013). Companies in the horticultural and agricultural industries also prefer to employ women for tasks that require both greater dexterity and high productivity (Barrientos et al., 2003). This feminisation of employment has consistently raised women’s labour force participation in most countries, as women are being drawn in large numbers into flexible employment. Though women remain locked into their role as seasonal labourers, they form the core of a semi-permanent skilled labour force, which is central to the smooth functioning of value chains at both the production and retailing ends (Barrientos, 2001).

Upgrading women’s roles in value chains can be an important long-term sustainability strategy. Interventions in the Ghanaian shea butter sector effectively increased women’s control of resources, skills and presence in decision-making sections of the chain, demonstrating the mutual benefits for women’s economic empowerment and the quality and productivity of a global value chain (Laven and Verhart, 2011). The Cafe Femino, a successful female coffee brand, benefits from consumer interest to buy a product which was produced, processed and sold only by women in the context of “fair trade” (FAO, 2011).

Promoting decent work for women can improve countries’ participation in global value chains. Increasing the number of women in the labour force may be a way to upgrade a country’s integration (Figure 1.25). This positive relationship holds stronger for developing countries other than African countries, however the two groups only marginally differ. The OECD Social Institutions and Gender Index 2012 (SIGI) shows that




Box 1.4. Tackling gender inequalities in women’s labour force participation to boost productivity and quality of global value chains

gender discrimination in social institutions is highly correlated with vulnerable female employment. Less discriminating social institutions often increase women’s economic contribution through both a higher female share in the labour force and decent work. Changing discriminatory laws and practices that restrict women’s choices and behaviour can strengthen GVC integration.

Everyone shares the responsibility of ensuring that women have access to decent work conditions. Countries and companies can provide childcare facilities, invest in training for women, and increase women’s control over key economic resources and assets. Consumers and civil society can also play a role, for example by including gender-sensitive indicators in commercial codes of conduct.

Figure 1.25. Estimated integration into global value chains related to women’s share of the labour force, 1995-2011

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Note: This chart shows the relationship between the women’s share of the labour force and the estimated values of integration into global value chains (foreign share of value added), controlling for GDP per capita, country and year fixed-effects (on a five-year basis: 1995, 2000, 2005, 2010). The black regression line and the black scatter plot describe the relationship for African countries, while the green regression and green scatter plot present those for other developing countries. Source: Authors’ calculations based on UNCTAD-Eora data and World Bank Indicators.12 http://dx.doi.org/10.1787/888933033517

(cont.)

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Notes

1. Bathia (2012), for example, describes General Electric’s global network of innovation centres that pass their work onto their colleagues in the next time zone at the end of their workday and receive it back the next morning from another team with progress made in the meantime.

2. Without the first, there is little that drives the economy forward. Without the second, productivity gains are not diffused to the rest of the economy (McMillan and Rodrik, 2011).

3. Africa’s labour productivity increased by close to 3% during the 2000s, with almost half of this attributable to workers moving to new activities with higher productivity (AfDB et al., 2013).

4. In such a case even a lower share of domestic value added in a value chain captured locally represents overall growth in the amount of value added and employment generated locally.

5. The likely reason for the low value of South Asia is India’s dominant position in the region. Its huge size has a strong downward pull on trade-based GVC integration. Moreover, India’s participation in GVCs is mainly in the form of services, which are notoriously difficult to track with trade data.

6. Inter-temporal comparisons of African GVC participation based on UNCTAD-Eora data should be taken as indicative. Data availability has been improving leading to more data being available for the 2011 estimates than for the 1995 estimates, which might be driving some of the growth in the results.

7. The 13 countries among the bottom 30 are Benin, Cameroon, the Central African Republic, the Democratic Republic of the Congo, Côte d’Ivoire, Gabon, Gambia, Egypt, Libya, Mali, Somalia, South Sudan and Sudan.

8. These results hold when controlling for GDP, geography, country effects and time period.

9. It is important to note dependence on natural resources, not natural resource wealth, shows a strong negative correlation with measures of structural transformation.

10. The R² of this correlation is 0.095.

11. The industrial network counts 5 669 enterprises with a staff of ten employees or more. Enterprises are represented as follows: agro-food 18.5%, construction materials 8%, chemical industry 9.7%, electrical, engineering and electronics industries (IME) 17.6%, textile and clothing 32%, other sectors 14.2%.

12. AfDB (2012), Comparative Study on Export Policies: Egypt, Morocco, Tunisia and South Korea, African Development Bank.

13. The UNCTAD-Eora database links existing employment data with value added flows to translate foreign and domestic value added into the foreign and domestic employment that went into producing a country’s exports.

14. Women make up as much as 73% of the workforce of the floriculture sector in Uganda (Evers et al. 2014) and as much as 90% of the workforce in the French bean and 60% in the cherry tomato sectors in Senegal (Maertens and Swinnen 2009).




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www.nber.org/papers/w17143.pdf

http://dx.doi.org/10.1787/9789264189560-en

http://www.pwc.com/ceosurvey

https://wits.worldbank.org

http://worldmrio.com

http://worldmrio.com



Integrating into global value chains and upgrading within them

depends on country-specific and value chain-specific factors.

Taking this into account, this chapter examines value chains in

agriculture, manufacturing and services in Africa. Lead firms play

an important role in increasing domestic capacity to participate in

global value chains, while regional and emerging markets may be

more accessible for African producers and create opportunities for

more value added.

Chapter 2

How ready is Africa for global value chains: A sector perspective


2. How ready is Africa for global value chains: A sector perspective


In brief

The main drivers of participating and upgrading in global value chains (GVCs) are country-specific and value chain-specific. An examination of country-specific factors shows that Africa has attractive endowments but that domestic productive capacity and infrastructure are holding it back. Regarding value chain factors, the distribution of power between lead firms and suppliers as well as lead firms’ commitment to developing local linkages are determinants of success. This chapter looks closely at the factors affecting GVC participation and upgrading in the agricultural, manufacturing and services sectors. Across all sectors, although most value added currently occurs outside of Africa, GVC participation offers employment and learning opportunities, and there is great scope to increase value added within Africa. Key factors for upgrading include meeting standard requirements, promoting local entrepreneurship and enhancing domestic technical capacity. Additional opportunities can result from targeting regional value chains and emerging markets.

Africa has attractive endowments but domestic productive capacity and infrastructure are holding it back

Africans see their attractive endowments and openness as strengths for making more of global value chains, but they consider the capacity to respond to external demand, infrastructure and the business environment as obstacles. The AEO country expert survey asked respondents to identify their country’s main strength and obstacles for participating in global value chains. Attractive endowments,1 such as deposits of natural resources and low labour costs, were identified as the most important strength of African countries, accounting for 38% of all identified strengths, but only 18% of identified obstacles. Openness2 to imports, exports and investment, including the efficiency of customs procedures and regional integration, accounted for 18% of identified strengths and only 7% of obstacles. Certain elements of infrastructure and the business environment3 were considered a relative strength for GVC participation in some countries and accounted for as many positive responses as attractive endowments (38%); however, they also made up the majority of identified obstacles with 63% of all negative responses. Finally, the domestic capacity to respond to external demand,4

which combines the elements that are crucial for upgrading such as a skilled workforce, the existence of local suppliers and local capacity to meet international standards, was widely regarded as a weakness, but also as less important. It accounted for 6% of voted strengths and 12% of obstacles. In other words, although capacity to upgrade seems low in most African countries, barriers to integration in the form of infrastructure and the business environment are considered more pressing in most countries (see Figure 2.1).

Investor surveys, interviews and case studies confirm that many African countries have the endowments to attract investors. Investor motivation surveys (James, 2013) in Africa show that most foreign firms that invested would have done so without the provision of tax incentives and subsidies. They invested because of what the country had to offer, such as natural resources, human capital at a competitive price and domestic and regional markets with potential. Interviews with international lead firms conducted for this report corroborate this impression. In Ethiopia, for example, the quality and price of the available workforce have been the main reasons for foreign investments in textile operations. Large food and consumer goods companies are often attracted by the consumption potential of the local market.



Figure 2.1. Drivers of global value chain participation and upgrading: Perceptions of strengths and obstacles

%0 10 20 30 40 50 60 70

12 %

63 %

7 %

18 %

6 %

38 %

18 %

38 %

Domestic capacity to respond to external demand

Infrastructure and business environment

Openness

Attractive endowments(e.g. natural resources and low-cost labour)

Strength Obstacle

Note: The percentages represent the share of total responses received for strengths and obstacles respectively.Source: AEO Country Experts Survey (2014).12 http://dx.doi.org/10.1787/888933033536

Yet domestic capacity in the form of skills and productive capacity to upgrade and meet demanding standards is scarce. Operations often remain limited to assembly of imported products as many African countries do not yet have the productive and innovation capacity and the connectivity to markets required to become major hubs for component manufacturing and global distribution (South Africa and Morocco are exceptions as they partially play these roles in the automotive industry). Case studies carried out in the framework of the Capturing the Gains project identify the lack of skills and workforce development as a major hurdle for economic and social upgrading. International lead firms and observers also cite the difficulty of standards compliance among local firms as a constraint. This includes standards for product quality and safety, and at times also cost. Standards and the limited capacity of local firms were identified as the top reasons for the low level of inclusion of domestic suppliers in the extractive industries in Africa in the last edition of this report (AfDB et al., 2013) and came third (after infrastructure and finance) in the OECD/WTO survey on aid for trade measures (OECD and WTO, 2013).

A sufficiently large base of local entrepreneurs is a key component of a country’s domestic capacity to build on global value chains, but it is sorely lacking in many African countries. Local entrepreneurs are more committed to the local market even in the face of economic difficulties. Goger et al. (2014) showed that while East Asian investors in some African countries tend to establish assembly-only operations and make limited investments in workforce training, domestically owned firms (as well as European) would engage in more complex activities and invest more in upgrading workforce skills. These firms were also more likely to be locally embedded (Staritz and Morris, 2013). The success of Mauritius’ garment industry is mainly attributed to the strong local entrepreneurial capacity that counterbalanced the withdrawal of Asian investors after the expiration of the Multi Fibre Agreement. However, entrepreneurs and entrepreneurial skills are lacking in many African countries. Enterprise maps for four African countries (Sutton and Kellow, 2010; Sutton and Kpentey, 2012; Sutton and Olomi, 2012) show that only 51 of 200 leading firms started as domestic privately owned firms (Gelb et al., 2014). The average management scores for firms in Ethiopia, Ghana,


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Kenya, Tanzania and Zambia fall substantially below the average score for firms in other developing countries (World Management Survey, 2014; Bloom and Baker, 2014).

Surveys, case studies and regression analysis confirm the importance of and challenges with infrastructure and the business environment. African countries must compete with each other and many other developing countries for investments and opportunities to join most global value chains. Even in the extractive sector, contrary to common perception, international investments do not come automatically but require the right conditions to make risky investments in exploration (AfDB et al., 2013). Surveys among firms and governments (OECD and WTO, 2013), case studies, and regression analysis with the UNCTAD-Eora GVC data used so far in this report confirm the crucial importance of good infrastructure (transport and utilities), logistics capabilities, a stable political and macroeconomic framework, and the ease of doing business for integrating into global value chains. Local firms in particular need better access to finance to make the necessary investments in quality to link with lead firms. Access to credit is also important for small firms to finance the mismatches in payment schedules with big firms.

Unfortunately, the business environment in many African countries is poor, and indirect costs are high. Combining rankings for gross domestic product (GDP) and business climates (measured by the Doing Business composite index), only eight African countries make it into the top 100 of 173 countries. Of the bottom 50, 38 are African; the rest are mostly microstates or countries with problematic governance conditions and special circumstances such as Afghanistan (Gelb et al., 2014). Indirect costs – electricity, transport, communications, security, rent, business services and bribes – form a larger share of the costs of firms in African countries than elsewhere (Gelb et al., 2007).

Most of Africa is far away from major end markets, and transport and logistics are particularly expensive in Africa, making GVC integration difficult. Most global value chains depend on sea freight for transporting intermediate inputs to assembly centres and final goods to markets. African countries, except for those in North Africa, face disadvantages due to the high cost and the time required to reach major end markets in Europe and the United States; they also suffer from inefficient transportation and logistics infrastructures (Pickles, 2013). For example, the cost to export a 20-foot container is USD 2 055 in Kenya, USD 1 680 in Lesotho and USD 1 531 in South Africa, while it is only USD 737 in Mauritius, USD 577 in Morocco, and USD 500 in China (Pickles, 2013; World Bank, 2012). Likewise, export time-to-market from Kenya, Lesotho and South Africa are two-to-three times that of Morocco, which is 11 days (Goger et al., 2014). Inefficiencies play a major role; in many African ports cargo sits for about two weeks, compared to under a week in Asia, Europe and Latin America5 (Raballand et al. 2012; Gelb et al., 2014). Port management and the availability of competitive logistics companies play a key role. Once goods have arrived, road and rail transport is necessary and often immensely expensive, especially to reach landlocked countries.

Corruption and cartels in the transport sector are also responsible for keeping costs high. According to a study by the Rwandan government, for example, to get from the port of Mombasa to Kigali via Kampala, a lorry has to pay USD 864 in bribes and stop at 36 roadblocks (The Economist, 2012; AfDB et al., 2012). Dismantling cartels in the transport sector could reduce transport costs, particularly for agricultural goods in rural areas (AfDB et al., 2013).

On the upside, the level of telecommunication services is increasing fast in many African countries and strongly associated with economic upgrading in global value chains. Mobile phone networks have expanded rapidly in Africa, today reaching 80% of the population, up from only 2% in 2000 (Lomas, 2012). Africa is also building on mobile



technology to leapfrog into new services. East Africa was the first region in the world to offer entirely mobile-phone-based money transfers. Internet connections have greatly improved as well since East, Southern and West Africa were connected to subsea cables in the late 2000s. A recent study of the determinants of upgrading in manufacturing value chains found telecommunications infrastructure and a competitive telecoms sector to be strongly associated with economic upgrading (Nordås and Kim, 2013).

Governance and openness to linkages determine opportunities for integrating into and upgrading in value chains

GVC governance influences potential paths to upgrading and can be classified into five structures. Governance describes the “authority and power relationships that determine how financial, material and human resources are allocated and flow within a chain” (Gereffi, 1994, p. 97). Depending on the complexity of the information between actors in the chain, on how the information for production is codified and on the level of supplier competence, global value chains can be classified into five governance structures: market, modular, relational, captive and hierarchy (see Box 2.1; Frederick and Gereffi, 2009; Gereffi et al., 2005). The five governance structures can be broken into two broader categories: producer-driven chains and buyer-driven chains.

Box 2.1. The five global value chain governance structuresGereffi and Fernandez-Stark identify five types of structures that apply to governing global value chains.

Market: Market governance involves transactions that are relatively simple. Information on product specifications is easily transmitted, and suppliers can make products with minimal input from buyers. These arms-length exchanges require little or no formal co-operation between actors, and the cost of switching to new partners is low for both producers and buyers. The central governance mechanism is price rather than a powerful lead firm.

Modular: Modular governance occurs when complex transactions are relatively easy to codify. Typically, suppliers in modular chains make products to a customer’s specifications and take full responsibility for process technology using generic machinery that spreads investments across a wide customer base. This keeps switching costs low and limits transaction-specific investments, even though buyer-supplier interactions can be complex. Linkages (or relationships) are more substantial than in simple markets because of the high volume of information flowing across the inter-firm link. Information technology and standards for exchanging information are both key to the functioning of modular governance. Relational: Relational governance occurs when buyers and sellers rely on complex information that is not easily transmitted or learned. This results in frequent interactions and knowledge sharing between parties. Such linkages require trust and generate mutual reliance, which are regulated through reputation, social and spatial proximity, and family and ethnic ties. Despite mutual dependence, lead firms still specify what is needed and thus have the ability to exert some level of control over suppliers. Producers in relational chains are more likely to supply differentiated products based on quality, geographic origin or other unique characteristics. Relational linkages take time to build, so the costs and difficulties required to switch to a new partner tend to be high.

Captive: In these chains, small suppliers depend on one or a few buyers that often wield a great deal of power. Such networks feature a high degree of monitoring and control by the lead firm. The power asymmetry in captive networks forces suppliers to link to their buyer under conditions set by, and often specific to, that particular buyer, leading




Box 2.1. The five global value chain governance structuresto thick ties and high switching costs for both parties. Since the core competence of the lead firms tends to be in areas outside of production, helping their suppliers upgrade their production capabilities does not encroach on this core competency but benefits the lead firm by increasing the efficiency of its supply chain. Ethical leadership is important to ensure suppliers receive fair treatment and an equitable share of the market price.

Hierarchy: Hierarchical governance describes chains characterised by vertical integration and managerial control within lead firms that develop and manufacture products in-house. This usually occurs when product specifications cannot be codified, products are complex or highly competent suppliers cannot be found. While less common than in the past, this sort of vertical integration is still an important feature of the global economy.

Source: Gereffi and Fernandez-Stark (2011).

Whether a global value chain is controlled by a producer or a buyer strongly impacts the opportunities for African firms to move into higher value-added activities. Producer-driven value chains are dominated by large manufacturing firms whose competitive advantage lies in a specific production methodology that is not widely available. Typical examples are the automotive and microchip value chains in manufacturing and the chocolate and coffee value chains in agriculture, as well as the extractive industries. Buyer-driven chains are dominated by large firms that control marketing, distribution and sales but not the production of the actual core product. Often these firms own a brand with high market value. Apparel and horticulture are typical examples for buyer-driven value chains.

Producer-driven chains tend to offer opportunities for learning, for participating in the supply chain and for creating additional varieties of goods rather than upgrading into adjacent stages of the value chain. In producer-driven chains, the potential to build relationships and transfer skills between local and international firms is significantly higher than in most buyer-driven chains. However, producers control most higher-value activities in processing along these chains, making them difficult to enter. Producer-driven chains are conducive to upgrading by participating in the supply chain, particularly in manufacturing and extractive sectors, and by producing additional varieties of goods that command a higher value, for example organic products (see AfDB et al., 2013 for examples on extractives and Box 2.9 on South Africa’s automotive value chain).

Buyer-driven chains are more open and easy to access allowing for a wider range of upgrading pathways, but they also tend to be competitive and can be captive. Retailers prefer to deal with finished products that are ready for sale. Thus these chains can present opportunities for African firms to incorporate additional stages of the value chain into their activities, such as making flower bouquets, cutting and packaging fresh fruit (see Box 2.4 on Blue Skies) or designing garments for apparel producers. The further the distance between the producer and the final customer, however, the more captive the chain can become, offering fewer opportunities for such upgrading. In large volume apparel for example, marketers and branded manufacturers control global production networks and dictate supply specifications, leaving little space for upgrading in design or distribution (Gereffi, 1999; Morris and Barnes, 2009). Product differentiation and the production of inputs are better means to upgrade in buyer-driven chains (see Box 2.2).

(cont.)



Box 2.2. H&M in EthiopiaIn 2013, the Swedish clothing retailer H&M started to source from Ethiopian garment producers. Traditionally, it sourced 80% of its production from Asian countries. As H&M does not have a hierarchical governance structure, rather than building factories in Ethiopia, the company established its offices in Addis Ababa to be close to its suppliers.

H&M “made in Ethiopia” illustrates a buyer-driven chain where retailers retain control over their supplier’s production. The company’s presence in the country strictly serves to ensure that its suppliers comply with quality standards. Suppliers not only need to meet quality requirements but are also responsible for shipping the final product to the end market.

The link to H&M can increase employment and output in Ethiopia’s apparel sector. However, opportunities for upgrading into higher value-added stages of the value chain are limited. Instead suppliers can increase their incomes by offering multiple options of the same product for different customers or by linking upstream (for example, sourcing Ethiopian textiles) which increases the value added in the country.

Irrespective of the chain’s governance structure, lead firms differ in their willingness to engage local suppliers and to institutionalise their commitment to local development. Strong local relationships can serve to gain access to local knowledge, ensure a “social licence to operate” in the face of social and political controversies, and improve the firm’s image in the eyes of local consumers. Suppliers located at lead firms’ doorsteps can also help reduce costs and increase flexibility (Jenkins et al., 2007; IFC and Engineers against Poverty, 2011). However, in many cases local conditions are such that linkages with local suppliers are not profitable instantly and require explicit commitment from the lead firm. Therefore efforts for linkage development need to be embedded in long-term strategies so that they can be sustained long enough to bear fruit (see Box 2.3). An increasing number of lead firms consider creating connections to local suppliers as part of their core business strategy, which is the strongest form of commitment and implies the existence of a business case. Many other firms work with local suppliers for reasons of corporate social responsibility and philanthropy (Figure 2.2).

Box 2.3. Institutionalised commitment to local linkages: ExxonMobil and Anglo American

Procurement regulations provide formal frameworks for managers on the ground to strengthen relationships with local suppliers. These local procurement policies can be backed up with performance measures and incentives to help managers make day-to-day decisions. Further to these overarching procurement strategies, lead firm business practices can be adapted to better accommodate local businesses. Examples include breaking up contracts to be more manageable for small and medium enterprises (SMEs) and introducing shorter payment cycles to account for SMEs’ difficulties in accessing finance (Jenkins et al., 2007).

ExxonMobil in Chad: National content strategy

In Chad, a consortium of oil producers led by ExxonMobil institutionalised its commitment to integrating into the local economy as part of a national content strategy. The overarching strategy establishes a mandate for managers to reach out to local businesses and communities. It encompasses the Local Business Opportunity programme, which focuses on developing local suppliers (IFC, 2009).

Anglo American: Local procurement policy Anglo American has a local procurement policy which explicitly states that staff and stakeholders are accountable for its active pursuit. According to the policy, Anglo American commits to allocating resources and building internal capacity to drive its local procurement agenda and embed it into the work process. Further, the policy recognises specific challenges faced by SMEs, and pledges to adapt sourcing practises and payment cycles in order to minimise obstacles (Anglo American, 2010).




Figure 2.2. Reasons for lead firms to better connect developing country suppliers to their value chains

14 %

17 %

21 %

25 %

28 %

33 %

59 %

82 %

0 20 40 60 %

Participation in a consumer labelling scheme

Regulatory requirements in local markets

International commitments

Company corporate foundation programmes

Participation in a business-to-business scheme

Partnership with a development agency

Corporate social responsibility agenda

Core business strategy

Note: The figure shows the responses by international lead firms present in developing countries (not only Africa) when asked why they invest in better connecting suppliers from developing countries to their supply chains. Source: OECD and WTO (2013).12 http://dx.doi.org/10.1787/888933033555

Agriculture, manufacturing and services value chains offer upgrading opportunities in Africa

Based on case studies, this section takes a closer look at the main factors that contribute to GVC participation and upgrading in agriculture, manufacturing and services. The analysis confirms that infrastructure, the business environment and domestic productive capacity can restrict upgrading, particularly in the manufacturing sector. The strong growth of telecommunication, business and financial service value chains, on the other hand, attests to their relatively lower needs for infrastructure as their products are intangible. The governance structures that determine upgrading opportunities vary by value chain, rather than by sector, with buyer and producer driven chains present in all sectors. In agriculture, the increase of direct sales to supermarkets has had a profound impact on agricultural value chain dynamics, with an increase in niche-markets and buyer-driven chains. The recent rise of supermarkets across Africa amplifies these developments. Quality and process standards can help African firms and farmers to acquire skills and access large markets, but they can also exclude many owing to the high costs of compliance. Regional value chains and emerging markets outside of Africa offer an important alternative as standards are lower and growth rates higher. This section does not consider the extractive sector in detail as the African Economic Outlook 2013 treated it at length.

At the value chain level, four types of economic upgrading exist:

• Functional upgrading entails expanding the range of activities that a country already performs within a specific value chain. If the initial link to a global value chain is in production only, for example in cutting, sewing and trimming shirts, functional upgrading could entail upstream stages of the value chain such as the sourcing of textiles.

• Product upgrading refers to the production of more sophisticated products, such as going from whole pineapples to freshly cut ones.

• In chain upgrading, the skills acquired are used to enter a new value chain, for example entering textile production based on the knowledge and skills gathered in the apparel value chain.

• Finally, process upgrading refers to increasing productivity in a given stage of a value chain through local innovation (WTO et al., 2013; Morris and Barnes, 2009).

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Upgrading in agricultural value chains requires new product varieties, shortening the distance to consumers and boosting smallholder capacity

Global value chains offer many market opportunities for the agriculture sector although at present most value added occurs outside of Africa. The agriculture sector employed 65% of Africa’s labour force and accounted for 17% of growth in African GDP between 2001 and 2011 (World Bank, 2013; AfDB et al., 2013). Thus global value chains related to the agricultural sector arguably have the most profound impact on the largest number of people. At present, Africa’s involvement in global agricultural value chains is primarily in the production of raw agricultural output, where value added is low (see Figure 2.3). As such, value added in African global agricultural value chains tends to occur predominantly downstream, outside of Africa.

Figure 2.3. Global agricultural value chain activities currently performed in African countries

%0 10 20 30 40 50 60 70 80 90 100

29 %

32 %

35 %

35 %

36 %

39 %

49 %

88 %

Primary inputs (fertilisers, equipment)

Research and development

Ancillary services (input retail, equipment services)

Packaging and shipping

Distribution (supermarkets, etc.)

Processing of agricultural output into higher value products (canned food, etc.)

Sales and marketing

Production of agricultural output (fruits, vegetables, cotton, tea, etc.)

Note: The results are based on a survey of AEO country economists. Respondents were asked to identify up to six activities that are currently performed within value chains in their respective countries. Production of raw agricultural output was the most frequently cited activity, indicated in 88% of cases.Source: AEO Country Experts Survey (2014).12 http://dx.doi.org/10.1787/888933033574

Most cash crop chains are characterised by hierarchical and captive governance structures which offer limited opportunities for moving up the value chain. Value chains of export crops that require heavy processing, such as cocoa, cotton, coffee, sugar, tea and tobacco, tend to be producer-driven chains which typically fall under the categories of captive and hierarchical governance structures as defined by Gereffi et al. (2005). African agriculture is dominated by the production of these crops, which collectively account for 50% of the continent’s total agricultural output (Diao and Hazell, 2004). As these chains are tightly controlled by lead producer firms, higher-value activities such as processing and manufacturing are most often performed outside of Africa, leaving little opportunity for functional upgrading (AfDB, forthcoming).

Product differentiation and quality upgrading are essential for value added in producer-driven, agricultural value chains. Opportunities for increasing income from traditional agricultural commodity exports lie in product differentiation, for example the branding and grading of speciality coffees. Many countries can also secure higher prices by raising the average quality of the products they export, establishing grading systems and segregating different qualities for export (Diao and Hazell, 2004). For example, in Côte d’Ivoire, the Qualité-Quantité-Croissance programme has resulted in a new standard of quality Origine Côte d’Ivoire, such that in 2013, 81% of cocoa exports from Côte d’Ivoire


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were in the highest Grade 1 category and a national brand of quality assurance was created (see Côte d’Ivoire Country Note). Moreover, improvements in access to markets, inputs and credits, combined with low labour costs, could enable African farmers to better compete with other countries in international markets for traditional export crops (Humphrey and Memedovic, 2003).

Buyer-driven chains in the agricultural sector may offer more scope for expanding along the value chain. Buyer-driven chains are more prevalent in exports of fresh products that require little processing such as fruits, vegetables, fish and flowers. Exports in these products have undergone phenomenal growth6 due to supermarkets seeking to consolidate their supply networks in order to exert more control over production processes (Lee et al., 2012). Functional upgrading can occur in such chains as retailers want ready-to-sell products, thereby pushing processing and packaging activities further upstream along the value chain. An example of a buyer-driven chain in this regard is the cut-flower value chain in Ethiopia, Kenya and Uganda. European retailers increasingly seek to deal directly with African growers, bypassing the Dutch auction houses. This shift in the value-chain structure allows for an increase in value-adding activities (such as bunching, bouquet-making and sleeving) to occur in African countries (AfDB, forthcoming). Blue Skies, which produces fresh-cut fruits in Ghana, Egypt and South Africa is another good example of upgrading opportunities prevalent in buyer-driven agricultural chains (see Box 2.4).

Box 2.4. Blue Skies Ltd. in GhanaIn Ghana the case of Blue Skies Limited is a successful example of functional and product upgrading in an agricultural value chain directly involving smallholder farmers. Blue Skies exports freshly cut fruits such as pineapples, mangos, papayas, pomegranates, coconuts, melons, grapes and berries, which are sold primarily in European supermarkets. Blue Skies has recently begun to target US markets.

Rather than shipping fruit by boat, Blue Skies cuts and packages it locally and then flies the produce to retailers, reaching the consumer within 48 hours of harvesting. While pineapples are traditionally exported unripe to be processed and packaged abroad, the Blue Skies business model increases value added in Ghana by having local suppliers cut and package the ripe fruit. Currently, Blue Skies employs over 1 500 people in Ghana, making it one of the country’s biggest private sector employers (McMillan, 2012). The company also sells to local markets in Ghana, where its fresh pineapple juice has been particularly successful.

To comply with standards in Europe, Blue Skies must be selective about its suppliers. A team of agronomists pays weekly visits to Blue Skies farmers in order to ensure the farmers’ capacity to adhere to international safety standards and produce high quality fruits. Blue Skies farmers are certified in GLOBALGAP and EUREPGAP requirements. GLOBALGAP consists of four main areas: Integrated Farm Assurance; Plant Propagation Material; Risk Assessment on Social Practice and Chain of Custody. The traceability of each piece of fruit is of paramount importance (McMillan, 2012).

The strong commitment of management, staff and farmers has contributed significantly to Blue Skies’ success. Strong managerial skills and social security benefits for employees contribute to a friendly, favourable working environment. Prompt payments on receipt of fruit provide a strong incentive to farmers to maintain regular supplies. As Blue Skies specialises in cut fruit, the size of the fruit does not matter and rejection rates are lower. Dedicated farmers receive interest-free loans which encourages good performance. An education in EUREPGAP and GLOBALGAP standards also fosters commitment among farmers (Dannson et al., 2004).



The strict entry requirements in the form of standards make participating in buyer-driven chains difficult. As retailers demand high-quality products that require little processing, standard requirements are generally high, and therefore those markets tend to be highly competitive and specialised, with rigorous quality standards. Generally, farmers are required to comply with requirements imposed by Good Agricultural Practices, while niche standards, such as organic, Rainforest Alliance and Fair Trade, may also be difficult and costly to meet. Further downstream, processing and packaging activities must adhere to strict health and safety standards such as Hazard Analysis and Critical Control Points. Additionally, private social standards have proliferated in the absence of adequate national inspection and certification systems, with a multitude for different purposes.7 In this regard, buyer-driven chains are more suited to larger farms capable of reaching the standards of foreign retailers, while smallholders face barriers in meeting the production requirements of such chains.

Given the large number of smallholders in African agriculture, their integration into global agricultural value chains is of crucial importance. The Food and Agriculture Organization estimates that smallholders supply up to 80% of food in sub-Saharan Africa (FAO, 2012), therefore the interactions of smallholders with global value chains are of particular interest. Smallholders face many obstacles in accessing global markets, most notably in terms of meeting strict standards of production, but also in ensuring continuous supply. However, increasingly smallholder farmers participate successfully in global value chains through the initiatives of lead firms and entrepreneurs that have sought to include them. Indeed, some supply chains, such as cocoa and coffee, depend heavily on smallholder farmers, owing to the particular nature of the crop in question. Similarly, as larger farmers integrate into global value chains, formal employment opportunities are created in rural areas, which may have a positive impact on development in the surrounding region (OECD 2013; UNCTAD, 2013).

Box 2.5. Opportunities and constraints to integrate Ghana’s smallholder farmers into global value chains

A study on farmers’ decision to upgrade their production or participate in global value chains examined factors that influence Ghanaian pineapple smallholders. The data show that economic development is determined by investments and good business relationships. The farmers’ choice depended foremost on investments in agricultural productivity, e.g. physical inputs and know-how, and on relationships based on mutual trust, which can be built, for example, by fulfilling a contract despite difficulties. Business relationships in the study group ranged from contract-farming to smallholder co-operatives, with varying degrees of formality and involvement of intermediaries. The main findings of the study include the following:

• Trust and reliability between value chain actors are decisive in keeping transaction costs low.

• Farmers who prefer rapid payment and have low trust are less likely to join a global value chain, because of the delay between delivery and payment (in contrast to selling locally).

• Farmers who experienced an income shock in the past or have little information about the functioning of a global value chain are less likely to join, because both factors are adverse to trust and long-term planning.

• Importantly, more productive farmers are more likely to participate in global value chains while farmers with less experience and small or remote fields are less likely, due to higher production and transportation costs.

• For productive investments (e.g. using a new variety, fertiliser and mulch) confidence and capital are the critical factors.

• Factors that encourage farmers to participate in global value chains include improved access to credit; insurance and information; clear land rights; a feeling of agency; a relatively lower aversion to risk; a reliable income; linkages with lead firms that encourage and support the investments.




Box 2.5. Opportunities and constraints to integrate Ghana’s smallholder farmers into global value chains

• Networks are of crucial importance as farmers tend to make most of their decisions within their farming groups, especially when the decisions concern more radical options.

• Risk is a major concern for farmers in making productive investments (such as investing in fertiliser or machinery), while the delay in receiving payments was of more concern in deciding to participate in global value chains.

The findings underline that poverty is a barrier to benefitting from global value chains. Overall, a strong focus on short-term gains and an aversion to taking risks negatively impact smallholder farmers’ decisions to participate in global value chains. Potential policy targets include i) securing incomes and land; ii) improving access to credits, insurance and information; iii) demonstrating beneficial agricultural practices; iv) developing more trust and co-operation among the stakeholders.

Further to these findings, Lee et al. (2012) have noted that while smallholders in traditional markets have more autonomy with wider control of their activities, the decision to remain in traditional informal markets may not be entirely sustainable, as developing country markets are adopting similar standards to those in the export markets. Source: Wuepper (2014).

Contract farming, also known as out-grower schemes, is a means to assist farmers in meeting production requirements so they can participate in global value chains while lead firms are guaranteed a supply. Contract farming usually involves a large agribusiness firm entering into contracts with smallholder farmers, providing farmers with inputs on credit and extension in return for guaranteed delivery of produce. The assistance to farmers in such cases goes beyond the realm of corporate social responsibility, as it is directly related to the sustainability of supply. These arrangements are close to hierarchical governance structures, although the smallholder remains an independent agent within the chain. Such arrangements have become increasingly common throughout Africa as lead firms react to supply side shocks amid an exodus of youth from the agricultural sector. Large firms such as Olam International and Unilever deal with African farmers through such contractual arrangements. The case of SABMiller in Uganda and Zambia is also a good example of how an out-grower scheme allowed a lead firm to capitalise on market opportunities by assisting smallholder farmers to meet their supply requirements.

Box 2.6. Examples of mutually beneficial contract farming arrangements: Olam International, Mars and SABMiller

Olam International shows how contract farming can benefit both a lead firm and smallholder farmers. While cashew exporters traditionally operate far from port cities, Olam’s business model brings the exporter to the farmer, who may be 1 000 km away. Olam deals directly with smallholders, offering micro-finance assistance and short-term advances for crop purchases. It also assists farmers in meeting Good Agricultural Practice requirements, while providing a market for farmers. In this regard, Olam can trace its produce and be certain that standards are met, such as organic, Fair Trade and Rainforest Alliance, depending on the particular desires of its customers. This contractual arrangement increases the capacity of the smallholder farmer to meet the production demands of Olam and their clients, giving Olam a competitive edge (Olam, 2013).

Mars has undertaken a similar approach to ensure the sustainability of their cocoa supply in West Africa. An exodus of farmers from rural areas in cocoa producing countries, such as Côte d’Ivoire, reduced supply.

(cont.)



Box 2.6. Examples of mutually beneficial contract farming arrangements: Olam International, Mars and SABMiller

At the same time, farmers sought to move away from growing cocoa, because of the four-year delay of return on investment between planting and harvest. Fearing a future supply shock, Mars, along with Cargill, the International Finance Corporation and in partnership with local government and farmer groups, set up a multi-stakeholder initiative to assist smallholder farmers in meeting international production standards, accessing finance and participating in the global cocoa value chain (TCC, 2012). Mars started by raising farmer incomes, paying an extra EUR 200 per tonne to their suppliers. Mars has a target to source 100% of their cocoa from certified producers by 2020, and already more than half their global usage (over 200 000 tonnes) is from certified sources. This case shows that programmes aimed at increasing farmers’ participation in global value chains are most successful when all stakeholders are on board (OECD, 2013).

SABMiller breweries decided to substitute imported barley with sorghum sourced from local smallholder farmers in Uganda; high production costs, driven by expensive imported barley and high levels of taxation, prevented the company from selling at retail prices suitable for local consumers’ purchasing power. Appreciating the company’s effort, the government agreed to cut taxes. The retail price of a new beer variety, Eagle Lager, was reduced by roughly a third, increasing the brand’s market share to 50% in Uganda, as well as to 15% in Zambia where the concept was applied later on. More than 10 000 farmer families have become part of the supply chain, and farmer income has increased by 50% on average (Jenkins et al., 2007).

High costs associated with stringent European standards increasingly contribute to the expansion of South-South and regional agricultural trade (Goger et al., 2014)Bamber and Fernandez-Stark, 2013; Evers et al., 2014; ACET, 2009). Standards in these emerging value chains are less stringent, normally cover far fewer elements,8 and thus are generally less expensive and time-consuming to adhere to (Barrientos and Visser, 2012). For example, Morocco’s citrus supply is increasingly shifting from traditional European Markets to the Russian Federation where standards are lower and less costly to monitor (Bamber and Fernandez-Stark, 2013). Additionally, South African producers selling to other African countries and Asian and Middle Eastern supermarkets that pay lower prices than European supermarkets, are often able to secure equivalent margins taking into account the reduced costs of inputs, audits and monitoring afforded under less stringent standards (Barrientos and Visser, 2012).

Table 2.1 offers interesting insights into these shifting end markets. Crucial here is that for the products covered, all export shares to Africa, Asia and the Middle East increased, while nearly all export shares to the European Union and United Kingdom fell (the one exception being grapes to the UK which registered a small increase). Studies indicating that this trend has escalated since the 2007 economic downturn (Evers et al., 2014) fit well with other studies witnessing increasing South-South trade over this period (Akyüz, 2012; Goger et al., 2014).

Table 2.1. Export destinations for South African fresh fruits and vegetables, 2001-11

Country GrapesApples, pears and

quinces Stone fruits TomatoesOnions, garlic and

leeks

2001 2011 2001 2011 2001 2011 2001 2011 2001 2011

EU (excluding UK) 63.83 49.94 14.13 9.69 46.71 40.94 2.39 0.00 21.34 14.6

UK 20.30 20.65 32.97 20.66 37.68 32.69 9.04 0.00 4.33 3.33

AEC 4.11 19.21 11.93 20.55 3.59 6.43 0.00 0.96 0.72 1.35

Africa 1.15 2.25 12.45 22.98 2.13 2.66 88.3 98.76 70.28 79.02

Middle East 2.73 5.72 2.51 7.41 9.29 16.38 0.00 0.90 0.24 1.00

Other 7.88 2.23 26.01 18.71 0.60 0.90 0.27 0.28 3.09 0.70

Note: Percentage values of total exports from South Africa. (AEC) ASEAN Economic Community.Source: Goger et al. (2014), based on ITC trade database 2012.

(cont.)




Successful upgrading in manufacturing value chains depends on local capacity, domestic and regional markets, knowledge transfer and openness to imports

African manufacturing covers a wide variety of industries and has grown alongside increasing participation in global and regional value chains. It ranges from low tech industries such as apparel and textiles in Ethiopia, medium-tech industries such as the automotive in South Africa and to high tech industries like aerospace in Morocco or electronics in Nigeria. Africa’s manufacturing exports nearly tripled over the last decade, from USD 72 billion in 2002 to USD 189 billion in 2012. Although only four countries – Egypt, Morocco, South Africa and Tunisia – account for two-thirds of these exports, the growth rates have been evenly spread and many African countries have seen their manufacturing output rise. As shown in the previous chapter, manufacturing activities exhibit a fairly high share of global and regional value-chain integration (see also Figure 1.20). The medium- to high-tech sectors have seen particularly strong growth of the share of foreign inputs embedded in exports (Figure 2.4).

Figure 2.4. Africa’s manufacturing industries by foreign share in exported value added, 1995 and 2011

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Product assembly is the most common entry point into global value chains for African manufacturing and offers opportunities for low-skill employment and upgrading along the value chain. The bulk of African participation in global manufacturing value chains is in the form of final product assembly; generally in labour-intensive low- to medium-tech industries. Integrating into international manufacturing production systems has been an important stepping stone to structural transformation in many developing economies. It can create the large numbers of low-skilled jobs needed to employ Africa’s population and can raise the general level of capabilities in the economy through knowledge spillovers and training of workers (Dinh, 2013; AfDB et al., 2013). Participating in manufacturing value chains can also help upgrade into adjacent stages in both directions of a value chain, such as packaging (downstream) and production of intermediate inputs and components (upstream). Such activities are already present in Africa to a much greater extent than it is the case in agriculture (Figure 2.5).

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Figure 2.5. Global manufacturing value chain activities in Africa, 2014

%0 10 20 30 40 50 60 70 80 90

24 %

33 %

44 %

56 %

58 %

64 %

79 %

After-sales customer service

Design, research and development

Ancillary services (input retail, equipment services)

Sales and marketing

Intermediate inputs (production of components, modules)

Packaging and shipping

Final product assembly

Note: Based on a survey of AEO country economists. Respondents were asked to identify up to six activities that are currently performed within manufacturing value chains in their respective countries. Final product assembly was the most frequently indicated activity, citied in 79% of responses.Source: 2014 AEO Experts Survey (2014).12 http://dx.doi.org/10.1787/888933033612

Despite employment growth in some countries, the overall potential of global value chains for the manufacturing sector remains far from being realised. Middle-income countries in particular struggle with downgrading in low-tech industries. Within the apparel sector, GVC participation has created employment opportunities and sustained output growth in some low income countries such as Ethiopia. In contrast, middle-income countries such as Lesotho and South Africa – whose wages are higher compared to other African countries – have experienced social and economic downgrading through the loss of market share (Goger et al., 2014). Across Africa, the manufacturing sector accounts for about 8.3% of the labour force (De Vriers et al., 2013), which is far below the share attained by the successful manufacturing-based developing countries at their peak.9

Buyer-driven value chains dominate most low-tech manufacturing. They offer employment opportunities but limited scope for upgrading along the value chain. The case of the textile and apparel industry provides a telling example. In Ethiopia, the 2010 relocation of the Turkish company Ayka Addis Textile and Investment Group created more than 10 000 jobs in the country. It triggered the relocation of 50 other Turkish textile and apparel companies which, according to the Ethiopian Investment Agency, are expected to create more than 60 000 jobs (EIA, 2013). However, the governance structure of textile and apparel chains prevents African producers from influencing the production processes since buyers’ specifications include quality, price, reliability and “speed to market”. Put differently, African producers are left with little room to upgrade along the value chain as buyers dictate where products are made, with which fabric, at what price and how quickly, as well as their destination.

Upgrading opportunities exist in product differentiation. As buyers determine production lines, differentiating products depends on the suppliers’ capacity to identify new buyers and customise their products. For instance, in the apparel value chain, new product varieties could involve making garments with unique kanga fabrics or organic cotton textiles. In the textile value chain, upgrading could involve processing new types of fibres (synthetic for example) and producing specialised fabrics. Developed countries’ growing interest in Africa’s cultural traditions could also help the apparel and textile industries participate more and upgrade (see Box 2.7).


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Box 2.7. African cultural traditions are in fashionThe growing interest of developed countries in Africa’s cultural traditions could help African countries capture more of the value within global apparel value chains. Fashion and craftsmanship are potential comparative advantages for Africa. African fashion designers are capitalising on the continent’s tradition of colourful and flamboyant clothing and on the high degree of craftsmanship in African cultures. Demand for African fashion is likely to be further boosted by the continent’s growing urban middle class, opening up the perspective of sustainable growth for the African fashion industry.

A notable donor initiative is the International Trade Centre’s Ethical Fashion Initiative. Launched in 2009, the initiative aims to link skilled artisans to global value chains through a partnership with leading fashion brands. Beneficiaries are mostly women from disadvantaged communities, many based in Kenya’s slums. Ethical Fashion Africa Limited, a social enterprise with a hub in Nairobi, works as an intermediary between communities of women artisans and the global fashion market, co-ordinating, training, controlling quality and packaging. The products are marketed under globally recognised brand names, such as Vivienne Westwood, and sell in many instances for hundreds of euros to the final consumer. So far, 7 000 jobs have been created for women in marginalised communities in East Africa as a result of the initiative, and the project is being extended to Burkina Faso, Ghana and Mali. Source: ITC (2011).

Better technology and production systems could open new markets as well. “Just-in-time” production systems, which decrease waste and reduce inventory costs by cutting down warehouse space, are one option. Although economies of scale are harder to achieve in this type of production organisation, if suppliers are capable of taking smaller orders from an array of different buyers, they can achieve economies of scale and raise value added. Large retailers such as Zara and H&M have adopted such systems, giving rise to “fast fashion” strategies. The retailers rely on their suppliers to source fabrics, manufacture garments and ship them within just a few weeks. Although a promising strategy for economic upgrading, social gains from such upgrading are not automatic (see Box 2.8).

Box 2.8. Mixed outcomes of social and economic upgrading: The Moroccan garment industry

Since the mid-1980s, the Moroccan garment industry has changed dramatically as it has become a key supplier for fast fashion supply chains, such as Zara. Fast fashion introduced a new logic into garment supply chains, giving higher priority to demand-sensitive just-in-time production, production in smaller quantities, higher quality and increased flexibility of suppliers. Under this logic, proximity to market is highly valued, owing to the importance of speed and responsiveness of suppliers to meet changes in demand effectively. Therefore, as a country close to Europe, Morocco has a geographical advantage in global fast fashion value chains.

The Moroccan textile industry association created a sector-led code of conduct and social label called Fibre Citoyenne, which the fast fashion retailers found attractive.

Despite Morocco’s successful economic upgrading into global fast fashion value chains, the social upgrading outcomes were mixed. One of the biggest determinants was worker status. Overall, regular workers shared in the gains from economic upgrading, gaining skills and benefitting from measurably improved standards. However, focus groups revealed widespread use of an informal, irregular workforce that experienced social downgrading in many respects. These workers were concentrated in lower skilled, lower paid positions and lacked access to social protections, and higher job insecurity.

Source: Rossi (2013) and Goger et al. (2014).



Local supply of commodity-based materials could become a strength for African manufacturing but currently presents a bottleneck in most countries. The growing demand for product differentiation and just-in-time production increasingly requires a diversified and reliable local supply of intermediate materials. Morocco and South Africa have been able to move into the fast fashion segment of the apparel market because they have local textile industries capable of supplying the desired quantities and qualities and of being a responsive partner. Ethiopia’s combination of local cotton and textile supply was among the reasons for H&M and its suppliers to invest there. In most other African countries, however, the lack of a local textile industry is among the major constraints to expanding or upgrading the existing apparel operations (Goger et al., 2014). In fact, only about 15% of sub-Saharan cotton is processed in Africa. Insufficient finance and reliable electricity supplies are among the main reasons for the absence of textile production, which is capital and energy intensive (Gherzi and UNIDO, 2011).

Medium- and high-tech manufacturing is dominated by producer-driven chains with tightly controlled stages of the value chain. They offer learning opportunities and the potential for global reach. South Africa’s automotive sector is an example. The country has attracted many of the large international car manufacturers to set up assembly operations, including General Motors, Mercedes Benz, Nissan and Toyota. The automotive value chain offers limited opportunity to upgrade into branding, marketing or design, which are tightly controlled by the lead firms. However, it has allowed South African suppliers to access global markets. By 2011, the average share of South African value added in an exported vehicle was about 35%, reaching 75% for exported components (NAACAM, 2011). Catalytic converter suppliers, and to a minor extent leather seat suppliers, have been particularly successful in accessing global markets, and by 2011 South Africa’s global market share for catalytic converters reached 15% (Alfaro et al., 2012). Removing explicit local content requirements and barriers to imports helped South Africa’s automotive sector to integrate into and upgrade in global value chains (see Box 2.9).

Box 2.9. The South African automotive sectorThe development of South Africa’s automotive sector began in the 1960s under a framework of protectionism and of direct and indirect subsidies with the aim of serving the local market (UNCTAD, 2010). The country was characterised by a number of assembly and production operations producing a range of vehicles at low volumes. However, a major policy change post-1994 saw a turnaround in the automotive industry.

In 1995, the government implemented an explicit GVC policy in relation to its automotive industry. With the Motor Industry Development Programme (MIDP), South Africa dramatically reduced tariffs on imports of vehicles and components, from 115% pre-1995 to 30% in 2007, and abolished minimum local content provisions (Humphrey and Memedoviv, 2003). Original equipment manufacturers (OEMs) and, subsequently, component producers returned to South Africa. Since 1995, major international assemblers and manufacturers have established operations in the country, including OEMs from traditional manufacturing powerhouses in Europe, Japan and the United States (Alfaro et al., 2012).

At present, the automotive industry is the largest manufacturing sector in the South African economy, accounting for 7% of GDP in 2012. The number of vehicle exports has increased significantly, from 15 764 units in 1995 to 277 893 units in 2012. More importantly, the ratio of exports of vehicles to production is now more than 50%, compared to a mere 4% in 1995. In addition, while exports to Africa have formed the largest destination market, the share of exports to Asia has been increasing.




Box 2.9. The South African automotive sector

Looking ahead, the South African government aims to ensure that the automotive industry remains a premier supplier of high quality, competitive original equipment parts, accessories and vehicles to international markets. To sustain the industry’s growth, policies should be enhanced to broaden South Africa’s supplier chain, increase manufacturing depth, improve infrastructure and supplier competitiveness, and upgrade the skills of the workforce (NAACAM, 2011).

Manufacturing quality products poses challenges for many producers, due largely to a lack of skills. Addressing knowledge gaps is crucial to increase opportunities to upgrade. Strict requirements in the form of ISO standards for accessing developed markets, such as the European Union, exclude many African producers that are incapable of complying with the quality provisions. The lack of quality is generally observed in the level of rejection rates. In the clothing industry, when comparing Ethiopia, Tanzania, China and Vietnam, product rejection both in-factory and by clients averages higher in Africa than in Asia (World Bank, 2011). Developing skills and introducing modern management practices through in-factory training or the establishment of training schools is essential to raise valued participation in the chain.

Lacking domestic factors that attract global manufacturing value chains, African countries tend to overly depend on fickle external factors such as trade preference regimes. Domestic pull factors such as a strong local supply base, a large internal market, a good location vis-à-vis major markets and a skilled workforce. Trade preference regimes have had a powerful effect on the geography of apparel production. With the disappearance of the Multi-Fibre Agreement (MFA) – a global system of quotas that curtailed large-scale producing countries such as China – exports and employment declined across African countries as many Asian investors relocated their production to their home countries. Since the African Growth and Opportunity Act (AGOA) was passed, many countries have attracted Chinese and Chinese Taipei investors, seeking quota-free access to the US market. Yet, the future of these industries is uncertain as AGOA ends in 2015 (Goger et al., 2014).

Looking ahead, Africa’s increasing consumer demand and regional integration are attracting market-seeking investments. African consumer spending is predicted to almost double in the next decade. While Nigeria and South Africa lead this expansion of consumer demand, other countries such as Angola, Ethiopia, Kenya, Uganda and Zambia will also see a substantial increase of their domestic demand (AfDB, 2012). These developments are attracting numerous market-seeking companies. Unilever, for example covers a market of 19 African countries and has identified Africa “as the next growth market” (Zwane, 2013). Manufacturing activities are now carried out in Côte d’Ivoire, Ghana, Kenya, Nigeria, South Africa and Zimbabwe, and the vast majority of goods are produced for African markets, especially South Africa. As companies like Unilever expand throughout Africa, facilitating trade between African countries is crucial. Regional agreements such as the East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA) are helping build a more attractive business environment by promoting measures which enable vertical specialisation e.g. removing tariffs on intermediate inputs and machinery, simplifying rules of origin, and harmonising customs and procedures (Lesser, 2014).

(cont.)



Service value chains offer easier integration and provide crucial support for global value chain operations in Africa

Although Africa exported about USD 100 billion worth of services in 2012, its total share in world service exports remains low, particularly in high value-added services. At around 2.2%, Africa’s share of world service exports has remained relatively stable since the 1990s. In 2012, travel (43%) and transport (27%) made up about 70% of the total. Exports in these two sectors have grown more rapidly in Africa than in developed economies for the past decade, while growth in other service exports has been slower in Africa. Growth in overall service exports accelerated considerably in the past decade relative to the previous decade (UNCTAD, 2014). Africa’s medium to high skill services, on the other hand, are only slowly regaining the market share that was lost during the early 2000s. Africa’s share in global financial service exports is down to 0.7% from a peak of 1.2% in 2003 and its share of other business services is down to 0.9% from 1.5% in 2000. Computer services have experienced a more positive trend of stable growth, but at a much lower level. In 2012 Africa accounted for roughly 0.5% of global exports in computer and information services, up from 0.2% in 2000 (Figure 2.6).

Figure 2.6. Africa’s share of global exports in high value-added services, 2000-12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

0.2

0.4

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1.0

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Computer and information services Financial services Other business services

Share of global exports (%)

Source: Authors’ calculations based on WTO Trade Statistics (WTO, 2014).12 http://dx.doi.org/10.1787/888933033631

Services offer a promising avenue for upgrading in Africa, and regional value chain formation is proceeding apace. Three sectors – financial intermediation and business services, retail, and tourism – stand out in terms of their potential for economic and social upgrading. Furthermore, the improved information and communication technology (ICT) infrastructure and greater access to information technology (IT) are helping expand global and regional value chains in African services sectors, enabling upgrading and opening up opportunities in IT and IT-enabled services (ITES).

Regional value chain formation has been most pronounced in financial intermediation and business services sector. African value added in exports in the sector more than doubled between 1995 and 2011, outpacing all other sectors in that period in terms of growth. This reflects the strong regional financial sector integration that has been occurring in Africa over the past two decades. African regional banks, which play a more prominent role on the continent than banks from developed countries, have been a driving force behind this integration. In the period 1987-2008, intra-African foreign direct investment accounted for around 42% of mergers and acquisitions in the African financial sector and 24% of greenfield investment in 2003-07 (UNCTAD, 2013; UNECA, 2013). Africa is the only world region where regional banks are driving financial sector integration to this extent (AACB and World Bank, 2012).


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Retail services are another sector where the formation of regional value chains is advancing at a rapid pace. Large African supermarket chains – especially from South Africa – are integrating the retail sector into regional value chains by expanding into new markets on the continent. Africa’s biggest grocer, Shoprite of South Africa, now has more than 260 supermarkets in 16 African countries. The growing African retail market is increasingly drawing interest from Western retail chains.

Global value chains in the African tourism sector remain relatively captive and producer-driven, with a few large Western travel agencies controlling the market. This is exacerbated by the fact that a much higher proportion of tourists to sub-Saharan Africa use tour operators than in other parts of the world because of the greater complexities involved in making travel arrangements. Nonetheless, national and regional travel agencies – especially from Kenya and South Africa – are emerging that could capture more of the value added in the sector (Goger et al., 2014). The World Bank estimates that by 2021, 75% of travellers in sub-Saharan Africa will be from Africa (World Bank, 2013), which is likely to further reinforce this trend.

Upgrading and downgrading are both occurring in the African tourism sector. Upgrading opportunities tend to depend heavily on placement within the value chain, with mass tourism operators more likely than smaller ethnic or community operators to experience upgrading. Firms with easier access to finance have a greater ability to secure the necessary permits and licences to operate in the wildlife parks and protected areas most popular with tourists (Goger et al., 2014).

More intensive use of information technology constitutes an opportunity for upgrading. The increasing use of IT has greatly expanded regional value chains in the financial intermediation and business services sector, where African lead firms have been playing a key role. In the tourism sector, significant opportunities exist for upgrading, for instance through the development of websites and online booking facilities that enable direct marketing access for local operators and reduce reliance on large international operators. But more IT skills are needed to exploit these opportunities.

Services have taken on greater importance as they make the manufacturing sector more competitive. OECD/WTO data show that the value created directly and indirectly by services as intermediate inputs represents over 30% of the total value added in manufactured goods. Countries that have open and competitive service markets tend to be more competitive in manufacturing. This reflects the fact that the quality and cost of intermediate service inputs such as transport and logistics, utilities and telecommunications affect the competitiveness of manufacturing.

Developing services linked to manufacturing exports therefore constitutes a good way of creating domestic value added. Data from Latin America indicate that, typically, around four-fifths of the service component of manufacturing exports consists of domestic value added (OECD et al., 2013). While similar data for Africa are currently not available, this ratio is probably lower given the relatively lower level of development of service markets in Africa. There is therefore considerable scope for increasing African value added by nurturing the competitiveness of service sectors linked to both natural resource and manufacturing exports.

Telecommunications infrastructure and a competitive telecoms sector are strongly associated with economic upgrading (Nordås and Kim, 2013). This finding highlights the central importance of adequate telecommunications facilities in co-ordinating complex, geographically dispersed production chains. The relatively strong, market-driven investment in telecommunications infrastructure on the continent therefore constitutes an important enabler of future economic upgrading in the African manufacturing sector.



ICT-intensive service exports offer opportunities where transport infrastructure holds back other sectors. The private sector participates to a greater extent in developing telecommunications infrastructure in Africa than transport infrastructure. About 72% of the capital invested in telecommunications infrastructure in Africa is partly or wholly in the hands of the private sector (Jerome, 2008). This means a lesser need to rely on cash-strapped governments to put in place the necessary infrastructure for ICT-intensive service as opposed to goods exports (see Box 2.10).

Box 2.10. Growth opportunities in IT-enabled service value chainsSeveral African countries have identified IT and IT-enabled services (ITES) as a key growth sector in their development strategies and are actively working to put in place an appropriate enabling environment and to stimulate investment.

Linking corporate social responsibility and ethical sourcing with the fledgling African IT/ITES sector is a promising avenue for both global value chain integration and social upgrading. The concept of “impact sourcing”, pioneered by organisations such as Digital Divide Data (DDD) and conceived initially to replicate the Indian development model in other countries, could provide an impetus to the sector. DDD operates business process outsourcing centres in three developing countries, including one in Kenya which currently employs 250 people. Impact sourcing aims to provide opportunities for youth in developing countries by linking up ethically conscious markets with a relatively low-cost labour force trained to supply a variety of IT and IT-enabled services. These include the conversion of non-digital content into digital and searchable form, media tagging, online research and service centre support.

Donors are taking note and are scaling up basic ICT training and linking it with the development of the necessary infrastructure and enabling environment. The Rockefeller Foundation recently announced a USD 100 million initiative that aims to provide jobs for one million African youth by developing the skills needed for the IT/ITES industry. Digital Jobs Africa focuses on training youth in practical skills that businesses demand, which is often a weakness of African university systems. The idea is to create a self-sustaining business model that can later be co-ordinated by government and business and thus boost the IT/ITES industry. The project focuses on Egypt, Ghana, Kenya, Morocco, Nigeria and South Africa, all of which have a potentially comparative advantage in the area.

Nonetheless, in light of the relative dearth of high-skilled workers in Africa, high-skilled services will likely remain a niche, not a vehicle for broad structural transformation. Many tasks in the business service sector require high levels of education, which remain relatively scarce in most African countries.10 Achieving broad-based growth on the basis of business service sectors in Africa seems unrealistic, except, potentially, for small countries with a well-educated labour force such as Botswana or Mauritius.




Notes

1. Attractive endowments are the pull factors that attract lead firms to invest or seek relationships with a particular country. They include deposits of natural resources that investors might seek, as well as the size of the local market, the cost of labour (as an attractive factor for labour-intensive industries) and the distance to consumer markets (for consumer goods industries in search of an assembly location).

2. Openness includes here barriers on importing intermediate goods, inward investment regulations, export restrictions, efficiency of customs regulations and border administration, the level of regional integration and trade barriers in partner countries.

3. Infrastructure includes here access to transnational infrastructure (roads, ports, airports and railways connecting to foreign markets), access to and reliability of telecommunications and power supply, and internal transport infrastructure. The business environment beyond infrastructure includes regulatory certainty, ease of doing business (red tape, administrative hurdles), access to finance and corruption.

4. Domestic capacity to respond to external demand includes here availability of local supply, domestic businesses’ ability to meet international standards and certification requirements, integration between multinational enterprises and local businesses, innovation capacity and availability of adequately skilled labour.

5. Inefficient ports will become an increasingly severe obstacle as more and more lead firms move to “floating warehouse” strategies in their supply chains. Instead of storing goods in warehouses, shipping is used not only to transport but also to store goods. Instead of taking the direct route, a container of car components leaving Germany for South Africa, for example, could be routed via a distant port in Latin America to save on warehouse space in both Germany and South Africa. Such practices make the efficiency of ports even more important.

6. Horticulture exports from Africa have increased by more than six-fold, from USD 1.51 billion in 2001 to USD 9.74 billion in 2011, outpacing global growth averages and doubling its world share from 3% to 6% (Evers et al., 2014; ITC, 2011; UNCTAD, 2012).

7. The full range of standards in operation can be fully appreciated using the International Trade Centre Standards Map, which attempts to categorise them (www.intracen.org/itc/market-info-tools/voluntary-standards/standardsmap/).

8. Woolworths is noted as the only known exception of African supermarkets to require social standards (Barrientos and Visser, 2012).

9. India had a share of 12% in 2002, and China had 16% in 1996 (Rodrik, 2014).

10. Even in India where this sector directly employs only around 2% of the labour force, the business sector has not been a force for the kind of employment growth that would allow for large numbers of people to move from the agricultural sector (out of poverty) into more productive sectors and higher-paying jobs.



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Global value chains magnify the need for a good business

environment, for openness to trade and investments, and for skilled

workers and capable firms and entrepreneurs. Policies for global

value chains must maximise economy-wide opportunities while

creating the optimal environment for the sectors with the greatest

potential.

Chapter 3

What policies for global value chains in Africa?


3. What policies for global value chains in Africa?


In brief

Global value chains (GVCs) amplify requirements for structural transformation in Africa. The shortcomings in the business environment, infrastructure, productive capacity and skills in Africa constitute major bottlenecks to structural transformation (see for example AfDB et al., 2013 and 2012; ACET, 2012; WEF, 2012; World Bank 2013; OECD, 2013a; OECD, 2013b; Ramachandran et al., 2009). The accelerating spread of global value chains amplifies these challenges, as they put African countries at a disadvantage in the competition for GVC investments, especially in manufacturing. Any policy that aims at benefitting from global value chains must effectively address these shortcomings, especially in infrastructure and skills, the environment given to entrepreneurs, and effective openness to trade, including with other African countries. This chapter addresses these needs in a summary fashion. For countries that do not tackle them, integration into global value chains will remain marginal and upgrading highly unlikely. Low road strategies that risk “races to the bottom” on social and environmental conditions would be the only option.

Five key considerations must guide policies for global value chains

Analysis reveals five key considerations that should guide policy makers in using global value chains for development. First, policies must be value-chain specific: Using global value chains for development requires providing the best environment for the value chains with the greatest identified potential. The objective of development policy is to identify the country’s best position in a value chain and the most competitive supply of business functions (Cattaneo and Miroudot, 2013). Manufacturing assembly operations require efficient logistics and import/export procedures that facilitate bringing in components and exporting the fully manufactured product. They also require reliable energy provision as well as a sufficient supply of workers with the right skills. Once a country has joined a global value chain at the production stage of a product, moving up the chain or developing additional product varieties requires a range of services that must be competitive both in price and quality. This is particularly crucial for local small and medium enterprises which need to have access to a range of services in order to concentrate on the specific value-chain activity they do best. The requirements in terms of infrastructure, skills and services are often specific to the value chain. Dairy products, for example, require dense and reliable cold chains and collection structures; manufactures, textiles and many fruits efficient access to sea freight, whereas fresh-cut fruits, vegetables and flowers need efficient air freight. Last but not least, in many global value chains the main players are a few international lead firms. Integration requires attracting these firms to the country, and upgrading requires working with them to identify opportunities. In some cases policy dialogue must therefore be firm-specific.

Second, making the most of global value chains implies trade-offs: Providing the best environment for the value chains with the greatest identified potential must be done without harming the development of other chains. As budgets and resources are constrained, the choice of prioritising infrastructure development, training programmes or preferential access to one sector over another creates policy winners and losers. A ground rule for formulating policy is therefore to ensure that no other sector or value chain is disadvantaged through the enactment of a sector-specific GVC strategy but that economy-wide opportunities are maximised.1 For African countries increasing diversification within the economy is essential for achieving structural transformation (AfDB et al., 2013) and for protecting the economy against market shocks (ACET, 2013). Furthermore, even within sectors, there may be trade-offs concerning the targeting of investments. For instance, setting up a policy supporting foreign commercial farmers needs to be weighed against the potential of the same policy for smallholders (ACET, 2009). Analysing the strengths, weaknesses, opportunities and threats of potentially successful value chains may assist in assessing such trade-offs.



Trade-offs also exist between strategies for integration and upgrading: policies that promote one may not be appropriate for the other and vice versa. For example, using tax incentives to attract foreign investment can facilitate integration into global value chains, however the loss of revenue may inhibit upgrading possibilities, as fewer resources are available for investing in infrastructure and education. Similarly, special economic zones may allow for GVC integration, because they attract exporting companies with preferential arrangement; but they can also prevent linkages and upgrading because they separate exporting firms from domestic non-exporting firms (Brautigam et al., 2010; see Box 1.3 in Chapter 1 and the Tunisia Country Note in this report). Furthermore, while localisation requirements can create linkages between local firms and foreign lead firms that lead to upgrading, they may deter foreign firms from investing in the first place and therefore may actually limit possibilities for integrating into global value chains.

Third, entrepreneurship and collaboration between public and private actors is crucial for using global value chains for development. Effective collaboration requires strong business associations. Entrepreneurs play a critical role in identifying value chain opportunities with high potential and accepting the risks involved in trying to seize them. Using global value chains for development requires public institutions to help build and support the country’s entrepreneurial base. This includes entrepreneurial training and access to finance, as well as partnering with local firms when formulating global value chain strategies. Domestic business associations are essential for this process. Their role is to identify the needs of firms in a given value chain and communicate them effectively to government. They also work as partners in capacity building and training for firms and can be interlocutors for international investors. The Ethiopian textile and garment manufacturers association, for example, has become a critical partner for government and for international lead firms such as H&M. The association has helped shape the government’s set of policies supporting the sector and been a partner to H&M in building capacity for meeting quality standards among local firms. The Kenyan Flower Council plays a similar role in Kenya’s horticultural sector. Actively supporting the creation of such associations must be among the first steps towards using global value chains for development.

Fourth, the power and ownership structure of a global value chain can determine which pathways to increasing domestic value added are open and which are not. The previous sections on the agriculture and manufacturing sectors as well as the section on assessing Africa’s readiness explain in detail the links between chain governance and upgrading opportunities. For example, upgrading to higher-value processing activities may not be feasible in certain producer-driven chains (e.g. coffee, cocoa) owing to the tight control over processing activities that is retained by large manufacturers. Promising options are instead found in product differentiation into higher quality varieties and in identifying additional buyers for them. Strategies must take into account which pathways to upgrading seem the most promising and which ones have low chances for success given the value chain’s governance structure.

Finally, global value chains are no panacea for structural transformation and inclusive growth. Low road strategies risk “races to the bottom”. African countries need to create 10-12 million new jobs every year just to absorb the young people entering the labour market (AfDB et al., 2012). Governments can tackle this challenge by making a national priority of attracting foreign lead firm investments and integrating into global value chains. This must be combined with a strong focus on creating the skills and domestic productive capacity necessary for upgrading and linking the rest of the local economy to the GVC presence in the country. Without such efforts, countries risk competing with each other for GVC investments with low social and environmental standards and with the generosity of their tax incentives. Such low road strategies tend to deliver limited gains for a few while the price is paid by many.




A four-step framework can help formulate effective and targeted policies

Global value chains already feature in the overall development strategies of many African countries. However, there are few examples for specific strategies for participation in global value chains. A country’s overall development agenda should facilitate GVC participation and meet specific value chain requirements. Individual industries and value chains require tailored policy responses to optimise upgrading opportunities. Figure 3.1 shows that 61% of African countries surveyed have incorporated global value chains into their development strategies2 but that specific GVC policies are not yet common in Africa countries.

Figure 3.1. Global value chains and national development strategies

61%

3%

33%

3%

Global value chains feature in the country’s development strategy

The country has a specificstrategy for its participation

in global value chains

Global value chains do not formpart of strategic considerations

Do not know

Note: The percentages reflect the share of countries in each category out of all responses to the question, “How are global value chains considered in the country’s national development strategy?”Source: AEO Country Experts Survey (2014).12 http://dx.doi.org/10.1787/888933033650

This section outlines four steps that policy makers can take to ensure effective GVC participation (Figure 3.2). The four-step process emerges from the findings in this report and from recent literature on global value chain policy formulation (UNCTAD, 2013; ACET, 2013; Bamber et al., 2014).

Figure 3.2. A four-step framework to formulate policies for global value chains

Develop enabling policy interventions

Identify current policies which may restrict/inhibit GVC participation

Are current policies conducive to GVC integration/upgrading?

Assess opportunities within the value chain

What opportunities exist for integrating domestic industries into GVCs ?

What opportunities exist for enhanced value added within existing value chains?

Identify current well-performing value chainswithin the economy

Identify value chains with potential (present in country or not)

Identify value chains with opportunities

Identify current policy bottlenecks


The first step in formulating policies is to appraise value chains that offer potential for integration and those that are currently operating within the economy. A baseline of current economic activities helps to identify areas of comparative advantages and disadvantages with respect to both sets of value chains.3 Such an analysis must consider

dx.doi.org



the position of local actors within the value chains and identify the role of lead firms so that effective collaboration can enhance upgrading opportunities.

The second step is to assess ways to increase value-added or participation in the value chain. This involves identifying opportunities for expanding current activities or even upgrading to higher value activities within a value chain. Opportunities should be prioritised based on the potential net gains, feasibility and risks. It is necessary to consider the governance structures and power dynamics of the value chain, as well as the technical feasibility and capabilities of domestic stakeholders. Some questions to consider at this stage include:

• What are the opportunities for value added with respect to positioning along the value chain? These vary depending on the country’s activities. For example, apparel value chains in Africa tend to involve final product assembly. Although limited for functional upgrading, opportunities for upstream participation may exist, particularly for linking with the domestic textile industries.

• What is the governance structure, and who are the key players within the chain? The governance structures of the chain determine the opportunities for upgrading. For example, in producer-driven cocoa chains where chocolate producers control the processing stages, further processing is limited. However, ways to upgrade can lie elsewhere, such as in product differentiation and quality upgrading.

• What is the technical capacity for upgrading within the country? Even where governance structures permit upgrading, a lack of technical capacity within the country can hamper feasibility. This can be due to inadequate skills or infrastructure or to the distance from final markets.

• What value-added opportunities exist in new or alternative markets? It is necessary to look beyond the current structure of the value chain in question in order to fully assess market opportunities for upgrading. There may be new and alternative possibilities in regional, as well as emerging economy markets.

The third step is to analyse the potential barriers that existing policies might pose to the value chain development. Policy barriers can include time-consuming customs procedures that affect the competiveness of time-sensitive and perishable products. High tariffs on the import of intermediate goods and requirements to procure locally can hamper the overall competitiveness of the value chain activity, while existing international trade agreements can restrict effective GVC participation and therefore require renegotiation. Policies that affect the efficiency of the domestic business environment (such as information and communication technologies (ICT), infrastructure and education) should also be reviewed.

The final step is to develop appropriate policies based on the preceding analysis. The policy choices will depend on the product and the country’s resources. Certain measures may involve trade-offs to consider when designing and implementing an adequate GVC policy response.

Having a good infrastructure and business environment is fundamental for integrating into and upgrading in global value chains

Sufficient infrastructure and an adequate logistics capacity are essential to participating in global value chains and attracting lead firms. The literature demonstrates that poor infrastructure impedes trade due to the resulting high costs (OECD, 2012). Despite the lower labour costs of some Africa countries, inadequate transport links can translate into higher costs for foreign investors and therefore reduce their productivity.




• Improving transport capacity − road, rail and air − should be a priority. Enhancing the links to ports and airports can enable a faster delivery of goods and make African economies more attractive to foreign investors. Moreover, African ports should direct their efforts to solving severe efficiency and capacity problems that result in long waiting times for export-oriented businesses.4

• Establishing rapid import/export processes is essential to integrate the global supply networks that heavily rely on imports for assembling activities. Ultimately, these policies should be accompanied by a commitment to improve transport governance through regulatory and administrative arrangements to fight corruption in the transport sector.

• Ultimately, these policies should be accompanied by a commitment to improve transport governance through regulatory and administrative arrangements to fight cartels and corruption in the transport sector.

• Furthermore, expanding nationwide electricity generating capacity should continue to be on the top of African policy makers’ agendas. Without a reliable energy supply, countries will not be able attract substantial investment either in extractive industries or in manufacturing activities.

Value chain analysis should identify the specific needs of key value chains. Most value chains stand to benefit from improvements in infrastructure, yet even within the same sector, the requirements vary. In agriculture, fresh fish, dairy products and flowers require air freight and cold chain facilities, whereas coffee and cocoa demand efficient port facilities. In manufacturing, “just-in-time” clothing orders can require airfreight capacity, while automotive production necessitates port facilities. Manufacturing and assembly, on the other hand may be attracted by the presence of cluster parks and special economic zones (see also Box 3.2).

The wider business environment beyond infrastructure equally needs attention. Red tape, long procedures and corruption continue to deter investments by foreign lead firms. They also hold back local entrepreneurs and farmers from making the most of the opportunities presented by global value chains. Improvements are essential to successfully compete in a globalised world.

African countries should further develop regional integration and increase openness to trade

Overall, trade liberalisation measures can make African countries more competitive in international supply chains. Measures restricting access to foreign intermediate goods and services increase the costs of production and negatively impact on value chain participation (OECD et al., 2013). For instance, import barriers need to be low in order to attract multinational enterprises that rely on imported intermediate inputs to export manufactured goods. In particular, import liberalisation of intermediate inputs and of machinery required for assembly processes is key. As global value chains tend to accentuate the negative aspects of protectionist strategies, countries that seek to protect domestic production networks can become locked out of globalised trading opportunities (Lesser, 2014).

Measures that facilitate trade can benefit African countries in their role as exporters as well as importers. Reforming customs and border procedures can ease trade transaction costs and contribute to development. In Ethiopia, for example, national customs reforms increased imports and exports by 200% and tax revenues by over 51% (Lesser, 2014). Trade facilitation measures are particularly important for helping African small and medium enterprises participate in global value chains, since they



often lack the financial resources and human capacity to deal with complex border-related administrative requirements (Lesser and Moisé-Leeman, 2009). Reforms in this area need not depend on international agreement.

Accelerating regional integration and fostering regional value chains can unlock opportunities and lead to more effective participation in global value chains (ACET, 2013; AfDB, forthcoming). As shown in the previous sections on agriculture, manufacturing and services, regional markets and regional value chains provide significant opportunities for growth as consumer markets across Africa are rapidly developing. Additionally, emerging economy markets and regional value chains tend to be characterised by less stringent requirements which can act as stepping stones to stricter, more demanding requirements. The less stringent standards required to participate in regional and South-South value chains may not offer sufficient social and environmental protection; but African firms can enhance their productive capacities and gradually upgrade in the value chain (Evers et al., 2014; Cadot et al., 2012).

Regional trade agreements could help raise the low levels of regional integration. As shown in Chapters 3 and 6 of the AEO 2014, the levels of regional trade and regional value chains in Africa are growing but remain low. Many trade agreements exist between African countries, but the reality at the border post or in the customs office is often still far from what the agreements stipulate. Deepening regional trade agreements could create more opportunities within value chains that focus on regional production for regional markets or for interconnected regional operations that supply global markets (Bamber et al., 2014). Trade agreements between African countries should include more simplified and flexible rules that allow the following:

• greater use of imported inputs,

• regional rules of origin,

• less costly compliance-related procedures (Draper and Lawrence, 2013; OECD, 2013c; Lesser, 2014),

• liberalisation of key services sectors beyond what is stipulated by the World Trade Organization,

• more co-operation in infrastructure development,

• open competition,

• enforcement of international contracts between buyers and suppliers,

• movement of capital and the temporary movement of business people (Lesser, 2014; UNCTAD, 2013; see also Chapter 3 of the AEO 2014).

African countries must boost their capacity to respond to global value chains

The ability to respond to global value chains requires skills, productive capacity and entrepreneurs. Given the rising complexity and competition in global supply networks, multinational enterprises increasingly choose locations based on the presence of skilled labour forces (Noorbakhsh et al., 2011; UNCTAD, 2013). Even in industries as apparently low-skilled as apparel production, the lack of a skilled labour force prevents countries such as Ethiopia from participating more fully in global value chains (ETGAMA, 2014). Concerted efforts to provide the necessary skills are crucial for Africa’s future participation in global value chains. A sufficiently dense presence of firms capable of delivering supplies that meet lead firms’ requirements for quality and timeliness is equally important. This is increasingly a binding condition for lead firms’ locational choices, particularly in the manufacturing sector (George et al., 2014). Local entrepreneurs are essential for creating this productive capacity. Furthermore, they




constitute an indispensable base of commitment to the local market that is needed to overcome swings in the global environment that can cause international firms to leave the country.

Developing education and skills is crucial to integrate into and upgrade in higher value-added activities in global value chains. As outlined above and in the preceding chapters, skills are essential for GVC participation and upgrading. Governments should improve access to universal basic education and ensure its quality. In sub-Saharan Africa, for example, 50% of children risk reaching adolescence without learning to read, write or do basic arithmetic (Van Fleet et al., 2012). Investment in technical and vocational training programmes should complement investment in basic education to enhance specific skill-sets related to individual industries and value chains (AfDB et al., 2008 and 2012; OECD 2013b). Fernandez-Stark et al. (2012) have elaborated a typology of the educational policies necessary to move up in global value chains (Figure 3.3.).

Figure 3.3. Typology of skills development policies for upgrading in global value chains

Early reactiveinterventions

Workers’ skills Current workers’ skills

Ongoing proactiveinterventions

Future-orientedinterventions

Emerging workers’ skills Future workers’ skills

Intervention areaOn the job training

(private sector training firm), tailored government programmes

Post-secondary education: technical education

& universitiesEducation system

Type of valuechain upgrading Value chain entry Process

upgradingProduct

upgradingFunctionalupgrading All forms of upgrading

Meet global standards, expansion of market share, competitiveness

(incremental innovation)

Long-term developmentof national economy

Source: Fernandez-Stark et al. (2012).

While reforms to the education system are necessary in the long-run, they will not deliver the skills needed for the near future; therefore, sector-specific training is essential. Activities in the services sector require broad improvements to the national education systems, whereas the other sectors demand more technical skills. In agriculture, many African smallholders are prevented from integrating into global value chains due to their inability to comply with international food standards and certifications. Delivering products that comply requires setting up schools and training institutes specialised in the field as well as establishing multi-stakeholders programmes to develop skills. Furthermore, establishing testing laboratories and improving technical and managerial skills are essential to move into higher value-added activities, such as processing and packaging. The situation is similar in the manufacturing sector where many producers lack the skills necessary to meet international quality standards. They need technical and business administration courses to be able to upgrade their productions. The technical and skills demands are even higher in extractive industries. Technical training and local employment requirements should bridge the gap in technology and skills,. Governments should support research and development, as the capacity to innovate is essential in the extractive industry. Conversely, as the service sector relies almost entirely on human capital, the educational demands are much broader, from communication skills to foreign languages.

To bridge the gap in skills and technology, both governments and lead firms have an important role to play. Governments should encourage the training initiatives of lead firms in order to maximise technological spillovers and capacity development (AfDB,



forthcoming). Lead firms within value chains should be encouraged to support small and medium enterprises and domestic producers by introducing training requirements and corporate responsibility initiatives. Governments should also consider co-financing training and capacity-building activities in order to maximise the technological spillovers of GVC participation.

Capacity building with respect to meeting standard requirements is a crucial aspect of GVC participation and upgrading. Both lead firms and governments play important roles in helping local producers meet international standard requirements. Governments need to develop national inspection and testing infrastructure, while lead firms can provide technical assistance and capacity building. The requirements for public enforcement of standards vary according to the nature of the value chain; public certification may be more necessary in fragmented, less integrated chains, whereas for certain highly customised value chains, buyers help ensure adherence to production standards (Humphrey and Memedovic, 2003). Governments can also assist by developing local certification bodies and corresponding domestic standards of production. Such standards may be more suited to the local context and therefore more accessible than stringent international standards. However, governments should avoid proliferating standards with overly idiosyncratic national ones.5

Attracting large amounts of foreign investment make countries vulnerable to the volatility of multinational enterprises’ locational choices. Therefore, local entrepreneurship needs to be encouraged. Indeed, the shifting of multinationals’ sourcing strategies can reverse “hard-fought upgrading successes” (Bamber et al., 2014). This risk is accentuated with highly mobile foreign firms seeking to profit from special access programmes or preferential trade agreements. Lesotho’s experience provides a telling example: following the uncertainty of the renewal of the United States’ African Growth and Opportunity Act in 2005, Chinese and Chinese Taipei clothing investors in Lesotho returned to China and India where manufacturing was cheaper, to the detriment of Lesotho’s manufacturing industry. However, a similar withdrawal of Asian investors from Mauritius did not have the same effect owing to the country’s strong domestic entrepreneurial capacity. Local entrepreneurs are therefore indispensable to decrease dependency on foreign investments, and policies should provide an enabling environment for them to succeed.

Entrepreneurship and innovation can be encouraged through providing education and training and improving the domestic business environment. Measures to encourage entrepreneurship include i) general policies related to the domestic business environment, such as facilitating access to finance and improving in infrastructure and ICT; ii) targeted responses, such as offering business start-up grants, incentives to explore new activities and foreign markets, and promoting success stories; iii) the provision of business training and start-up assistance, in the form of business-plan development, and managerial and organisational training. Policy makers should create an environment that enables innovative African entrepreneurs to bring their business ideas to fruition. In order to encourage African innovation, investments in ICT, tertiary education, and research institutions are paramount (OECD, 2013b).

Promoting associations of smallholders and small and medium enterprises can boost domestic capacity to benefit from global value chains. Effective associations can do the following:

• enhance the negotiating position of small farms and firms,

• improve inter-firm learning and technology transfer,

• increase connections between small firms and large firms and between small firms themselves,




• increase supplier capacity to comply with national, regional and global standards,

• increase access to finance,

• improve representation in projects such as infrastructure development,

• provide a forum for exchanging management strategies and market information,

• help the domestic private sector strategically identify gaps and niches in the value chain that represent opportunities for upgrading.

Box 3.1. Supporting African firms’ participation in global value chains: What role for bilateral development partners?

Traditional development partners directly support African enterprises’ participation in global value chains in the form of loans, equity and guarantees. They aid businesses operating in sectors such as mobile telecommunication networks, roads, ports, railways and other critical logistic infrastructure. The following are examples from the portfolio of European Development Finance Institutions (EDFI):

• Large infrastructure projects. In 2013, the Lomé Container Terminal (LCT) in Togo received financing of USD 225 million arranged by the International Finance Corporation and co-financed by several international financial institutions, including EDFIs. The Port of Lomé has been playing a major economic role for landlocked countries in the region, such as Burkina Faso, Mali and Niger. The LCT aims is to allow large containerships to enter the Port of Lomé and to stimulate the activity of trans-shipment by smaller vessels towards countries in the sub-region, reducing transport and export costs and decongesting existing ports in Togo.

• Manufacturing and agribusiness. Kevian, a Kenyan fruit juice producer, initially received EDFI financing in 2011 and used the patient growth funds to double production capacities and increase productivity. Technical assistance increased environmental and social standards and established renewable energy components. Today Kevian works with around 30 000 smallholders, has a strong market position and is an established exporter for the European market.

• Vertically integrated agriculture supply chain management. Recent EDFI investments helped expand the Export Trading Group (ETG). Founded in 1967, with its head office in Tanzania, ETG procures, processes and distributes agricultural commodities, connecting African smallholder farmers to consumers around the world. ETG procures 80% of Africa-originated stock from African smallholders. Its 7 000 employees work across 30 African countries and operate 26 processing plants and 600 warehouses. ETG also supplies fertiliser products to small farmers across Africa, using its large-scale buying power to make products available at competitive prices.

• Agriculture exports. Ivoire Coton was founded in 1998 in Côte d’Ivoire after the privatisation of the national cotton industry. An EDFI equity investment in 2001 with the aid of Industrial Promotion Services/AKFED allowed the company to become a leading cotton producer with positive environmental and social effects. Today, Ivoire Coton is among the most important private employers for smallholders in Côte d’Ivoire, in particular in the poorer northern region. It also contributes to alphabetisation campaigns, sets up health stations for employees and surrounding communities and constructs water wells.

The broader experience of bilateral and multilateral aid agencies in support of African economies’ integration into global and regional value chains is documented by the Donor Committee for Enterprise Development (DCED, 2014).



Global value chain participation and upgrading require partnerships with international lead firms

International lead firms are essential players for integrating into and upgrading in global value chains. African countries must attract them to invest and build linkages with local firms. Recent estimates suggest that 80% of global trade is linked to the networks of multinational corporations (UNCTAD, 2013). These firms are at the centre of the drive towards global value chains as they expand their production networks in search of the best global combination of production locations and market access (see Chapter 1). To integrate into a global value chain in most cases requires attracting a lead firm to establish a presence in the country. Once the firm sets up a production facility or office, local businesses can benefit by developing new capabilities through exposure to new technologies and through meeting the lead firm’s requirements.

Ideally, the co-operation between international and local firms becomes self-reinforcing, combining upgrading with continuously expanding GVC participation. In the long run local upgrading can stimulate further investments. Suppliers located at lead firms’ doorsteps can tailor inputs to their needs, help reduce costs, and increase specialisation, quality and flexibility within their value chains (Jenkins et al., 2007; IFC and Engineers against Poverty, 2011). The accumulation of such local expertise can attract more foreign direct investment (FDI). This in turn can trigger additional cluster effects that further boost the capacity for domestic production. Domestic small and medium enterprises gain access to more diversified clients, and risks can be shared among local firms through joint funding or joint operations, facilitating local innovation and upgrading (Jenkins et al, 2007, Nelson, 2007; OECD, 2013b). China’s success in driving development with global value chains underlines this model. Having learned from the presence of international firms over many years, today China has a deeply integrated supply base for many manufacturing activities; the supply base constitutes such a strong comparative advantage that it outweighs rising labour costs.

Research has shown that for foreign enterprises seeking to invest, incentives are secondary to more fundamental determinants, such as market size, access to raw materials and the availability of skilled labour (James, 2009; Basu and Srinivasan, 2002; Zee et al., 2002; Cleeve, 2008). An easy and open investment regime both includes measures that ease and automate procedures to start a business and offers investment-related information. Lowering investment barriers and establishing sound and predictable regimes are crucial for attracting investors (Draper and Lawrence, 2013; Lesser, 2014).

Fiscal incentives can be a strategic tool for integrating into promising global value chains, but they are costly and must be compatible with the long-term objective of upgrading. This is particularly true for countries with few comparative advantages to offer and for cost-sensitive industries, such as textile and apparel. Fiscal incentives range from temporary rebates for certain types of investment, to tax holidays, tax allowances and credits. These incentives are costly in terms of direct expenditures and – often much more importantly – in terms of forgone tax revenues. For example, the loss of tax revenues through the granting of incentives amounted to 10% of GDP in Burundi in 2006 (Chambas and Laporte, 2007; AfDB 2010) and roughly 6% of GDP in Ghana in 2011.6

Expenditures on incentives leave fewer resources for investing in the primary factors attracting investments and driving upgrading.

Where incentives are considered necessary, investing in cost-recovery incentives offers a more targeted and effective tool than providing tax holidays. Cost-recovery incentives include investment allowances and investment tax credits and give priority to investments in productive capacity in the form of plants and equipment. They have




been shown to be more cost-effective in attracting FDI than tax holidays (Zee et al., 2002). Under a tax holiday, a new firm investing in the country is exempt from paying corporate income tax (and perhaps other tax liabilities) for a specific time period. In 2004, while only 20% of OECD countries applied for tax holidays, 70% of African countries were proposing them to draw investment to their economies (Bora, 2002 in Cleeve, 2008). This is despite broad evidence suggesting that tax holidays are unnecessary to attract beneficial investment (Van Parys and James, 2010; James, 2009) and that they risk appealing to short-run projects with few long-term gains for the local economy (Cleeve, 2008; Zee et al., 2002).

Box 3.2. The limited success of African special economic zones in global value chains

Today, about 60% of African countries have special economic zone (SEZ) programmes (Brautigam et al., 2010). Established in a specific region, SEZs enjoy exemptions from a variety of fiscal burdens. With the exception of Ghana and Mauritius, evidence suggests that African SEZs have largely failed to deliver significant benefits. The majority of these zones struggle to attract foreign direct investment because of their modest strategic and management plans and their country’s overall unappealing political and legal landscape. The incentives brought by SEZs are generally not enough to interest investors when the country’s national investment climate is poor (Brautigam et al., 2010). Moreover, linkage creation between export-oriented and other local firms is difficult where regulations and tax regimes for the two differ significantly. Tunisia’s difficulties to create more social benefits from its offshore sector illustrate this (see Chapter 1).

Nonetheless, SEZs remain a frequently used tool in Africa, most recently by China. The African SEZs officially approved by the Chinese government are located in Algeria, Egypt, Ethiopia, Mauritius, Nigeria and Zambia. In addition to these, subnational entities and private actors have undertaken several other projects in Africa of varying types and sizes. Although its own SEZs were established in a different economic and institutional context, China is the world leader in the field, having established more than 100. The Chinese SEZs are being implemented on a for-profit basis by private sector consortia, albeit often led by public or semi-public enterprises and with the aid of subsidies and concessionary finance from the Chinese government (Brautigam et al., 2010). Research shows that zones implemented by the private sector tend to do better than government-led SEZ schemes. Some evidence shows that the Chinese SEZ in Egypt has enabled Egypt to move along the global value chain within the extractive sector to manufacture petroleum drilling rigs and related components for use by international oil companies operating in the country.

Attracting foreign direct investment alone may not be sufficient to increase local participation in global value chains: additional measures are required to promote linkages between domestic and lead firms. As local firms interact with foreign companies, they may gain technical skills through knowledge spillovers. Governments can facilitate this transfer of skills and technology through two policy measures: i) facilitating the exchange of information by providing institutional support and establishing investment promotion agencies; ii) imposing localisation requirements to encourage investors to link with domestic firms. Complementary measures may also be necessary to strengthen the bargaining power of local producers relative to their foreign GVC partner (AfDB, forthcoming). These include establishing domestic producer associations to help balance the power between local producers and multinational enterprises and enacting specific laws for GVC activities, such as local employment quotas and preferential treatment regulations for local input suppliers (UNCTAD, 2013).



Providing enterprise maps and supplier databases on major firms in various sectors can help develop linkages. Enterprise maps contain sector profiles, detailed supply chains, in-depth information on major companies within each sector as well as their sources of inputs. This information can be useful both for domestic firms aiming to enter supply chains as well as for governments seeking to identify potential areas for promotion of local firms (Sutton and Kellow, 2010; Sutton and Kpentey, 2012; Sutton and Olomi, 2012). Supplier databases or subcontracting exchange schemes help lead firms identify local businesses with which to partner. Generally, the databases provide information on potential suppliers, their quality and their capability of delivering on specific tasks. The databases are often managed by enterprise centres, whose staff evaluates the businesses’ performance to reduce the lead firm’s risks when contracting with local partners for the first time.

Localisation requirements can encourage linkage development; however, they also impose additional costs on foreign investors and can therefore simultaneously inhibit upgrading opportunities further down the value chain. The requirements for foreign firms to enter a joint venture or provide equity to local partners are meant to allow local firms and investors to participate in and share the rent generated, while encouraging linkages based on local know-how. The requirements to transfer technology aim to increase technology spillovers to the domestic economy. Instruments include mandatory technology sharing, or indirect tools such as weak enforcement of property rights. Local content rules require foreign investors to source from domestic businesses, in order to force linkage development (OECD, 2005). However, the added costs of localisation requirements, coupled with a lack of domestic supply capacity, can divert investment to countries with more investor-friendly conditions. Furthermore, mandatory localisation requirements are increasingly ruled out in bilateral investment treaties and free trade agreements (OECD, 2005). As an alternative measure, lead firms can benefit from incentives to create linkages with domestic firms. If foreign investors fulfil certain conditions in terms of local employment, local procurement or training of local business partners, they are granted certain benefits. These can include the relaxation of binding requirements such as import duties, ownership rules and limitations on expatriate staff.

To ensure inclusiveness and sustainability, global value chain policies must be based on a strong social and environmental framework

Governments should consider the potential trade-offs between increased GVC participation and social and environmental concerns in order to avoid a “race to the bottom”. As policy makers seek to make domestic firms more attractive to investors and increase market opportunities, they must also ensure to provide a strong environmental and social framework.

Social upgrading does not necessarily flow from GVC participation or from economic upgrading; explicit social policy is required. The challenge for African economies is to ensure that increasing GVC participation has a positive impact on socially inclusive development by providing quality jobs. Since the institutions that enforce legal standards and compliance codes are generally under-resourced and weak in African countries, informal employment, the segmentation between casual and permanent workers, and overall non-compliance in many sectors harm society. Countries that have not ratified International Labour Organization and human rights conventions should do so, and those that have should enforce them. Enforcement is particularly critical for the most vulnerable workers, such as women and migrants, who tend to be over-represented in lower-value segments of the value chain or in positions that are casual, temporary or undocumented. Policy makers can address gender inequality in global value chains by




i) improving access to jobs (especially in non-traditional occupations); ii) increasing training and mentorship opportunities for women; iii) promoting sexual harassment policies and awareness in workplaces; iv) offering supportive services such as childcare and social services; and v) developing transport infrastructure to provide safe access to work.

Environmental safeguards are necessary to reduce the potential negative impacts of GVC participation. GVC participation can change the use of land, resulting in deforestation and generally degrading the ecosystem. Therefore effective natural resource management systems are necessary to protect local environments, biodiversity, and the quality of soil, water and the landscape. Similarly, policy makers should encourage sustainable development to line up carbon and greenhouse gas emissions with international frameworks and conventions. Lead firms are under mounting pressure to ”green” their supply chains as eco-conscious consumers increasingly scrutinise procurement practices. Therefore, collaborating with lead firms is crucial to the successful implementation of environmental policies relating to global value chains. Lead firms can play an important role in ensuring that certain environmental codes are adhered to as it is in their interests to do so.

Beyond necessity, going social and going green offer African countries with opportunities to diversify as consumers increasingly value socially and environmentally certified products. As shown in Chapter 2, developing new varieties of products is a key element of successful strategies in many global value chains. Certifications of social and environmental quality standards can provide such variation and fetch premium prices in consumer goods markets, particularly in high-income countries.



Notes

1. Multi-purpose infrastructure is a good example of combining support to a specific value chain while maximising economy-wide opportunities. A railroad that is needed for transporting mining products such as coal and iron ore, for example, should be built in such a way that it serves as many other sectors and towns as possible. Export restrictions on raw materials, on the other hand, are an example of a policy that supports a specific value chain but harms others: such restrictions can support local processing through cheaper raw material inputs but harm the raw material sector through lower prices. Such measures must be time-bound and conditional to strict performance targets in terms of effective domestic demand for the raw material in question at export price parity minus the cost of transport.

2. Examples of national development strategies that explicitly target global value chains include Rwanda’s Economic Development and Poverty Reduction Strategy-2 (2013-18) and Egypt’s Industrial Development Strategy 2008 (MINECOFIN, Republic of Rwanda, 2013; ERF, 2006).

3. Given the infrastructure and difficult business environment, many firms in Africa must be of higher productivity than comparable firms in countries with similar levels of development (Harrison et al., 2013). As a result many economic activities do not yet exist in Africa because they cannot be profitable; once infrastructure and the business environment improve, those activities will develop. Many future opportunities for attracting global value chains to African countries will therefore likely differ from current ones.

4. In Tunisia, a reduction in cargo delays from ten days in 2003-04 to 3.3 days in 2010 helped generate 50 000 full-time and 50 000 part-time jobs for the firms involved (OECD, 2013c in Lesser, 2014).

5. For instance, the proliferation of domestic standards in relation to fertilisers and seeds has prevented producers and importers from exploiting economies of scale across markets. Because of the small market size of many African countries, the additional costs of meeting each country’s standards are spread over a small volume of sales. In the best case they increase prices for farmers and consumers and in the worst case disrupt supply if the burden of a country-specific standard renders import or production unprofitable (AfDB et al., 2013).

6. OECD estimation based on data provided by the Ministry of Finance and Economic Planning (MoFEP).




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PART TWO Country notes

Country notes


AlGERIA

The main activities concerning productive potential that are integrated into global value chains (GVCs) are oil and gas, agri-food, the extractive industries and mining, and foreign trade in goods and services (exports and imports). In 2011, the main productive sectors that contributed to GDP were oil and gas (36.0%), services (19.7%) and agriculture (8.1%). Industry, meanwhile, had contracted to 4.3% of GDP (down from 9.1% in 1998).

The institutional economic environment of GVCs is shaped by a national productive system (excluding agriculture) structured around 934 250 economic units operating in business (54.8%), services (34.0%), industry (10.2%) and construction (1.0%). The vast majority (98%) are private units, while the rest (2%) are public units or public-private partnerships. The private sector generates 52% of total value added, and is formed by mainly family-run VSEs with limited investment capacity, access to bank credit and development prospects. The larger public enterprises and public-private partnerships (those with more than 250 employees and a turnover of more than DZD 2 billion) provide 48% of value added. The oil and gas sector is centred around the Sonatrach group (GSH), which alone provides 36% of GDP. All these public enterprises, and to a lesser degree the private sector, are involved in GVCs through production and trade.

The 2011 input-output table shows the share of exported value added for each sector: 99.5% for oil and gas (mainly GSH); 90.0% for leather and footwear; 47.5% for mining and quarrying; 10.6% for the mechanical, metal, electrical and electronic industries; 10.2% for agribusiness; 10.0% for wood, paper and cork; 8.0% for transport and communications; and 3.5% for building materials. To put the weight of each sector into perspective, it should be noted that GSH provides 97% of all of Algeria’s exports. Algeria’s economy is strongly linked to the global oil and gas economy both during periods of prosperity1 and periods of decline.2 Other sectors’ more modest involvement in the global economy is in the export of raw materials or materials that have gone through primary processing. This integration in GVCs points to an industrial sector in decline, with frequent major changes and ineffective reforms. The industrial sector is subject to an unrestrained opening of foreign trade, which actually encourages the development of the informal sector (25% of GDP). Furthermore, the law establishing the 51/49% rule for foreign investment has not yet yielded the results that were hoped for.

The Algerian economy also participates in GVCs through trade. In 2011, exports of goods were valued at USD 73.49 billion and imports of goods at USD 47.25 billion, giving Algeria a trade surplus of USD 26.24 billion. Imports were equal to 31.9% of GDP and exports 38.7%. Excluding oil and gas, exports were worth only 3% of GDP, partly because of the limited domestic supply of goods.

Oil and gas (and derivatives) accounted for 97% of exports, with GSH overwhelmingly dominating trade and GVCs. It is Africa’s largest company, with a consolidated turnover of around USD 100 billion in 2013.

Excluding oil and gas, the Algerian economy’s integration into GVCs is relatively negligible, accounting for only 2.81% of total exports. But it is substantial nonetheless, and is composed as follows: i) raw materials or semi-finished hydrocarbon derivatives (USD 1.2 billion, 1.6% of total exports), such as oils and products produced through tar distillation (USD 836 million, 1.1% of exports) and anhydrous ammonia (USD 372 million, 0.5% of exports), which provide little value added; ii) agri-food (USD 321 million, 0.4% of exports), including sugars produced by the private-owned CEVITAL group (USD 268 million), drinks produced by the public-owned Eaux minérales algériennes (USD 26.9 million) and dates produced by private firms (USD 25 million); iii) other industries (USD 565 million, nearly 8% of exports), including skin-tanning products (USD 20.3 million), calcium phosphate (USD 128 million), unwrought zinc (USD 25.7 million), glass sheets (USD 19.1 million), acyclic alcohols (USD 41.8 million), hydrogen and rare gases (USD 39.1 million), and other products (USD 290.3 million), led by those produced by the public-owned SGP Industries manufacturières. Although sectors other than oil and gas are not very

www.africaneconomicoutlook.org/en/countries


integrated in GVCs, the productive sectors have the potential to become more involved in the global manufacturing industry, especially flour milling, cement, steel, sugar refining and the dairy industry, whose output was well below capacity in 2010 and 2011.

Imports totalled USD 47.25 billion in 2011, many of which were from European Union countries. Imports of capital goods were worth USD 16.4 billion, or 34.7% of the total, and were mainly transport vehicles for passengers and cargo. Imports of goods for production facilities totalled USD 13.6 billion, or 28.8%, and consisted of iron and steel products and oils for the food industry. Food imports, including cereals, milk and sugar, were worth USD 9.9 billion, or 21.0%. Finally, imports of non-food consumer goods were valued at USD 7.3 billion, or 15.5%, and included passenger cars, pharmaceuticals and motor-vehicle accessories.

There is significant integration in GVCs for imports, but only 28.8% generate value added in exports. The remaining 71.2% consists of food and durable goods.

The reforms to the public industrial sector and the dismantling of the sector had various consequences: assets were privatised, imports were replaced by domestic production (supported by liquidity in the oil and gas sector), foreign trade was made fully open, productivity fell, and the informal sector grew. The government sought to break this dynamic in 2013 by issuing a call for proposals for 18 industrial sectors to stimulate the industrial recovery and integration of sectors of the economy in order to increase and diversify domestic production and create jobs.


Country notes


ANGOlA

Before independence in 1975, Angola possessed a diversified economy with strong agricultural and manufacturing bases. The civil war caused major upheavals and the economy became mostly dependent on oil, diamonds and other minerals. Angola’s involvement in the global oil value chain has been limited with only underwater umbilicals, risers and flowlines made locally. Other key activities performed at local level include systems, equipment, pipes and valves installation, construction and services and drilling services. The oilfield service sector injected USD 51 billion into the economy from 2004 until 2010. However, only about 1% of Angolan workers are in the oil industry. Moreover, most activities in the oilfield value chain are global. Currently, Angola produces 1.8 million barrels of crude a day and refines about 39 000 barrels per day against total domestic demand for 85 000 barrels each day. The country exports 90% of its oil production, primarily to China (44%) and the United States of America (25%) according to petroleum ministry sources.

Despite the fact that all material inputs are imported, there are opportunities for Angola to enhance its position in the global value chain and broaden its participation into sectors such as liquefied natural gas, methanol, power gas transmission and gas-to-liquids. Investment in these industries could generate jobs and promote the emergence of higher value-added activities. According to a 2013 African Development Bank study, Angola is more likely to integrate into the oil and gas value chain and play a catalytic role at regional level by: i) major investment in liquefied natural gas; ii) adopting a phased approach to developing oil and gas downstream industries, starting with high impact projects to demonstrate Angola’s viability; iii) additional investment in fertilisers, methanol and gas-to-liquid downstream industries; iv) improving the regulatory framework by ensuring stable transparent regulations, encourage transparency and address capital gain taxes.

The major obstacles to developing these industries are the inadequate transport infrastructure, difficulties in access to international infrastructure (roads, ports, airports and railways connecting to foreign markets), inadequate and unreliable power supply, difficulties in access to finance, volatile trade flows resulting from fluctuating global commodity prices and strategy changes by multinational enterprises. Also the business environment is not yet conducive to regional integration due to administrative barriers to free movement of goods and labour. Weak capacity in local manufacturing and a lack of specialised oil industry skills limit the development of links between oil service activities and the rest of the economy.

Because of the barriers to entering the oil and gas global value chain, the government has introduced legislation to unleash oil and gas downstream transformation industries, create jobs and ultimately contribute to poverty alleviation efforts. The Petroleum Activity Law assigns the sole ownership of Angola’s hydrocarbon resources and mining rights to the Angolan state. Under the law, Sonangol, the state oil company, is the concessionaire of Angola’s oil industry and sole owner of mining rights. Other entities may access Angolan hydrocarbon resources only in partnership with Sonangol and through concession and production sharing agreements. The government has also used the Petroleum Activity Law and local content decrees to promote the creation of local skills through the “Angolanization” of human resources. They also aim to increase the participation of local firms in global markets by giving preferential treatment to national firms in the supply of goods and services.

To stimulate a greater local input, the Angolan government could consider policy measures such as:

• Balance support given to different sectors. The government could give the same fiscal and financial incentives to all local firms involved in different parts of the oil industry and prioritise the setting up of research and development activities alongside the promotion of national enterprises, which is the main focus of current policy. The government could pick ‘champion’ local manufacturing firms to enter the supply industry and encourage the development of knowledge networks between suppliers and manufacturers and clients.



• Invest more in training at higher technical level in the general education and training system and at petroleum institutes to fill capacity gaps at this level.

• The petroleum ministry and Sonangol (the regulators of the oil sector) should work more closely on policy with the industry and economy ministries which are leading Angola’s industrialisation and diversification agendas.

• Clear policy implementation mechanisms to enable policy efficiency and stamp out potential channels of corruption.


Country notes


bENIN

Global value chains (GVCs) can provide the Beninese economy with an opportunity for integration into international trade and a chance to attract foreign direct investment to exploit its potential.

GVCs are embryonic in Benin. Several activity sectors – including agriculture, agro-food and tourism – could be integrated into GVCs if they were structured by appropriate policies. The country does have assets to facilitate its integration into GVCs, including political stability, the availability of non-cultivated arable land irrigated with a dense network of rivers and effluents, its integration into an organised regional area (ECOWAS and WAEMU) and a privileged gateway to Nigeria, a huge market.

The activity sector in Benin with the most integrated approach to the production of added value is cotton. Its integration into the cotton-textile GVC is limited but could be improved with the development of a better structured distribution channel for Beninese semi-processed production. The cotton sector in Benin is an integrated value-chain model that interconnects producers of the chain – input suppliers, middlemen, cotton producers, transporters, ginners and international traders. This value chain is mainly structured by the state, which guarantees inputs supply to farmers and implements price-setting mechanisms amongst the different stakeholders (input distributors, cotton producers and ginning industries). The state also ensures the movement of financial flows between the different links of the value chain, from pre-financing of input (seeds, fertilisers and pesticides) to payment of production to cotton farmers. Integration of the financial sector into the process is also ensured by the state, which mobilises resources through bank loans extended until the ginned products (cottonseed and fibre) are sold on the international market. More than 95% of the cotton fibres are thus exported to Asian markets.

Schemes have also been set up to strengthen techniques in the sector with investments in research and development (seed) and ancillary services to define technical and production routes.

Integration into the cotton-textile GVC could be further developed by seeking more added value downstream, especially in the textile industry. Benin is part of a rich regional African textile market but is struggling to assert its comparative advantages. Similarly, the European and American markets today are niches to attract FDI into the textile sector through agreements such as the African Growth and Opportunity Act (AGOA), given the country’s competitive cost of labour.

Development of the cashew-nut sector, along with the export of raw cashew nuts, white almonds and roasted almonds to India, Brazil, Viet Nam, Europe and to a lesser extent sub-Saharan Africa, is also an area where Benin is integrated upstream of the GVC. The production of raw cashew nuts makes up more than 95% of the exports of the sector. The local value chain is integrated through the structuring of the cashew producers’ region-based associations, the URPAs, which organise the sector. The URPAs provide producers with jute bags, set marketing rules and negotiate bundled-sales contracts for producers. The processing link of the chain is still embryonic. It represents less than 5% of the production volume and is dominated by small processing units with at most a 2 000 tonne capacity. There are, however, niches in: i) research into the improvement of plantation productivity; ii) processing for greater added value (white and roasted almonds); and iii) distribution.

Promoting sectors such as rice, pineapple, maize and cashew nuts, developing irrigation infrastructure (dams, dykes and irrigation canals) and setting up agro-processing units are among the policies likely to diversify Benin’s export agriculture and further integrate national agricultural production into GVCs. Similarly, development partners such as the Netherlands and the European Union are launching programmes for the integration of certain sectors (pineapple, cashew, etc.) into GVCs. The goal is to strengthen the capacities of local producers in terms of production techniques, organisation of the sector and of the capacity to contract with international players on the one hand, and on the other to facilitate entry into the sector of agro-industrial multinational companies.



In the service sector, tourism and transport have been identified as having the potential to facilitate Benin’s integration into GVCs. Tourism in Benin is an important potential asset (featuring zoos, royal and colonial relics, etc.), but the country is lacking in accommodation infrastructure. The government is fostering an extensive public-private partnership programme to promote the development of specific tourist areas, such as in particular the route des pêches (fisheries route), with the development of facilities and tax concessions. Strengthening tourism infrastructure should ultimately make it possible to get more out of GVCs by promoting Benin as a tourist destination and encouraging regional tourism with Ghana or Nigeria in particular.

With regard to transport, Benin is a country with a transit vocation featuring a port and more-or-less workable international road connections. The current projects to transform the port of Cotonou into a third-generation port with dry ports and the Sèmè-Podji deep-water port and to build the Glo-Djigbe airport and the Cotonou-Niamey-Ouagadougou-Abidjan rail loop should allow Benin to use its geographical position to greater advantage, to increase its trade in West Africa and to facilitate its integration into GVCs.

Benin must, however, remove a number of obstacles to the integration of its high potential sectors into GVCs. The business environment is still hampered by, among other things, the deficiency and poor quality of transport, energy-generation and telecommunications infrastructure, as well as by corruption and the shortage of skilled labour.

Benin should also develop a policy to minimise the risks inherent in stronger integration into the global production of added value, in particular exposure to imported crises, confinement in GVCs to links with low added value, or overexploitation and depletion of the country’s natural resources. Strategies to move up in the value chains and mechanisms for a sustainable and optimal exploitation of natural resources should be implemented to mitigate these risks.


Country notes


bOTSWANA

Botswana has an open economy. In 2012, imports and exports of goods and services amounted to 99.78% of GDP, with 47.02 percentage points accounted for by exports. As in other developing nations, Botswana’s commodities sectors and tourism are, by value, the most engaged in global value chains. Official data from 2003-12 suggest that the sectors most engaged in global value chains (GVCs) are mining (diamonds, copper nickel, soda ash and gold), vehicles, textiles, beef and tourism.

Botswana exports its diamonds, mostly in their raw form, to the United States, Europe and Japan. Still, the diamond subsector is by far the country’s main player in GVCs, accounting for 84.7% of the total value of principal exports in 2012. That year, polished diamonds, valued at USD 706.6 million accounted for 17.6% of diamond exports. The relocation of the Diamond Trading Company from London to Gaborone and the establishment of the Diamond Hub, with a focus on developing downstream activities such as diamond cutting and the manufacture of jewellery will significantly raise the sub-sector’s contribution to gross value added.

Though important in terms of job creation, textiles and vehicles have weak prospects for long-term growth because of low domestic value added, high content of imported inputs and low domestic and international competitiveness. Beef exports, in carcass form, are largely destined for Europe. International tourism is a major and growing contributor to national output, employment and foreign exchange earnings. However, it is primarily wilderness based and not adequately measured in national accounts.

The potential development impact of these sectors’ participation in GVCs is enormous. Mining has been the mainstay of the economy since the 1970s. In 2012, it accounted for 19.6% of GDP, 30% of government revenue and in excess of 84.7% of foreign exchange earnings. Movement up the value chain could contribute significantly to economic growth, export earnings, employment creation and government revenue. The government has effectively utilised mining revenues to finance the country’s infrastructure and the development of its human capital. Between them, mining, tourism and beef directly account for approximately 17.2% of formal employment (Labour Statistics Report 2010). The indirect impact on employment and livelihoods is even larger because some of these activities, especially mining, have anchored the development of sources of livelihoods beyond the primary activity. Botswana has mining towns that have developed into the main centres of commerce, light manufacturing and services in their regions. Tourism has had a similar effect on Maun and Kasane in northern Botswana. On the downside, and with particular reference to mining, there are two concerns, namely: i) substantial external costs such as environmental degradation, disruption of livelihoods and ill health; and ii) the risk of the Dutch Disease phenomenon. Neither is adequately studied.

There is significant scope for Botswana to enhance its positioning within the minerals, beef and tourism value chains. In sum, the challenge lies in improving the investment climate. Through the Botswana Mineral Investment Promotion Strategy, Botswana continuously reviews the fiscal, legal and policy framework for mineral exploration, mining and the processing of minerals to secure the sector’s competitiveness. The key priorities in this regard are enhancing licensing efficiency and the security of tenure; a fiscal regime that encourages investment in mining; improving information management and exploring opportunities for local value addition. The Diamond Hub is a good start in this regard.

The Mining Code of 1999 streamlined licensing and enhanced safeguards for tenure. It also provided for an investor -friendly fiscal regime, elements of which include a variable income tax rate based on project profitability, 100% capital redemption and stability. The National Integrated Geo-Science Information System helps address information failures. A promising move to expand processing capacity and therefore to place Botswana higher up the diamond GVC has been the relocation of the Diamond Training Company from London to Botswana and the government’s decision to reserve a proportion of Botswana’s diamonds for local processing. Both are products of tough negotiations which are paying dividends in terms of investment, quality jobs, and diversification into downstream activities in the diamond sector. Sustained investment in



mineral exploration is critical to Botswana’s economic future because the profitability of mining known diamond deposits has peaked and is expected to decline.

The beef sector requires serious reform to improve its performance. The existence of the Botswana Meat Commission (BMC) as a state monopoly with sole responsibility for marketing beef outside Botswana constrains investment, innovation and competition in the sector. The BMC has had serious management problems for years, culminating in a parliamentary investigation in 2012 that revealed extensive managerial inefficiencies. Ongoing dialogue suggests that deregulation, including the privatisation of the BMC, is a possibility. Terminating the BMC monopoly may lead to the unearthing of alternative markets whilst more effective management of the threat of foot and mouth disease will ensure access to the EU market is sustained. The performance of the sector could also be enhanced by improvements in the quality of the national herd and management skills, especially in communal areas.

Tourism has significant potential for growth. Whilst the Botswana Tourism Board is doing a good job of marketing Botswana’s tourism services, three other areas require urgent attention. One is the diversification of the product’s emphasis on wildlife; culture, for instance, is an option. The second is enhancing the sector’s capacity to provide services. The third is reforming the management of the tourism sector to ensure that a greater proportion of the tourism revenue is retained in the country. According to Botswana Tourism Statistics, only 10% of the tourism revenue is retained locally. This is partly because the bulk of Botswana’s tourist bookings are handled in South Africa, and partly because the sector’s supply chain is foreign-dominated.

Botswana faces a range of barriers to participation in global value chains. These include: relatively high costs of accessing input and output markets on account of being landlocked; serious power and water challenges and generally high utility costs; low labour productivity; and bureaucratic costs. Most worrisome, Botswana has been slow to initiate reforms to improve its business environment, managing only one reform in each of 2011 and 2012.

The foregoing challenges notwithstanding, Botswana has taken measures to enhance its capacity to participate in GVCs. These include: the pursuit of macroeconomic stability through strict adherence to a defined fiscal rule; the pursuit of a firm inflation target; and the accumulation of reserves as a buffer against shocks. More specifically, Botswana has developed a number of strategies to enhance competitiveness and the growth of Botswana’s private sector. These include: the Botswana Excellence Strategy (2008), the Economic Diversification Drive (2011) and the Botswana National Export Strategy 2010-2016. The Botswana Confederation of Commerce, Industry and Manpower also developed the Private Sector Development Strategy (2009-2013). Other efficiency enhancing measures are investment in broadband width and the modernisation of the payment system.


Country notes


bURkINA FASO

Burkina Faso plays only a small role in global value chains (GVCs). For decades Burkina Faso’s participation in value chains was essentially through its agriculture, with cotton being the main product. The situation has changed substantially since 2000, with the extractive industries now being centre stage. This is especially the case for gold: production rose to 42.8 tonnes in 2013 from one tonne in 2000. As a result, it has become the main export, accounting for 72% of exports in 2013. As for agriculture, apart from cotton (exports of ginned cotton reached 255 000 tonnes in 2013), there are also opportunities for new products, particularly sesame and cashew nuts. Value chain activities in these are limited, however, to research and development and production and extraction.

There are numerous possibilities of positioning the country in GVCs in agriculture and manufacturing. Regional integration with the Economic Community of West African States (ECOWAS) offers opportunities. The 15 member states have a relatively stable regulatory framework and labour is relatively cheap. The guaranteed minimum inter-professional monthly salary is XOF 30 684, less than EUR 50. This is much less than the wage offered by most companies with foreign capital. As a result, the country has advantages that could help it develop its agriculture, namely onions in a regional value chain. In the 1980s Burkina Faso’s production of green beans became part of a GVC. But poor transport infrastructure and packaging, plus the low level of innovation by producers to adapt to market demands, saw the industry decline.

The country also has potential for the production of higher value goods and the development of segments for sale and distribution, namely the processing of shea nuts, cashews and dried mangoes. The country also has significant value chain potential for sesame and cowpeas.

To take advantage of the value chain of extractive industries, the country could make more use of niche segments using local products (agricultural and livestock products, etc.). With this in mind, the government intends to set up a growth pole for the mining industry based on local products. With respect to services, Burkina Faso has opportunities in banking and finance. Segments that could be developed include venture capital, guarantee funds, leasing and other services that facilitate structural investment. The tourism and hotels industry also offers opportunities. However, infrastructure must be developed and tourist resorts and internal transport must be promoted.

Access to trans-national infrastructure, reliable energy and qualified workers for technical and professional fields are the main obstacles blocking Burkina Faso’s path to GVCs. As Burkina Faso is landlocked – it’s about 1 000 kilometres from the nearest coasts in Côte d’Ivoire, Togo and Ghana – the poor state of roads and railways is a key obstacle to the country’s participation in GVCs. This drives up the cost of bringing in equipment and weighs heavily on export competitiveness.

Burkina Faso’s energy costs are the highest in the WAEMU zone at XOF 118 per kilowatt/hour, compared to XOF 56 for Benin and XOF 53 for Niger. The lack of supply and frequent and lengthy power cuts seriously affect the economy. A mere 13.9% of Burkinabé households are estimated to be connected to the electrical grid. Finally, the lack of a qualified workforce in technical and professional fields also constitutes a major constraint.

There is no specific strategy in Burkina Faso for taking up the challenge of participating in GVCs. On a national level, however, the SCADD strategy contributes to this aim, particularly with its first declared target of the “development of pillars of accelerated growth.” Measures which contribute to strengthening Burkina Faso’s role in value chains are spread out across different strategies and sectoral policies, such as those for industry, trade and skills and rural areas. To improve the country’s chances in GVCs, these different measures should be applied more coherently in a specific strategy that aims to develop its value chains.



bURUNdI

The analysis of value chains in Burundi aims to: organise the population from the base up around high-growth-potential sectors; integrate persons demobilised and displaced by successive conflicts into producer and trader organisations to empower them; improve the population’s access to energy, social services and markets to support the development of value chains; and develop inclusive domestic markets in which the private sector contributes more to poverty reduction.

On a global scale, Burundi has a narrow, undiversified export base, and the few products it presents to the international market are exported in their raw states, with very low value added nationally. Upstream, the industrial system is not developed and is still in its infancy, but Burundi could take advantage of new developments within the framework of the EAC and prospects offered by the mining sector.

Given the absence of data on trade expressed in terms of value added for Burundi, this analysis is based solely on export data from the ITC Trade Map database.

Two companies can be considered models of success in the agri-food sector: Brarudi, a Dutch company that brews beer from wheat, and the Burundi Tea Board (Office du thé du Burundi, OTB), which processes tea. Both companies, however, are poorly integrated into the global value chain.

Coffee accounts for 70% of Burundian exports. Initiatives have been introduced to improve businesses’ value added, mainly by renewing high-quality coffee trees, fertilising soils, and improving hygiene at cleaning and hulling stations.

Tea is the second largest export crop. For a long time the tea sector was dominated by a single public enterprise, the OTB. Following the recent liberalisation of the sector, a new company, Prothem, has entered the market. Tea exports pass through the Kenyan port of Mombasa in their raw state, with low value added. Since the sector’s liberalisation, efforts have been under way to modernise equipment and improve the quality of the product.

Burundi has a considerable mining potential; mining is currently artisanal and informal. It has the world’s second largest nickel reserves and sixth-largest coltan reserves, but the extractive industries provide less than 1% of GDP. A mining code based on international standards has been adopted, and legislation is being drafted to improve the legal framework and cash in on the mining potential. Meanwhile, the government has addressed the country’s energy deficit by building new dams; in transport infrastructure, negotiations are under way to build a railway linking the EAC countries.

The only industries in the manufacturing sector are food and textiles. There is great potential for the food industry, with fruits, vegetables and milk. Some small fruit- and vegetable-processing units are beginning to achieve results. Burundi could export banana, pineapple, passion fruit and tomato juice to the sub-region and the rest of the world. The country has a large milk-production industry, but it has low technological processing capacities.

The Burundian economy has long been dominated by the primary sector, but evidence in the latest national accounts suggest it is turning towards the tertiary sector. Services have boomed in recent years, accounting for 40% of GDP in 2013. The boom has been most prominent in the banking, insurance, post and telecommunications, and hotel and restaurant sectors.

The boom in banking and insurance services is fuelled by the arrival of financial institutions from other countries in the sub-region (KCB and CRDB Bank) and from India (Diamond Trust Bank). The post and telecommunications sector, meanwhile, grew considerably thanks to the arrival of new operators using cutting-edge mobile-telecommunications technologies. The coming decades will be marked by intensive Internet use and better quality connections thanks to fibre-optic broadband installations. Despite the lack of statistics, it is clear that the telecommunications sector has contributed significantly to job creation in recent years. The post office has also diversified its range of products.

The hotel and restaurant sector has also boomed. Benefiting from tax exemptions on the construction of new hotels – a measure taken to promote tourism in Burundi – the sector has been growing by 15% a year since 2010, and in 2013 it represented 11% of GDP.

Despite these developments, Burundi is not well integrated into the value chain of the main economic sectors. The country’s only factor of production is its labour, with all other factors coming from abroad.


Country notes


CAbO vERdE

Cabo Verde’s natural and geographic conditions combine a lack of non-renewable natural resources, a lack of sizeable arable land, a dry climate, which makes it unsuited for large-scale agriculture, and a relative small population of 500 000 dispersed in nine islands. These conditions have limited the country´s ability to integrate into global value chains and to develop a strong industrial sector. Integration through the manufacturing sector is also limited due to the scarcity and price of inputs that are mostly imported, small-scale production of low value products, and limited access to financing at the national level. Today the country connects to global value chains through three main sectors: tourism, labour and sea products.

Tourism is the sector most engaged in global value chains, having become an important engine of growth in the Cabo Verdean economy after 2005. The Central Bank of Cabo Verde estimates that the volume of inflows associated with tourism travel into the country have reached the equivalent of more than 20% of GDP in 2012 and 20137. In 2000, the volume of inflows associated with tourism travel corresponded to less than 3% of GDP. However, the tourism sector’s substantial growth relative to the rest of the economy has failed to create jobs and stimulate other sectors of the economy. This is in part a result of other sectors of the economy not being structured to meet the demand from the tourism sector and, also in part, a result of the very model of tourism that is based on all-inclusive hotel chains. Indeed, the archipelagic formation in combination with a relatively small-scale production and high costs of inter-island transportation has limited the ability of national production of goods and services to reach the tourism sector with competitive prices.

Cabo Verde has also a large number of nationals working abroad, which is estimated to be twice as large as the number of nationals residing in the archipelago. The large diaspora connects the country to global value chains through the labour sector and brings remittances that are estimated to have reached close to 10% of GDP in 2012 and 20138. In 2012, the largest share of remittances, around 32%, came from the diaspora from Portugal, followed by the diaspora in France (around 24%) and the United States (14.5%). The weak global economic prospect, especially in the euro area represents a considerable risk for the remittance flows going into the country.

The sector of sea products, which are mostly canned and frozen seafood, also engages the country in value chains abroad. These products represented in 2012 total exports at a value of approximately 2.7% of GDP. Most of these products, about 91%, are exported to one single market: Spain.

Going forward Cabo Verde is seeking strategies that would more strategically position country at higher-value stages of the global value chains by stimulating new exports of goods and services of higher added-value and expanding existing ones. At the same time, these strategies aim at enhancing employment opportunities, especially among the youth and women, at national level. The strategies, that include the development of a strong creative economy, are centered in three main pillars: i) create conditions necessary to produce and sell products and services in the domestic and global markets that present a quality standard, that are adequate to the national producers’ cost structures and that, at the same time, can enhance the country’s capacity to conform to international standards; ii) promote creative capacity to develop new high-value added and niche products and services based on knowledge and creativity that can position Cabo Verde well in a competitive global market; iii) enhance the country’s market integration by building up its national capacity to produce, store, move, and transport goods and services between islands and abroad9.

Besides the problems with production scale, limited arable land, climate and small population, there are other barriers that inhibit Cabo Verde’s participation in global value chains, including the tourism sector. Included in these barriers are: the difficulty associated with the inter-island transportation and the absence of an effective national system of logistics to efficiently store and distribute goods. While information technologies and Internet-based services offer an opportunity for the country to overcome many of its structural constraints, the fragmentation of the domestic market is a bottleneck that, if solved, would allow a better flow of people and goods inside the country and across its borders.



A growing priority in Cabo Verde’s development strategy, as described in the GPRS Paper III, is to develop the creative economy as the driving force for sectors such as the IT cluster, agro industry, fisheries, cultural products and tourism. The creative economy is seen as a strategy to develop niche markets and add value to primary produce through culture and design. The strategy also aims at incentivising a more solid micro and small enterprise network at national level by formulating, for instance, a special tax regime. The strategy expects that the value added and differentiated exports of niche products and services will position Cabo Verde well to compete in the global market at higher-value stages of the global value chains10. Cabo Verde is also investing strongly in renewable sources of energy as a way to decrease its dependency on fossil fuel based energy that boosts the cost of production at the national level.


Country notes


CAMEROON

The proven potential of raw materials (mines, timber, agricultural products) and production factors (electricity, arable land) have shaped Cameroon’s participation and positioning in global value chains (GVCs). The raw material-producing sectors (timber, agriculture and mining) and high-voltage electricity-consuming sectors (basic metals and cement) appear to be most involved in global value chains. Various services sectors are also integrated into global chains: ship repair and maintenance, information technology and transport.

Cameroon’s participation is limited mainly to activities at the ends of the chains in lower value sectors and little benefit for the rest of the economy. At the top of the chains, Cameroonian businesses simply supply raw materials, or at best supply products that have been through primary processing. At the bottom, Cameroonian firms act as intermediaries for foreign industries, providing, for instance, packaging, assembly and distribution to the local market or the Central African region.

In some industries, however, the government has adopted measures to encourage increased local processing of raw materials. This timber industry has moved towards primary and secondary processing. Moreover, strong demand from CAEMC and ECCAS countries and from Nigeria – part of the Economic Community of West African States – is attracting more and more agro-industries (processing of palm oil, cocoa, etc.). Sluggish global demand for some raw materials has forced manufacturers to look towards domestic and sub-regional markets. These changes should gradually lead to a shift away from commodity exports and towards the production of finished goods. Capacity-building in ship repairs (shipyards) has therefore enabled Cameroon to participate fully in global value chains in this sector, at least within the Gulf of Guinea region.

Sectors that have increased their participation in global value chains have contributed to economic growth, created jobs, developed capacities and improved infrastructure. However, Cameroon’s position in value chains (at the extremes of the chains) exposes it to fluctuations in commodity prices and global economic cycles. The recent global financial crisis highlighted this vulnerability, especially among export-oriented industries.

These industries have a large number of small operators that are often poorly equipped and largely disorganised. Their integration into clusters will allow them to regroup and upgrade more effectively. This has already occurred with the timber cluster set up in Yaoundé to bring together artisans, structure timber supply, and equip the site with a kiln and other finishing machines.

Opportunities to strengthen Cameroon’s position in global value chains

Analysis of geographical distribution identifies opportunities for participation in global value chains in the north of the country, thanks to the concentration of livestock farming and cotton cultivation. SODECOTON produces cotton fibres and refined cottonseed oil. The enhancement of livestock farming, meat products and leather is still held back by the sectors’ infrastructure deficits. The southern part of the country enjoys a tropical climate, making it ideal for developing agricultural industries (cocoa, palm oil, natural rubber, cassava, fruit and vegetables, etc.). On the coast, the potential development of hydroelectricity and gas-based thermal electricity (with large reserves) and access to the sea offer Cameroon opportunities to participate in global value chains (ship repairs, shipping, light metals, etc.). Furthermore, Cameroon’s strategic position as a country of transit towards several countries in the sub-region provides opportunities to develop global value chains at the borders with neighbouring countries.

Obstacles to global value chains

Obstacles have to be overcome to improve Cameroon’s place in the world economy through global value chains. These constraints are related to the poor support infrastructure: the collection markets and wholesale markets, the packaging and transport infrastructure at ports and airports, and standardisation infrastructure. Furthermore, the deficit in human-resource capacities, the largely obsolete production equipment in certain sectors, and the difficulties people encounter in obtaining finance limit the country’s participation in GVCs. The lack of infrastructure is



particularly a result of insufficient investment budgets and two decades of accumulated delays during the period of structural adjustments since the mid-1980s.

Government policies to increase participation in global value chains

The government set up the Enterprises Upgrading Office and the CFCEs to tackle these shortcomings. The Enterprises Upgrading Office aims to build the capacity of companies, while the CFCE ensures the growth of clusters and sectors. In addition to these measures concerning the structure of sectors and the capacity-building of businesses, the development of infrastructure to reduce the costs of production is one of the key areas in which the government is working to increase Cameroon’s participation in global value chains. More rational budget choices are required. Fuel subsidies, for instance, are equivalent to 3.3% of GDP and represent 19.5% of current expenditure.

Better budgeting would free up finance for infrastructure investment for internal resources, which could be added to extra external resources that could be raised with a judicious debt policy.


Country notes


CENTRAl AFRICAN REPUblIC

Despite its abundant natural resources and huge agricultural and mining potential, Central African Republic has never experienced growth that could transform the economy. The country has not been part of significant regional nor global value chains. Although there is an estimated 15 million hectares of land suitable for highly varied crops, most is only farmed for subsistence food. Export cash crops account for only 800 000 hectares.

Wood production bears no relation to the potential of the forestry sector, despite attempted reforms. Exports remain limited to unprocessed lumber and over the past few years wood production has slumped from 555 143 cubic metres (m3) in 2008 to less than 300 000 m3 more recently. Global demand having fallen following the international financial crisis, forestry companies had reduced operations before the political crisis.

While diamonds, gold, uranium, iron, oil and other extractive industries could bring the country into global value chains, mining remains artisanal and limited to diamonds and gold. Foreign direct investment targeting mineral extraction, which should have been completed in recent years, has been delayed. The Canadian group, Axmin, obtained a permit to exploit gold and the French company Areva a permit to produce uranium. These companies had not reached the production stage when the Seleka crisis erupted. Three other international companies in diamond and gold extraction had already ceased operations following political crises in Central African Republic.

The country has faced perennial challenges in harnessing its natural resources and participating in global value chains during decades of political instability and armed conflict, as well as poor economic and political management. Central African Republic is sprawling, landlocked, and served by inadequate transport, energy and telecommunications infrastructure. However, particularly since 2006, considerable efforts have been made by successive governments supported by the international community to put the country on a path towards growth. Political and institutional normalisation programmes have been given international support and donors have funded transportation infrastructure projects, particularly regional corridors and multinational programmes in the energy and telecommunications sectors.

Institutional and sector reforms to develop the private sector and encourage foreign investment have also been undertaken. Reforms of the mining and forestry codes and taxation, as well as support for private sector development, enabled Central African Republic to become an EITI conforming country in 2011. These, like other initiatives, were halted by the crisis which has exacerbated the country’s difficulties. Many challenges must be overcome before Central African Republic can harness its natural resources and participate in global value chains.



CHAd

Four decades of fighting have prevented Chad from building a solid and diversified industrial foundation and participating in global value chains (GVCs). Before oil was found, cotton, introduced in the 1920s, was the main economic activity and brought in a lot of money to fund development. It accounted for two-thirds of export earnings and one quarter of the population lived off the industry. The technical, financial and production problems of CotonTchad (which runs the sector), along with the collapse of world prices, have undermined this national value chain, but the industry is being restructured.

Growth of the oil sector is the country’s most successful evidence of participation in a major value chain so far and has increased the state budget tenfold in a decade, from about XAF 160 billion in 2001 to some 1 300 billion in 2011. Domestic investment has risen 22-fold to surpass external resources, the share of which in the budget has dropped sharply.

Starting oil production required an investment of USD 3.7 billion. USD 1.5 billion were needed to launch three oilfields in the south and a 1 070-km pipeline was built for USD 2.2 billion to link the oilfields to the Cameroonian port of Kribi. Oil operations are run by a consortium of production firms, Exxon Mobil, Petronas and Chevron, with two companies running the pipeline – Totco in Chad and Coctco in Cameroon – and the Chadian and Cameroonian governments. The consortium handled all oil production between 2003 and 2011, selling it mainly to Asia and the United States. Two other consortia were then formed, the first led by the China’s CNPC to extract the Bongor Basin deposits, and the second – made up of Chinese Taipei’s Overseas Petroleum and Investment Corporation (OPIC) and the Société des hydrocarbures du Tchad (SHT) – extracting the deposits in the Chari Ouest III block.

The number of operators in the sector has increased greatly since 2010, with production-sharing contracts being established. Construction of an oil refinery in partnership with China has allowed crude oil to be turned locally into value-added products such as petrol and diesel fuel. The refinery, owned by CNPC (60%) and the Chadian government (40%), began operating in July 2011, with a production capacity of 1 million tonnes to meet domestic demand of half that. It can thus meet both domestic needs and subregional ones in northern Cameroon and the Central African Republic. Cotco estimates that between 2003 and 2013, the Cameroonian government earned about XAF 200 billion from oil activity, mainly in transit fees and taxes. Activity in this value chain will increase with the arrival of new operators who also intend to use the pipeline to export their production. The government of Niger decided in 2013 to build a 600 km pipeline to link with the Chad-Cameroon one to transport its own oil production. This will further strengthen the regional nature of the value chain.

Opportunities exist to create value chains in other economic sectors. Livestock is the most promising, given that Chad has about 20 million animals and that the sector accounted for 85% of non-oil exports in 2012. Income from this industry, ranging from meat to leather and hides, is estimated at XAF 140 billion, with Nigeria and Cameroon constituting the chief markets. The value chain is still not very dynamic, however, either in the subregion or worldwide, because little value is added to its products and the lion’s share (60%) goes to unofficial trading channels. The value chain could be boosted by developing dairy activities and the production of leather and hides.

The growth and modernisation of the gum-arabic sector also offer good prospects to Chad, the world’s second biggest producer after Sudan gum arabic, which is the country’s third biggest export item.

Difficulties in setting up value chains include lack of infrastructure, which hampers their operation in a landlocked country very dependent on the infrastructure of neighbouring states. The remoteness of consumers of the products further drives up the cost of handling and shipping, which is a crucial factor in a successful value chain. About 85% of Chad’s exports pass through the Cameroonian port of Douala on their way to customers mainly in Europe, Asia and America. The country’s capital, N’Djamena, is about 2 000 km by road from the sea. There is also


Country notes


no attractive environment in which to develop commercial activity and investment, create new businesses or boost the productive capacity of existing ones. The dearth of small and medium-sized enterprises and industries (SMEs/SMIs) makes it even harder to tap into some of the added value generated by value chains already in place, especially in the oil sector. The absence of government support for SMEs/SMIs and the difficulty for them to comply with required standards are further obstacles to their growth.

To seize and make best use of the economic opportunities that global value chains offer, Chad needs to create structural policies around key players and elements, especially the government, whose role is crucial in developing infrastructure but also in strengthening value chains already in place and even more so in defining the strategic shape of value chains that could be created and energised, especially in the livestock industry. Government action is also crucial in reforming the regulatory and legal framework. Given its small domestic market, Chad needs to focus on regional integration in its efforts to promote value chains.



COMOROS

A former French colony, the Union of the Comoros comprises three of the four main islands in the Comoro Islands, an archipelago in the Indian Ocean to the north of the Mozambique Channel and to the north-west of Madagascar. Anjouan, Mohéli and Grande Comore are part of the Union, while Mayotte is part of France. As a result of its insularity, the Union of the Comoros is not well integrated into the regional and global economy.

The country’s current economic climate is dominated by the primary and tertiary sectors, especially agriculture, fisheries and livestock and trade in imported goods. The industrial sector accounts for only 12.5% of GDP and is formed mainly by small processing units in sectors such as carpentry, bakeries and small-scale distilleries.

The Comorian economy is not integrated into international production networks such as global value chains (GVCs). If GVCs were introduced into the Comoros they could provide opportunities and enable economic growth to recover. These new production models would allow the Comoros to become involved in international trade, create jobs linked to the new economic activity, and attract foreign direct investment (FDI), which accounted for only 4% of GDP in 2012.

GVCs could benefit products from various sectors of the economy. In agriculture, the UNDP and the Chamber of Commerce and Industry will shortly launch an ambitious USD 3.5 million value-chain programme for vanilla and ylang-ylang. The UNDP has also committed to upgrading the fisheries sector to bring it in line with sanitary and phytosanitary (SPS) standards, giving the Comoros access to international markets. In the extractive industries, which are in the exploration and prospecting phase, gas and oil may benefit from GVCs. In the manufacturing industry, the Comoros could better integrate in the sub-regional economy by developing value chains in the cement industry (bagging), the agri-food industry (bagging ordinary rice), and the production of fruit juices, mineral water and soap. In the services sector, there are opportunities to develop tourism, banking services and communications.

The Comoros can fulfil different roles in the GVCs, depending on the sector. In agriculture and fisheries the country can provide production, processing and packaging. In the extractive industries (in the prospecting phase) it can extract the material and sell it. In manufacturing it can offer inputs, final product assembly, packaging and shipping. Finally, in the services sector it can provide inputs and auxiliary services, sales, marketing and associated services.

The economy’s structural weaknesses make it difficult to introduce GVC industries. These weaknesses include: i) a severe lack of basic infrastructure (roads, ports, airports, etc.); ii) insufficient, expensive electricity, severely hindering production activities such as developing the cold chain in a country that imports more than 90% of its food; iii) an inauspicious business environment, with the country ranked 158 out of 189 countries in the World Bank report Doing Business 2014; iv) the country’s small size and small domestic market; and v) widespread corruption, with the country ranked 127 out of 177 countries in the latest Transparency International index.

Aware of these difficulties, the Comorian government intends to use the opportunity presented by the development of the new accelerated growth strategy to begin to provide some answers. This strategy proposes using the development of basic infrastructure and support for the private sector to drive growth over the next five years.

The factors that make the Comoros attractive include cheap labour, an attractive investment code, membership of major regional markets (IOC, COMESA, Arab League), and good security.


Country notes


CONGO, dEM. REP.

The Democratic Republic of Congo remains one of the least developed countries in the world, due to its poor capacity to develop its enormous production potential. Structural weaknesses, lack of infrastructure and governance issues since independence in 1960 are some of the reasons for the absence today of an industrial fabric that could make this an emerging country.

Agriculture and mining, the two pillars of the economy, do not create enough wealth or jobs. Since 1970, agriculture employs 70% of the labour force but provides only 40% of production, reflecting its low productivity and an inability to adequately feed the population. The mineral resources of the country, which is of global strategic interest, have seen their relative importance decrease due to the sharp fall in markets of the late 1970s. The secondary sector’s share of GDP declined between the 1970s and the 2000s. This deindustrialisation was exacerbated in the 1990s by looting and armed conflicts that tore the country apart.

The private sector contributes only marginally to international production networks, contributing mainly to the low end of the value chain. The country’s participation in global trade is also limited by the range of products offered and demanded (capital goods and food). Exports are concentrated on low value-added raw materials. The investment rate is low and capital unproductive. The development model adopted (commodity exports and import substitution) has not led to a diversification of the production base. The country has for decades been in a situation of commercial technological and financial dependency. From 1960 to 2000, the share of primary products in exports has remained the same (about 80%), while their share in the world market has declined.

In addition, the productive sectors of the economy are poorly interconnected. Several agricultural products are exported unprocessed. While in the 1970s the country had a dozen food industries, it only has five today. The mining industry does not transform raw materials locally. They are connected to the energy sector and the transport sector for the sole purpose of extracting minerals and shipping them abroad. Extraction, even when it is not artisanal, is based on obsolete equipment which limits its efficiency.

Manufacturing contributes little to growth (no more than 2 percentage points) due to the obsolescence of production equipment, limited ability to use new technologies and the effects of foreign competition, as well as costs imposed by the effects of poor infrastructure and access to energy. Textile mills that once contributed 5% to GDP have lost ground against foreign competition, unable to control their production costs. Only breweries have been relatively successful, despite difficulties caused by unpredictable electricity cuts.

Growth is relatively unstable in the short to medium term due to the low diversification of the production base, a strong dependence on the world market and a low capacity to respond to external shocks. By integrating its industries into global value chains, the country could consolidate its growth, reduce poverty and improve its net external position.

Recognising this need, in 2012 the government created a study group to define its new industrial policy. Two major objectives have been set: to strengthen private-public partnerships to overhaul the industrial fabric of the country and promote the optimal use of natural resources; and the gradual creation of an industrialised, competitive and fully integrated, dynamic, regional and global trade economy. A strategic document has also been prepared on the role of agro-food, building materials, mining and metallurgy in the economic recovery and the fight against poverty. An industrialisation strategy for the country is in preparation, which will focus on six sectors: wood, textiles, oils and fats, building and construction materials, metals and livestock products. In addition, to encourage mineral processing and refinement within the country, the government has banned the export of copper concentrates and cobalt.

Industrialisation will not happen without a better business climate. The lure of natural resources is not enough to attract new capital and expand the wealth creation chain. The country must establish an institutional and infrastructural architecture to support their exploitation and encourage the private sector to play its full role in driving growth.



CONGO, REP.

Although its wealth of natural resources gives it significant natural advantages in participating in global value chains (GVCs), Congo’s share in international production networks is still modest. The biggest sectors are oil, timber and logs in GVCs and sugar in regional value chains. The country’s share in GVCs in agriculture and services has been very slight. Aside from oil and sugar, the main contributions to GVCs nationally have not changed much over the last decade and have been mostly limited to the export of primary inputs. Finished products, mainly refined oil products, make up no more than 5% of overall exports. In the oil sector, apart from the extraction and export of crude, mainly to Europe and Asia, the other form of participation in GVCs is, at a marginal level, the sale of refined petrol. The sugar industry is also relatively well integrated into regional value chains. Thanks to the advantage afforded by its production of sugar cane, Congo has been able to take its place in a regional value chain. Around 60% of production goes for export to ECCAS member countries and to the United States in the framework of the African Growth and Opportunity Act (AGOA). In respect of forestry, despite laws imposing a minimum local processing of 85%, production of timber with high value added accounts for just 3%.

The impact of Congo in GVCs is not great. Oil exports have certainly been very conducive to the country’s good economic performance over the last decade and oil income has provided nearly 80% of overall state receipts, and served to finance a large part of public investment and social expenditure. But the overall impact of oil on socio-economic indictors has been limited. The economy’s dependence on the very capital-intensive oil sector has not favoured employment. Moreover, because of the weak linkages between national enterprises and the foreign firms exploiting resources, the country’s participation in GVCs has had no significant impact on bolstering the capacities of local SMEs. The weak impact of GVCs in Congo contrasts with the opportunities it possesses.

Congo has great potential for increasing its positioning in GVCs. Apart from oil and timber, the country has substantial mineral and forestry resources, and good agricultural potential. Improving the transformation of oil and timber provides, in the medium term, the potential for increasing added value and creating jobs. There could also be sub-contracting to local SMEs in oil and mining companies (building and public works, training, boiler-making, maintenance). The country’s considerable mining potential should begin production in 2014, and also gives Congo the possibility of a bigger role in GVCs, as well as the treatment of agricultural production and agro-industry, in which the country has a certain comparative advantage. Finally, the country’s strategic geographical position, with a coastline and a deep-water port, is a major advantage for Congo’s SMEs in accessing regional and international markets. Despite the strong hand it holds, Congo’s integration into GVCs is held back by major structural obstacles.

The main constraints hindering Congo’s wider participation in GVCs are the absence of quality transport infrastructure, of adequate energy supply, the lack of skilled workers, of technological capacity and an uncongenial business climate. Infrastructure shortcomings are specially marked in the transport sector, with only 10% of roads paved and a dilapidated railway, and are a major obstacle in accessing foreign markets. Moreover, despite increased energy production, the unreliable electricity supply is one of the main factors weighing upon the competitiveness of the Congolese economy and restricting foreign investment. Lack of infrastructure also stops Congo from taking advantage of regional trade.

The underqualified available workforce and skills shortages are a further serious impediment to Congo’s progress towards adding value in GVCs. The country is still confronting a major challenge improving its technical and scientific education and strengthening its technological abilities. Technical and professional training attracts fewer than 10% of pupils. The dearth of skills, combined with an absence of investment in technology, prevents local enterprises from improving their competitiveness and meeting quality norms of international markets. The serious deficiencies in the business climate, as illustrated by Congo’s poor showing in the Doing Business 2014 ranking are a major hindrance to the private investment needed to transform the economy.


Country notes


Knowing the opportunities GVCs can give Congo to speed up its industrial development, the government wants, through its 2012-16 national development plan, to step up its efforts to create conditions conducive to the country’s having a significant participation in GVCs. To this end, the strategy identifies seven clusters, which should act as the principal vectors of Congo’s participation in GVCs. These include in particular agriculture and agro-business, forestry and timbers, oil and hydrocarbons as well as mines. But optimal exploitation of these clusters necessitates certain reforms and specific measures. In this regard, government is prioritising : i) increasing investment to build competitive infrastructure; ii) speeding up the implementation of the action plan to improve the business climate; iii) creating specialised institutes to meet the needs of sectors with a high potential for creating added value. (the government has already set up specialised technical and vocational training centres under 120 educators in 12 key areas); iv) increasing investment in science and technology; and v) improving access to finance to support the development of businesses’ productive capacity.

The authorities are also considering setting up four special economic zones, with the aim of diversifying economic activity and exports and supporting integration into the global economy. These zones, for which feasibility studies are complete, will be devoted to petrochemicals, mining, timber and agro-business as well as transport, financial and logistical services. At the same time, an agency for the promotion of investment and a fund to encourage, guarantee and support SMEs have been created and ought soon to be operational. Finally, given that regional markets are very important for Congo because of the small size of its economy and that they can assist the country in joining GVCs quickly, the government intends to increase investment in building an efficient regional infrastructure, to eliminate bottlenecks strangling regional integration and trade.



CôTE d’IvOIRE

Côte d’Ivoire participates in global value chains (GVCs) involving many agro-food items (palm oil, cashews, pineapples, bananas) and agro-industries in heavy demand regionally or worldwide. The country supplies 40% of the world’s cocoa, as well as coffee (300 000 tonnes a year) and rubber (256 000 tonnes in 2012). These are exported unprocessed or after intermediate processing and attract giant international firms such as Cargill, Michelin, Olam, Nestlé and Unilever.

Potential exists for better participation in GVCs, through rich soil, plentiful farm labour, established firms and production sectors with good growth prospects. Rubber, for example, already has 16 industrial processing plants. Very good weather for production results in yields among the five highest in the world, in a global market where supply cannot keep up with demand.

Worldwide cocoa demand is also growing, driven by chocolate consumption in emerging countries. Since 2012, Ivorian coffee and cocoa producers enjoy locally guaranteed prices and new quality control giving the right to a country-of-origin label under the 2QC (Quality, Quantity, Growth) programme. The last harvest produced 81% grade-1 cocoa.

Côte d’Ivoire is Africa’s biggest exporter of palm oil, with all processing (into refined oil and by-products) done domestically before export to ECOWAS countries, where demand is soaring. The two main firms, Palmci and Sania, majority-owned by the Ivorian group Sifca and its partners Olam and Wilmar (Singapore), do 90% of their business in the sub-regional market (Burkina Faso, Mali and Nigeria).

Limited access to rural land is one of the main structural obstacles to higher production and yields, mainly of perennial crops. Palm oil yields are seven times less than for growers in Indonesia and coffee yields are two-and-a-half times less than in Indonesia. A lack of secure long-term farmland tenancy (no deeds or leases) limits funding and development opportunities and also the possibility of outsourcing production. A good land access formula is needed, perhaps modelled on neighbouring Ghana’s Lands Commission, which enables a practical link between the government and local tribal chiefs and creates the predictability needed for agricultural contracts.

The government wants to boost the industrial sector’s share of the economy from around 30% of GDP in 2012 to 40% by 2020, and is looking into how to increase raw-material processing, taking into account that some strategic GVCs do not have much room for direct industrial input, such as those whose related products are not traded on world markets. Making a finished product also requires capital and proper transport and distribution. A committed policy of local processing to supply world markets could be costly and of little benefit for GVCs.

Côte d’Ivoire’s best industrial growth opportunities, along with creating value and jobs, lie in GVCs with strong regional potential, and also in strengthening SMEs involved in intermediate export activity. The country has a diversified production, ports and good roads. This potential is still underused in the sub-region, if not underestimated by sectors such as textiles and clothing.

Population growth, urbanisation, the emergence of regional hotel chains, the diaspora and regional trade preferences (zero duty inside WAEMU, preferential access to European markets and only 6% duty on exports to the United States) offer West African stylists and clothes designers healthy niche markets in high-class dressmaking, household textiles, interior decoration, traditional embroidery and luxury handicrafts. Côte d’Ivoire has good industrial capacity to compete in rapidly supplying these customers by diversifying its products. The two main current products, bazin and wax fabric, are only a small part of the regional market’s needs.

Many industrial opportunities also exist in agro-food, especially tropical fruit processing. Côte d’Ivoire is Africa’s leading cashew-nut producer and top international exporter (450 000 tonnes a year). The wooden furniture market also has big potential, with Africa’s rapid urbanisation. By putting a specific focus on improving port facilities and administration, the country’s geography


Country notes


and expertise in port logistics would be an advantage in attracting assembly operations by big international firms seeking West African markets. The extension of the CET in ECOWAS in 2014 should provide better opportunities for these activities.

Additional obstacles need to be removed to use this regional potential. SMEs still perform too few useful functions for producers, such as packaging, marketing and distribution, and struggle to win new business in raw-material processing or exports. The national survey of SMEs (firms with annual turnover of less than XOF 1 billion and fewer than 200 employees) showed 30 000 enterprises, many more than expected. Nearly all were focused on the local market, 84% of them in the tertiary sector (telecommunications and commerce), only 15% in the secondary (processing) and 1% in the primary sector.

Apart from the idea of creating a guarantee fund for access to credit and setting up an SME development agency, export and sub-contracting activity must be made more attractive through simplified procedures for SMEs, special incentives and greater assistance in management. Small businesses know how to move quickly between sectors and into new and profitable activities. They lack the skills for the formalities required to get into export markets or presenting adequate loan applications. Their production capacities are also still too small to meet large orders.

Better local structuring of activity in special zones, with firms geographically close to the services they require, could also be an important attraction. The Moroccan model of integrated industrial platforms (with offers of infrastructure and training skilled labour) could be followed. The government’s plan to set up new free zones and modernise existing industrial areas is a first step in the right direction.



dJIbOUTI

Djibouti is low on the global value chain (GVC), with its economy focused on maritime transport services. An agreement in 2000 for Dubai Port World to run the port of Djibouti has enabled the country to use its geo-strategic position at the crossroads of key commercial maritime routes. Since 2008, a state-of-the-art container port at Doraleh for transit and transhipment of goods has led to an increase in port business that previously passed only through the port of Djibouti. About 80% of goods handled are to or from Ethiopia. Transhipment can include destinations worldwide but volumes vary from year to year.

New port infrastructure investment begun in 2012 will boost port activity in the short term through greater specialisation, with two new ports being built for salt and potash exports. The government plans to build others to handle livestock exports and storage of oil and liquefied gas. Such specialisation will help to boost activity but funding has not yet been secured.

The country also plans to expand participation in the GVC through the assembly industry, which could be developed alongside transhipment. Djibouti’s manufacturing is small-scale, apart from bottling beverages for the local market. The country could develop food processing industries based on its fisheries and livestock resources.

But these GVC expansion plans are still limited by the high cost of factors of production such as water, electricity and to a lesser extent human resources. Lack of water and electricity will be eased in the medium term by projects that began in 2013 to build an aqueduct and a second electricity line from Ethiopia and a desalination plant. Exploratory drilling to exploit geothermal resources has also been reported.

The infrastructure investment programme also aims to boost the country’s role as a major regional shipping centre. Djibouti competes with nearby ports such as Mombasa (Kenya), Berbera (Somalia) and Aden (Yemen). Recent policy decisions have prioritised removing structural constraints on water and electricity supply, followed by a new goal in 2012 identifying potential growth sectors to diversify the economy. Investment policy was reviewed with the UN Conference on Trade and Development in 2013 to improve the country’s attractiveness to investors.


Country notes


EGyPT

In early 2008, the IMF described Egypt as “one of the Middle East’s fastest-growing economies”, as the country’s real GDP had accelerated beyond 7% in 2006/07 from 3.2% in 2001/02. This acceleration was due to the economic reforms introduced in 2004 by President Hosni Mubarak’s administration. The reforms increased the participation of the private sector in the Egyptian industry and service sectors; pumped in massive FDI inflows, resulting in the expansion of key sectors such as telecommunications; and created millions of jobs. The tourism sector, which has strong backward linkages to SMEs, was boosted when EgyptAir joined the Star Alliance in 2008. Since the January 2011 revolution, however, the sector has contracted sharply because of political unrest, denying the full benefits of globalisation to the poor.

Building on China’s experience, Egypt has boosted its industrialisation drive with the enactment of Law no. 83 of 2002 on special economic zones (SEZs). A research paper (Emma Scott, “China goes global in Egypt: A Special Economic Zone in Suez”, August 2013) shows that since 2005, China has entered into joint ventures with Egyptians and others, with initial investments totalling USD 334.47 million. These investments are contributing to knowledge transfers and industrialisation in a number of manufacturing sub-sectors: fibreglass, high- and low-voltage electrical equipment, textiles and petroleum equipment. For example, Chinese investment has enabled Egypt to move along the global value chain (GVC) within the extractive sector to manufacture petroleum drilling rigs and related components for use by global oil companies operating in the country.

Vodafone, Orange, Microsoft, Intel and Oracle have set up operations in Egypt that serve their global clients in the information and communication technology (ICT) sector. These players’ operations in Egypt span the entire GVC, from new product development to provision of technical solutions to their global clients in state-of-the-art call centres. For example, over 80% of Microsoft’s system software development in the Middle East is performed by Egyptians, either in Egypt or in the Gulf countries, who focus on creating user interfaces in Arabic and providing after-sales technical support, according to the United Nations Conference on Trade and Development’s 2010 report “Integrating developing countries’ SMEs into global value chains”. In addition to the Arabic language, Egypt offers several advantages to the ICT sector, including proximity to Europe and the Gulf, strong fibre-optic infrastructure for outsourcing services and a huge market that drives up demand for product enhancements.

According to Egypt’s General Authority for Free Zones and Investment (GAFI), the country has established over 100 SEZs that offer competitive incentives to investors, including land, adequate supplies of utilities, high-grade road networks, tax breaks and a one-stop shop for government services. Inspired by the Chinese experience, Presidential Decree no. 35 of 2003 created the North-West Gulf of Suez Special Economic Zone (SEZone). Situated next to Port Sokhna in the Suez Canal region, the SEZone is organised in several light and heavy industrial clusters, including the automotive industry, petrochemicals, pharmaceuticals, food processing and textiles. Information from GAFI reveals that Egypt’s textiles sector is engaged in the full range of GVC-related activities – from cotton cultivation to production of fabrics and ready-made wear – thus creating about 30% of manufacturing job opportunities. Marks & Spencer, Levi Strauss, Calvin Klein, Pierre Cardin and Tommy Hilfiger are examples of the international brands that produce in Egypt. A Chinese-Egyptian industrial zone established in 2006 has benefited Egypt through the transfer of textile manufacturing technology. Egypt’s natural resource endowments and locational advantage, with easy access to key markets in Europe, Africa, and the Gulf, are key comparative advantages that the country offers global players in the textile sector.



The aviation sector provides the greatest opportunities for Egypt to expand its participation in regional and global GVCs. According to the Ministry of Aviation, Egypt has acquired the sole licence for a satellite-based communication and navigation system that would cover the whole of Africa. In the view of the International Civil Aviation Organization, all air navigation systems worldwide will need to migrate to a new communications, navigation, surveillance/air traffic management (CNS/ATM) system that is satellite-based and that will greatly enhance air travel safety. To capture the benefits of this unique asset, the government has approached the African Development Bank for support in bringing together Africa’s governments and private sector players to invest in a geostationary satellite project called NAVISAT that will undertake the requisite investments. The project will also deliver broadband Internet services to private sector actors across the continent for a fee. Furthermore, because of its capabilities in the aviation sector, Egypt is exploring opportunities to become the trainer of choice for Africa’s national and private sector airlines.

Although Egypt has several comparative advantages that it can exploit to enlarge its participation in current GVCs and open up new opportunities, it needs to overcome several challenges and constraints. Improved governance is crucial if Egypt is to create a favourable climate for private sector development. Such improvement would better enable the country to leverage its solid infrastructure, competitive costs of production, proximity to regional and global markets, and favourable bilateral trade agreements to extract more activities from the GVCs. Increasing private sector participation in the state-controlled textile industry, which is plagued by ageing machinery in ginneries, would remove a binding constraint of outdated technologies and put Egypt in a better position to compete with Asian producers of ready-made garments. Furthermore, formalising the SME sector, which is characterised by low value added, would enhance the opportunity for integrating such businesses in GVCs through twinning arrangements with global players in Egypt’s SEZs and other areas.

The Ministry of Trade and Industry’s 2006 industrial development strategy aims to broaden Egypt’s integration into the global economy through new niches in medium- to high-technology clusters. Building on this effort, the Ministry of Communications and Information Technology (MCIT) has launched an ICT strategy (2013-17) that aims to forger deeper public-private sector collaboration. The strategy calls for strengthening legislation and technology infrastructure to transform Egypt into an ICT hub for North Africa. The government expects this to create an enabling environment for higher foreign investments that will create new jobs for Egyptians. The strategy mandates MCIT to create an EGP 20 million fund to provide incentives for SMEs to capture value in the GVC’s upstream activities in the areas of mobile and open-source applications. The government hopes that the initiatives outlined in its ICT strategy will create over 100 000 jobs in 2014.

Although the tourism sector is performing poorly because of the ongoing political crisis, the Egyptian Civil Aviation Ministry’s new strategic plan aims to increase the capacity of Egyptian airports from the current 30 million passengers to 40 million by 2025. This is expected to create millions of jobs because of the sector’s close linkages with the tourism sector and related business and recreational travel. In addition to deepening the reach of EgyptAir in global aviation networks, the ministry is seeking to capitalise on Egypt’s locational advantages to forge more linkages with the global aviation economy. An important initiative in this regard is the unveiling, at the March 2013 Airport Cities World Conference and Exhibition in South Africa, of a USD 20 million airport city development project at the Cairo International Airport. To create jobs, this 480 000 sq.m. facility will include recreational facilities, five-star hotels and a Disneyland theme park that will enable Egypt to tap more deeply into the aviation and tourism sectors’ GVCs. The first step that Egypt must take, however, is to tackle the current political and security concerns in order to secure urgently needed FDI that would enable it to participate more fully in the global economy.


Country notes


EqUATORIAl GUINEA

The country was radically changed in the 1990s when oilfields were discovered and went into production. It was upgraded from a low-income, mainly agricultural country to a middle-income country, the third largest oil producer in sub-Saharan Africa and the second main destination of FDI – from foreign oil companies – in Central Africa. The country’s main trading partners are, in order of importance, the United States, China, Spain, Italy and France, to which Equatorial Guinea exports petroleum, methanol, timber and cocoa. Major imports include petroleum equipment, food and beverages. The tremendous growth driven by the oil and gas sector has enabled the development and improvement of basic infrastructure but has at the same time led to a decline in agriculture, fisheries and forestry, making the economy highly dependent on the oil sector.

Oil reserves are estimated by the authorities at 1.2 billion barrels, or 10 years of production at the current pace. The authorities are now focused on developing the petrochemical value chain in order to increase the vertical integration of the domestic oil industry. The main opportunities for foreign investors identified and highlighted by the government in the area of petrochemicals are the gas industry, bioethanol and biodiesel, refining and industrial-waste recycling, paint, asphalt, tyre retreading and plastics recycling.

Natural gas should provide half of the total hydrocarbon resources by 2016 and is being considered as a remedy to the decline in oil production since 2012. The country aims to become the regional hub for gas production. The first LNG terminal for exporting liquefied natural gas was built in 2007, and a second terminal is scheduled to open in 2016. The government aims to build a natural-gas collection system in the fields currently in operation (Zafiro, Alba and Alen) as well as in future fields, with transformation planned in the Punta Europa port area. The country also wishes to attract foreign investment to mine its gold, diamond, bauxite, tin, tungsten and coltan deposits.

Unused arable land, combined with strong demand for agricultural products both within the country and in the region, has made developing agriculture and livestock a key vector in the country’s economic diversification strategy. The government is seeking to attract foreign investors in processing activities for animal feed and fertilisers; cocoa and coffee; soap manufacturing; juice and derivative products; palm oil and coconut oil; packaging, processing and conservation of fishery products; and canning. The main foreign company currently operating in this sector is SOEGUIBE (a subsidiary of the French group Castel), which produces and distributes 300 000 hectolitres per year of drinks (beer, sugary drinks and mineral water).

Despite massive public investment to modernise infrastructure, Equatorial Guinea’s industrialisation level is lower than the regional average. To take an active part in building global value chains and to promote industrialisation of the economy, the authorities intend to improve competitiveness, notably by setting up a one-stop shop for investors. The stated goal of the PNDES is to diversify the economy to free it of its dependence on hydrocarbons and turn the country into an emerging economy by 2020. To do so, the Equatorial Guinean government has committed to supporting foreign investment by allocating XAF 500 billion to a joint investment fund, the Fondo de coinversión (FCI), which testifies to the country’s determination to lay the groundwork for economic diversification in order to achieve sustainable growth and create more jobs. The FCI should support the country’s development in the key economic sectors identified for industrial development: agriculture and livestock; fisheries; petrochemicals and mining; tourism; and financial markets.



ERITREA

The Government of Eritrea considers global value chains as one of the main engines for reducing economic volatility and improving growth. Major activities within the value chain are currently performed in the provision of ancillary services, production of agricultural goods, processing, natural-resource extraction, and sales and marketing. The mining sector has been the biggest area of attraction with more than 14 mining and exploration firms from Australia, Bermuda, Canada, China, Libya, the United Arab Emirates and the UK involved.

In the agricultural sector, China-based firms are increasingly investing in the construction of cold food-storage facilities, an aluminium-tin manufacturing plant and a high-quality PVC agriculture drip-irrigation pipe-production line. The government is strongly encouraging companies and individuals to invest in building residential housing, roads, airports, ports and hospitals. In the housing sector, Gruppo Italiano Costruzioni, an Italian firm, is constructing 1 680 housing units in the capital city, Asmara, as well as several housing projects and a resort in Massawa. The main drivers of the development initiatives are embedded in the country’s commitment to development through a self-reliance policy.

The Eritrean Investment Centre has been reaching out to potential investors and has provided assurances of protection to investors in the country. The government also introduced a crash programme for export take-off designed to penetrate the European and US markets (through the US Africa Growth and Opportunities Act, 2000). Eritrea was thus able to export textiles/garments to the United States free of duty and free of quota restrictions up to 2008.

Overall, the impact of the country’s participation in the value chain is noticeable, particularly in job creation, infrastructure and capacity development and in increased revenue inflows. Direct and indirect employment associated with the Bisha mine only is expected to amount to as many as 700 jobs when in full operation.

The growth potential of agriculture has not been fully exploited mainly due to low connectivity of the production locations, low levels of value addition and low productivity. The fishing value chains are relatively well-developed, but there is considerable room for improvement. Key investment opportunities in the fisheries subsector provide a potential of 90 000 km² of fishing grounds, with an estimated annual production potential of between 65 000 t and 70 000 t of fish and other marine produce. Demand for fish exceeds supply in urban areas and there is latitude for increased domestic consumption. In addition, the Eritrea fisheries sector has the potential to contribute significantly to Eritrean food security, foreign-exchange earnings and job creation.

The tourism sector has huge potential based on the scenic and topographic diversity of the country as well as on its history, in addition to a long coastal line of pristine sandy beaches, many islands and clear water with abundant marine life. There are also good investment opportunities in developing the historical and cultural heritage of the country.

Investment in exploration activities for reserves of oil, natural gas and other minerals provide a potential source for the expansion of export receipts. Offshore-oil and natural-gas exploration are specific areas of potential investment.

In spite of these investment opportunities, the country faces many challenges, amongst which low productivity in agriculture attributed to archaic farming practices and a land-tenure system that vests ownership of land to the government.

Exploitation of the existing economic opportunities in Eritrea will require not only the commitment of the Government of Eritrea and its people, but also regional integration and international trade. The country therefore needs to undertake effective policy reforms, including regional co-operation and integration policies, and develop a strong infrastructure base in addition to the provision of sufficient energy, transport, communication and physical marketing facilities, as well as adequate institutional and human-resource capacity and incentives. For example, with adequate policy reforms and investment, there is ample room for accelerated


Country notes


agricultural development. By using modern cultivation, fertilisation, plant-protection and water-conservation techniques, large quantities of food crops, exports and raw materials for industrial enterprises can be produced. The development of irrigated agriculture in the lowland river basins is highly promising.

In the medium-term, Eritrea should consider the following key measures:

• Actions to deepen the value chain must be driven by market opportunities and demands. Here, the Government of Eritrea must address barriers such as high infrastructure costs, lack of access to finance (capital) and the limited availability of skilled workers and appropriate incentives. In particular, it must address barriers facing small and medium-sized firms, as these provide greater opportunities to deepen the value chain within the major economic sectors.

• Policies aimed at supporting private-sector development in manufacturing and primary input processing are also useful. There is great potential for Eritrea in processing agro-food products for export.

• The government’s forthcoming development plan emphasises the move into higher value-added activities. The government needs to consolidate these plans into one national plan and detail out synergies across sectors. It should further develop a business environment through the creation of supply-chain linkages between foreign and local firms in formal manufacturing in order to foster the emergence of local manufacturing firms capable of subcontracting tasks and subsequently competing with foreign firms. This will encourage domestic firms to become more innovative and raise labour productivity in order to work with multinational enterprises.

• To improve the country’s business climate, the government should make efforts to develop human skills further and provide appropriate incentives in order to respond to labour-market demands. The government, with assistance from the AfDB, is developing the required skills and technical expertise through a vocational and technical training programme. The government has asked the AfDB to support the programme continuously over the medium term in order to close the skills gap in the country.



ETHIOPIA

Ethiopia’s participation in global value chains (GVCs) and its relative share in total value-added created by trade in GVCs are minimal both in forward and backward linkages. Ethiopia, along with many African countries, is still in the initial stages of gaining access to GVCs beyond natural-resource exports, highlighting the need for new strategies to enable better access to value chains. Even those engaged in GVCs are not yet getting the full benefit. A representative producer co-operative in Ethiopia gets only about 7% of the retail price of speciality coffee and this share would decline to about 4% for non-member (private) coffee exporters. The selling price of cut flowers from Ethiopia is about USD 0.183 per steam while the retail price in the European market, where the bulk of Ethiopian cut flowers are destined, is about USD 9.09. This makes the share of the Ethiopian exporters in the vicinity of about 2%. Notwithstanding the extremely small share of the retail value that accrues to the cut-flower exporters, the sector has shown respectable growth, mainly due to favourable government support to the sector, along with a conductive climate. The Ethiopian flower industry represents an extraordinarily fast and successful diversification into a non-traditional export product. The floriculture industry began to emerge in the early 2000s and, within a decade, Ethiopia became the 5th largest non-EU exporter to the EU cut-flower market and the 2nd largest flower exporter from Africa (after Kenya). One of the largest shoe exporters in China – Huajian – set up a factory in Ethiopia in 2011, as part of a plan to invest USD 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 this period and will integrate local input manufacturers into global supply chains.

Ethiopia has many natural resources that can provide valuable inputs for light manufacturing industries serving both domestic and export markets. Among its abundant resources are cattle, which can be processed into leather and its products; forests, which can be managed for the furniture industry; cotton, which can support the garments industry; and agricultural land and lakes, which can provide inputs for agro-processing industries. Ethiopia has abundant low-cost labour which gives it a comparative advantage in less-skilled, labour-intensive sectors such as light manufacturing. The Ethiopian livestock value chain can become a thriving industry that can produce packaged meats destined for Middle Eastern, European and East African markets, or fashion gloves and shoes that sell in volume on the high streets and boutiques of Europe. To reach this level of development, operators and investors along the value chain might consider how to improve the quality and value of meat exports by establishing a standardised grading system for meat and live animals; encouraging more supply into the abattoirs to increase capacity utilisation, thereby lowering costs; improving cost competitiveness and providing more raw material for leather producers; and introducing proper and improved feeding, fattening, animal health care and other services while encouraging foreign and domestic investment at all points along the value chain. Ethiopia has identified the leather and leather products value chain as one of the promising industries in the country. The leather value chain’s potential is to become a leading supplier of leather and leather-based products to fashion houses in Europe and Asia.

Important issues facing the agro-processing industry as it strives to strengthen its capabilities in the face of increasingly fierce global competition include lack of sufficient supply of raw materials to meet demand, lacks of a price incentive that reflects premiums for superior quality; limited foreign and domestic investment in the value chain and lack of access to operating capital; lack of specialisation necessary for accessing key niche markets in Europe and Asia; low worker productivity and weak backward and forward linkages. By addressing several shortcomings, including increasing the supply of animals into the abattoirs, improved collection and introducing quality standards, the promise of accessing the globe’s leading buyers of leather can be realised. Friendly macroeconomic policies and domestic administrative reforms would, properly sequenced, enable Ethiopia to use its abundant factor of production – cheap labour – to drive its development on a basis less vulnerable to the risks inherent in rain-based agricultural production, including participation in the processing trade. The government can follow the course pioneered by a succession of Asian nations by taking the initiative to accelerate the realisation


Country notes


of latent comparative advantage in segments of light manufacturing in which specific, feasible, sharply focused, low-cost policy interventions can deliver a quick boost to output, productivity, and perhaps exports, opening the door to expanded entry and growth. The value chain requires efficient services as well as the possibility to move people, capital and technology across countries. Policy should thus address obstacles at all points of the value chain, especially on the trade logistics. As mentioned earlier, Ethiopia’s performance in trading across borders is relatively weak. Globally, Ethiopia stands at 166th in the ranking of 189 economies. Policies and strategies are not yet tuned towards the forward and backward linkages of the Global Value Chains.

The GoE, under its GTP, launched a strategy openly to lay the foundation for a rapid structural transformation in the economy to benefit from the GVC. The vision is building an economy which has a modern technology and an industrial sector that plays a leading role in the economy. The significance of expanding the industrial sector lies in its capacity to help transform other sectors, particularly agriculture. Efforts are currently marshalled through a holistic, comprehensive industrial development policy and incentive packages. Textiles and garment, leather and leather products and agro-processing have got due attention. FDI in these sectors, especially in the industrial parks, is flowing in. Several multinationals are vying to be part of the new government-developed industrial zones that are being established in Addis Ababa, and in other areas around the country. Some 20 foreign companies are setting up in the Bole Lemi industrial zone on the outskirts of Addis Ababa, the first of its kind constructed by the government. The Eastern Industry Zone, developed and owned by a Chinese firm some four years ago, paved the way for the government to realise potential in the area. The export sector and foreign direct investors have received a lot of encouragement through tax and non-tax incentives. More precisely, in its Agricultural Sector Policy and Investment Framework, the government has planned to address the bottlenecks, through increased rural commercialisation, increased private-sector participation and natural-resource management. The industry policy advocates export-oriented industrialisation that could be taken as support towards increased participation in the global value chain. In addition, the ongoing negotiation for accession the WTO is another commitment by the government that would indicate the country’s prospects for increased participation in the global value chain.



GAbON

In 2010, Gabon initiated a strategic plan to propel itself to the status of an emerging economy by 2025. The plan is underpinned by a sweeping reform programme aimed at diversifying the economy and making the industrial and services sectors more competitive while preserving the country’s great environmental wealth. Implementation of this programme since 2011 has brought heavy public investment and an industrial policy involving the development of SEZs to attract FDI, PPPs and acquisition of equity stakes in Gabonese subsidiaries of large multinationals.

In line with this industrial policy, Gabon issued USD 1.5 billion in eurobonds on 5 December 2013, in order to reduce its borrowing costs and finance part of the new infrastructure in the port, airport, road and energy sectors. The government, observing the stalled implementation of the Bélinga iron mining project, has undertaken to review the agreement on mining operations that it signed with Compagnie des mines de Bélinga (Comibel), which is 75% owned by China National Machinery & Equipment Import & Export Corporation. The Government of Gabon has acquired 180 000 shares of the Chinese holding company and now owns the entire capital of Comibel.

Gabon’s entire industrialisation strategy rests on the timber industry. The sector is booming, and forests, which cover nearly 85% of Gabon, offer opportunities to reduce the country’s dependence on oil, fight poverty and improve living conditions. With more than 400 tree species, Gabon has immense ecological wealth. Given this potential, the authorities decided in 2010 to stop exporting raw logs in order to encourage local processing. It should be noted that Gabon has long exported its wood as logs, even though the forestry code of 2001 stipulated that 75% of logs should be processed in Gabon. Research studies demonstrated in 2012 that only 35% of logs were actually processed in the country. The ban on exporting raw logs is aimed at creating jobs and boosting profits by exporting semi-finished products ready for consumption on the world market. The government created an administrative body, the timber industry office (Bureau industrie bois), to support the industrialisation of the forestry sector and to provide training to industrial operators.

Until 2008, China was the leading importer of processed wood from Gabon, with 1.1 million m3, followed by France, which at the time accounted for 14.3% of the market share. When exports of raw logs were prohibited, Europe became in 2012 the largest importer of processed wood products from Gabon (42% of sales), ahead of Asia (36%), Africa and the Americas (22% combined).

The creation of the Nkok multi-sector SEZ made it easier for new foreign firms to set up shop in Gabon. Of the 62 investors in the SEZ in 2013, 40% operate in the timber industry, and the number of factories rose from 81 in 2009 to 114 in 2013. The number of jobs in the sector rose from 4 000 in 2009 to nearly 7 000 at year-end 2012. The boom in the sector also prompted the start-up of small and medium-sized transport firms to haul logs from the interior to the SEZ, as well as services and handling companies to maintain vehicles and mechanical equipment.

At the regulatory level, Gabon, with the support of foreign firms, has introduced an international standard, the Forest Stewardship Council (FSC) label, guaranteeing that its timber is harvested from a sustainably managed environment. The authorities have also introduced a “legality and traceability grid”, managed by the AEAFB, an agency that checks up on forestry operations and certifies that their activities are in compliance with regulations. Gabon is thus in compliance with the criteria set by the European Union, which requires traceability of all wood imports to Europe in order to be sure that they are in compliance with regulations and were not harvested illegally.

The central government has also reviewed the missions of the national forestry/timber company SNBG. Opening its capital to foreign investors enabled this public enterprise to build an industrial complex that attracted many more outside investors, and SNBG’s capital increased from XAF 4 billion to XAF 10 billion. The complex can now handle all stages of processing, including slicing, sawing and plywood production. This acquisition offers new opportunities for the sector and gives it an advance over the other Congo Basin countries. Gabon has become


Country notes


the main timber-processing location in the region, with a wider potential market. A training centre specialising in forestry and timber-processing trades is to be opened in 2014 at Booué, in the Ogooué Ivindo province. It will train technicians, engineers, sales representatives and maintenance staff qualified to work at every stage of the timber industry.

The new petroleum and gas institute, the Institut du Pétrole et du Gaz (IPG) will train young Gabonese for jobs in the extraction and management of oil resources. The IPG, which was founded through a PPP with oil companies operating in Gabon, will give its trainees access to positions of responsibility. It will accept students at the master’s level for an 18-month training course that delivers both theoretical and practical knowledge in a learning environment that simulates actual operating conditions.



GAMbIA

The Gambia is connected to global value chains through two main sectors: tourism and nuts. Tourism and nut production are the main foreign exchange earners outside the re-exports sector. We will analyse in this section the tourism and cashew nut sectors for which information is available.

Tourism value chain

Tourism has become the fastest growing sector of the economy, contributing 12% of the country’s GDP and 3.8% of total employment in 2011. In 2012 about 175 871 tourists visited the Gambia in comparison to 91 000 arrivals in 2010. Tourism’s contribution to GDP is targeted to increase to around 18% by 2020, which implies that tourism will grow considerably faster than other sectors of the economy.

Tourists mainly come from the UK (54.6% of traditional markets in 2012), Holland (17.9%) and Sweden (7.3%) because of proximity (only 5 to 6 hours by air from the airports of northern Europe). As the destination is almost entirely dependent on the charter flights of the major tour operators, decision making about capacity is in the hands of the UK-based tour operators. The Gambia is very vulnerable to any downturn in the demand for sun, sand and sea tourism in its originating markets. This form of tourism is highly competitive, with new beach tourism and winter sun destinations being developed. Tourism in The Gambia is highly seasonal, with most of the originating market tour operators only operating from November to April. From the UK, Gambia Experience is the only major all-year operator and its charters constitute the scheduled service between London and Banjul.

The Gambia Tourism Board (GTB) was established in July 2001 to promote, develop, regulate and oversee the tourism sector in the Gambia. This is comprised of hoteliers, travel businesses and entertainment. The GTB is also responsible for advising the tourism sector and it offers a one-stop-shop service; the board is aggressively marketing and promoting foreign and local investment in the tourism industry. It also works in co-operation with its European partners to develop sustainable tourism products and services in Africa.

The Gambia is seeking to diversify its tourism brand from a low-cost budget “sun, sea and sand” destination to more upscale attractions cross-country. Incentives are being offered to investors through the Investment and Export Promotion Act, the Gambia Tourism Development Master Plan (developed in 2006) and the national development strategy. These incentives are aimed to benefit eco-tourism, national heritage, up-country tourism, tourist camps, sport fishing, river sports and cruising, 4/5 star hotels, integrated resorts and marinas.

The Gambia Tourism Development Master Plan highlights key priorities in order to ensure more spill-over of tourism earning to the rest of the economy. These include infrastructure development, especially in terms of increased access to the interior and agricultural linkages. For agricultural linkages, the short-term strategy includes the promotion of local products in hotels and restaurants, while the medium-term strategy focuses on improving the functioning of the horticulture supply-chain to the food service industry in terms of wholesalers and women’s groups. To address seasonality, the Master Plan emphasises the need to target niche markets, including through the conservation and exploitation of natural and cultural heritage sites and areas.

The structure of the Gambian tourism sector is concentrated with a few package operators that work with only 4 national operators and approximately 20 hotels along the coast. The package holiday value chain accounts for the majority of tourism into the country. In an Overseas Development Institute (ODI) study of March 2008 by J Mitchell and J Faal, “The Gambian Tourist Value Chain and Prospects for Pro-Poor Tourism” the authors calculated that one-third of the package holiday value remains in-country while the remainder is retained abroad by air transport companies and international tour operators. In the case of out-of-pocket expenditure


Country notes


from tourists, though, a much larger share remains in the country and much of this spending has relatively high pro-poor impacts. The ODI calculations conclude that overall “14% of the Gambia-based part of the value chain flows directly into the hands of the poor.” For agriculture in particular, the use of local inputs for food and beverage sales to tourists has been estimated to translate to about 1 million British pounds (GBP) at the farm gate.

Aside from policy reform, such pro-poor benefits can also be attributed to in-country initiatives such as Gambia is Good (GiG) which works to strengthen linkages between the fruit and vegetable sector and the tourism industry and the Association of Small-Scale Enterprises in Tourism (ASSET). The Tourism Challenge Fund through ASSET had also resulted in formalising some small and medium enterprises (SMEs) enabling them to enter the tourism value chain. For example, it has been reported that beach, fruit sellers and juice pressers adopted a code of conduct to reduce the hassling of tourists and established stalls so that they no longer needed to hawk for business on the beaches. Guides and craft workers took similar initiatives, and hoteliers invited craft workers to sell within the hotels on a rotational basis. Fruit sellers’ incomes increased by 50%; juice pressers’ by 120%; guides’ by a third; and craft workers in the market reported a doubling of their incomes and 43 new jobs.

Though the country has achieved a relatively high multiplier effect from tourism, such returns are mainly limited to coastal areas. By promoting up-country eco and cultural tourism, the Gambia can expect greater benefits to the poor. In order to promote investment in such opportunities, an enabling environment needs to be created through land and river networks and ICT to increase accessibility.

Cashew value chain

Cashew occupies a prominent place in the international trade of nuts, accounting for nearly 20% of total trade by weight. West Africa currently harvests about 650 000 tonnes of raw cashew kernels per year, which makes up 30% of the world crop. The vast majority (95%) of the cashew produced in West Africa are exported to India, where the kernels are baked, stripped of their shells, and processed into edible cashew nuts before being sold locally and internationally. Although the price of cashew has been variable in the past, the trend is leaning on the upside. The price spike in 1998/99 was caused by crop shortfalls and processors contracting in advance for more product than they were able to deliver.

Currently more than 1.2 million small-scale farmers grow cashew in West Africa. The current yields in cashew farming in West Africa stand at around 400kg/ha. This is low considering the potential yield of 1 500kg/ha if best cashew farming practices were adopted. With the help of the Africa Cashew Alliance, the region is developing into an increasingly significant producer and processor of cashew nuts, feeding into lucrative markets in India. The benefits of developing a local processing industry in West Africa are evident: fairer prices for farmers selling to local processors, reduced unemployment, improved rural food security and improved income for farmers. Countries with the best business environment and government commitment are likely to see the fastest increase in processing industries.

At independence in 1965, the Gambia was dependent on the production and export of nuts, a sector which has subsequently declined in relative importance as tourism has grown in significance. Nut production now accounts for some 10% of GDP. In this section we will focus on cashew nuts which are better integrated in the global value chain and accounted for 62% of nut production and 44% of total exports in 2013. Cashew was introduced in the Gambia in the 1960s and was originally intended as a fire break surrounding forest areas. Cashew production as a cash crop has increased significantly since 2000, especially for small farms in the West Coast and North Bank regions. The production of raw cashew nuts has multiplied by more than 20 times in fewer than 10 years, from an estimated 150 tonnes in 2001 to 6 500 tonnes in 20091. Production is estimated to have reached 10 000 tonnes in 2010. The Gambian government is keen to support the cashew sector as one of the value chains earmarked to achieve the country’s trade development objectives.



The economic environment of the Gambia is ideal for investing in cashew nuts. Notable among these ideal conditions are: very good drying conditions, a superior quality nut (nut count of 190-210 per kilogram and an outturn of 23-28 kilograms of kernels per 80 kilograms of raw cashew nuts) comparing well to nut production in Senegal and Guinea Bissau. The cashew is mostly purchased by seasonal Indian exporters. There is currently no major purchaser of cashew nuts and, as a result, farmers are never sure of whom to sell their products to, and at what price. Over the years, however, the price of raw cashew nuts (RCN) has steadily increased as a result of increasing global demand and the quality of the Gambian crop. Currently, the cashew throughput at the ports is estimated at 54 000 tonnes annually which is an 8% increase over 2009.

The Gambian cashew nut value chain includes several different stages between the farmers and processors which further squeezes the margins of the farmers. Specifically, after the post-harvest handling, purchasing is generally handled by middlemen, village shop owners, and collection agents. The product is then transported to either local exporters, seasonal Indian exporters, or to national stockists. National stockists, who are mostly Gambians, are generally local businessmen who stand to make a profit by buying, storing, and selling nuts to seasonal Indian buyers. Almost all of these nuts that are purchased are eventually shipped to India for processing.

The value chain would need to overcome a number of challenges to enhance wealth creation opportunities: i) marketing challenge, i.e. lack of official cashew buying centres in the Gambia; ii) no processing facilities; iii) farmers and technicians in need of best practices training; iv) no processing done on the cashew apple; v) insufficient and expensive transportation from rural farming areas to urban areas; vi) lack of storage and drying facilities at the farm level.

Cashew processing in the Gambia is negligible: only between 5-10 tonnes are processed annually. A large proportion of cashew nuts are exported to processors in India. With the 165 000 tonnes of cashew nuts that come out of the region, there is an opportunity for companies to set up processing facilities in the Gambia and to become a major processor in Africa. The advantage of the location is its efficient and cost-effective port system relative to that of the sub-region.

Another potential venture would be processing of the cashew apple. This would be a venture for which the input would essentially be free as farmers in the region throw cashew apples away. In some parts of the world, the pulp from the cashew apple is used to make juice, spirits, and jams. Another serious potential for the cashew apple is ethanol production.

Note

1. In 2009, the production was about 2 000 000 tonnes for the whole world, 124 000 tonnes for Guinea Bissau and 35 000 tonnes for Senegal.


Country notes


GHANA

Strategic and selective integration in global and, in particular, regional value chains offer opportunities to Ghana to develop its industrial capabilities and diversify its sources of growth. Ghana’s economy has not undergone a significant structural transformation, despite a sustained annual average economic growth of 5% since 1990. Indeed, agriculture still provides over 60% of total employment and primary commodities, mainly oil, gold and cocoa, correspond to over 80% of total exports. For Ghana to sustain this high growth rate and create sufficient employment will likely depend on its capacity to develop its industrial sector and on the linkages it creates with its emerging oil and gas sector.

Ghana’s industries are characterised by a small number of leading firms dominating the sector. Five sub-sectors – metal products, wood products, fats and oils, plastics and rubber and pharmaceuticals – represent over 50% of Ghana’s non-primary commodity exports. Since 2000 the industrial sector’s share of GDP has remained stable at around 25%. Construction, driven by an urban housing boom and infrastructure development, became the largest sub-sector, while manufacturing’s share in industrial GDP has declined from 36% to below 30%.

Energy provision and access to finance are the two most pressing hurdles facing Ghana’s manufacturing sector. The rising cost of energy has eroded manufacturers’ profit margins, while erratic energy supply results in expensive loss of production and the need to use fuel for electricity generators. The high cost of credit and the inadequacy of Ghana’s financial sector to provide financing adapted to the needs of the manufacturing sector makes it hard for SMEs to scale up production, modernise their machinery and raise their competitiveness. As a result most natural-resource-based manufacturers (wood, metals, agri-business) prefer to be fully integrated, so as to control and ensure the quality and reliability of their inputs, ancillary services, logistics and distribution channels.

The Ghanaian government has launched several strategies to promote Ghana’s industrialisation process: the Industrial Policy (2010), the Industrial Sector Support Programme (2010), the Trade Sector Support Programme and the Export Promotion Strategy (2013). These strategies are very broad based and their design process was inclusive, yet, the lack of clear priorities and low implementation capacity due to financial challenges has limited their impact. This absence of decisive government action, combined with a difficult business environment and poor transport infrastructure render most of Ghana’s manufacturing sector uncompetitive on international markets, which complicates its integration into global value chains (GVCs) or its ability to compete against imported products.

In 2013 the government started to develop a strategy, which it aims to implement in 2014, to promote the integration of specific sectors into GVCs, including aluminium, textile, agri-business, plastics and pharmaceuticals. So far Ghana’s integration into GVCs has been limited and is largely driven by the existence of preferential trade agreements (ECOWAS, AGOA) or its natural resource endowments (bauxite, tropical wood, cocoa, fresh fruits and gold). Ghana’s relative low labour productivity is not sufficiently offset by the relatively lower wages in Ghana to attract efficiency-seeking industries on a large scale.

Rising consumer demand in regional markets (Togo, Burkina Faso, Nigeria, Côte d’Ivoire, etc.) offer significant export potential to Ghanaian manufactures and could facilitate their insertion into GVCs over the medium term. By eliminating tariffs the ECOWAS export-liberalisation trade system (ELTS) offers Ghanaian exporters a competitive advantage over cheaper imports in regional markets. Additionally, regional markets typically require lower and more accessible standards than EU or US markets. Most Ghanaian manufacturers cannot bear the costs of adapting to frequently changing and increasingly demanding standards and consumer preferences of US and EU markets. For instance, the AGOA trade agreement spurred a revival of Ghana’s garment industry in the early 2000s, exporting shirts, trousers and scrubs to large US retailers. However, the recent energy crises have severely impacted the viability of the sector and forced most small-scale producers out of business.



Additionally, the longstanding presence of some of Ghana’s leading firms, in some cases since the country’s independence, has enabled the country to develop Ghanaian brands in textiles and pharmaceuticals that are recognised and valued by consumers in the sub-region. Also, in comparison to cheaper imports, “Made in Ghana” is considered to be of premium quality for construction material (aluminium, steel, plastics and wood). This quality premium compensates for the higher price of the product and targets middle-class consumers and formal entrepreneurs in ECOWAS countries. Yet, for most African citizens “low price” remains the decisive factor in the decision to purchase, resulting in the rising popularity of cheaper Chinese (light tools, construction material, furniture, plastics, etc.) and Indian (pharmaceuticals) imported and counterfeited products. This trend threatens existing brands and local production capacity.

Ghana’s comparative advantage in integrating GVCs resides in its natural resources, including cocoa, tropical wood, fisheries, fresh fruits and bauxite. Yet, poor infrastructure, unreliable agricultural production and lack of clear land-tenure rights constrain the development of competitive agro-processing for the potential domestic market that is currently met from imports. Ghana’s wood-processing industry, once exporting tropical wood to the EU and regional markets, is threatened by resource depletion and insufficient reforestation. Antiquated machinery and unskilled labour render processing lower value wood uncompetitive, compared to cheaper processed wood from Asia. Ghana exports bauxite to Central America for processing into Alumina, which it then re-imports as inputs for the Aluminium smelter VALCO. VALCO’s output serves as inputs to Aluworks, West-Africa’s only rolling mill and producer of aluminium ingots.

Government provides incentives to attract foreign investors as well as to ensure the competitiveness and survival of most of the nation’s leading firms. The Ghana Free Zone Board offers significant tax incentives to 260 companies that export at least 70% of their total production. These companies do not need to be located in an enclave, which enables agri-businesses and mining companies to benefit from free-zone incentives while being located close to their raw inputs. Other policies include import duties to protect local industries, including plastics, aluminium and alcoholic beverages or export bans on round logs and metal scrap to ensure the provision of raw materials for the wood and metal processing industry.


Country notes


GUINEA

Guinea’s small industrial structure and energy supply problems hinder its inclusion in global value chains (GVCs), which are chiefly in mining, chemicals (plastics, paint and cement) and agro-food. The small value-added operations are in mining, assembling and packaging semi-finished products and selling them locally and sub-regionally. The unskilled labour-intensive factories involved hire mainly machine operators.

Guinea has abundant mineral resources and about 6.2 million hectares of arable land, with 45% of the population under the age of 30. It borders six countries and actively participates in sub-regional organisations. It has also signed up to the African Growth and Opportunity Act (AGOA) and has partnership agreements with the European Union. These give the country great advantages in joining GVCs, especially for making metal parts for vehicles and construction, supplying raw materials to agro-industries, assembling garments, and for tourism. This potential is greatly under-used, as the country does not advertise itself and business activity is focused in commerce and construction.

An industrial policy, which has been lacking for years, should focus on establishing industrial production stages. But poor and erratic electricity supply is still a major obstacle and the inauguration of the Kaleta hydro-electric dam is a big opportunity. The improved business climate is important but private property and contracts need to be more secure. The 58.7% primary school completion rate is still below the 2012 UNESCO-calculated sub-regional average (67%), as is the 34% adult literacy figure (69%). Beyond these inadequacies, research and development activity could be promoted.



GUINEA-bISSAU

Generally speaking, Guinea-Bissau is only weakly integrated into global value chains (GVCs). With an industrial and commercial fabric that is structurally underdeveloped, the production of goods and services in the country contributes little value added. Industrially, after significant growth in recent years pushed value added in manufacturing up from 8.8% of GDP in 2002 to 13% in 2005, this share fell to 11.7% of GDP in 2012. Apart from the low levels of value added, the industrial sector represents only a tiny portion of the country’s exports (less than 5% of total exports), with a trivial amount of FDI supporting its development. This final point is partly linked to Guinea-Bissau’s political instability in recent decades, as well as to a lack of the infrastructure needed for production. Similarly, extractive resources are scarce, with no prospects for the short or medium term.

The only sector which can claim to be integrated into GVCs is that of the cashew nut. Guinea-Bissau is indeed a major producer: in 2013, cashew nut production amounted to 150 000 tonnes (16% of total African production), accounting for 11.9% of the country’s GDP and 87.7% of its exports. Less than 5% of the cashews produced are processed in Guinea-Bissau, however; the rest is exported raw, mainly to India (more than 80%), where it is mixed with local production or that imported from other countries and processed. In order to capitalise on this resource, in 2011 the government created a fund to promote the industrialisation of agricultural products (FUNPI) to encourage processing, research and development. This fund is financed by an export levy that has fluctuated between XOF 10 and XOF 50 per kilo several times since its implementation. The government collected the equivalent of 2.1% of GDP from the FUNPI, but this has yet to be employed in such a way that it effectively contributes to the sector.

In addition to the cashew nut, the agricultural and agri-food sectors have great potential. Guinea-Bissau enjoys an abundance of natural resources with good quality land, extensive biodiversity, significant fishing resources and ample rainfall, receiving an average of 1 500 to 1 900 mm over 112 days. Productivity nonetheless remains weak with low yields (around 1.7 tonnes per hectare for rice and 0.8 tonnes per hectare for millet and sorghum). The use of these resources has not led to economic progress that matches the existing potential, due to a lack of hydro-agricultural improvements, inputs and infrastructure to support production. In addition, the land law approved in 1998 has been only partially implemented, preventing the sector from developing. The annual grain requirement exceeds annual production by 100 000 tonnes, the gap mainly being plugged with rice imports. In addition, political instability and logistical problems have slowed agri-food investments. There are only a few isolated cases of foreign investors, mainly involved in rice cultivation (production and processing) and in horticulture in the Bafatá region.

There are several main obstacles preventing Guinea-Bissau’s integration into GVCs. First, the political situation over the past 20 years has hindered investment. The country has inherited an unfavourable business environment, heavy regulatory burdens and obsolete physical infrastructure. In addition, the general lack of resources has prevented Guinea-Bissau from gaining any competitive advantage in terms of the workforce – by investing in training, for example – or from stimulating research and development so that it might benefit from the favourable regional trade policies in the WAEMU area.

Successive governments have drawn up a variety of sectoral policies with a view to boosting production levels and attracting investment that could potentially promote the integration of the country’s production base into GVCs. These strategies have been interrupted a number of times, however, due to a lack of resources for their implementation. Overall, these strategies are set out in the poverty reduction strategy paper, which advocates: i) strengthening the rule of law and greater security for investors; ii) a stable macroeconomic environment to guarantee a framework for growth; iii) promoting inclusive and sustainable economic development to support growth sectors; iv) improving human capital, thus boosting levels of production and of productivity. These are the conditions that will allow sectoral policies, in particular for cashew nuts, to bring about successful participation in GVCs.


Country notes


kENyA

Kenya has a range of value chains in floriculture, textiles, leather, automotive production, intermediate and final manufacturing, music industry and tourism. It is evident that the country is generally at the low end of the value chain, given that a large component of Kenya’s exports is in raw materials (e.g. coffee, tea, animal products) which have low foreign value added content (Box 1). For example, though Kenya has been integrated in the global leather value chain, this has not been done in a manner that is beneficial to the country and the local industry players. There is little value addition and about 70% of the exports from Kenya are raw hides and skins. Analysis also shows an industry that has been neglected after liberalisation, one that suffers from poor regulation and weak policy support. The production of processed leather has actually declined and installed capacity utilisation is below 50% in all tanneries. The competitiveness of the sector is weak compared to Asian countries.

The range of barriers to global value chains (GVCs) in Kenya include are domestic, regional and international. Local barriers to GVC prospects include policy gaps, corruption, poor transport infrastructure, crime and insecurity, high cost of energy (esp. electricity), land tenure issues; high cost of finance; lack of economies of scale for small firms and poor financial intermediation, among others. Regional and international barriers include tariffs and quotas, technological barriers, currency fluctuations, political risks and market failures, among others. Though Kenya has surplus and fairly well trained manpower, some industries have not been able to find ready and appropriately skilled personnel due to mismatches between the training provided by Kenyan institutions and labour market requirements. However, as part of Kenya’s long-term plans contained in the Kenya Vision 2030 and occasional curriculum updating, a number of policy reviews are being made to ensure schools equip graduates with market demanded skills.

In promoting growth, trade, jobs and development, Kenya has sought to increase domestic value added from GVC participation, through such policies as import substitution, subsidies, tax holidays, export processing zoning, export promotion, export compensation, and industrial property legislation. Many of these policies have had implementation and/or outcome challenges; for example the import substitution policy failed to build international competitiveness, but instead created a scenario where Kenyans paid higher prices than they would have otherwise while the country’s ability to export diminished, leading to skyrocketing and enduring balance of payments deficits, before it was finally abandoned. The EPZs, through such programmes as AGOA (where Kenyan-based firms primarily make and export apparel to the USA), have led to significant increase in exports and employment, though the expected technology and skill transfers as well as backward linkages have not been realised, which suggests a low chance of sustainability once the AGOA arrangement comes to an end. The tax holidays ended up benefiting foreign investors at the expense of Kenyans, as most of them tended to relocate at the end of their respective grace periods.



Box 1. Participation in global value chains (GVCs)

Sector Sub-sector Activity in the GVC performed in the country

Agriculture & Agro-processing

Floriculture Utilisation of imported chemicals and equipmentProduction and export of cut flowers for repackaging and resale

Tea Utilisation of imported chemicals (e.g. fertiliser) and equipment Production and export of processed tea for repackaging, rebranding and resale; exported tea also used in blending other teas and beverages

Coffee Utilisation of imported chemicals (e.g. fertiliser) and equipment Production and export of coffee beans for foreign processing; a small percentage processed locally for use by residents and tourists, with some exports to the COMESA region

Leather Utilisation of imported chemicals and equipment Production and wet-processing of leather; bulk of which is exported for final processing and making of final products

Textiles Utilisation of both local and imported raw materialsUtilisation of imported chemicals and equipment Export of final products to US and other markets

Edible Oils Utilisation of both local and imported inputsUtilisation of imported machinerySale of final products to both local and export market

Manufacturing Automotive Utilisation of imported CDKs and semi-processed inputsUtilisation of local inputs (e.g. upholstery and fabricated parts)Sale to both local and export markets

Plastics Utilisation of imported raw and semi-finished inputsUtilisation of imported machinerySale to both local and export markets

Petrochemicals Utilisation of imported inputsUtilisation of imported machinerySale of final products to both local and export market


Country notes


lESOTHO

Livestock, textiles and clothing are the main areas where Lesotho has attempted to participate in regional and global value chains. Though currently undeveloped, opportunities for value chains also exist within mining, agro industries and the natural resources sector, such as sorting, cutting and polishing diamonds. Livestock plays an important role as a source of livelihood, contributes about 4% of Lesotho’s GDP and has considerable potential to contribute to poverty reduction. It also accounts for 60% of total value added in agriculture. The sector is largely in the hands of the private sector, which operates with underdeveloped value chains. Value-added interventions in the agriculture sector would have an immediate positive impact on the livelihood of the majority of the population.

The clothing sector plays a crucial role in Lesotho’s economy, accounting for 60% of total exports and employing 80% of Lesotho’s manufacturing workforce. It provides more than 30 000 people, mainly to women and young people and is the second biggest employer after the government. Asian and South African investors and manufacturers dominate the industry. Asian companies have more market control than South African enterprises as they are linked to US value chains. However, the South African market is increasingly important. While Asian investors operate in Lesotho to take advantage of US market concessions under the African Growth and Opportunity Act, South African manufacturers are attracted by favourable labour conditions, including wage differentials as well as ease of access to South Africa and SACU markets. The Lesotho clothing sector is a buyer-driven value chain common in labour-intensive consumer industries and characterised by decentralised, globally dispersed production networks, co-ordinated by lead companies that control activities that add value to products. Textiles and clothing manufacturing in Lesotho is linked to two important value chains comprising of the US value chains, which are global, and the South African one, which is regional.

While the two sub-sectors have good opportunities, they are constrained and measures have been recommended by recent studies on value chains in Lesotho. There is good potential for developing textiles and clothing as well as livestock value chains regionally although global opportunities are also available. For livestock the opportunities are mainly regional focusing on wool and mohair. These are the only well-developed livestock value chains in the country and have enormous trade connections with South Africa. Lesotho can also develop poultry, meat and egg marketing value chains.

In textiles and clothing, Lesotho could supply South Africa the products traditionally bought from China. It has a cost and time advantage over Chinese suppliers. In this respect, Lesotho-based South African-owned firms can remain cut trim and make suppliers. Alternatively, upgrading opportunities exist where more advanced functions based in South Africa could be shifted to Lesotho, where firms could strengthen their value chain links. There are also opportunities for integrating in value chains in Asia and other countries such as Russia for textile and clothing exports.

Lesotho must overcome formidable challenges to fully harness the regional and global value chains. In livestock, there is poor genetic quality, poor nutrition, diseases, low-quality products and stock theft. Other constraints relate to limited knowledge and business management skills, market requirements, poor access to technology, weak market links and limited access to investment and financial services. The textile and clothing industry also suffers from limited skills and industrial capabilities as well as poor infrastructure. In view of the required skills levels, high-value activities such as design, marketing and retailing remain with lead companies. While upgrading and shifting more functions and responsibilities to staff in Lesotho is desirable, South African firms are sceptical about the availability of skills in Lesotho.

Unless strategic moves are made, the benefits of the livestock, textile and clothing industries will be limited. In livestock, there is need to build capacity in value chains by training farmers, developing entrepreneurship in young farmers and strengthening farmers associations, focusing specifically on dairy, poultry and pig farmers’ groups. Other interventions could be to extend credit facilities to medium and small enterprises, improve animal health through better drugs procurement and improving agriculture ministry capability for livestock value chains



development. The textiles and clothing industry needs to develop better skills to support the desired upgrading to higher level manufacturing. This will allow the industry to go beyond generating employment and develop locally owned companies that maximise the linkage effects of the foreign-owned ones.


Country notes


lIbERIA

Liberia has participated in global value chains for decades through its export of primary commodities, and the revitalisation of this sector after the war has been a key driver of economic growth. Exports have been dominated by three commodities – iron ore, rubber and timber – that accounted for more than 80% of exports and an estimated 22% of GDP in 2013. These shares should increase by 2015 as iron ore production increases. Much of Liberia’s commodity exports were interrupted during the conflict, and since the end of the war, the government has awarded concession contracts in iron ore, rubber, timber and palm oil to revive growth, achieving more than USD 16 billion in FDI commitments. Iron ore production re-started in late 2011 with one mine (Arcelor Mittal) beginning exports, while other mines will commence production between 2014 and 2015. Timber exports were banned by United Nations sanctions from 2003 to 2006. Logging re-started in 2008 and exports picked up considerably from 2011 to 2012, but plummeted in 2013 after fraud and abuse related to logging permits resulted in a moratorium. Rubber production and exports, led by the Firestone plantation, continued during the conflict. Since the end of the conflict, several oil palm plantations have also begun planting, although the process has slowed due to disputes with local populations regarding prior consultation and land access.

Liberia’s current activities are focused on the export of primary commodities, with limited processing and few local business linkages. The government and partners are making concerted efforts to avoid repeating Liberia’s history of “growth without development”, where growth was based on enclave primary export industries that largely bypassed local business. Therefore, increasing the linkages between exporters and local businesses will be a key growth strategy. Given the low sophistication of the Liberian private sector, this is starting with increasingly supplying goods and services such as transportation, catering, security, and the procurement of goods and services. These services require only limited skills, but would increase employment and capacity. After improving standards, the private sector could increasingly participate more in construction and civil works, maintenance, and supplying agricultural inputs. Local procurement is currently limited, with two mining firms reporting only 2.6% of expenditure was from Liberian manufacturers or service providers, and only 0.1% from a local importer. This compared with 3.3% and 3.2%, respectively, of spending in Burkina Faso, showing that expansion of local procurement for mining may be limited (Kaiser/World Bank Survey).

There is potential for increased valued addition in Liberia. The timber industry supplies wood for a burgeoning woodworking industry, but quality is still low. While palm oil plantations should increasingly install refining capacity, it will be only after production increases substantially. Rubber plantations do some limited processing, with rubber and latex plants at Firestone. The market for rubber wood has been active and additional investment could help develop rubber goods production such as tubes, hoses, inflatables and sporting goods. Potential additional sectors for increased value-added and exports include fruits and vegetable processing, as well as fisheries. Tuna fish licensing is commencing in 2014 and two fish processing zones are being constructed.

Despite significant potential, Liberia’s general business environment presents numerous barriers to increasing exports, increasing linkages with local businesses or value addition. The country currently supplies power to less than 2% of the population (compared to around 29% in all of sub-Saharan Africa) at a price that is among the highest in the world. Businesses rely on generators at a prohibitively high cost, limiting the potential for small-scale manufacturing and diversification. Additionally, lack of paved roads – less than 10% of the road network is paved – cuts off much of the country from Monrovia during the long rainy season. Low capacity and poor infrastructure at ports is also a problem, particularly for forestry. For agriculture, the lack of warehouses and other storage is an additional constraint. Labour force skills are limited with some 57% of the labour force having either less than full primary education or none at all. Liberia’s largely informal private sector also faces limited access to credit, especially for the long term, and contract enforcement is problematic. Access to land and tenure security continue



to thwart the expansion of mining, agriculture and timber concessionaires, which has led to disputes with local populations. Government regulation and oversight of the extractive sectors will need to improve to balance local needs with commercial interests.

The government is working together with partners to address these infrastructure constraints. Its Agenda for Transformation for 2012 to 2017 puts a strong emphasis on rebuilding power, roads and port infrastructure. Electricity access will gradually increase in Monrovia and should experience a significant boost in 2015 and 2016 when the Mount Coffee Hydropower Plant comes online and there is more investment in transmission and distribution networks. Road construction, including outside Monrovia, is also progressing, as well as improvements to the ports. The government is also promoting Special Economic Zones, which would provide dedicated infrastructure and services to allow for improved value addition to exports.

The government is preparing a local content policy, led by the National Investment Commission (NIC), intended to promote increased linkages between local businesses and large foreign investments. Public procurement has a preference system for Liberian firms and the last two government budgets have called for 25% of government spending on goods and services from Liberian businesses although there is not currently sufficient capacity to fulfil this demand. Concession agreements, except for agriculture, currently encourage reporting on local procurement, but do not require it. Agreements allowing for the duty-free import of inputs may, in fact, constrain increased local procurement. Agriculture concessions generally require out grower schemes, where the concessionaire designates and manages a portion of land for out growers, from which it would then purchase crops. Concession agreements further require various contributions including using national labour, granting access to infrastructure, investing in communities, and providing social services to workers. The newly established National Bureau of Concessions could increase the monitoring of concession agreements while also working with the NIC to improve dialogue and policies on increasing local procurement.

The government is also supporting initiatives to improve the business environment. It is working to improve access to finance by improving the credit reference system and developing a collateral registry. The Liberian Better Business Forum brings together government and the private sector to regularly discuss and address other business environment issues. Various training and capacity building programmes for small and medium-sized enterprises are also underway, as well as programmes that have improved information-sharing and created directories of local businesses to identify potential suppliers for concessionaires.


Country notes


lIbyA

Libya’s economy is primarily structured around the energy sector, which generates about 50% of GDP and 96% of government revenues. Concentration on the export market for hydrocarbons has led to dependence on imported consumer and industrial goods, both failing to create domestic employment opportunities and inhibiting domestic entrepreneurship. Notably, most of these activities have been concentrated on the upstream part of the industry whereby crude oil is exported with no transformation or value added. The substantial revenues from the energy sector have not been used sufficiently to develop national infrastructures, or to promote other sectors. However, the country’s large financial reserves leave room both for public investment and fiscal incentives for private initiatives linked to local transformative industries and services. Developing a self-sustaining non-petroleum sector is highly important to the long-term sustainability of the Libyan economy as it will diversify the country’s sources of revenues, create new employment opportunities, and allow Libya to use its natural and competitive advantages to participate more fully in international production networks. The country’s other major industrial products, apart from hydrocarbons, are petrochemicals, aluminium, iron and steel, processed food, textiles, handicrafts, and cement – however, these have not been developed fully.

Much of Libya’s post-independence industrial policy was state-led and aimed at moving away from dependence on foreign ownership or control. There have been attempts to promote Libya’s positioning in the global value chains (GVCs), for example through the promotion of industrial projects creating downstream petrochemical operations, satisfying internal demand for processed petroleum products, and taking advantage of cheap energy to build export-oriented manufacturing capacity. However, these were not completed due to the country’s lack of infrastructure and adequate regulatory environment. The government attempted to develop light processing and a petrochemical industry, with particular priority given to the processing of food products, especially since the 1970s. However, given the high dependence of development expenditure on oil revenues, actual spending often failed to reach planned levels given the fluctuations in oil prices.

Libya’s new political landscape creates opportunities for a renewed drive towards diversification and sophistication of non-oil sectors through greater reliance on the private sector and an enhancement of the relationship between public and private sectors. Some of these opportunities are limited in the short term, given the lack of available expertise and skills, adequate infrastructure, weak regulatory and institutional capacity, and the absence of an overall development framework in the country. The post-revolution Libyan government has highlighted the potential of the industrial sector to bring added value to the economy and contribute to economic diversification. The Libyan Ministry of Industry has announced Libya’s desire to export finished goods rather than raw materials, while recognising that Libya’s diversification also requires the development of human resources, private-sector operations, and infrastructural development. Broader issues of reforming the regulatory and enabling environment for the expansion of non-oil sectors, as well as an increase in the country’s overall economic and political stability, are essential requirements for Libya’s successful positioning in regional and global value chains.

Libya could leverage its other comparative advantages to diversify its economy away from the hydrocarbon sector and link it to GVCs. For instance, given its extensive Mediterranean coastlines and its close proximity to Europe, Libya is well positioned to develop a sophisticated ports and shipping industry which would benefit trade between Africa and Europe, and beyond. Currently, lack of equipment, skills, container handling facilities and deep water quays to accommodate mega-container ships are among some of the major challenges facing the industry. Unless addressed, these weaknesses will undermine Libya’s competitiveness, with an increasing number of cargoes being shipped to neighbouring countries such as Tunisia. In the area of oil refining, this sector was impacted by UN sanctions, specifically UN Resolution 883 of 11 November 1993, which banned Libya from importing refinery equipment. Libya is seeking a comprehensive upgrade to its entire refining system, with the aim of increasing output of gasoline and other light



products. However, given their strategic significance, these refineries have been targeted by the recent domestic tensions. In November 2013, the government announced plans for building new oil refineries aimed at meeting most of the fuel and other refined goods needs of eastern Libya. Although vulnerable to oil-price fluctuations, a more developed refining industry could increase the value added of Libya’s energy exports, resulting in higher levels of revenues from this sector.

Home to some of the world’s most unique archaeological heritage sites (including five UNESCO World Heritage Sites, three of which are classical ruins), combined with some of the most extensive Mediterranean coastlines, Libya’s tourism industry, which has been hit hard by the recent internal tensions, is a sector with great potential for development, provided the political turmoil subsides and the relevant skills and infrastructure gaps are addressed. In Libya, 88% of the land is desert, offering huge potential for solar-energy generation. The latter would reduce the country’s reliance on oil, allowing for increased non-oil exports. Libya could potentially export part of the clean energy output to the European markets that are under pressure to meet their clean energy targets. Proximity to Europe is a significant comparative advantage in this regard.


Country notes


MAdAGASCAR

Madagascar’s participation in global value chains (GVCs) is limited to exporting unprocessed goods to Western Europe and North America and selling to consumers mainly non-food products imported from France and China and food imported from SADC and COMESA member states. Sectors such as tourism, the textile-manufacturing free zone and ICT-related services are exceptions in that they are not limited to unprocessed products and also include transformation and processing activities.

Tourism has developed over the past 15 years and arrivals of tourists were about 375 000 in 2008. The political crisis and increasing lawlessness slowed tourism down and arrivals fell 52% between 2008 and 2013. The industry did generate more than 31 000 direct jobs in 2011.

The country’s textile industry has greatly benefited from the free zone set up in 1989 and from the US African Growth Opportunity Act (AGOA) which the country signed up to in 2001. Textile exports grew strongly, from 14.9% of all exports in 1995 to 54% in 2008, before dropping after 2009, when the country was excluded from AGOA, to 27.5% in 2012. The sector, which accounted for 1.6% of jobs created in 2012, according to the MDG survey, was the hardest hit by the political crisis, losing about 20 000 jobs.

Despite the crisis, the ICT sector has expanded steadily over the past decade thanks to the opening-up of the sector and major infrastructural investment. The volume of business by mobile-telephony companies grew 13-fold between 2005 and 2009 and created direct and indirect jobs.

Madagascar could also boost its GVC participation through its natural resources of agriculture and minerals. Only a quarter of the country’s 8 million hectares of arable land is cultivated. The island also has 5 000 km of coasts and more than 1 500 km2 of natural lakes that could be used for fishing and fish-breeding. The country’s rare and endemic medicinal and aromatic plants give it a potential competitive advantage too. Growing regional demand for agro-industrial products and the recent world food crisis are also potential sources for greater agricultural exports.

The firm Lecofruit is doing research on green beans and engaging in contract agriculture with small farmers to gather, process and ship produce to local and European markets, transforming the subsistence activity of 9 000 farmers into export production. Another firm, Guanomad, has set up a business over the past decade manufacturing bio-fertiliser made from bat droppings for local and foreign markets, an example of successful entry into the GVCs at the level of sustainable bio-agriculture.

The government has granted prospection and production licences since 2003 for major mineral deposits. Rio Tinto has invested some USD 760 million in the QMM (Qit Madagascar Minerals) group to build an ilmenite mine and a port to ship the mineral to Quebec – 870 000 tonnes in 2013, about 12% of world output. The firm Sherritt has invested about USD 4.5 billion in a nickel and cobalt mine at Ambatovy and a processing plant at Toamasina. The mine began operating at the end of 2012, with annual production of 5 600 tonnes of cobalt (10% of world output) and 60 000 tonnes of nickel (5% of world output). A dozen other firms are prospecting for oil.

Tourism is the services-sector activity most geared to exports, with foreign-exchange revenue that rose from 90.2 million special drawing rights (SDR) in 2001 to 229 million in 2013. Activity chains in Madagascar involve conception, production and marketing of tourism. Better transport and reception infrastructure will enable growth of luxury tourism.

ICT has great potential to draw the country further into GVCs, as shown by the firm Vivetic, which began as a specialist in data entry but whose marketing and relocation strategies led it to expand into cross-channel-customer marketing in French-speaking European countries, creating 1 000 jobs in Madagascar.

Several obstacles prevent the country from moving faster towards more value-added stages in the GVCs, notably its physical distance from developed-country markets, lack of transnational infrastructure and remoteness of agricultural areas, then the small size of local markets, difficult



credit access and costly and unreliable energy, which discourages investment. Governance constraints are also significant, especially repeated political crises that force investors to include them as risks in their decision making, and the still major problem of corruption. Slow growth of human resources is another big snag, with tradition still weighing heavily on the economy and curbing creativity and innovation. Fewer than 3% of Madagascan workers completed secondary education according to figures for 2010.

GVCs have been implicitly taken into account in the country’s development strategies. The first poverty reduction strategy paper (PRSP), for 2003-06, stressed the need to make the economy more competitive in order to reduce costs and improve quality. The Madagascar Action Plan (2007-12) which followed the PRSP aims for “a diversified and strong private sector” that can meet “the challenges of globalisation and gain a competitive advantage”. Another aim in the agriculture, livestock and fisheries development plan being prepared is to “produce better to sell better, at home or abroad, and profit from known competitive advantages”. Economic recovery plans after the end of the political crisis and the country’s development programmes should include vigorous strategies to boost export items with strong added value.


Country notes


MAlAWI

Malawi’s economy is highly undiversified, rendering it vulnerable to exogenous shocks. The export basket consists mainly of primary commodities.

The main export commodity is tobacco, which accounts for 60% of Malawi’s foreign exchange earnings. Other key export commodities include tea, sugar, and cotton and uranium. Because of concentration on low-value primary commodities, the benefits to Malawi from globalisation are limited.

Malawi’s industrial base is very narrow. The share of manufacturing in GDP has declined during the past decade from 15% to 10%. Moreover, existing manufacturing activities are limited to low-value products, mainly agro-based processing. These are primarily for the domestic market. Malawi’s production and supply capacity is limited; hence the country’s high import dependence.

Malawi enjoys a comparative advantage in labour-intensive activities, notably agro-processing and production of less sophisticated consumer products. The shift in the production and export patterns of industrialised countries, as well as emerging economies, such as China, towards higher value and knowledge-intensive products has opened up opportunities for low- income countries, such as Malawi, to export labour-intensive products and integrate into regional and global supply chains. The challenge facing Malawi is to reposition its economy and build capability to exploit such opportunities through enhanced competitiveness.

Currently, Malawi’s integration into global supply chains is limited to tobacco. Malawi’s tobacco industry is organised around clusters with strong linkages throughout the value chain. Small-holder farmers grow Burley and Virginia tobacco leaf, which is sold at auction. The tobacco leaf undergoes limited processing, involving mainly destemming. The semi-processed tobacco is exported by local buyers to international tobacco companies on a contract basis. When the tobacco leaf reaches foreign markets, it is processed into the final consumer products.

In 2013, tobacco earned Malawi USD 362 million. The direct economy-wide effects to the rural economy of tobacco incomes are, therefore, quite significant. In some instances, the multiplier effect measured as the differential between the unit cost of production and the unit selling price could be as high as 1:3. As tobacco is the main foreign exchange earner for Malawi, the government has developed deliberate policies to strengthen the tobacco value chains. The model adopted involves linking farmers to agriculture research and extension, input suppliers, and other players along the value chain. This model of linking farmers to international buyers through local intermediaries through contractual arrangements could be replicated to other commodities in which Malawi has a comparative advantage

There is significant potential for Malawi to diversify into the export of higher value products and to join regional and global supply chains. Agri-business, in particular, offers significant potential for value chain development to exploit regional and global market opportunities. Malawi Mangoes, a new agro-processing venture located in Salima along Lake Malawi, is a good example of how such opportunities can be exploited. The venture involves the establishment of a large-scale fruit-processing plant to produce banana and mango puree and concentrates for export to regional, Western and Asian markets targeting major retail chains.

The main factors hindering competitiveness of enterprises in Malawi and their ability to move up the value chain and supply regional and global markets are high trading costs, associated high transport costs and NTBs. The other constraint is the lack of skills required to produce products of competitive quality. Therefore, the removal of these constraints is necessary for Malawi to exploit emerging opportunities to participate in regional and global value chains.

The government is taking deliberate steps to address these challenges, including trade facilitation reforms. The government of Malawi has developed a National Export Strategy (NES), which establishes a road map for building Malawi’s productive base to raise exports and reduce demand for imports with the ultimate objective of reducing the trade deficit. The NES identifies three priority export sectors in which Malawi has potential comparative advantage for domestic value addition. These clusters are: i) oil seeds products: e.g. cooking oil, soaps, lubricants; ii) sugar cane products: e.g. sugar, high-value branded sugar, and confectioneries; and iii) other manufactured products, such as packaging. The strategy is to move up the value chain over the longer term as skills are developed and infrastructure improves.



MAlI

Mali focuses on growth of global value chains (GVC) through its programme for competitiveness and agricultural diversification (PCDA) and integrated economic growth initiatives (IICM).

The PCDA is a government project to promote supply chains to raise and diversify income and economic opportunities in the countryside, by improving supply chain organisation and efficiency (from production to marketing) in commercial agriculture, livestock and fisheries, where Mali has clear competitive advantages. It aims to promote commercial farming as an alternative to subsistence and is a chance for professionals to expand their sources of income through more responsive and efficient commercial farming.

The project is targeting the transformation of the value-added market chain into fully-fledged industries that boost development, based on growth shared by the private sector and small farmers to create value at every step in the chain. The project acts in response to requests from the private sector and encourages dialogue and public-private partnerships through contracts to bring producers to markets. The crop sectors involved are mangoes, potatoes, shallots, onions, shea butter, papayas, tomatoes, fish, milk, meat and on the hoof livestock.

Joining GVCs offers Mali a real chance to create jobs, especially for young people, as well as access to new technology with skills training and growth of more value-added economic activity that can help industrialise the country. But the dangers of GVCs include: the development of foreign economic enclaves with poor links to the local community, the over-exploitation and exhaustion of natural resources, the undermining of social and environmental standards (especially in mining) and exposure to imported crises through the wider links to the world economy.

The country has the potential to profit from GVCs in the extractive sector, agro-industry, livestock, crafts and tourism. To make good use of them, the government needs to adopt policies and strategies to remedy weaknesses such as the country being landlocked, access to and reliability of energy, shortage of a trained workforce, low consumer buying-power and corruption.

Setting up a plant to process mangoes at the Diguiya women’s cooperative in Yanfolila, backed by the government and the UNDP, is a good example of a project to increase the added value of fruit and vegetable exports, boosting the skills and living standards of co-op members. Annual production capacity is about 150 000 jars of jam for domestic and foreign markets, which could be expanded to process other fruit. First-year annual turnover is estimated at almost XOF 40 million, and should rise to XOF 205 million after five years. The plant employs 20 people directly and also generates indirect employment for local farmers, pickers and suppliers.

Cotton is the country’s second biggest export and an AfDB project (FAFICOT) to support the cotton-textile sector is also helping to grow value chains. It supports not only increasing production and productivity (through improved inputs, agricultural research, regional scientific co-operation and easier credit access for growers), but also focuses on marketing and distribution (linking growers to markets, building and improving rural roads and building storage warehouses) and processing (creating and strengthening national processing capacity).

Potential partners in developing GVCs in Mali include Europe (as part of the EU/ACP partnership), China and some emerging countries (India, Brazil, Turkey and Venezuela) and North Africa (Morocco, Egypt and Tunisia), with which Mali is developing very close trade, financial and economic ties. The Banque internationale pour le Mali (BIM), which was been bought by the Moroccan group Attijariwafa Bank, is working on increasing trade and industrial relations between Malian and Moroccan firms. It should play a big part in expanding value chains in Mali through Moroccan-Malian joint-venture firms. Attijariwafa is expected to make it easier to attract more Moroccan funding for the potential Malian value chains. Plans to open an Indian tractor-assembly plant in Samaya, a few kilometres from Bamako, could launch another value chain.


Country notes


MAURITANIA

Mauritania is integrated into global value chains (GVCs) to varying degrees through its mining and oil sector, its fisheries sector and its Nouadhibou free zone. Iron, oil, copper, gold and fish are exported unprocessed to Europe and China, where they are used as inputs into the value chains of their own production systems. Advanced processing of these products before export would give them higher value and allow Mauritania to move up the GVCs. The country could encourage the development of domestic enterprises around the wide range of activities that would be generated by the processing of its natural resources. Growth would then be more inclusive because local jobs would be created.

The mining activities managed by the SNIM on behalf of the state play a leading role, dominating exports and imports. The budget increasingly depends on mining revenue, the share of which rose from 13.4% to 29% of total revenue (excluding grants) between 2006 and 2013. The SNIM is the main employer in Mauritania’s productive sector, with a staff of more than 5 000, and is the second largest iron-ore producer in Africa. Fishing, meanwhile, has enormous potential, but domestic production is not sufficiently processed in Mauritania. It would be advisable to define a new strategy for the processing of goods on the one hand, and preservation of the resource on the other. A Fisheries Partnership Agreement (FPA 2012-14) considered “ethical and fair for all” was signed by Mauritania and the EU in October 2013. The agreement preserves Mauritania’s strategic interests by protecting its fishery resources and local economies. This is a crucial step, as the fisheries sector alone accounts for 40% of revenue in foreign currencies, 25% of government revenue, 12% of GDP and 40 000 jobs. The free zone in Nouadhibou will also allow Mauritania to host industries seeking relocation and to integrate the country into various GVC levels.

Several obstacles could slow down Mauritania’s participation in GVCs or prevent it from moving upwards to levels of higher value added. One is the country’s deficient electricity supply, notwithstanding the ongoing construction of the 120 MW combined-cycle power station in Nouakchott, which will be an important asset. Access to finance remains difficult even though a development fund, the Caisse des dépôts et de développement, was set up in 2011. Furthermore, the country’s workforce lacks skills and is not fluent in foreign languages. In addition, Mauritania’s sub-regional integration still needs to be optimised.

The government’s priority ought to be to remove all these constraints and obstacles. A genuine innovation policy also remains to be developed in the following seven areas: i) exporting products with high value added; ii) adding value to unprocessed local production; iii) stepping up the pace of reforms to improve the business climate and innovation; iv) identifying and developing sectors with a high potential for integration into GVCs; v) promoting innovations that are in the collective interest; vi) strengthening scientific and technological structures; and vii) promoting a technical culture and enterprise.

All observers believe the emergence of GVCs provides an opportunity for Mauritania. It could enable the country to improve its competitiveness, benefit from more outlets, and diversify its production and exports, either by going upmarket with its main exports or by exporting its products to regional and international markets.

Three great opportunities are offered under GVCs. The first is greater integration in international trade with more exports and more diverse exports. The second is related to a greater potential for local job creation. The third involves greater attractiveness for foreign direct investment, which is already present in the mining sector, averaging approximately USD 450 million over the last ten years with good prospects ahead.

Outside of the major export products, all the sectors of the economy offer other opportunities. In the primary sector (fisheries and forestry included), integration into GVCs could be explored in rice cultivation and livestock, by developing meat and milk supply chains, for example. In the secondary sector, branches such as leather (tanneries) and cement (gypsum mine) could be easily integrated into GVCs. In the tertiary sector, sectors such as trade, restaurants and hotels could be better exploited with a view to integrating them into GVCs.



MAURITIUS

Mauritius’ small and geographically isolated market has historically motivated its integration into the global value chains (GVC). With trade accounting for about 120.5% of GDP the economy is highly open and strongly linked to other markets. Building on peace and stability, strong institutions and fiscal discipline, the country has made huge strides towards the frontier with respect to business environment and global competitiveness, occupying a leading position in the region. The objective is to deepen its participation in global value chains and accelerate growth so as to catapult the country into a high-income status. Participating in global value chains has so far helped the country optimise comparative advantage through linkages to raw materials and cheaper sources of production from Madagascar, Bangladesh and India. It has also helped maximise economies of scale, and achieve technological improvement in Mauritian factories, thus releasing older generation equipment and machinery for relocation to other destinations. This in turn assists in the conclusion of trade agreements which allow market access and reinforces regional economic integration. Positioned between Africa and Asia with strong economic ties to the euro area, Mauritius is strategically positioned to be an economic hub, bridging value chains in the three economic blocks.

Several sectors are engaged in GVCs, including textile and clothing, sea food, agro-industries (in particular sugar) and the services sector (most notably tourism and the ICT/BPO sectors). As regards the textile and clothing sector, increased global competition as a result of globalisation and the erosion of preferential treatment has led to a variety of strategies being adopted by Mauritian firms involved in the value chain. These include: i) process upgrading (improving technology and/or production systems to gain efficiency and flexibility); ii) product upgrading (shifting to more sophisticated and complex products); iii) functional upgrading (increasing the range of functions or changing the mix of activities to higher-value tasks, for example moving beyond production-related activities such as design, input sourcing or distribution/logistics); iv) supply chain upgrading (establishing backward manufacturing linkages within the supply chain, in particular to the textile sector); and v) channel upgrading (diversifying to new buyers or new geographic or product markets).

Similarly, the sugar sector has also undergone substantial changes, successfully transforming into a cane industry. Mindful of the resilience of EU refined sugar prices relative to raw sugar prices, the Mauritian sugar industry has pursued a strategy of investment in moving up the sugar value chain, as well as developing other revenue streams from sugarcane production such as electricity co-generation. As part of this restructuring strategy, the Mauritian sugar industry has sought out new corporate partners in Europe to assist them in packaging and marketing refined sugar products. The experience gained on the EU market is of considerable value when it comes to the packaging and marketing of refined sugar in both regional and international markets, where the growth of sugar consumption is projected to be far stronger than in the EU. Mauritius’ ultimate objective is to scale-up production of value-added products based on sugarcane. Investment in sugar production in neighbouring East African countries needs to be seen in this light, since it assists in securing supplies of sugar to enable the development of a globally competitive scale of production of value-added sugar products.

The Mauritian seafood strategy aims at promoting an efficient and attractive environment for the supply of value-added processes and services related to the sourcing and marketing of sea food products. The value chain of the Mauritian Seafood Hub includes fishing, trans-shipment, storage and warehousing, light processing (sorting, grading, cleaning, filleting and canning, and ancillary services). For the sustainable development of the Seafood Hub, a Fisheries Partnership Agreement and Protocol was concluded and initialed by both the European Commission and Mauritius in February 2012. The Fisheries Partnership Agreement establishes the terms and conditions under which vessels registered in and flying the flag of the EU may carry out tuna fishing in Mauritian waters in accordance with the provisions of the United Nations Convention on the Law of the Sea (UNCLOS) and other rules of international law and practice.


Country notes


In the global business sector, a wide range of activities including software development, call centre operations, business process outsourcing (BPO), IT-enabled services (ITES), web-enabled services, training, hardware assembly and sales, networking, consultancy, multimedia development, disaster recovery (DR) and other support services are presently being undertaken. The ITES-BPO operations are mainly centered on customer support, help desk and telemarketing campaigns1.

Participation in GVCs has helped Mauritian companies to integrate into regional and global value chains gaining visibility and recognition as emerging players. Companies participating in GVCs have greatly improved their income from the offshore activities. Mauritius is actively engaged in developing backward and forward linkages with Africa and other neighbouring countries. Most players engaged in the GVCs are large companies, mostly local multinational corporations (MNCs), and thus only a few SMEs have integrated into the value chain. Where large firms have integrated into the GVCs, they have shifted out old technology, machinery and equipment and their labour-intensive operations. As a consequence they have upgraded technology in their local companies and enhanced value creation in Mauritius, e.g. design in Mauritius; production in Malaysia, Bangladesh and India; research and development in Mauritius; and project implementation in Africa, such as biotechnology, seed cultivation and plant nurseries.

Immediate opportunities exist for Mauritian companies to integrate into the regional value chains, in respect of agriculture, manufacturing and services. Mauritius has built up know-how and capacity in these areas that it can share in the region. The first option should be for local firms to integrate into the region. Thereafter, the process could be extended to industry level integration, namely the fibre to fashion cluster (textiles and apparel); the seafood sector; the seed to market pipeline for agro-industry; and the integrated services sector development, such as tourism, financial services, ICT, health and education.

The main barriers to upgrading along the value chain remain over-dependence on overseas markets as value is added on local and regional markets for producing products for exports largely to the EU and USA. Thus few benefits accrue to the region except through employment creation and limited technology transfer. In addition, there are also restrictive regional measures which may inhibit Mauritian firms’ ability to integrate into GVCs, such as restrictive national labour, trade and investment policies relating to local economic empowerment and trade protection. Furthermore, the emergence of other global players in some of the GVCs in which Mauritian firms are involved, coupled with the erosion of preferences also constitute further impediments to increased participation in GVCs. Lastly, the lack of investment in research and development is a major deterrent to the innovative capabilities of firms to move upstream in the GVCs in certain sectors. The uncertainty surrounding the Double Taxation Avoidance Agreement with India which remains unconcluded after years of negotiations may be a source of concern for Mauritian firms involved in the global business sector.

Note

1. www.hsbc.co.mu/1/PA_ES_Content_Mgmt/content/website/documents/guide_to_global_business.pdf.



MOROCCO

In recent years, Morocco’s trade balance deficit has widened due to the entry into force of numerous free trade agreements, while the country’s export profile, in particular of advanced technology products, has become a problem. The policy of import substitution that lasted from independence to the mid-1980s led to specialisation only in products with low value added and low labour costs. The objective of the National Pact for Industrial Emergence (PNEI), in force since 2005, is thus to attract new international investment to Morocco. The goal is to develop skills in demand internationally and in which Morocco has a comparative advantage, while redirecting exports towards high-growth markets. The PNEI is expected to achieve growth of 6% by 2015, creating value added of MAD 53 billion and generating more than 250 000 direct jobs.

In line with the PNEI, the introduction of new industrial strategies oriented toward Morocco’s internationally marketable skills has accelerated industrial growth. Led by the automobile and aeronautical industries, the industrial sector saw average growth of 7.6% per year from 2005 to 2011, compared to 1.5% between 1999 and 2004. Overall employment creation in industry has only risen slightly despite this growth, however, because the jobs created in the dynamic sectors are lost elsewhere in industries suffering from contraction. In addition, it should be noted that the structure of exports changed between 1998 and 2011, and although the chemical and para-chemical sectors and electric and electronic sectors benefited (growing from 32% to 43% and from 5% to 19% of exports, respectively), it was at the expense of the traditional textile and leather sectors, which fell from 41% to 15% of exports.

In recent years the government has created a programme dedicated to making industry more dynamic, the Moroccan Emergence Plan. This was launched in 2005 and updated in 2009, to become the National Pact for Industrial Emergence (PNEI). This pact sets specific objectives for increasing industrial GDP and turnover from exports and for creating additional jobs by 2015. Six economic sectors – known as Morocco’s Global Jobs (Métiers mondiaux du Maroc - MMM) – have been identified and supported due to their strong potential for growth: aeronautics, offshoring (sub-contracted activities from outside the country), agrifood, textiles, electronics and automobiles. The pharmaceutical and chemical and para-chemical sectors were added to the list in February 2013. The choice of sectors was motivated by a re-casting of the country’s natural strategy from being based on geographical location and availability of cheap labour to one based on logistics and competitive offer.

Despite these efforts, Morocco’s industry still contributes little to the valued added of other sectors, in the absence of any true structural transformation. Improvements have been achieved only in the metallurgy, mechanical and electromechanical industry, through its links to the automobile and aeronautic sectors, and in the agrifood industry: the two industries recorded respective growth rates of +32% (increasing from 16.7% in 1998 to 22% in 2012) and +4% (increasing from 26.3% in 1998 to 27.4% in 2012). The textile and leather sectors, in contrast, suffered a net dip in their contribution to industrial value added of 22% for the period 1998-2012, while the chemical and para-chemical sector’s contribution fell by 21%.

Currently, Morocco’s main industries are phosphates, agri-food, automobiles, and aeronautics. The phosphate industry has developed across the entire value chain, covering everything from extraction to fertiliser and phosphoric acid production as well as that of other derivatives. The Office Chérifien des Phosphates (OCP), which initially had just a few hundred employees and turnover of USD 3 million, employed nearly 23 000 people in 2012 with a turnover of USD 7.1 billion.

The agri-food sector also plays an important socioeconomic role in Morocco through the “contract programmes” introduced with the Morocco Green Plan in 2008. The goal of these is to restructure all value chains in export industries, in particular through better organisation of those involved in structured inter-branch organisations. These contracts require an investment of nearly MAD 70 billion, mainly for four sectors: citrus fruits, arboriculture, fruit and vegetable market gardening and olive cultivation. The fact that such a large percentage of Moroccan exports


Country notes


is intended for the European market means that the Kingdom is very vulnerable to the economic situation in the European Union countries. The low levels of diversification, in terms of market outlets, and a policy that stresses increased production at the expense of promoting and seeking new markets, represent significant challenges for the sector.

Morocco’s automobile sector has enjoyed significant potential for growth for more than a decade, with double-digit annual growth rates for investment and exports. The best example of the sector’s emergence in Morocco is the opening of the Renault-Nissan industrial complex in Tangiers in 2012, which has an annual production capacity of 340 000 vehicles, 90% of which are intended for export, in particular to Europe. Since the Renault group began operating in Morocco it has continued to implement a policy of local integration aimed at increasing the number of components that are locally sourced. This is due to savings achieved through lower logistics costs.

Finally, the development of the aeronautics sector, a very promising global value chain, has been aided by specific government measures, such as that which created MidParc, the integrated industrial platform inaugurated on 30 September 2013 near Casablanca; other examples are a newly created pool of skilled human resources and public financing of up to EUR 2.7 million through the Hassan II Fund for Economic and Social Development. With 100% of its production aimed at exports, the Moroccan aeronautics sector comprises nearly 100 companies of international scope involved in activities covering production, services and engineering, which are the main components of the global value chain for aeronautics. EADS, Boeing, Safran, Ratier Figeac and, more recently, Eaton and Hexcel, are all present in Morocco.

Despite the contribution made by the PNEI, Morocco’s industrial model remains vulnerable. Four factors illustrate this vulnerability: i) persistent shortcomings in the basic prerequisites (effective industrial and sectorial policies, and a high-quality transport infrastructure, in particular) for the integration of Moroccan companies into global value chains; ii) limited progress in industrialisation and the country’s overall competitiveness; iii) the failure of the education and training system to produce enough highly skilled human resources for the needs of production; and iv) the limited contribution of industry to economic growth.



MOzAMbIqUE

Mozambique has a residual place in global value chains (GVC). The economy is focused on the primary sector, and particularly the extractive industries. During the last decade agriculture progressively increased its share of GDP to 32%, over the secondary sector (24%) and services (44%). The services sector is mostly dynamic in telecommunications, financial services and retail, servicing the urban final consumer. The recent prominence of the extractive sector has brought about little transformation. Economic activity occurs mostly at the primary input level, with little added value both on the upstream and the downstream processes. During the last decade with the exception of the Mozal aluminium plant, the industrial sector presented the lowest growth rate, employing just 2.8% of the labour force. Some studies point to a labour shift from more productive to less productive activities, such as agriculture. The average productive capacity of Mozambique is lower today than in 1975. According to a joint report between the Government of Mozambique and the University of Copenhagen, the country presents one of the lowest productivity levels of sub-Saharan Africa, particularly at the SME level, which constitute the bulk of companies. Recent evidence indicates that imports of intermediary products by SMEs decreased between 2006 and 2011, signalling a possible decrease in links to GVCs.

The aluminium industry, however, is well integrated in the GVC via the Mozal megaproject. Established in 1999 as the country’s first megaproject with an initial investment of USD 1.34 billion, (increased to USD 2.2 billion in 2003) the aluminium smelter plant is currently the second largest in Africa. The investment in the plant took advantage of the country’s comparative advantages, such as its geographic favourable position, the availability of low cost electricity (provided from Mozambican hydropower sources) and extensive fiscal incentives. Moreover, Mozambique benefited from the European Union under the Lomé Convention, which allowed aluminium to be exported to Europe tax free.

Despite Mozal’s success, several reports and studies have documented the low fiscal revenue generated for the country and the limited positive links with the country’s economy. Some studies noted a 5% increase in GDP in the early years, but a less than 0.5% increase in Gross National Income. Currently 1 200 people are directly employed by Mozal, of which over 80% are Mozambicans, and indirectly employment is upwards of 10 000. Mozal created a joint programme with government and development agencies – MozLink – to promote connections between the project and Mozambican suppliers, which achieved some success. The greatest indirect impact of the programme came via the adoption by national suppliers of quality standards and certifications. The launch of similar programmes with other megaprojects did not replicate the same success. Only recently, some progress has been made in integrating Mozambique into the global value chain. A deal was signed in 2013 between Mozal and Midal Cabos, a subsidiary of the Bahrain-based Midal Cables, for the first aluminium processing industry in the country to be built in an industrial park beside the Mozal plant.

Aside from natural gas, electricity and aluminium, representing more than 66% of exports, Mozambique mostly exports unprocessed agriculture products (cashew, cotton, shrimp, wood and tobacco). Export of manufactured or processed products is low and only 3% of SMEs are exporters, with South Africa being the primary destination for food and beverages, and fabricated metal products. Asia (China) provides a market for wood products. The main constraints for integrating Mozambique in GVCs are: i) the lack of qualified human resources; and ii) poor infrastructure that impedes the country’s connectivity. Among the SMEs considering launching exports, the main stated constrains are lack of knowledge of potential markets, difficulties setting up distribution channels, and high tariff and non-tariff barriers.

The development of an efficient infrastructure network coupled with the creation of a logistical structure will facilitate trade, particularly within the SADC region, enhancing Mozambique’s position as entry point to hinterland countries including Botswana, Zambia, Malawi and Zimbabwe. However, the free trade zone also exposes Mozambique’s lack of competitiveness, specifically due to low productivity and the currently overvalued currency.


Country notes


The recent discoveries of large-scale natural gas reserves that allow for the construction of a multi-billion dollar LNG plant, together with the extensive coal basins already being exploited, have opened the possibility of developing value-added products locally, such as iron, steel, power and a diversity of downstream hydrocarbon related industries. The agricultural sector also presents good opportunities for agro-processing, in particular the more developed crops of cashew, cotton and tobacco. The government is currently preparing its new National Development Strategy (ENDE) with a special focus on the country’s industrialisation, as well as a specific industrialisation policy. These are opportunities to strengthen the country’s framework to take advantage of global value chains.



NAMIbIA

Namibia has the potential to step up its integration into a number of global value chains (GVCs). Some positive diversification trends have occurred in the structure of the Namibian economy over the past three decades although the economy has remained narrow and resource-based. The contribution of the mining sector to GDP shrunk from about 47% in 1978 to 19.6% by 1990 and reached 12.6% in 2012. The contribution of the manufacturing sector to GDP increased from 5.3% in 1990 to 12.7% in 2012, mainly thanks to the rapid expansion of fish and meat processing and some mineral beneficiation, the areas in which manufacturing activities are currently concentrated. The share of services in GDP rose significantly from an average of about 39% in the 1970s to an average of about 56% since the 1990s, standing at 62.4% in 2012. The contribution of agriculture to GDP declined to 7.7% in 2012 from 9.3% in 1990, mainly due to unfavourable climatic and soil conditions but also reflecting the rapid expansion of other sectors (manufacturing and services).

Namibia’s participation in GVCs is difficult to measure due to lack of data. The emergence of GVCs is however perceived as an opportunity for the country, especially in view of Namibia’s abundant natural resources. Namibia has a variety of minerals, including diamonds, uranium, lead, gold, copper and zinc. It boasts some of the world’s most unusual flora and fauna, as well as some of the most spectacular and varied scenery and wildlife in the world, and it is one of the richest fishing grounds in the world. The country is also suspected of having large deposits of oil, iron ore and coal. These natural resources offer Namibia a unique opportunity to expand its operations in GVCs, especially in fish- and agro-processing, and secondary industries through further exploration of mineral beneficiation.

The extraction and the processing of minerals – mainly diamonds – for export remain Namibia’s main growth driver despite the relative decline in the contribution of mining to GDP in recent years. In 2012, the mining sector generated NAD 12.1 billion (USD 1.2 billion) of added value, and contributed 37% of total export earnings and about 10% of total public revenue. The capital-intensive nature of mining and its weak linkages with the other economic sectors have limited its contribution to value chains in other sectors of the economy. Even though the sector contributed 12.6% to GDP, it employs less than 2% of the labour force. Diamonds are Namibia’s most significant mineral resource, making up about half of total mineral exports, followed by uranium. Most of the diamonds mined in Namibia are exported in rough form, now mainly to Botswana instead of the United Kingdom following the decentralisation of De Beers’s rough-diamond sorting and trading from London to Gaborone in 2011. Only about 10% of the diamonds are kept for cutting and polishing by the local industry. Namibia has the potential to move towards further value addition and beneficiation with existing opportunities in the diamond-cutting and -polishing industry by raising its productivity and lowering its cost of processing.

Namibia’s manufacturing sector has registered significant growth since independence. Its activities are concentrated in meat processing, fish processing, other food and beverages, and mineral beneficiation. Mineral beneficiation is the most important subsector, accounting for 50% of value addition in the manufacturing sector. The importation of ores underlines the significance of the sector with ores ranking fifth in Namibia’s 2013 import statistics. There is, however, little value addition so far carried out in Namibia as regards agriculture products. Agro-processing is one of the priority areas in the Industrial Policy and it would be worthwhile to explore the viability of importing agricultural products from neighbouring countries with more fertile soils for further processing in Namibia because of the country’s reliable infrastructure. Besides the polishing and processing of diamonds, mineral beneficiation includes the refining of copper and zinc. As for fish processing, some fish products are imported into the country, to which Namibia adds value before they are exported. In 2013, imported fish accounted for about 2% of total imports. There are also a few companies located in the Export Processing Zone (EPZ) in Namibia that are providing inputs such as specialised packaging material to the European automobile industry. There is still significant room for expansion in the manufacturing sector that will enable Namibia to integrate


Country notes


into several GVCs, including upstream mining products (input for mining), mineral beneficiation (potentially in copper, diamonds, gold, uranium and zinc), and agro- and fish-processing. As part of the SACU common industrial policy, research is being conducted to determine whether the manufacturing of automobile parts across the region would be a viable cross-border value-chain industry.

Namibia is well-placed to take advantage of the opportunities arising from GVCs. Thanks to its proximity to South Africa, the country has easy access to a range of South Africa’s expertise, research and development, advanced technology, developed infrastructures, relatively advanced intermediate input and goods markets, marketing and distribution and after-sales services, capital and financial markets and investment resources. The country also has an established network of modern transport and communication infrastructure. Its strategic geographical location connects it with southern African countries, Europe and the Americas through the Walvis Bay Corridors, an integrated system of well-maintained tarred roads and rail networks comprising the Port of Walvis Bay and the Trans-Kalahari, Trans-Caprivi, Trans-Cunene and Trans-Oranje Corridors. The quality of overall infrastructure is generally good, ranked 4th and 11th in Africa by the 2013-14 Global Competitiveness Report and the AfDB’s 2013 Africa Infrastructure Development Index, respectively. The implication of this is that Namibia has the potential to connect to supply chains in South Africa and the region, as well as globally. Through the Walvis Bay Corridors, Namibia also has the potential to become a regional leader in logistics and distribution. This is reflected in logistics’s being one of the four priority sectors in the Fourth National Development Plan, which covers the period of 2012/13 to 2016/17. This would offer further value-addition opportunities through packaging/repackaging, distribution, intermodal transport services and the provision of related services.

There are a number of challenges that need to be addressed in order to enhance Namibia’s competitive advantage. The country is facing skills shortages across all sectors of the economy, especially middle-level skills. The situation is further compounded by mismatches of available skills and job vacancies in the labour market and inflexible labour laws and regulations. The business environment in Namibia is also relatively less attractive than those in neighbouring countries. A wide range of policy, legal, regulatory and institutional weaknesses places the country at a competitive disadvantage compared to South Africa and Botswana, for example. Key weakness areas include excessive bureaucracy, regulatory bottlenecks and a weak PPP framework. Namibia is also currently facing the risk of serious power deficits. If measures are not taken to increase its capacity to generate power, there is a strong likelihood of an energy crisis in the near future. Access to financial services, particularly for business start-ups and micro, small and medium-sized enterprises, is a challenge. Although Namibia has relatively developed financial systems in sub-Saharan Africa, high bank-user charges and fees, high transaction costs, low levels of financial literacy, lack of appropriate and innovative finance products (such as microfinance) and instruments, and lack of entrepreneurial and business management skills are key factors limiting access to finance. Some of these deficits are being addressed by for instance the Namibia Financial Literacy Initiative spearheaded by the Ministry of Finance, including a basic bank account for low-income earners and abolishing fees for cash deposits at banks up to a certain monthly limit. These initiatives support Namibia’s 10-year Financial Sector Strategy.

Although GVCs do not specifically form part of the government’s strategic considerations, the government is aware of the need to implement innovative measures to enable the country to make the most of its comparative and competitive advantages, including policies to reduce the high cost of doing business, removing various bottlenecks in infrastructure and investing in skills as part of a broader diversification strategy. Notable measures the government has implemented include the establishment of the EPZ regime and special incentives for manufacturing companies. Following approval of the Industrial Policy in 2012, the government is currently completing a strategy for its implementation, which will give impetus to private-sector-led industrialisation, export orientation, value addition, skills development and economic diversification. The government has also already embarked on reforms to promote an enabling business environment.



NIGER

Niger’s participation in international trade remains low-key because of an underdeveloped productive capacity. Global value chains (GVCs) are perceived to present an opportunity for Niger to take advantage of globalisation. Indeed, the country possesses assets, notably low labour costs, a sizeable regional market that is benefiting from the current integration process, and abundant raw materials. The agro-food, extractive and manufacturing industries have good potential for developing GVCs. Their development should increase foreign direct investment and technological and knowledge transfers. The most promising markets are China and West Africa.

The principal value chains are:

Agro-food industry: The government is attempting to create additional value for farming and livestock products in the key GVCs of meat, onions and gum Arabic. Its support thus aims to target all levels of the value chains that offer considerable potential, especially in terms of processing, sales, packaging and dispatch. According to national data in 2011, Niger’s livestock herd was estimated at 9.5 million cattle, 9.9 million sheep, 13.2 million goats, 1.6 million camels, 306 878 horses and 1.5 million donkeys1. The national herd, which guaranteed an average of 107 litres of milk per person a year in 1968, now only supplies around 45 litres per person a year, with a contribution of around XOF 10 billion to exports2. When it comes to the Violet de Galmi onion, which is highly rated and in demand in the sub-region, losses due to insufficient storage and transport are more than 30%. It is estimated that there are more than 300 000 hectares on which gum Arabic could potentially be exploited.

Extractive industry: As the principal source of the country’s exports, the extractive industries form an enclave within the national economy. They contribute little to national added value, as they are exclusively focused on raw natural resources such as uranium. The authorities are focusing on the development of national enterprises in the mining sector, either to supply inputs or to process production. In addition, oil refinery activities began at the end of 2011 with the Zinder refinery. Following the government’s decision to use the Chad-Cameroun pipeline, exports should not be long delayed. Overall, great potential for sales and distribution exists, both domestically with the indirect effects on the transport sector and internationally with production largely in excess of market needs.

Manufacturing industry: The manufacturing sector, dominated by tanning, also offers potential for transformation and the creation of value added for basic commodities and their sale and distribution. It contributes as much as 22% of all export value and is the second source of export revenues for Niger after uranium. In this sector, efforts target: i) increasing the contribution of the leathers and hides sector to economic and social development in order to reduce poverty; ii) improving the competitiveness of leathers and hides by reinforcing the capabilities of actors in the value chain.

Service sector: Mobile telephony presents attractive potential for GVC development. This relates to the integration of upstream and downstream activities with internet service provision, bill payment, access to funds , and access to agricultural products markets and digital leisure (music, ring tones, etc.). The development of these GVCs is a powerful job-creation tool, making possible financial consequences.

However, in the short term poor productive capabilities and the preponderance of the informal sector restrict integration into GVCs. Niger must surmount a certain number of hurdles relating to organisational capabilities, inadequate inter-professional organisation, and lack of respect for international standards and certification demands. Likewise, access to energy is not reliable enough, infrastructure is not sufficiently developed and the home market remains limited in size. In addition, GVCs could expose the country to the risk of large crises, notably demand shocks or exchange rate fluctuations. They could also have limited economic benefits if they take the form of enclaves that are not integrated into the national economy. It is necessary that policies be introduced to improve the business environment and promote greater integration between sectors, particularly the mining sector and the rest of the economy, for Niger to be integrated into GVCs in time, and the associated risks managed.

Notes

1. Statistics Directorate/Ministry of Livestock and Animal Industries.

2. Prodex.


Country notes


NIGERIA

Nigeria’s industrial sector is categorised into crude petroleum and natural gas, solid minerals and manufacturing. Exploration of oil and gas is the main contributor to industrial activities. The level of industrialisation is low as outside of oil and gas, this sector only accounts for 3.4% of total GDP and offers low employment opportunities. Lack of competitiveness in the industrial sector, particularly in the areas of cost, packaging and product quality, has contributed to its underutilisation thereby preventing the country from climbing up the global value chain towards industrialisation. The average manufacturing-capacity utilisation declined to 55.8% in 2010 from 78.7% in 1977. This is gross underperformance when compared with countries such as Ghana and Togo. In South Africa, industrial-capacity utilisation is higher than 80%.

Nevertheless, there is potential for expansion of activities in the extractive sector. Ongoing plans towards large-scale refining of crude oil in Nigeria should add value to crude oil and enable the country to become more integrated into the global value chain. In addition, they should increase export and foreign-exchange earnings and also save the nation’s foreign-exchange earnings hitherto spent on imports of refined oil. Increased linkages with other sectors of the economy are also expected to boost its employment-generation capacity.

The manufacturing sector is another viable area in which the country can expand its integration into global value chains. This sector has more potential to create jobs than the extractive industry due to its labour-intensive nature, especially at the bottom of the value chain. Use of modern technologies will improve the quality of tradable items, make the products more competitive and enable Nigeria to reap greater benefits from the global value chain. Nigeria has been a major producer of textiles and fertilisers, but these sectors have not performed well over the years. Capacity utilisation in the textile industry dropped to 38% in 2010 from a 79.7% peak in 1975, while fertiliser and pesticide production only operate at 11.7% of its capacity utilisation. The cotton and textile production in Nigeria involves many activities such as spinning, weaving, dyeing, etc. These activities are largely labour-intensive and have job-creation potential. Nigeria has a comparative advantage with its huge population and relatively lower labour costs. The expansion of production activities in textile production, particularly in the areas of quality improvements, will reduce the cost of textile exports and make the country more competitive in the international market.

The dwindling performance of this sector is also largely linked to adverse government policies and high operating costs caused by epileptic power supply and corruption. These factors have compelled businesses to collapse or move to neighbouring countries with relatively lower operating costs. Electricity generation in the country was 3 600 megawatts in 2013, while estimated demand for private consumption and production activities was approximately 13 000 megawatts. A large volume of manufacturing activities takes place in the informal sector due to the high cost of entry into the formal sector and the high unemployment rate. The informal sector, although often neglected, was estimated to amount to 57.9% of GDP already in 2000.

Globalisation, particularly international trade, presents varying opportunities for Nigeria to develop its industrial sector and integrate into the global value chains. The major export trading partners of Nigeria are the Americas, Europe and Asia. In recent times intra-Africa trade relations have also increased significantly. Nevertheless, a large volume of exports from Nigeria such as agricultural products, oil and other resources are exported in their crude form. For instance, Nigeria is the largest producer of shea nuts, estimated at 425 000 t in 2008. Mali and Burkina Faso follow with about 182 000 and 70 000 t, respectively. Although it is evident that Nigeria has a comparative advantage in the export of this agricultural commodity, only about 10% of the production is exported annually, either as nuts after roasting or processed traditionally into shea butter, thus keeping the country at the bottom of the global value chain where nuts are collected and processed locally for export. There are strong prospects in the export of processed shea nuts, which are intermediate inputs for pharmaceuticals, cosmetics companies and chocolate factories. Improving the quality and standards of shea-butter production and adding value to it would further integrate the country into the global value chain and also increase the country’s share in the value chain.



Another area that has not been fully exploited is the automotive industry. The ongoing government National Automotive Industry Development Plan aims at discouraging importation of vehicles by setting up local assembly plants. Two Indian automotive companies, TATA and TVS, are finalising plans to set up assembly plants in the country, as is the Japanese auto giant, Nissan. This should create jobs for Nigerians and integrate local input manufacturers such as textile for car upholstery, rubber, tyre manufacturers, etc., into the global value chain.

Integrating successfully into the global value chain should offer opportunities to the large and vibrant informal segments, particularly of Nigeria’s agricultural and industrial sectors. The agricultural sector presently employs more than 70% of the population. This is a key path to creating jobs, increase income and reduce poverty incidence in the country. The government would also benefit from higher export revenues and foreign-exchange earnings. Upgrading the standards of these tradable products is also essential to ensuring their competitiveness on the world market. The onus lies on the government as regulator to ensure that industry players conform to international standards while promoting an enabling environment for the production of tradables to thrive.


Country notes


RWANdA

Embedding domestic firms into global value chains (GVCs) has been identified as a key government priority to support export growth and diversification, bolster private sector development and leap-frog the various impediments that continue to hinder the contribution of the country’s private sector. In the absence of data to quantify the content of foreign added value in the country’s exports (an indicator of participation in GVCs), the thematic analysis focuses on three clusters with the potential to lead Rwanda’s integration into GVCs: coffee, tea and mineral exports; food processing, dairy and beverages; and ICT and Business Process Outsourcing (BPO).

Most of the value chain activities are upstream, focusing on the development and supply of primary and intermediate inputs to export markets in the region and elsewhere. This is due to several factors. For instance, manufacturers and other processors typically seek raw materials from other countries due to the inadequate quantity and quality of domestic raw materials and the structure of the domestic input supply market, which ‘diverts’ inputs to the final consumer. In the dairy sector for instance, milk farmers also sell directly to the final consumer as opposed to channelling their products through milk collection centres. However, due to the high transportation costs, estimated at 40% of the country’s imports and exports, the bulk of the upstream activities are increasingly being conducted domestically.

In the coffee and tea sectors, actions by processers and exporters to overcome constraints such as inadequate supply and poor quality of pre- and post-harvest handling have expanded the downstream and upstream value chain activities. Coffee processors and exporters are expanding beyond the core activities of processing and marketing to activities such as providing extension services to farmers. For instance, two leading coffee exporters, Coffee Business Center and Rwanda Trading Company, have established networks of wet mills and exclusive supply contracts with farmers. NGOs and exporters are also providing incentives to farmers and co-operatives to ensure high-quality coffee production. These incentives include working capital to farmers, support in the management of wet and dry mills and aid for the marketing and export of coffee. The tea sector demonstrates some explicit examples of GVCs. For instance, the curl-tear-curl (CTC) black tea, which dominates Rwanda’s tea products, is processed domestically but packaging is usually sourced from Kenya and Uganda. Rwanda Mountain Tea, the leading tea processor in the country, established a tea packaging company in Rwanda in 2009 to primarily serve the domestic market.

Light manufacturing is developing, particularly in food processing, dairy and beverages and construction materials such as steel bars and cement. Downstream activities like marketing, packaging and shipping are undertaken domestically. Industry developments, including mergers and acquisitions, have also led to the entry of Rwandan firms into GVCs1. The acquisition of CEMERWA cement factory in 2012 by Pretoria Portland Cement (South Africa) is expected to facilitate knowledge transfer, allow the country to leverage the Portland cement brand and expertise as well as break into GVCs.

The food and beverages sub-sector also presents additional opportunities to link national value chains with GVCs. AZAM (Bakhresa Grain Mill Rwanda Ltd.) processes wheat for domestic consumption and export. Wheat is imported from the USA, German, Russia, Canada and Australia and processed in Rwanda. Local farmers have been integrated into AZAM’s value chain with pilot wheat farming in Musanze and Kayonza in the northern and eastern parts of the country, respectively. AZAM has expanded into the production of juices with some of the raw materials being sourced from other countries as well. BRALIRWA Ltd. is engaged in the production and distribution of beer and other beverages. Raw materials (maize) are sourced locally and also from Europe (malt) and Southern Africa (sugar), and the company’s products are exported to Uganda, Burundi and DRC. Inyange is the largest dairy producer in the country and also has interests in bottled water and juices. To adequately respond to its market, Inyange has recently installed packaging equipment and currently undertakes the bulk of its downstream value chain activities



in-house. Moreover, to address supply constraints, particularly for dairy, Inyange has entered into contractual agreements with domestic dairy farmers, an indication that the company’s upstream activities are also increasingly being undertaken domestically.

Case study evidence demonstrates that some downstream activities in the mining sector are undertaken outside the country. Mineral Supply Africa, a company incorporated in Rwanda, is one of the firms engaged in the mining trade in Rwanda. The company procures minerals from various mines operating in the country, processes and ships the products to Switzerland for other high-value processing, packaging and marketing activities before they are shipped to their final markets, typically in Asia.

To expand the backward and forward linkages in ICT and BPO, the government has undertaken reforms in telecommunications to increase competitiveness and also attract FDI. This has increased the number of telecom network operators from 1 in 2005 to 3 in 2013. It also increased the ICT composite network coverage from 75% to 90% during the same period. Rwanda is currently partnering with institutions such as the Massachusetts Institute of Technology and Carnegie Melon University to upgrade the capacity of ICT instruction and develop critical ICT skills to support the country’s contribution to ICT GVCs. In 2013, GoR and Korea Telecom (KT) agreed on a Joint Venture (JV) to, among other things, deploy and operate a high-speed 4G broadband network, which will cover 95% of the population and expand the country’s online services capability. A subsequent JV was agreed between GoR and KT in 2014 to expand the nation’s capabilities to undertake an unlimited range of online economic and social activities. These partnerships will allow Rwanda to niche into ICT-enabled high-value shared services, such as in the financial sector and BPO.

In conclusion, expanding linkages between domestic production and GVCs requires addressing three key factors. First, the supply constraints, which lead to low capacity utilisation, particularly in manufacturing and agri-business, need to be resolved. These constraints typically stem from a variety of factors, ranging from cyclical fluctuations for coffee and low productivity for tea to excess demand for processed manufactured products. Second, the inadequate quality of domestic raw materials requires urgent attention. For instance, AZAM routinely relies on imported wheat as the domestically produced wheat lacks the required quantities of protein and wet gluten. BRALIRWA sometimes substitutes imported maize grits from Uganda for domestic production due to the irregular quality of the domestic supply. Third, inadequate infrastructure, particularly in transport and energy, remains a binding constraint. The cost of energy at USD 0.22/kwh is more than twice the regional averages of USD 0.10-0.12/kwh. Together with the skills gaps in technical, operational and management functions, infrastructure bottlenecks reduce the competitiveness of domestic production, thus limiting the scope for inclusion in GVCs.

Note

1. BRALIRWA (1), AZAM (3) and CEMERWA (4) were among the top 10 manufacturing and agri-business firms by turnover in Rwanda in 2010/11.


Country notes


SãO TOMé ANd PRíNCIPE

The emergence of global value chains (GVCs) presents an extraordinary opportunity for São Tomé and Príncipe, a small island state off the coast of Central Africa that gained its independence from Portugal on 12 July 1975. GVCs have the potential of increasing the value of the country’s two main export crops, cocoa and coffee. This could bring major benefits to an insular country where nearly half of the population is living in poverty. According to the United Nations Development Programme’s 2010 poverty profile, 49.6% of the population lives below the poverty line and 15.9% in extreme poverty, compared to 53.8% and 19.2%, respectively, in 2001. Beyond cocoa and coffee, which account for more than 80% of total exports, the tourism sector has become an engine of growth in recent years. The country also has significant potential in the agriculture sector, while the discovery of oil has raised expectations of growth.

São Tomé and Príncipe is still in the initial stages of gaining access to GVCs and joining global production networks. At present, cocoa and coffee beans produced in São Tomé and Príncipe are exported to Europe raw or roasted and packaged. This denies the country the most profitable part of the confectionary market value chain – the processing of the cocoa into chocolate. Growers in West Africa are estimated to receive only 3.5% to 6.0% of the final value of a chocolate bar, depending on the percentage of cocoa content. In the last few years, following the construction of a small chocolate factory, the country has observed some processing of cocoa beans into chocolate. This not only adds value to the raw cocoa and produces a higher price, but also generates employment. São Tomé and Príncipe also has an abundance of exotic and tropical fruits. In early 2013, a small company that processes fruit juices, Naturalismo, began operations in the country.

As an island economy, the country has an abundance of fish and marine resources, and in recent years the fishery sector has seen a high level of government investment. Private operators have been encouraged to enter the fish processing industry to prepare products for export, mainly to European destinations. However, the majority of São Tomé and Príncipe’s fish continues to be processed abroad, hindering the country’s potential to add value and increase employment. The lack of highly qualified skill labour also hampers the country’s participation in GVCs.

In the medium to long term, São Tomé and Príncipe needs to develop its comparative advantage in cocoa, coffee, tropical fruits and marine resources to benefit from GVCs. There is a critical need for future investment in research and development, as well as after-sales customer service. Beyond the European market, the Central Africa region has the greatest potential for linkage via GVCs and would allow São Tomé and Príncipe to benefit from its membership in the region. China/Chinese Taipei also represents a significant opportunity for linkages in GVCs.

In addition, there are positive prospects of São Tomé and Príncipe becoming oil-rich country, with oil production expected in 2015/16. Good governance and prudent management of the country’s oil resources will provide an unparalleled opportunity for structural transformation of the economy. Research and development have already begun, with exploration contracts awarded. With the expected forthcoming production of oil, it is also advisable for the authorities to invest heavily in resource processing to fully benefit from the country’s natural resource endowment.

Nonetheless, the country´s undiversified economy presents the government with several key challenges that could inhibit effective implementation of its growth agenda and prevent it from capitalising on the potential of GVCs. These challenges include: i) poor infrastructure development (e.g. roads, railways and ports and airports for connecting to foreign markets); ii) difficult access to credit; iii) a weak legal system; iv) the country’s small size and low level of local consumption. These challenges are compounded by São Tomé and Príncipe’s exposure to exogenous shocks owing to its high dependence on external assistance. Possible threats of participating in GVCs could include a decrease in (already weak) domestic resource mobilisation, in particular tax revenues, and volatility of trade flow as a result of changes in strategy by international financial institutions.



According to the African Development Bank´s study on Insularity and the Cost of Insularity in São Tomé and Príncipe, completed in July 2010, the above mentioned obstacles affect the potential of the country’s participation in GVCs. Findings of the study included the following:

1. Agriculture: Bio-cocoa is of significant economic interest. Thus the reduction or elimination of additional transport and production costs related to insularity will substantially increase the producer’s income.

2. Fishery: It is important for the country to capitalise on the economic viability of its tuna industry for export. As a World Food Programme study in 2009 reported: “The average cost from packaging to exit from the local factory is about EUR 2 500/tonne, of which EUR 1 200 represents the raw material partially fished from STP’s Exclusive Economic Zone, EUR 200 labour costs and EUR 300 intermediate consumption”.

3. Tourism: São Tomé and Príncipe needs to: i) develop legislation while maintaining the eco-tourism balance, taking into account the insular specificity of the country, in order to avoid uncontrolled tourism; ii) carry out the necessary training; iii) prepare promotion measures; iv) improve infrastructure, health and hygienic conditions. It is worth noting that tourism remains a capital-intensive activity (the investment needed for operation is higher, compared to the expected turnover, by a factor of 2 to 3), according to the insularity study.

4. Construction: The study found that the total cost of building an individual house of 200 m² is about USD 300 000, or USD 1 500/m². Imported goods represent a significant portion of materials (cement, bricks, plumbing, paint, etc.). Therefore, improving construction planning, diversification of supply markets and training will be beneficial to the country.


Country notes


SENEGAl

The emergence of global value chains (GVCs) is seen by the authorities as an opportunity more fully to integrate the country into world trade, even if there are risks attached. For example, the processing of peanut oil, an export product, has encountered difficulties including variations in production and the export of non-treated unshelled peanuts to China and India. In textiles, the country’s only cotton mill closed in 2008 in the absence of a plan to adapt to competition. The main extractive industries – phosphates, limestone, cement and oil refining – have limited industrial potential. The new information technologies sector, by contrast, offers opportunities, in particular call centres (word processing, accounting for foreign companies, web pages and so on). Horticultural products and leather also offer GVC possibilities.

There are two elements in the strategic vision. The first is better to position Senegal as a regional competitive hub in logistics and international subcontracting. The second seeks to improve local and regional circuits in the supply of tropical fruits and vegetables, with a view to re-export to the markets in Europe, West Africa and the Gulf states where there is demand for these products.

The country is relatively well endowed with transnational infrastructure (seaport, air links), with railways and a road network to neighbouring countries, and the quality of telecommunications infrastructure gives Senegal opportunities to exploit in international logistics, sub-contracting of back-office services, reception of fitting and assembly activities, and in distance services other than call centres, in particular in the targeted areas of education and health. The country aims to establish a “business park” and by 2018, to host 50 regional headquarters of international businesses and institutions in the sub-region. There is also the issue of turning Senegal into a regional “campus of excellence” and making Dakar a health capital, a development that involves the rehabilitation of the country’s secondary airports. But the problem of access to electricity remains a major obstacle. The price, of XOF 115 per kilowatt hour (kwh), is almost twice that in Côte d’Ivoire (XOF 63), but service quality is seen as only half as good. The same applies to access to credit, transport and logistics in general.

One of the constraints affecting access to GVCs is the shortage of local supply of raw materials. Backed by the accelerated growth strategy, the approach aims to establish better connections between all the participants involved at different levels of the chain between production, delivery, processing or export. A sector-based approach aims to identify clusters of activities with high potential for growth, added value, export competitiveness and job creation. It is accompanied by a territorial rationale so the geographical zones concerned, the “competitiveness territories”, can be better organised and connected. The clusters identified in this way will form the central axis of Act III of the decentralisation process that seeks to organise the country into viable territories equipped with consistent financial resources and sources of growth. The accelerated growth strategy seeks to build on 50 clusters as opposed to 12 at present.

For each identified chain, the aim is to improve client/producer supply chains, solve problems of unsold raw materials and increase local value creation by introducing the missing critical skills and activities. In this way, for carrots, the introduction of new skills for packing, creating labels, marketing and managing distribution chains made it possible to double the quantity of carrots marketed to the equivalent of eight months of production. In the same way career opportunities were created for young marketing managers. The same policy is in place for milk and poultry with a view to extending it to sweet corn and other cereals. In the case of horticulture the experience of a farm at Kirène (about 60 kilometres from Dakar) is another example of integration into GVCs. Activity is mostly centred on production, on a site of some 300 hectares, of beans and sweet corn for European markets.

The challenge for public policy is to uncover the various elements of expertise, which are often fragmented between several types of participants with very little formal structure and scattered through the informal sector. For example, the breakdown in supplies of cassava during the crisis in Côte d’Ivoire revealed how substantial national demand in Senegal could be. As flour or as a vegetable cassava is used as an ingredient in several widely-consumed types of food such as bread, cooked dishes, garri and tapioca.



About 90% of entrepreneurs operate in the informal sector. Most say they have problems in selling their products (60.4%) and obtaining raw materials (19.1%). The unsuitability of their sales outlets and an inadequate managerial organisation limit their capacities in regional and international markets. Leaving the informal sector would very obviously give them the possibility to export easily and at a lower cost combined with a greater chance of growth, with bigger and more regular orders.

In textiles, the Aïssa Dione Tissus company has a very substantial turnover, mainly with luxury goods in Europe and the United States (80%) and some big African hotels. The designer Aïssa Dione employs about 100 people. China and other Asian countries do have a global advantage in industrial manufacture and large-scale supply but prospects exist for Senegal. New trends in ethical consumption and international trade preferences – with 0% customs duties in the ECOWAS region, preferential access to the European Union market and only 6% customs duties in the United States – are all encouraging. (See OECD and WTO 2013 Aid for Trade and Value Chains in Textiles and Apparel). Senegal has a large number of stylists and small self-employed designers who have an acknowledged expertise in independent design, embroidery and high-class couture.

As is the case with textiles, opportunities for the processing of leather are impeded by structural obstacles, starting with the major role played by the informal sector. There is substantial demand from India and the whole sub-region. An 80% share of the production of the association of shoemakers of la Médina, based in Dakar, finds its way to Mali, Guinea-Bissau, Guinea, Congo and as far afield as Angola. The challenge for Senegal is therefore to make its formal circuits more attractive with appropriate measures of encouragement and support.


Country notes


SEyCHEllES

Seychelles has a small, open economy, limited in natural resources and in skilled labour, which imports over 95% for its consumption and production. As a result, the country has to depend upon global value chains (GVCs) to sustain its economy, enhance incomes and employment.

Like many Small Island Developing states (SIDS), Seychelles is characterised by its small size, remoteness from global markets, limited natural and human resources, but it is also endowed with unique biodiversity, cultural richness and an expansive maritime environment. Tourism has therefore emerged as the major economic pillar, providing livelihood to a large segment of its population and a major source of foreign exchange earnings. Seychelles has emerged as a dream destination for high-end tourism especially from Europe (which accounts for approximately 69% of tourists). In the wake of the global economic crisis, however, successful attempts have been made to diversify markets to Asia (China), Eastern Europe, Emirates and Africa. The growth of the tourism sector has forged both forward and backward linkages with the development of new products and diversification into newer destinations, while supporting ancillary sectors such as hotel and food establishments, yachting and cruise ships, transportation services, water sports, spa and wellness and also boosting housing construction and development around the islands. To reap the benefits of complementarity and sustainable tourism, Seychelles has forged regional partnerships through the “Vanilla Islands initiative” linking seven Indian Ocean islands – Comoros, Réunion, Madagascar, Maldives, Mayotte and Mauritius. The Fisheries sector, while providing less employment than tourism (at only 1% of the workforce), is also a key foreign exchange earner, due to the licensing fees paid under the numerous Fisheries partnership agreements. The country is home to one of the world’s largest tuna canning factories, Indian Ocean Tuna, which mainly exports to Europe and Asia.

The government has undertaken several policy initiatives to develop these two economic pillars and integrate them into GVCs. The tourism sector, on average, contributes more than 20% of the country’s GDP and 60% of total foreign exchange earnings (2009-13). Over 23% of the total work force is directly employed in tourism-related businesses including accommodation, restaurants, car hire, airlines, tour operator, dive centres etc. The government’s strategy for the tourism sector set out in the Seychelles Strategy 2017 and the recent Seychelles Sustainable Tourism Master Plan 2012-2020 envision the attainment of the highest standards in the industry and the distribution of the benefits of the industry for the optimum social and economic benefit of the people of Seychelles, without compromising the country’s natural environment and biodiversity, and its international reputation as an environmental leader. The innovative marketing strategies1 of Seychelles Tourism Board (STB), the agency responsible for tourism promotion, as well as partnerships with various airlines have paid-off and led to a diversification of markets with tourist arrivals from other countries such as Russia, UAE, South Africa and China. Seychelles tourism is highly competitive compared to other small islands in the Caribbean and Oceania and the country has handled exceptionally well the years since the 2008 global crisis2. The sector is however, not without challenges. Tourism in Seychelles is vulnerable not only to climate change, but also to other externalities (piracy, for example, which has led to a sharp decline in the calls made by cruise ships in recent years). The skills mismatch, with a concentration of expatriate labour in managerial positions, is also a concern. Furthermore, the on-going trade liberalisation as part of the country’s accession to the World Trade Organisation (WTO) and in keeping with regional commitments has led to the reduction in size of the local agriculture sector.

A Tourism Value Chain Analysis done by the Commonwealth Secretariat on behalf of the government identified three specific areas for policy interventions: increasing the supply of local agricultural produce to the tourism sector; engineering related training for mature students; and additional support to micro and small businesses in tourism3. These recommendations are yet to be implemented under the 2012-2020 STMP.



The fishing industry has over time developed from primarily sustaining the local population to one capable of competing internationally as an important foreign exchange earner. Seychelles’ location at the centre of the western Indian Ocean tuna migratory routes makes it the region’s most efficient hub for tuna fishing and home to industrial fishing fleets from the European Union and the Far East. The Indian Ocean Tuna (IOT) canning factory is the largest single employer. Canned tuna remained the dominant commodity produced, accounting for 90% of total domestic production in 2011. Trade in fish and fish products and other related activities accounted for 33% of current account receipts in 2011. Exports of fish products represent around 68% of the Seychelles exports (excluding re-exports). Industrial tuna fishing activity continued to increase in importance in the economy, in terms of revenue generated (derived mainly from foreign fishing vessels’ expenditure on goods and services in Port Victoria, as well as through payments for licences and financial compensation). The government is promoting investments in fish processing to be used mainly by the artisanal sector, developing the aquaculture sector for high value fish such as sea cucumber, and improving port infrastructure and fisheries infrastructure. A new Mari-culture and Aquaculture action plan is being developed in 2014 to improve the sectors linkages to the local economy.

Seychelles has a very small manufacturing sector, the main lines being beverages (rum and beer by Takamaka Bay and Sey Brew, respectively) as well as a small retail distribution industry. Due to its small size and geographical isolation, deepening along GVCs is difficult.

However, the financial services sector, the third and growing pillar of the economy, offers a range of services and products to encourage it as a destination for investment. The Seychelles International Business Authority (SIBA) is responsible for monitoring, supervising and co-ordinating the conduct of international financial services in Seychelles. The major challenge for the country is to emerge as a well-regulated centre that meets international standards with a good reputation. To achieve this vision, the government has embarked on regulatory reform in the financial sector to strengthen regulation, modernise its services and enhance private sector access.

Participation in GVCs, though limited, has enabled Seychelles to become more competitive and integrated in a few key sectors. Some of the major barriers for upgrading along global value chains are limitations in skilled manpower, land resources and access to finance.

As the government aims to address some of the main barriers to benefiting from GVC, there is still some scope for further opportunities for Seychelles to integrate further into regional and global value chains in tourism (regional tourism, ecotourism), fisheries (aquaculture, boat repair services), financial services (offshore services) and agriculture (small scale, high value non-perishable farming of essences/spices). The government is currently drafting their next medium-term development plan as it seeks to broaden the scope of economic activity beyond fisheries and tourism.

Notes

1. Innovative marketing strategies such as “The Seychelles Islands, Another World” in March 2007, the “Affordable Seychelles” campaign in 2009 and the recent “Seychelles Sustainable Tourism Label”.

2. See A.Culiuc,” The Determinants of Global Tourism Flows”, IMF Working Paper quoted in IMF Country Report No.13/202.

3. David McEwen and Oliver Bennett, “Seychelles Tourism Value Chain Analysis”, 31 October 2010.


Country notes


SIERRA lEONE

Overall appraisal of the country’s participation in global value chains (GVCs)

Plagued by ten years of civil conflict that inhibited commodity production and trade capacity and weakened market systems including the country’s infrastructure, it would be understandable that during and immediately after the conflict period, the country’s level of participation in global value chains were quite weak and limited. However, following a successful post-conflict recovery in the early 2000s supported by interim and full poverty reduction strategies (PRSPs) in 2001 and 2003 respectively, the country was on track in building the foundation for its participation in global value chains through policy reforms and institutional strengthening.

Due to consistent economic and trade policy reforms the country achieved two significant milestones that enhanced its global and productive competitiveness in 2006. These were: i) qualifying for debt relief under the Heavily Indebted Poor Country’s Initiative (HIPC) that did not only wipe out the country’s debt stock but provided space for robust policy reforms including productive-sector-related reforms; ii) developing and implementing an action-oriented Diagnostic Trade Integrated Study (DTIS) that included an extensive productive-sector-based action matrix aimed at prioritising and sequencing trade related policy reforms and rendering the productive sectors such as agriculture and fisheries more competitive. These two milestones set the pace for the country’s gradual participation in global value chains especially at the sub-regional level.

However, despite these milestone achievements, the country is expected to undertake extensive and holistic supply- and demand-side reforms in the trade and production sectors for it to be fully integrated in the global value chain network, especially in commodities in the production of which it has a comparative advantage. Implementation of the 2006 DTIS action matrix – which includes around 100 actions covering 8 areas – indicated considerable progress including legislative and regulatory changes to improve the overall business climate and expanding institutional capacity for formulating and executing trade policies. The updated DTIS finalised in November 2013 builds on progress made on the 2006 action matrix by complementing its achievements and drawing on useful lessons learnt.

Description of the GVC participation in the country context – Historical and futuristic

The updated DTIS provides deep insight and analysis on prioritised productive sectors such as agriculture, tourism and fisheries and sets the country’s trade-enhancement agenda for the next five years by giving special emphasis on some cross-cutting issues such as trade facilitation and logistics in order to reduce supply-side barriers to trade and global competitiveness. The updated DTIS also effectively mainstreams trade issues in the governments A4P (2013-18).

An evaluation of the 2006 DTIS action matrix indicated that while notable progress has been made such as the adoption of regulations and strategies, these actions have not necessarily translated into lower trade costs, value added exports and reliable supply chains. Therefore Sierra Leone can be assessed to be at the entry point of becoming fully integrated in GVCs. Implementation of the updated DTIS is expected to accelerate the country’s integration in the GVCs.

The analysis in the updated DTIS indicates that the key sectors involved in global value chains are the agriculture sector with a focus on four cash crops namely cocoa, cassava, rice and palm oil; the fisheries sector with a focus on limiting illegal, unreported and unregulated fishing; the tourism sector enhancing tourist-related infrastructure and tourist-related employment. As a country richly endowed in base and precious minerals, the mining sector is part of the integrated GVC network especially from the perspective of primary production and the export of raw materials. The diamond sub-sector (Kimberlite and Alluvial) has also been a key player in the GVC network and accounts for a fair share of mining exports. Due to the country’s fragile status, value chain operations are mainly conducted at the primary level.



For instance most base metals are exported as raw materials to industrialised countries for further refinement and processing into higher-value products. In 2012, the country exported 7.5 million tons of iron ore mainly to China and Europe but imports of finished mineral products for the same year amounted to 32.4% of total imports. Special stones such as diamonds are also exported mainly as raw materials.

The same holds true for cash crops such as cocoa, coffee and palm-oil, produced and exported to regional countries. In essence the key activity performed in Sierra Leone along the value chain is to produce or extract the commodity and export to other countries for value addition. With very poor infrastructure especially in energy supply and in its roads network – only 12% of the population has access to electricity and 8.9% of trunk roads are paved – the country lacks the necessary conditions for its participation higher up in the value chain.

While the final markets for the exports of mining commodities have a global dimension – such as China and Europe for iron ore/ bauxite/titanium oxide, Belgium and Israel for diamonds and gold – the final markets for food commodities are still local or to a limited extent regional in nature, probably with the exception of cocoa and coffee. The country’s marine products still cannot access EU markets. However, due to illegal and unregulated fishing, most of the country’s marine resources find their way to the EU market with the country losing out on much needed revenue from the sector.

There are some opportunities for the country to enhance its positioning in GVCs especially in the diamond mining sub-sector and cassava (agriculture) sub-sector. For instance, the updated DTIS indicates that production of cassava and processing it into gari is a highly profitable venture for farmers, traders and processors and the overall production cost is lower due to limited application of inorganic inputs. The finished product (gari) currently attracts significant demand in countries in the sub-region. Sierra Leone has huge potential in participating in GVCs in cassava given its comparative advantage and favourable production conditions.

Opportunities and potential for GVC participation

Sierra Leone also has potential in diamond cutting and polishing into higher value commodities given its status as a key producer and exporter of both alluvial and kimberlite diamonds. The country has two large-scale kymberlite diamond projects and a huge alluvial mining community in both gold and diamonds and a fair share of diamond exports. The opportunities for enhancing Sierra Leone’s participation in the diamond industry value chain are imminent and the country should provide the right conditions for this to happen.

Opportunities to broaden the scope of value addition participation to other sectors such as iron ore within the mining sector and cocoa in the agriculture sector require huge investments in infrastructure.

Limiting factors for GVC participation

As a state in transition out of fragility, there are numerous limitations that inhibit the country’s full participation in GVC’s or advancing to higher levels in the value chain as identified in the evaluation of the 2006 DTIS. The most limiting factors include the high production costs and sub-optimal levels of productivity. Other factors include inefficient commodity-assembly and processing methods used by farmers with little scope for specialisation as farmers combine various functions along the chain. In some cases, for instance, production, assembly and processing are all combined as one. High input costs due to low technology use create inefficiencies that increase production costs. Labour-intensive production methods are a further barrier to GVCs. For instance, the updated DTIS indicates that the country has a comparative advantage in rice production. However, imports are substituted due to labour-intensive methods of production and relatively low yields per hectare. In the cocoa sub-sector, an analysis of the value chain shows that approximately 43% of costs come from farming, 27% from assembly and 30% from processing and exporting stages, reflecting low productivity as a result of poor agronomic practices and


Country notes


the use of old plantations. In addition, assembly functions, sorting and local transportation of the commodity are very inefficient. Palm-oil trade competitiveness is affected by high costs incurred at the processing and logistic trading stages. Cost elements at the processing stage include packaging, energy provision, vehicle operations and maintenance. At the assembly stage, cost elements include vehicle depreciation costs, and overheads and levies and fees. However, despite these inherent limitations, there have been numerous national policies and strategies focused on creating a more conducive business environment consistent with global value chain integration. The country is part of regional bodies such as ECOWAS and MRU that facilitate tariff harmonisation efforts. Infrastructure deficits in water, energy and roads/sea/air transport are the most binding barriers to upgrading along the value chain. Weak domestic SME participation along the value chain and low skills and systemic weak capacity in critical sectors are also inhibiting factors for GVC participation.

National policies and strategies

The two medium-term strategies for facilitating GVC participation include the updated DTIS adopted in December 2013 and the programmes and practices articulated in the Economic Diversification Pillar in the Agenda for Prosperity (A4P). As mentioned earlier, both strategies are complimentary and mutually reinforcing. Implementation of the 2006 DTIS indicated useful lessons for updating the actions in the 2013 DTIS taking cognizance of the changing global and regional context.



SOUTH AFRICA

South Africa is integrated into several global value chains (GVCs), particularly in the automobile, mining, finance and agriculture industries. It may be unique in Africa in possessing the efficiency and scale to drive a global value chain. As the largest African economy it is also an important regional hub, and South Africa increasingly capitalises on regional value chains, especially in retail, finance and telecommunications.

According to the joint OECD-World Trade Organization (WTO) Trade in Value Added database, South Africa ranks 2nd amongst the BRICS countries in terms of the content of foreign value added to exports. China’s exports contain 37% of foreign value added, whilst South Africa’s contain 16%, ahead of those coming from Brazil, India and Russia with 15% or below. In terms of specific industries, in South Africa, the automotive industry adds the most value to exports at 40%, whilst finance, retail and mining are the lowest at less than 10%.

These data reflect the position of South African operations in global value chains. In the automobile value chain, South Africa serves as an assembly hub for Africa and for right-hand steering. Some of the models produced in South Africa are also exported to the US market. The large assembly presence has also come to attract component manufacturers too that produce parts alongside the automobile plants. These component and car manufacturers are large international firms that own the core elements of the value chain all the way from research and development through assembly, marketing, distribution and after-sales services. Consequently, many intermediary products are imported for assembling in South Africa. Experience working with the local assembly lines has enabled local firms to become exporters of several components, of which catalytic converters and leather seats have been prominent in the recent past. South Africa’s automotive industry accounts for more than 6% of its GDP and 12% of its manufacturing exports.

The high value of domestic content in mining exports reflects the industry’s long history, local ownership and extensive backward integration into the wider South African economy. In 2012, mining contributed ZAR 468 billion to South Africa’s economy. The impact of the mining industry on other sectors (steel, timber and rail, for example) is close to 19% of South Africa’s GDP. Additionally, mining accounts for over 16% of formal sector employment. Recent cost figures from the mining industry indicate that of the ZAR 437 billion spent in 2011, purchases and operating costs for steel, timber, electricty, rail, etc. accounted for the largest proportion of total expenditure, followed by wages at ZAR 89 billion and capital expenditure at ZAR 47 billion.

The finance from mining circulates throughout the economy, affecting sectors as diverse as financial services and housing. The mining services and equipment sectors have developed into important exporters in their own right. Indeed, South African suppliers are global leaders in numerous areas, particularly the provision of washing spirals, underground locomotives, submersible pumps, hydropower equipment and mining fans. South African firms are also leaders in some of the vast mining services including geological services, prospecting, shaft sinking, turnkey solutions to the mining and mineral processing industries, and operation services. They are also competitive on a global scale when it comes to the four vital areas of mine safety, tracked mining, shaft sinking and ventilation. Development in these areas is strong and considered much greater than in comparable countries such as Chile or Australia. According to the South African Capital Equipment Export Council (SACEEC), one of South Africa’s largest exports is mining equipment, accounting for 8.5% of total exports from 2005-09, and 55% of capital equipment exports during the same period. It is estimated that 90% of the exports of the mining equipment and specialist services are local content. Mining houses are clustered around Johannesburg and supply industries around East Rand. Mining equipment and specialist services have not received any direct government subsidy at any stage in their development.


Country notes


South Africa’s finance and retail industries also have deep value chains, and have an expanding presence in other African countries. The four major banks are well established, offering a full and comprehensive range of banking services and are amongst the top players on the continent. South African retailers are similarly branching out into neighbouring countries leading the supermarketisation of retail there. These regional value chains offer important opportunities to create value in key industries, boost employment opportunities, and improve economic growth.

South Africa’s advantages in global value chains pertain to skills (especially experiential skills), well established companies with leading products and competencies, public research linked to firms, sophisticated customers, well-developed and dense networks of local supply industries and services and geographical clustering. However, these advantages must be maintained and some are not being further developed. There are skills shortages at every level, particularly amongst engineers and artisans, with many firms stating that standards are declining. Publicly funded research has fallen significantly. Global value chain-related activities are ignored in South Africa’s innovation policies and there is less research and declining links between firms and science councils. Companies increasingly see their major areas of operation outside the country, and regard South Africa as a less attractive place from which to direct and administer global value chain investments. The lack of new investments in global value chains in South Africa is reducing the overall size and impeding the prospects for technological advancement for local suppliers.

Improving the capacity of specific value chains, and on a globally competitive scale, is a critical part of an important diversification strategy. South Africa would stand to benefit from the diversification promoted by linkages and spillovers between industries. In order to increase the depth of value chains, measures that target skills development, expansion of technological capabilities and access to capital are essential.



SOUTH SUdAN

Developing domestic production and exports in the non-oil sectors is important for South Sudan’s drive for industrialisation, yet its participation in global value chains (GVCs) is still in its infancy. South Sudan has great potential in sectors such as mining, agriculture, forestry, livestock, fisheries, energy (except oil) but supply capacity remains severely constrained. As part of Sudan, South Sudan used to be mainly active in the global value chains of gum arabic and crude oil. While gum arabic is still produced in Upper Nile state, the production is no longer part of an international network. Regional and global companies in telecommunications, beverages, and banking have an established presence in South Sudan mainly as retail outlets. Product development in these companies is done outside the country.

Opportunities exist for South Sudan to enhance its positioning and broaden its participation into further sectors. In the short run, the opportunities to enhance its positioning in existing value chains is limited because of the skill levels required. The skill set required in telecommunications, for example, is not the same as in agriculture. The greatest opportunity South Sudan has is to broaden its participation into further sectors in which it has a comparative advantage. For instance in livestock, it has one of the world’s highest number of cattle per capita; in agriculture over 95% (or 428 260 km2)1 of arable land is uncultivated; in mining, it has rich deposits of major metals, precious stones, energy minerals, and industrial materials including gold; in tourism, national parks cover a vast area; and in forestry it has timber, teak, gum arabic, and shea nut trees2.

There are substantial barriers that inhibit participation in GVCs, or prevent the country from advancing to higher-value stages. The critical barriers, most of which are binding, that inhibit South Sudan to advance to higher value chain stages are inadequacies in skills, roads and electricity, institutions, and security. These are reflected in the World Bank’s report Doing Business that ranks South Sudan at 186 out of 189 countries.

In order to achieve gainful participation in international production networks, national policies and strategies need to be more explicit with regard to GVCs. In its two years of existence, a number of polices and plans have been concluded for specific sectors. Value chains as a strategy are implied, but are only explicit in the agriculture sector. Even within the agriculture sector, no comprehensive strategy has been developed to facilitate gainful participation. The agriculture strategy, for instance, identifies cereals, roots and tubers, pulses and oilseeds, beverage crops, fruit trees, and vegetables as strategic crops. Value chains will likely evolve with a more explicit policy focus, which, by raising awareness, will enable more targeted development and South Sudan’s meaningful participation in international production networks.

There are three essential strategies to propose. First, in the short run, South Sudan needs to focus on global value chains that are of high value but requiring a low skill set, and not dependent on having a well-developed road and transport infrastructure. For example, gum arabic and shea nut trees are available in 7 of the 10 states. Hides and skins too are available in all the 10 states. South Sudan could usefully invest in a nationwide process to prioritise and develop 4 to 5 value chains that pass this test and create jobs. Second, South Sudan needs to embrace regional economic co-operation to “import” skills and allow itself to move up the value chain. As a producer, South Sudan will have to focus at the bottom of the chain in the short term. In the medium term, South Sudan will climb the chain and “import” skills in the form of economic co-operation to quicken this transition. The development of national value chains, especially for food, will be critical. Regional value chains will dominate global ones, as the county strengthens its ties within the region. In this context, South Sudan will, as a general principle, need to prioritise its national, regional and global engagement in that order. Third, barriers that inhibit participation in global value chains have to be addressed in the medium to long term even within the context of conflict. The efforts to improve road infrastructure, capacity of institutions and


Country notes


security of persons and property will need to be revived quickly. These are binding in most parts of the country. Additional barriers such as the relative absence of a private sector and general low levels of skills and literacy (e.g. only 27% are literate) will have to be addressed too.

Notes

1. It is estimated that about 70% of the 644 000 square kilometres of South Sudan is arable. Xinshen Diao, Liangzhi You, Vida Alpuerto and Renato Folledo (2012). Assessing Agricultural Potential in South Sudan – A Spatial Analysis Method, Application of Geographic Information Systems, Dr. Bhuiyan Monwar Alam (Ed.), ISBN: 978-953-51-0824-5, InTech, DOI: 10.5772/47938. Available from: http://www.intechopen.com/books/ application-of-geographic-information-systems/assessing-agricultural-potential-in-south-sudan-a-spatial-analysis-method

2. SSDDR & UNDP (2012); “Report on the South Sudan Livelihoods and Economic Opportunities Mapping”, South Sudan Disarmament, Demobilisation and Reintegration Commission (RSSDDRC) and UNDP, South Sudan.



SUdAN

Sudan’s recent experience revealed that the value chains processes of precious minerals and agricultural production were competitive rather than complementary. Although oil has contributed to exports and generated positive forward linkages in terms of downstream industries (refining, plastic production and oil-related infrastructures) including the provision of energy input into the economy, the negative backlash effects are substantial. The resultant export concentration and the sharp drop in the share of cotton exports from 39.8% average over 1970-98 to 2% average during the oil boom (1999-2011) have considerably weakened the access of agriculture to global value chains (GVCs). At its prime, cotton supported a broad-based supply chain with high domestic value addition, involving cultivation, harvesting, grading, ginning, packaging and exporting as well as cotton lint, spinning, textile and apparel for the local market.

After secession Sudan continues to be a provider of upstream inputs to the GVCs; during 2012-13, exports were dominated by oil (44.8%) and gold (40.4%) with agricultural crop exports accounting for about 10%. Over 2012-13, export of crude oil accounted for 85.4% of total exported oil, benefiting from the existing interconnected network of pipelines and export terminal.

In the gold-subsector, informal and small-scale miners are the main producers, contributing about 90% of production (60 tonnes in 2013). The major value chain activities comprise mining, ore crushing, beneficiation, small-scale refining and marketing and the main actors are the miners, stamp mills operators, chemical and equipment suppliers, financers and middlemen. The intermediate inputs include locally fabricated tools, gold pans, metal detectors, petrol-powered jackhammers, jaw crushers, chemicals as well as hand and machine operated trommel classifiers. Deep gold mining up to ten metres is regulated by the 2010 Ministerial Act; and a licence costing SDG 3 225 is required. Small miners often sell their produce on-site to traders, jewellers’ agents or in the nearby towns, depending on the quantity and purity, with the profit of the onsite traders (who also supply inputs to the miners) estimated at 11% per gramme. In 2012 the government established a gold refinery (with a design capacity of 270 tonnes per annum) for the refining and fabrication of gold bars with high purity up to the international standards for export; since then, the BoS has been the sole exporter with most of gold export targeting the UAE (90.1% in 2012). Because of the low purity of gold extracted by the small miners (50% on average), a number of artisans operate in-house refining. However all were closed by a ministerial decree in 2012, to standardise the quality of traded gold and combat smuggling. Despite the government’s attempt to internalise part of the gold value chain, the supply chain in the SSGM sector is largely informal and prone to illicit activities. Furthermore the variation in purity and informal financing of production (with 25% capital share in output) including the relatively low price in the onsite gold market prevent many miners from benefiting from downstream value capture.

With a share in exports of 18.6% in 2012, agriculture is less integrated in the upstream GVCs as an input provider; in addition the agricultural trade balance is negative (the ratio of agricultural exports to food and agriculture-related imports is 25%). However, the reliance of agriculture on foreign inputs has increased (the ratio of imported agriculture-related inputs such as chemicals, fertilisers, tractors, pesticides and sacks in total imports was about 6% in 2012, up from 4.8% in 2011). The traditional rain-fed production, (crops and livestock), accounted for 62.1% of agricultural GDP between 2000 and 2008 and contributed most to GVCs as an input provider, with about 90% of livestock exports in 2012 sourced from this sub-sector. The main value chain actors involve producers, collectors, fatteners, middlemen, traders, live animals and meat exporters.

Sudan has diversified agriculture, (rain-fed and irrigated, with a mix of small and large-scale farming) as well as oil and gold products that are supportable by buyer-driven GVCs, with potentials for recovering the cotton linkages and up-scaling minerals and traditional exports. In this regard, the revitalisation of cotton production benefiting from existing significant irrigation infrastructures would revive cotton supply and value chains, especially since the Sudanese barakat cotton ranks among the world’s highest quality cottons. Also the domestic market


Country notes


is sizeable; in 2012 imports of textile and related products accounted for about 3% of imports (USD 300 million). At present only three out of 16 textile factories are operating.

Moreover, Sudan is one of the countries with the largest livestock inventories in Africa; the population of sheep and goats alone was estimated at about 69 million in 2013. Live sheep are the largest livestock export earner, contributing USD 286 million (8.5% of exports) in 2012. Sudan is neighbour to some wealthy Middle Eastern countries with sizeable markets and considerable preference for Sudanese breeds of sheep; also the country could explore the EU market for imported sheep meat. The livestock farm-gate value addition could be upgraded by undertaking the fattening and reconditioning of animals including linking herders to regional terminal markets.

Sudan’s oil industry is virtually vertically integrated and the rent accrues to the public sector; there are good prospects for boosting oil yield from depleting fields using enhanced oil recovery techniques to increase the recovery factor up to 30% and reserves by one billion barrels by 2020. Also, there is great potential for value addition in the SSGM sector through upgrading the locally fabricated tools and establishing machine leasing schemes together with enhancing the small miners’ and the larger mining firms’ synergies, including strengthening the community-based mining organisations.

The I-PRSP 2013, acknowledges that to create jobs and reduce unemployment and poverty, agriculture, livestock, manufacturing and services should be the main sources of growth. To that end, Sudan needs to address trade and non-trade barriers, including production, to upscale value addition and participation in the GVCs. Studies revealed that lifting the burden of high taxes and other levies along the supply chains would upgrade the value chain. Charges on crops are estimated at 30% of the total assembly and logistic costs and average tariffs on imported agricultural inputs at 30.6%. Marketing costs represent, on average, 33% of the cost of the sheep. Also, reducing the high cost of energy and infrastructure services, which raises the domestic resource cost (a measure of the opportunity cost of producing or saving foreign exchange), would enhance participation in GVCs. During 2001-07 about 41% of all factories closed due to high competition from imports and in export markets. The supply chain could be upgraded into value chains by clustering SMEs to increase participation of small producers (as in the case of the Sudan and Ethiopia organic banana project). Increasing the quality and safety measurements of production in compliance with international standards would raise the domestic value added. During 2000-01 Sudan’s sheep were banned, and the EU also banned groundnuts. Attracting foreign mining companies with advanced technology would ensure healthy development of the mining industry. Improving the governance of extractive industries would enhance traceability; transparency, and confidence, and hence, reduce property disputes and upstream costs. More important, the supply and value chains need to be incorporated into the national development planning framework.



SWAzIlANd

Swaziland’s inflows of foreign direct investment (FDI) targeting the export market were larger than those for Botswana and Namibia in the early 1990s. Its attraction for such investments has declined since the demise of the apartheid regime in South Africa and the end of civil war in Mozambique. Despite the decline in FDI inflows, USD 136 million in 2010 to USD 90 million in 2012, the stock of foreign direct investment has remained significant at almost a billion dollars. In 2011 and 2012, the share of FDI in gross fixed capital formation was more than 24%. With foreign firms being key drivers of global value chains, Swaziland’s participation in such activities, although small in terms of the global value, is quite significant at the domestic level. Swaziland’s share in global trade, however, has fallen over the years – its share in world merchandise exports peaked at around 0.02% of world trade in 2004, but fell sharply to 0.01%in 2010. Exports have therefore declined as a source of economic growth, especially over the last decade, with the current ratio of exports of goods and services to GDP below the 30-year average of 0.67 and close to the value recorded in 1980.

The World Investment Report 2013 noted that value-added trade contributes nearly 30% to developing countries’ GDP on average. Inflows of FDI constitute about 24% of GDP. Foreign direct investment is spread across many sectors of the economy, including natural resources, manufacturing and services. For a country whose trade openness ratio is about 1.94, global value chains are an important element of the country’s economic activities. The exports from Swaziland include sugar and sugar products, forestry products, processed fruit products, textiles, soft drink concentrates, refrigerators and, more recently, pneumatic drills.

Based on the social accounting matrix for 2006, it is observed that the extent of value addition within specific sectors varies widely across products. In agriculture, for instance, winter grain, tobacco and canned fruit comprise of less than 20% in domestic value. Imports from South Africa and the rest of the world form most of the value in the final products. Such imports include packaging materials, marketing and transport services and the final products themselves. For canned fruit, the main producing firm is of South African origin and sells its product to the rest of the world and the home country. Opportunities for increasing local value are very limited in this operation due to the limited stages of production that are required to produce the final product unless Swaziland could attract a can producing firm. For the livestock and poultry sector, local value could be increased if Swaziland were to be able to increase the grain output that is required in feed production. Significant increases in productivity would be required to replace grain imports from South Africa.

In the extractive sector, the greatest domestic value is generated from forestry, coal, lignite and peat, while other mining activities generate less than 40% in domestic value. Once again, limited upscale activities in these products, given the size of the Swazi economy and the size of operations would suggest little scope to extract greater value out of such activities.

In manufacturing, sugar and textiles related activities are dominant in the Swaziland economy. As indicated in the Economic Diversification Study (EDS), the erosion of trade preferences for sugar and textiles pose a challenge for Swaziland. Although textiles are an important product by value, they constitute a large component of imports in the form of fabric. Given Swaziland’s low labour costs and the rigid and hostile labour relations environment in South Africa, improving the productivity of labour could attract investments from its neighbour or further afield. With regards to sugar, critical issues relate to diversifying sugar products. Coca-Cola Swaziland (Conco Ltd) produces soft drink concentrates that are exported to 20 countries in Africa. Conco imports dairy products and sources most sugar materials locally. The EDS identified possible additional sugar and sugar-related products including chewing gum, solid sugar and alcoholic solutions as possible products where there is demonstrable competitive advantage. The existing relationship between Swazi and South African firms could also be exploited to diversify export markets.


Country notes


Key challenges impacting negatively on Swaziland’s ability to benefit from global value chains are the existing constraints to domestic production. Export-oriented firms have been hamstrung by an unfavourable investment environment, regulatory restrictions, government distortions and the high cost of trade. The service sector, which is one of the fastest growing sectors, especially telecommunications, is still to fully emerge out of a legislative bind that has impacted investments. Also, limited export market diversification has cast a shadow of uncertainty regarding trade preferences in key products. Limited access to finance by local small and medium-sized enterprises in the face of declining FDI affects the extent that the country can exploit existing links into global value chains.



TANzANIA

Tanzania’s current role in global value chains (GVCs) is low. The service industry contributes 48% of Tanzania’s GDP. It is heavily geared towards urban centres in the domestic market and especially active in telecommunications and financial services. Agriculture contributes 27% to GDP but plays the predominant role for employment. Industry’s share in GDP is 25%, with particular contributions from light manufacturing and agro-processing. Tourism is important too, contributing some 20% of GDP, but with little value addition at the local level. Economic value addition thus occurs predominantly at the primary and secondary input levels. There is little generation of value added in GVCs, both in terms of forward and backward participation1. And despite the international financial and euro area crises, output growth and trade was remarkably stable and virtually resilient to exogenous shocks – a clear indication of seemingly little integration of the economy into GVCs.

Tanzania has experienced strong export growth and diversification away from traditional markets and products. Its total merchandise exports grew approximately five-fold over the past decade. This rapid growth has been partly fuelled by higher prices for traditional agricultural export commodities, such as coffee, tea, tobacco and fish. But the main factor has been the emergence of gold, rising from USD 383 million to over USD 2 billion. In addition, light manufacturing and agro-processing exports grew from 7% of total merchandise exports to 20%. Between 2003 and 2012, exports to the EU decreased from approximately 50% to 30%. Total exports to Asia increased from 23% to almost 30%. Most importantly, exports to Tanzania’s neighbouring countries in EAC and SADC rose from less than 10% to over 30% today.

While no specific data is available on trade in value added, Tanzania’s overall trade patterns do suggest important trends. On the export side, these include the emergence of raw mineral exports at the expense of traditional agricultural commodities. On the import side, the trends concern more than 25% of petroleum and oil refined products and another 25% in the form of intermediary industrial products, mostly focused in the car industry and the power sector. Another feature of Tanzania’s export performance has been diversification away from traditional markets in the EU. Trade is steadily increasing towards Asia and to some extent also regional neighbours. Overall, with only a slight shift from raw agricultural to raw mineral exports, these trends suggest that Tanzania currently continues to generate little value added in its main exports markets. In turn, the country is becoming more dependent on intermediary and final industrial products, namely from Asian markets. Tanzania is becoming one of Africa’s FDI front runners, yet the large majority is for greenfield investments in the extractive and tourism sectors, with seemingly little local value addition. The most important development potential for Tanzania to generate trade in value added therefore probably lies in strengthening Regional Value Chains with neighbouring countries (i.e. Burundi, DRC, Kenya, Malawi, Mozambique, Rwanda, Uganda and Zambia). Selected case study evidence supports these assertions.

Looking forward, the biggest potential to value added trade lies in the exploitation of Tanzania’s trade linkages to its neighbouring countries. Improved overall transport interconnectivity and corridor development is hence crucial for Tanzania and its landlocked neighbouring countries. The port of Dar-es-Salaam is currently a major trade hub for East and Central Africa. It also opens the door for the development of Special Economic Zones and more global trade, in particular with the Asian markets, to which the country has a privileged geographic position. Due to cost advantages this includes the possibility of outsourcing lighter manufacturing businesses. Tanzania therefore needs to prioritise transport corridor infrastructure and port development to facilitate better regional trade connectivity. Moreover, institutional upgrades can improve co-ordination in the hinterland access regime.

Of course, the commercial exploitation of vast natural gas resources might open a unique opportunity for better integration into GVCs, namely through the proposed investments in a LNG plant, domestic energy generation and various spin-off effects, leading to employment-intensive


Country notes


participation of domestic businesses in the gas boom. It is estimated that the contribution of the extractive industry will increase from currently 3.5% to approximately 10% in 2025. Beside infrastructure investments, key areas include continued improvement in the overall business environment, the development of Tanzania’s skills base and the effective implementation of national development strategies.

Tanzania case study evidence on GVCs• Agri-business has a strong potential for regional trade. For example, value chain analysis

of the cross-border trade of Tanzanian onions into the Kenyan market reveals that many farmers in Arusha have specialised in regional trade (Koening et al., 2011). This is because of the input cost advantages, superior quality of Tanzanian onions and reversed cropping seasons in both countries. The market is characterised by informal entrepreneurs and on-the-spot market linkages among the actors. Across the entire value chain, casual wage labour and small-scale retailers are among the poorest, while wholesale brokers and the transport sector benefits the most. Farming can be highly profitable, too, although farmers tend to have the highest risks of all part participants in the value chain. There is little support from the public sector and virtually no export regulation for onions. Although a number of quality standards and regulations exist, enforcement is rare.

• The tourism GVC has so far contributed little to local development. De Boer and Tarimo (2012) assess community-business tourism partnerships in northern Tanzania, the country’s main tourism hotspot. One of the characteristics of the nature-based tourism industry is the fact that it takes place in poor rural areas with a lot of surrounding wildlife. In principle, the tourism businesses are important, as they do not only generate additional income but also positive externalities, including enterprise development. However, the impact of global tourism on the local economy remains absent. One of the important lessons from Tanzania is that the conditions of inclusion into GVCs matter, rather than inclusion or exclusion per se. As Loconto and Simbua (2012) show, this is also evident in the fair trade GVCs for Tanzania tea.

• Changing public perception in industrialised countries about GVCs matters. In Tanzania, a prominent case is the value chain of fish from Lake Victoria. Fishing communities are better incorporated in the export-oriented Nile perch GVC rather than in fish chains that are oriented towards local and regional markets. At the same time, as Ponte (2008) and Molony (2007) show, risks and vulnerability of participation in the export-oriented GVC can be very high. For example, the award-winning European documentary Darwin’s Nightmare dramatised the supposed vastly deleterious social impacts of fishing on local communities in Tanzania. As a result, public perception in import countries on the social costs related to Tanzania fish suddenly shifted, with substantial temporary effects on trade and the local economy.



TOGO

Togo became part of global value chains (GVCs) in the 1860s, with the export of several dozen tonnes of cottonseed to Europe, followed by coffee and cocoa. This trade with the world in cash crops has intensified since the 1940s, peaking in the 1970s. Towards the end of the 1970s, Togo went through an initial phase of sustained industrialisation, financed by loans backed by the boom in phosphates, cocoa, cotton and coffee. Government initiatives to build factories for textiles, chemical products, agro-food, construction materials, oil refineries and steelworks succumbed to the test of time and the vicissitudes of the market.

Almost all state or mixed-economy industries were in deficit by the end of the 1980s. Over time the authorities resigned themselves to selling off, renting out, liquidating or shutting down industrial enterprises. These factories on the whole made extensive use of capital and little use of manpower – the opposite of what needed to be done to create local value added. The companies producing and exporting raw materials (phosphates, coffee, cocoa and cotton) had highs and lows, which eventually led to their being temporarily shut down or restructured. In 2013 their exports were less than a third of what they were during the peak in the 1980s and 1990s. Of the big factories in the 1970s and 1980s only a beer and carbonated soft drink factory and a clinker/cement factory have continued growing until now.

The second period of industrial growth dates back to the 1990s, with the development of the free-trade zone for processing exports in 1991. Ten years later, in 2001, value added represented 51% of the turnovers of companied based in the free-trade zone1. Since then this percentage has been in constant decline, standing at 36% in 2008 and a mere 18% in 20122. This situation is partly due to a decline in high value-added agro-industrial companies. The share of local inputs fell to 12.3% in 2012 from 12.5% in 2008 and 32% in 2000.

The modern sector today employs around 94 000 permanent employees3, including 60 000 in government, 21 000 in industry in the customs area and 13 000 in the free-trade zone. The contribution of the free-trade zone to modern employment was 12% in 2013, compared to 14% in 2007. This is not even remotely close to the figure of 100 000 new employees projected when it opened in 1991. The majority of the zone’s companies do not respect the agreement that requires them to use local raw materials and labour-intensive equipment in exchange for tax deductions and state benefits.

In 2012, roughly 60% of Togolese industry operated in the free-trade zone. The zone had 62 companies, of which 52 were industrial firms, with revenue of XOF 250 billion. Out of these 40% had capital from Asia, 34% from ECOWAS, 27% from Europe, 25% from Togo and 5% from the Americas4. A full 73% of intermediate consumption is imported.

Mining companies created value added to the tune of 62% of their turnover in 2012. This was followed by food processing companies (25%), services (11%) and manufacturing (3.8%). Since 1997, the biggest economic activity in Togo has been clinker/cement, including everything from extraction of the local raw material – limestone – to its transformation into a final product ready for export. Its share in Togo’s exports increased to 15.7% in 2013 from 15.3% in 2006 and 1.6% in 1998.

Exports provide 94% of manufacturing’s intermediate consumption and represent 96% of the sector’s revenue. It makes up 88% of jobs in the free-trade zone, but its share in the total value added of the zone is a mere 12%5. This is a direct consequence of the low-skilled jobs. Half of these jobs are in the production of synthetic hair, wigs and toupees. The other companies in the free-trade zone are capital intensive.

In 2012, 70.2% of Togolese exports went to Africa, 20.6% to Europe, 8.4% to Asia, 0.3% to the Americas and 0.5% to other, unspecified countries. The same year 37.8% of imports came from Europe, 33.8% from Asia, 14.8% from Africa and 11.8% from the Americas6. The mining industry and related processing plants for exports were Togo’s main opportunity for GVCs.


Country notes


The country has 2 billion tonnes of phosphate carbonate reserves, 70 million tonnes of unconsolidated ore and 300 million tonnes of metaphosphate. In addition, it has 200 million tonnes of limestone, 40 billion cubic metres of marble, 500 million tonnes of iron, 15 million tonnes of manganese, and oil, the quantity of which remains to be determined. Port infrastructure was expanded with a new wharf, which is expected to be operational in 2014, and a new container terminal for transhipment, slated for 2015. These additions are unquestionably an asset for Togo, which will be able to export its port services. Opportunities in other industrial areas will depend on the development of the quality of public service and the availability and price of utilities.

The cost of energy and communications, coupled with the poor quality of public service, has been one of the most serious hurdles to industrialisation in the country since the 1980s. The competitiveness of companies in the free-trade zone remains low compared to Asian products and those manufactured in Togo’s customs area. The deductions and benefits accorded to the free-trade zone make it artificially competitive, leading to substantial speculation at all levels and market distortions. The new industrialisation strategy must first open up the national economy to competition – without necessarily handing out benefits – in order to create significant local value added. In this way Togo will be able to better position itself and take advantage of its assets by integrating its mining industry and its services sector in GVCs. The authorities have already started down this road by making private investment and an openness to world trade the drivers of the country’s development.



TUNISIA

Since the 1970s, Tunisia has opted for an economic model oriented toward exports and industrialisation, supported by a proactive policy of public investment in physical and human capital, and of attracting FDI through a law favouring enterprises that export their entire production. Mainly dominated in the early 1960s by the agricultural sector, the structure of Tunisia’s economy has changed profoundly in favour of industry and services.

The industrial network counts 5 669 enterprises with a staff of 10 employees or more. Enterprises are represented as follows: agro-food 18.5%, construction materials 8%, chemical industry 9.7%, electrical, engineering and electronics industries (IME) 17.6%, textile and clothing 32%, other sectors 14.2%.

Benefiting from its geographic and cultural proximity to Europe, Tunisia has progressively strengthened its relations with the EU, its main industrial partner and main client. The association accord signed in 1995 established, over time, a free-exchange zone between the two sides, which took effect on 1 January 2008 for industrial products. The start of the national programme for upgrading industry at the end of the 1990s allowed Tunisian industries to become more competitive for better integration into global value chains (GVCs). In this context, major international donors set up branches in the country and/or developed subcontracting agreements, leading to greater Tunisian participation in the world economy. In 2013, there were 2 614 wholly exporting enterprises, the source of 323 262 jobs. Two sectors are particularly significant in this regard: textile and clothing since the 1970s and, more recently, the electrical, engineering and electronics industries. If textiles are declining somewhat as a result of international competition, notably from Asia, the electrical, engineering and electronics sector has seen major evolution over the last 15 years, with the development of automotive and aeronautics component activities. The sector’s exports increased by an average of 18% per year from 2000 to 2012. Since the early 2000s, the development of information and communication technologies has allowed the rise of new service activities and greater integration of Tunisia into GVCs. Call centres have developed, as have other forms of outsourcing to a lesser degree (outsourcing of accounting services, for example).

This progressive integration into GVCs has fostered growth in Tunisia, contributing to the creation of many jobs and exports. In 2012, the textile sector accounted for 22% of exports, and the electrical, engineering, and electronics sector more than 36%. However this development model is running out of steam and its impact on the Tunisian economy appears limited today. The jobs created involve activities with little value added and therefore with unskilled personnel. And the location of the majority of exporting enterprises near logistical export zones (ports and airports) has accentuated regional disparities.

The low management-staff ratio has not been beneficial to technology transfers and the rise of value chains, limiting the development of these activities. Imported inputs constitute a significant portion of Tunisian exports, although this varies according to the products involved, and the exports mainly consist of intermediary products. According to a study by the AfDB (2012), the level of sophistication of Tunisian exports has been declining for several years. Finally the constraints of the 1972 law on companies that export their entire production strongly limited their impact on the rest of the economy, the local market being barely considered as a client or potential supplier.

The socio-economic difficulties of recent years have slowed Tunisia’s integration in the world economy, but many opportunities exist in the medium term. The Minister for Industry, Energy and SMEs published a document in 2008 on “national industrial strategy looking toward 2016”. Based on an analysis of international trends and the good practices of countries with successful integration into GVCs, this strategy aimed to transform Tunisia into an innovative and high-level Euro-Mediterranean centre of competitiveness. In 2010, Tunisia also began readying a strategy for promoting the services and outsourcing sector. Since the revolution of January 2011, and in view of urgent socio-economic matters, these projects have been on the back burner.


Country notes


Tunisia’s participation in GVCs, meanwhile, faces the same difficulties as the economy as a whole, namely a workforce less and less adapted to the needs of the market, along with political, economic, and social uncertainty, insufficient logistical infrastructure (the port of Radès is saturated) and the crisis in the euro area.

Nonetheless, various sectors offer the potential of major development for Tunisia, such as local transformation of products that are usually exported untreated (hydrocarbons or agricultural products), or the creation of niche products with high value added from traditional sectors (technical textiles, for example). To encourage this development, the Tunisian authorities must make considerable efforts in order, notably, to improve the business climate, to strengthen industrial capacities and logistical infrastructure, and to reform the education sector. The fight against corruption at every level will also be a determining factor. Tunisia has many support structures for enterprises, and many public and private institutions that are engaged in the process of creation and development (technical centres, business centres, chambers of commerce, business incubators, etc.), but their effectiveness is limited.

Negotiations currently underway with the EU concerning, among other things, the liberalisation of trade in agricultural products and services, are likely to open opportunities, on the condition that they are accompanied by the upgrades necessary to meet international production standards as well as real worker mobility. The diversification of partnerships and the development of new markets, notably through the strengthening of regional integration, are additional strong points, even for exchanges with the EU. Finally, the country’s integration into GVCs will fully bear fruit only if local Tunisian enterprises participate fully in the productive system. A reorganisation of sectors will be needed to end the duality of the Tunisian economy, involve the entire economic network, and allow more inclusive growth. Tunisia’s strong dependency on Europe, which still absorbs more than 70% of its exports, and inequalities in territorial development linked to the physical constraints of import-export, remain two factors of vulnerability that need to be offset by appropriate policies.



UGANdA

Global value chain (GVC) development is receiving increasing attention in Uganda. The National Development Plan (NDP) 2010/11-2014/15, for instance, includes as a key intervention “supporting and strengthening key product value chains to access high value markets and penetrate global value chains through Public Private Partnerships and inter-government sectoral collaboration”. The NDP document goes further and identifies key products that should be the focus of these efforts. These include: dairy products and poultry, beef, fish products, coffee, floricultural and horticultural products, maize, beans, cassava, processed bananas and processed mineral products.

Value chain development in the Ugandan context, however, is largely seen through the lens of domestic value chain development; i.e. as a strategy for strengthening production integration within the Ugandan economy and increasing value added generation at the sector level, with the aim of capturing domestic and, to a lesser extent, regional markets for selected products. It is not, in this sense, seen as a strategy for deepening Uganda’s integration in the world economy through the participation in selected segments of key global value chains. Similarly, value chain development is largely seen as a means for developing production capacities and enhancing value added generation in primary sectors, not as a strategy for industrialisation, as can be seen by the list of products identified for value chain support in the NDP.

The lack of adequate data for GVC analysis makes it difficult to assess the extent to which Ugandan producers are integrated in global value chains. The most recent available input-output table for Uganda dates back to 1991 and it is reasonable to assume that the structure of the Ugandan economy has changed significantly since then. Moreover, these are not international input-output tables, capturing elements of global production, and are therefore not suitable for GVC analysis. Still, the various case studies that have been undertaken for value chains do provide useful insights into value chain development in Uganda. We review in the next paragraphs developments in apparel, floricultural and fish and fish products value chains.

The apparel industry has traditionally been chosen by many developing countries to accelerate the process of industrialisation and structural transformation. In the African context, the US African Growth and Opportunity Act (AGOA) of 2002 presented LDCs in the region with a unique opportunity to enter this value chain, an opportunity, which some countries, such as Lesotho or Madagascar, successfully seized. Uganda has been eligible to benefit from AGOA provisions for apparel and textiles since October 2003. However, despite policy pronouncements to the effect, it has never managed to establish an apparel industry on the back of AGOA. Hence, exports of these products to the US, which in 2003 amounted to USD 1.6 million, have been on the decline since then, reaching only USD 143 000 in 2012. The main reasons put forward for Uganda’s failure to take advantage of AGOA provisions for the apparel sector are high transportation and logistical costs, the absence of an appropriate policy framework for the Textile & Apparel industry, weak government commitment, lack of industry specific government support and the limited availability of quality raw materials.

Uganda has been more successful in entering the floricultural global value chain. This industry started in Uganda in 1993, with a focus on exporting to the EU market. Initially, exports of roses and cut flowers experienced a sharp increase, from 1 150 metric tonnes in 1995 to a peak of 7 500 tonnes in 2005, employing around 6 000 workers on 15-20 farms on the shores of Lake Victoria and indirectly providing livelihoods to 30 000 people. However, exports volumes have gradually declined since then, down to only 3 436 tons in 2011. Some of the reasons cited for this decline are the increasingly unfavourable climatic conditions that exist in flower producing areas in Uganda, due to the effects of climate change and the resulting increase in disease. However, weak government support, high production costs, including high energy and air freight costs, and the competition from other East African countries have also played an important role in undercutting Ugandan flower producers’ market share in the EU and other advanced economies.


Country notes


The fish and fish products industry, heavily concentrated around Nile perch fishing in Lake Victoria and mainly focused on the EU market, has experienced a similar fate. Also established as an export industry in the early 1990s, exports of fish and fished products initially experienced a sharp increase, from around 1 664 metric tons in 1991 to 39 201 tons in 2006, but have since declined, reaching only 21 552 metric tons in 2011. The main reason behind this drop has been the gradual depletion of fish stocks in Lake Victoria, driven by a surge in illegal fishing and inadequate regulation and control of fishing activities. In addition, exports of fish and fish products to the EU market have suffered from several import bans imposed by the European authorities due to the failure of Ugandan exporters to comply with EU sanitary and phyto-sanitary standards.

Altogether, the review of these three case studies and those for other key value chains in Uganda (e.g. coffee, horticulture), point to a number of common constraints hindering Uganda’s insertion in GVC and the maximisation of its benefits. These include high production costs, including transport and energy costs. Also, weak policy frameworks that provide for adequate support to the development of specific value chains, in the form of improved sector-specific business environment conditions, training and business development support services, etc.



zAMbIA

Zambia is abundantly endowed with natural resources such as land, forests and water, as well as non-renewable minerals, including copper, cobalt and emeralds. The implementation of appropriate development policies therefore has the potential to lead the country to reap the full benefits of its resource endowment. Designing and implementing effective private-sector-led economic transformation policies that create employment and reduce poverty remain a national challenge. With little value addition, the country thus remains an exporter of unprocessed primary products.

In order to stimulate value addition and industrialisation, as well as increase the manufacturing sectors share of GDP from its current levels (below 10%), the country has embarked upon the establishment of Multi-Facility Economic Zones (MFEZs). These zones blend the best features of free trade zones, export processing zones and industrial parks. They create the administrative infrastructure, rules and regulations to support both export and domestic-oriented industries. The zones are designed to support firm clusters that can benefit from spatial proximity throughout various industrial processes, from primary production, processing, marketing and sales and ultimately distribution.

Two MFEZs have been developed and are already operational. Four others are still at early development stages. The parks are located in the Copperbelt, North-Western and Lusaka regions. Chambishi MFEZ in the Copperbelt is focused mainly on the copper supply chain and houses both heavy and light industries, including copper smelting, manufacture of copper wire and cables, household appliances such as stoves, motor parts and agro-processing. More than 10 enterprises have been established, creating over 3 500 jobs.

MFEZ development has been sluggish due to poor road infrastructure and unreliable and undeveloped power and water supply. Successful industrialisation will require that government creates an enabling environment by stepping up its efforts to provide infrastructure and support services. The rewards will be access to human capital, technological innovation, financial systems and financing.

There are some products in Zambia that are well suited to integration in global value chains (GVCs), with the potential for further development. Copper mining is already creating higher value through smelting and refining copper into cathodes for exports. The Chambishi mentioned above is an example of this. Gemstone mining is another, with latent integration into the GVC. In an attempt to realise this potential, the country has made it mandatory that all locally extracted gemstones be auctioned in the country in order to stimulate beneficiation as well as local market development. In order to spur this further, there is a need to ensure that the policy is complemented by initiatives that will produce and enhance local skills in stone cutting, polishing, jewellery design and production and marketing and sales.

The agriculture sector can be harnessed to become the leading sector for economic transformation and employment creation. Over the past few years, agri-business has demonstrated consistent growth, particularly in livestock production, providing linkages to the dairy, beef and leather industries. A small niche in fruit and vegetables also provides potential for expanded development. The Zambia Export Growers Association assists farmers who grow vegetables and flowers, exporting their products to Europe. Farmers lump their products together through storage facilities provided by the association, which later handles transport and marketing of their products to Europe and other markets. Out-grower schemes help small-scale farmers gain access to markets, while there is technological transfer from large-scale farmers. Zambia Sugar is one such company. It obtains 30% of its throughput from larger private growers, while 10% is from small-scale farmers. In turn, small-scale growers receive training, extension services and benefit from technological transfer. Another example is honey production. Beekeepers form co-operatives through out-grower schemes, provided with buckets and registered as members to ensure traceability of the product while they receive training. The value addition is significant, with more than 10 000 beekeepers occupied in major production areas of north-western Zambia.


Country notes


Zambeef has been highly successful in vertically integrating its different businesses along the value chain, from farming to beef and dairy production, manufacturing, processing and retail. In order to meet the demand for its products, the company has enlisted local farmers, who supply it with cattle which are slaughtered in its abattoirs. The beef is sold in its own retail outlets or in supermarkets. The hides are processed to good standard leather for markets in the region, the Far East and Europe. It also produces leather products such as shoes and bags for the local market. Aside from the milk obtained from its own farms, it also buys raw milk from small and medium-sized farmers. The milk is used to produce yogurt, cheese, butter and cream. Zambeef also engages in pork production and processing by enlisting small-scale farmers to supply pigs. Through these value additions the company has been able to create over 5 500 direct jobs.

The textile industry was historically significant in Zambia, with over 140 companies operating. With the help of Chinese investors, the sector was resuscitated in the 1990s. But in 2007 the industry started to crumble, with the closure of Mulungushi Textiles. It was hit by imports of second-hand clothes and low-cost imports from Asia. In an effort to once again revamp the industry, government recently announced that a new investor is willing to invest in the factory.

Industrial policy needs to address the integration of the rural sector in the rest of the economy. This can be done by advancing agro-industry value addition and the supply of goods and materials, which enhances the competitiveness of domestic enterprises. Increasing vertical integration in global agri-business supply chains changes the requirements placed on small-scale farmers. But policies aimed at supporting such farmers need to be realistic about the prospects for small-scale farmers of being upgraded by large firms.

Zambia faces a number of challenges for effective participation in GVCs. First, Zambia’s landlocked position substantially increases the cost of long-haul transport by up to 40% of the final product’s value. There is a need to improve trans-boundary corridors and border administration to reduce delays. Deepening regional integration could offer the potential to tackle some of these challenges by providing access to regional and global markets.

Second, access to reliable and stable electricity is critical in ensuring constant food production flows to reduce production wastage, particularly for perishables. Access to good quality water for production and sufficient wastewater treatment is also required.

Third, the linkages between rural primary production areas and urban processing plants are often weak, adding additional costs to the final product. A system of reliable feeder roads linking rural and urban areas is critical.

Other challenges the industry is facing include access to qualified local labour, with the right skills mix needed to operate machinery that is more automated and complex than ever. Global consumers and health and environmental authorities require better and safer products. This means increasingly higher food-safety standards, with smaller margins of error. Increased technical knowledge and know-how, combined with investments and improved control procedures, is needed to ensure continuous compliance.



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Global value chains (GVC) that operate in a transparent and accountable way can be an engine for sustainable development. Zimbabwe is currently integrated in global value chains in agriculture (tobacco, sugar, cotton and horticulture), mining (diamonds, gold, and platinum) and manufacturing (food and beverages, clothing and textiles, wood and timber, fertilisers and chemicals and pharmaceuticals).

Zimbabwe has some of the largest deposits of diamonds, gold and platinum in the world. The GVC of the diamond industry includes exploration, mining, sorting, polishing, dealing, jewellery manufacturing and ultimately retail. Zimbabwe is able to conduct the first three stages but must now focus on achieving the other four.

With respect to gold refining, the RBZ first opened Fidelity Printers (Private) Limited in 1966. After it established a gold refinery section in 1987, the company changed its name to Fidelity Printers and Refiners (Private) Limited. The refinery produced internationally accepted delivery bars, however, it ceased operations in 2008 after gold output slumped to a record low of three metric tonnes. Since then, Zimbabwe has been sending its gold for refining and marketing to Rand Refinery of South Africa. With respect to platinum, the country currently has no refineries. Zimbabwe has one of Africa’s largest copper processing plants in the town of Alaska. It has, however, been lying idle since the 1990s when nickel prices began to fall. This has led to the closure of Mhangura and other copper mines. Also, the collapse of nickel mining has resulted in the Empress Nickel refinery being decommissioned.

The development potential of the mining sector can be maximised through building resource linkages with the rest of the economy. This includes revenue linkages, backward linkages (supply chains), forward linkages (value addition/beneficiation) and knowledge and spatial linkages to create new industries associated with mining. This is particularly important in that economic recovery in Zimbabwe hinges on the mining sector.

Zimbabwe can borrow from the Africa Mining Vision (AMV) of 2008 and the International Study Group (ISG) report of 2009. These argued for the creation of strong and diverse linkages between mines and the immediate economy to maximise the growth, development and employment potential offered by mineral resources.

Zimbabwe is currently the largest cotton producing country in southern and eastern Africa. The cotton produced in Zimbabwe is renowned for its high-quality, uniform lint. The country’s competitiveness in cotton production arises mainly from favourable climatic conditions, as well as the availability of manpower to process the cotton through its various stages of the cotton value chain. The country has an installed ginning capacity of approximately 600 000 tonnes, more than double the cotton seed production. There is limited value addition in the industry, with spinning capacity currently at less than 30% of the total lint available. The country has an installed spinning capacity of 39 000 tonnes of lint per annum and an average annual lint output of 160 000 tonnes. Such installed capacity can no longer be used at 100% productivity, as most of the equipment is now old and even obsolete. The weaving and knitting industry processes fewer than 39 000 tonnes of lint output, with dyeing, printing and finishing processing less than weaving and knitting.

Sugar-cane is one of the most important agricultural export crops in Zimbabwe, along with cotton and tobacco. The sugar sub-sector is concentrated and dominated by two companies. Production of sugarcane in Zimbabwe is based on the plantation system of production. Under this system of production, each sugar company owns a sugar estate and mills, permitting the companies to efficiently manage the cycle of cane production and processing. The sugar industry provides direct employment to 25 000 workers and indirect employment to more than 125 000. Tongaat Hulett owns the Triangle Sugar estate and has a 50.4% stake in the Hippo Valley estate. Triangle estate is the biggest sugar estate in Zimbabwe, with an annual crushing capacity of 2.5 million tonnes of cane. It can produce up to 300 000 tonnes of raw sugar. Hippo Valley is the


Country notes


second largest sugar operation and has a mill of almost the same capacity as Triangle. In addition, there are small-scale out-growers at Mkwasine estate, cultivating about 10 hectares each, plus a group of 17 cultivating 35 hectares each. The two estates, including out-growers at Mkwasine, have a potential production capacity of 600 000 tonnes.

After processing, sugar has different products (e.g. raw sugar, molasses and ethanol) that are traded in the domestic and export markets. In October 2013, Zimbabwe passed legislation requiring that imported petrol be blended with 10% of locally produced ethanol (mandatory blending). There are two independent sugar refineries located in Bulawayo and Harare that produce white sugar, with a capacity of 260 000 tonnes per annum. In addition, brown sugar comes from the two mills at Triangle and Hippo Valley. Around 65% of the sugar is produced for the domestic market, and the remainder is exported to the southern Africa, the EU and the United States. About 148 000 tonnes of raw sugar were exported to the EU in 2009, and the market is secure from 2010-15, as it can be exported duty and quota free.

Several initiatives currently in place to strengthen agricultural value chains include: the Zimbabwe Agricultural Competitiveness Program (ZimACP), the Zimbabwe Agricultural Income and Employment Development Program (ZimAIED) and Credit Fund.

ZimACP is a USAID-supported programme that started in September 2010 and will run for 4.5 years. The programme aims to provide support to the agriculture and agribusiness sectors through dialogue with their representative bodies to reach a consensus on policy issues that affect the competitive environment of agribusiness in Zimbabwe. More specifically, ZimACP seeks to support market dynamics and players to achieve improved access to capital and services. ZimAIED, which is also supported by USAID, seeks to increase the incomes of rural households across the country through the commercialisation of small-scale farming. The programme works with a wide range of domestic, regional and international buyers to create reliable and profitable marketing systems for small-scale commercial farmers. ZimAIED also works with rural agri-traders to ensure that all farmers have access to competitively priced inputs, allowing them to sell their products at fair prices.

The major constraints to effective participation within the GVCs are poor infrastructure, liquidity constraints, deindustrialisation, technology gaps, lack of competitiveness, the high cost of doing business and uncertainties related to indigenisation and economic empowerment regulations.

The government needs to build capacity and support private sector participation, especially in SMEs. It also needs to develop an institutional framework for public-private partnerships, in particular to develop world-class infrastructure.


The full report is available at:


2014 G

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Africa’s Ind

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