Global value chains. Africa factory floor world

In order to significantly transform the economies of Africa from the current low-income level to middle-income status, value must be added to Africa’s large reservoir of natural and agricultural resources through processing and manufacturing activities – implicit in the transition process from predominantly agrarian to industrial economies. It is a fact that Africa’s recent relatively good growth performance has not been inclusive regarding its impact on poverty, due largely to the lack of diversification of its growth sources and an over-reliance on primary commodity exports. Also, growth has not necessarily led to job creation, and in some countries, has rather resulted in a rise in inequality!

The absence of significant industrialization in much of Africa is a missed opportunity for more robust, diversified and sustainable economic development.  The Asian industrialization experiences are the most successful among the developing countries, and there is therefore good reason for Africa to look at this model as a basis for its own industrial development. Specific industrial policies and programmes worked in Asia and can be replicated in Africa.  Among these are a sophisticated use of Global Value Chains (GVC) and the Special Economic Zones (SEZ).

Global Value Chain operations concern the global division of labour in production processes and its concurrent effect on the distribution of income and profits between participating countries. Involvement in GVCs presents an opportunity for African economies to move beyond producing raw materials and build dynamic and competitive manufacturing sectors capable of processing the continent’s abundant minerals and agricultural products. It also provides an opportunity to create sustainable jobs and stimulate inclusive growth, as new markets for value-added products evolve both in the continent and in the industrialized and emerging economies.

Special Economic Zones are designated areas possessing special regulations and economic incentives for organising production around processing and manufacturing activities.  China’s SEZs were key features of its early reforms, transforming coastal towns like Shenzhen or Zuhai into industrial centres within a generation. In the context of its development cooperation with Africa, China has initiated and supported the operation of SEZs in Algeria, Botswana, Egypt, Ethiopia, Nigeria, Mauritius, Tanzania, and Zambia.

African governments have been granting favourable conditions to foreign investors in the SEZs, which they believe will create jobs and boost export earnings.  With China graduating to higher-value industrial production, Africa stands to benefit from the outsourcing of lighter manufacturing businesses from China to African SEZs. It is estimated that China has 85 million light manufacturing jobs to export, and GVCs and SEZs could improve Africa’s chances to win a fair share of this number and reverse its declining share on manufacturing.

Long-term strategy for industrialization

The success of Global Value Chains, SEZs and other industrialization initiatives requires the creation of an enabling environment that enhances requisite domestic capacity and capability, particularly in respect of physical and social infrastructure, human capital, technological innovation, financial systems, and governance.

In addition, governments need to put regulatory frameworks in place for tackling market failures as part of a wider and all inclusive industrial policy. The creation of such an enabling environment will help realize the full potential of the African private sector.

Africa’s vast unexploited resources and abundance of labour provide opportunities for development of the private sector and attracting private investments for economic diversification and value-addition. The phosphate industry in Morocco has positioned itself in all parts of the value chain from the production of fertilizer to that of phosphoric acid as well as derivative products. Its industrial strategy has led to continued growth and leadership, as it has been punctuated by the steady strengthening of the production tools and a policy of ambitious sustainable partnerships, supported by a prudent financial policy. The Office Chérifien des Phosphates has grown from several hundred people at its creation and revenues of three million USD to revenues of 43.5 billion MAD (2010), and nearly 20,000 employees.

It should also be recognized that entrepreneurs in Africa continue to face greater regulatory and administrative obstacles and high transaction costs, which make doing business harder; these obstacles and constraints must be addressed in any industrial policy. Last but not least, deepening regional integration also offers the potential for Africa to tackle some of the challenges it faces in pursuing meaningful and beneficial industrial development.

The strategic importance of manufacturing (including agro-processing) in industrial policy

The creation of food-processing agro-industries can contribute to lifting a significant number of African rural dwellers out of poverty through the additional wage­ earning employment opportunities created.  In terms of an appropriate industrial policy, the high forward and backward linkages that can evolve from manufacturing and agro­ processing will contribute to boosting domestic investment, employment and output in the transformation process.

For instance, policies pushing local production processes in Egypt’s textile industry have led to increases in value-addition, contributing, in 2011, 5.6% of the Egyptian GDP, 27% of industrial production, and 18% of total commodity non-oil GD. Also, Ethiopia’s coffee industry supports 15 million people and contributes about 10% to its GPD with only washing, sorting and grading activities mostly taking place in-country. Imagine the returns should more value addition activities be undertaken in-country?

It is important to add that this strategic role of manufacturing in industrial policy in Africa should be supported by technology and innovation, which are crucial for economic transformation and development. Manufacturing, on the back of the prevailing Information and Communication Technology (ICT) revolution in the region, can be an important source of technological innovation in African economies as well as a conduit for the diffusion of new technologies to other sectors. Examples from Kenya, Tunisia, Rwanda and others show that investment in ICT and its enablers help create synergy and share information faster and more consistently. Tunisia’s Elghazala Technopark, Kenya’s iHub are home to more than 200 companies including subsidiaries of international ICT companies such as Microsoft and Google.

Despite the critical role of manufacturing per se in the transformation and development processes of African economies, it is important that African policy-makers do not seek to achieve industrialization at the expense of the agricultural sector.

Industrial policy has to address the integration of the rural sectors with the rest of the economy as well as the contribution that these could make to industrial development. This can be done by advancing agro-industry value-addition and the supply of wage goods that enhances the competitiveness of domestic enterprises in global value chains and export markets.

The olive oil sector in North Africa is a good example for opportunities to integrate the rural world with the rest of the economy through GVCs. Development of new competencies in the last steps of the supply chain will allow the sub-region to create sustainable competitive advantages. Ongoing efforts on brand management, development of new products in the medical and cosmetic sectors as well as control of the supply chain are being explored by North African countries. It is hoped that the implementation of these strategies will deepen sub regional integration efforts and build coherent national strategies.

The promotion of GVCs should be based on the complementarities between agriculture and industry, taking into account the potential of agricultural development to contribute to the creation of competitive advantage industry.  In many African countries, given the dominance of agriculture in their economic structure, the sector will continue to be an important source of foreign exchange needed to import intermediate inputs for domestic industries. A major challenge in industrial policy, including its implementation through the establishment SEZs, is how to create mutually supportive linkages between the industrial and non-industrial sectors of the economy.

Economic diversification and industrialization

Africa’s significant agricultural and natural resources are being exploited and exported mostly in their raw form, with little or no value  added to commodity exports.  Some of these natural resources represent irreplaceable, non-renewable asset, and their exploitation generally has weak economic linkages to the rest of the economy.

The upsurge in GVCs as a vehicle for economic diversification and the basis for resource-based industrial development is timely, given the increased demand for Africa’s natural resources, together with increased urbanization and consumer demand for processed goods within the continent. The domestic and sub regional markets should be a prime target.  However, accelerating industrialization through diversification of exports can also potentially contribute to the expansion of trade within Africa and between Africa and the rest of the world.

Job creation

Much has been said about the fact that six of the world’s ten fastest-growing economies (DRC, Ethiopia, Ghana, Mozambique, Tanzania and Zambia) are in Africa, recording at least a seven percent growth rate. But the evidence so far suggests that growth in the region has generally not led to massive job creation. As part of the process of structural transformation, African countries should take targeted actions at national and regional levels to establish production and trade links and synergies between different actors along the entire agri-business value chain, through the provision of incentives for bolstering private sector investments and competitiveness. Together with SEZs, which have sprung up all over Africa recently, the shift from primary production towards modern integrated agri-business will undoubtedly be crucial for job creation and poverty reduction.

Preliminary evidence from some SEZs in Africa indicate that they are indeed creating new jobs and that workers in these zones are on average paid more than workers outside of the zones. The macro-impact on jobs is still, nevertheless, limited to only a few countries. Ethiopia may be a good case for what needs to happen. The country is prioritizing light manufacturing growth, particularly the leather industry, as part of its economic transformation  programme, and  recently landed  a large investment  by a Chinese firm producing  designer shoes for the US and EU markets. Production is based at an industrial SEZ just outside Addis Ababa. It is estimated that over 25,000 jobs have been created through GVC and SEZ- FDI enterprises in the country.

Ghana’s free zone area is another example. It houses companies such as Nestle and L’Oreal and had generated about 30,000 jobs by 2012 of which only 1,000 are held by expatriates.  The Tangier Free Zone in Morocco, established a decade ago, had also by the end of 2010, attracted nearly 522 companies, USD 830 million investments, and created more than 50,000 direct jobs.

Conclusion

Major challenges regarding global value chains realizing their potential as a valuable tool of industrial development and economic transformation in Africa relate to overcoming constraints of poor governance linked to weak institutions, lack of infrastructure, and shortage of skilled and disciplined labour. While GVC and SEZ-fuelled industrialization has contributed to export and employment growth in countries such as Malaysia,  Thailand, Indonesia and Vietnam, and  turned China and South Korea  into  industrial giants,  Africa’s experience with industrial policy and its outcomes since independence has been largely disappointing.

Most of Africa’s economies are still driven by commodity production and export of agricultural and mining products, and the continent remains the least industrialized region of the world. If GVCs and SEZs in Africa are to be sustainable and successful as showcases of industrial progress and structural transformation – as they have been in Asia, there is a need for forceful policies. Specifically, industrial strategies have to be introduced as a matter of urgency to remove existing constraints on value-addition and economic transformation – weak infrastructure, unreliable energy supply, underdeveloped and inefficient private sector, and shortage of skilled labour.

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First published by UNECA