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New evidence on Africa’s integration into global value chains

6 June 2014
by Guest author
Click to read the Outlook

Click to read the Outlook

Today’s post is by Kjartan Fjeldsted of the OECD Development Centre

This year’s African Economic Outlook shows that Africa’s integration into global value chains (GVCs) is greater than one might have expected—in fact, Africa is the world’s third most GVC-integrated region, ahead of North America and South East Asia.This is calculated by looking at value added—the difference in price between the goods or services an industry produces and the sum of the intermediate inputs of goods and services it needs to produce its own product (intermediate inputs used by a car manufacturer for instance could include steel, software, or seats).

On the other hand, the greater part (about 60%) of the integration is due to Africa’s role as a source of inputs for other countries’ exports—of which a large part is presumed to be raw materials—rather than to its role as a production hub. (In technical terms, its forward integration is greater than its backward integration).

In fact, Africa’s share of global trade in intermediate goodsis only 2.2%. But that percentage is nonetheless higher than Africa’s share of world GDP. What is remarkable, however, is that the increase in backward integration—the extent to which Africa imports goods or services, processes them and re-exports them—has increased at a rate greater than that of China and is second only to India since the mid-1990s. Africa did start from a relatively low base, but the rate of increase is nonetheless noteworthy. As an illustration of this, the average foreign value added (the value of imported goods or services used to make a product)in African exports increased from about 14% in 1996 to about 24% in 2011, which is fairly close to the world average.

Looking closer at the figures, Southern Africa and North Africa are contributing the most to this integration into GVCs. These two regions were responsible for around 75% of the total increase in exports of foreign value added in Africa over the period 1995-2011, with Southern Africa at 48% and North Africa at 27%. South Africa alone accounted for around a quarter of the total increase. Relative to their level of exports, however, the results are mixed. While Southern Africa still performs the best, North Africa actually does relatively poorly and East Africa and the Indian Ocean region much better.

The Southern African region also enjoys the greatest share of intra-African value added in its exports. In fact, the AEO 2014 presents new evidence that South Africa is playing the role of a “headquarter economy” in the Southern African region, much like Germany in Europe, the U.S. in North America, and Japan in East Asia—although the effect is somewhat less strong. By contrast, intra-African value added in North African exports is quite low, reflecting the region’s greater integration into the Euro-Mediterranean area.

What’s driving Africa’s integration in global value chains?

The African Economic Outlook 2014 suggests that Africa’s increasing integration into GVCs is due to a number of things. At a basic level, the predominance of dispersion forces (the division of production into ever smaller tasks that can be detached geographically, falling transport costs, etc.) that has been affecting the global economy as a whole seems to have finally reached Africa. Secondly, the growing African consumer market is making it more attractive to locate production facilities on the continent, thereby attracting market-seeking foreign direct investment (FDI). Indeed, the FDI that is flowing to Africa has been rapidly diversifying away from the extractives sector—in 2012, 73.5% of greenfield investment in Africa went to manufacturing and infrastructure-related activities. Thirdly, the pressure on manufacturing wages in other parts of the world, and China in particular, is reducing the cost advantage of Asia vis-à-vis Africa. And fourthly, greater political stability and better governance are making investment in Africa a less risky prospect. Nonetheless, there are still a host of obstacles to overcome—like the business environment, infrastructure and relatively uncompetitive labor costs—for Africa to be able to fully take advantage of GVCs. But the changes that are taking place are encouraging.

Is Africa turning the corner?

Overall, the African economy is clearly undergoing diversification and becoming more integrated into the world economy—not just as a source of inputs but also as a production hub. However, whether the current pace of change is sufficient to achieve lasting structural transformation is another question. Countries that have achieved structural transformation have tended to grow at significantly higher rates for a much longer period of time, so Africa may not be quite there yet.

In order for GVCs to contribute positively to structural change, policy also needs to adapt. Integrating GVCs at low value-added activities can be beneficial for countries—especially low-income ones—in terms of creating employment and spurring growth. But ideally countries will also want to be able to gradually move into higher value-added activities to avoid getting stuck at the bottom of the value chain.

To do so, countries need to adopt value-chain specific policies rather than merely national or sectoral ones. This is because value chains are firm-led and opportunities to grow depend crucially on the power of different actors within the value chain of which a country is a part, which in turn depends very much on the structure of the global market of the product in question. For instance, the global market in chocolate is highly concentrated and dominated by a handful of large firms, so producers of cocoa tend to be very dependent on the lead firms. On the other hand, the global market in apparel is relatively open and easy to access, but also highly competitive.

African governments have largely woken up to the potential of GVCs to affect their development: GVCs are now specifically addressed in the development strategies of a majority of African countries. Hopefully, today’s strategies will in turn translate into tomorrow’s success stories.

Useful links

Compare your country The African Economic Outlook presents key economic indicators for Africa as a whole and for each country

Understanding global value chains

 

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