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Capturing Africa’s niche in the global value chains

31-May-2018

Africa sits on vast resources. Of greater potential than its extractive resources such as oil, diamonds, gold, or cobalt, is its population bulge.

By 2030, it is projected that Africa will have 1.7 billion people, whose combined consumer and business spending is expected to reach $6.7 trillion. This demographic dividend – if properly harnessed – offers the continent an incredible opportunity to build a strong labour-intensive manufacturing base.

Africa has the fastest-growing youth population in the world, with 60 percent of its population under age 24. A robust manufacturing sector could absorb this youth bulge with good jobs, while injecting some much-needed diversity into agriculture-reliant African economies.

But on the flipside of this enormous opportunity, the region is heavily under-represented in global value chains. Global value chains comprise all the people and activities involved in the production of a good or service and its global level supply, distribution and post-sales activities. GVCs are a defining element of contemporary globalization, allowing countries to participate in global trade by specializing in a specific part of the supply chain in which they are most competitive.

Why are African countries absent from the global value chains? Africa faces a host of obstacles in developing the competitive edge needed for entering into global value chains. At the heart of the challenge is the need for a coordinated, common trade policy and well-established institutions.

Trade policies and Africa’s global value chains potential

Yiwu, an inland city in Zhejiang province, China, currently produces nearly two-thirds of the world’s Christmas products. From September 2016 to August 2017 alone, Yiwu, with a population of just 1.2 million and more than 600 factories, generated $3 billion worth of Christmas products.

Yiwu’s case demonstrates how even a small city can have a competitive edge in the global value chains.

Europe, North America and Asia’s experiences indicate that building regional value chains are a key step towards participation in global value chains, increasing the market for exports and imports.

But intra-African trade is low, at just 9 percent, compared to Asia (54 percent) and Latin America (18 percent). In its recent study (link is external), the United Nations Conference on Trade and Development estimates that, on average, only 6 percent of the value-added exports to African countries are sourced from within the region.

There are variations across the different regional blocs. In the Economic Community of Central African States, for example, only 3.6 percent of imports were sourced from within in 2016. The Southern African Development Community is the highest performer for the same period, with 21 percent of exports and 22 percent of imports exchanged within the regional economic community. Botswana, Namibia and Swaziland happen to be the most integrated countries, thanks to their proximity to South Africa, the main Southern African Development Community hub.

The need for strengthened regional production networks – through trade facilitation – and strong institutions is much more compelling today, if Africa is to boost its participation in global value chains.

What’s Africa’s niche?

The blossoming of Kenya’s cut-flower industry, now employing about 100,000 direct workers and having the biggest market share for exports to Europe, generated about $500m in sales in 2013. It shows the niche that Africa could have.

The continent has immense agricultural potential – it is home to over 60 percent of the world’s uncultivated arable land. Developing a competitive agricultural value chain could improve the lives of more than 70 percent (link is external) of Africa’s population who depend on subsistence agriculture for food, jobs and income.

This potential cannot be realised when there is no clear-cut trade policy. There was excitement at the recent signing of the African Continental Free Trade Area (link is external) in Kigali, Rwanda, which forms an integral element of the African Union’s Agenda 2063. The African Continental Free Trade Area commits countries to phasing out tariffs on 90 percent of goods, with 10 percent of "sensitive items" to be phased out incrementally. It will also liberalise trade in services.

The African Continental Free Trade Area holds tremendous opportunity as it could boost intra-African trade by more than 52 percent, worth about $35 billion per year. Most importantly, it signals a step towards building strong regional value chains. Signing the agreement is a major milestone, but it will take the political will of African leaders to ratify and bring it into operation.

Fostering Africa’s regional value chains will require building strong institutions that will regulate and facilitate the production and distribution of goods and services. A major bottleneck to a functioning institution is the unavailability of adequate infrastructure. The continent has a huge infrastructure gap, which cuts an estimated 2.6 percent of its GDP growth every year (link is external). Playing host to many small-sized economies, cross-border infrastructure investment in Africa is significant to attracting investments, creating economies of scale and boosting participation in regional value chains.

Investing in infrastructure is also linked to developing a skills-based economy that prioritises technical and vocational training. Key to participating in global value chains is digitization and workforce skilled in information and communication technology. Yet the ICT sector receives the lowest amount of allocated spending across Africa, with a total of $853 million in 2016 (link is external). It is important therefore that African governments and private partners increase investments in ICT infrastructure.

This is where institutions like the African Development Bank come into play with regard to investments in transformative infrastructure would place the region in a better position to develop regional value chains and consequently compete favourably in global value chains. The African Development Bank’s High5 agenda (link is external) offers an important vehicle to unleash innovative finance to boost infrastructure.

Africa’s participation in global value chains will boost its manufacturing sector. But, making inroads into the global economy will require tapping into less-exploited regional value chains across the continent. Given Africa’s demographic structure and immense natural resource potentials, the world stands to gain from a strong manufacturing base through increased participation in regional and global value chains.

Victor Oladokun is Director of Communications and External Relations, at the African Development Bank
 
 
 

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