Aid only for the neediest? Official development assistance after 2015

Click to read the book
Click to read the book

Today’s post is from Jon Lomøy, Director of the OECD Development Co-operation Directorate (DCD-DAC)

According to the most recent OECD aid statistics, in 2013 official development assistance (ODA) reached a record high of USD 134.8 billion, representing a rise of 6.1% compared to 2012. While this is good news, more detailed analysis shows worrying trends. The growth was largely (about 33%) in non-grant ODA – mostly loans – which tends to go to middle-income countries. On the other hand, grants, which typically flow to less developed countries, lagged behind, increasing by only 3.5% (excluding debt forgiveness). What’s more, bilateral aid to sub-Saharan Africa fell by 4% in real terms. So while ODA is on the rise in overall terms, the countries with the greatest need are being left behind.

It is important to put these figures in context when we consider the future of ODA. Traditionally seen as the mainstay of development, in recent times ODA’s volumes and growth rates have been outstripped by foreign direct investment, market-based instruments such as non-concessional loans, and remittances. In addition, many developing countries now have solid domestic resource mobilisation capabilities that are helping them to finance their own development.

Nonetheless, a recent OECD study of external financing options available to developing countries shows that ODA is still a vital resource for the least developed countries, where it represents 75% of financial flows from external sources and the equivalent of 59% of domestic tax revenues. In the upper middle income countries, on the other hand, it accounts for only 6% of external financial flows and is the equivalent of just 0.8% of domestic tax revenues.

Another study takes a look at economic growth forecasts to 2030, estimating which developing countries will no longer qualify for ODA because their average per capita income, measured as average share of Gross National Income (GNI), is too high. At present, the threshold is just over USD 12,000. The projections show that 28 of the 148 countries currently on the OECD Development Assistance Committee’s (DAC) List of ODA Recipients could move above the threshold – but that still leaves many others for whom ODA will continue to be critical.

Does this mean that post-2015, ODA should be targeted only to the least developed countries? While in many ways this is – and should be – the future of ODA, the issue is not so simple.

It is, of course, important to continue to provide support to the neediest countries to ensure that they are not left behind. The OECD Development Assistance Committee is considering building on the current United Nations target, which calls on providers of development assistance to give 0.15-0.2% of their country’s gross national income (GNI) to the least developed countries, to create an even more ambitious target.

Yet it is not only a question of where we use development co-operation, but how.

Providers of development co-operation can help upper-middle income countries overcome stubborn development challenges, for instance, by sharing knowledge and providing technical assistance. Colombia used official development assistance to the tune of just USD 15,000 (two technical missions to Colombia in 2012) to fund a capacity development programme for tax administrators. Tax revenues collected by local authorities jumped from USD 3.3million to USD 5.83million in just one year.

We also need to get smarter about using ODA to leverage private flows for development. Mechanisms like government guarantees can take some of the risk out of investment, encouraging private investors to become active in places they would not usually go. This can help to bridge large funding gaps and bring down some countries’ dependency on ODA. At the same time, it can be particularly useful in many of the least developed countries and fragile states, where large amounts of money are essential to put in place the infrastructure they need to power economic growth, create jobs and reduce poverty.

Finally, the targets that will replace the Millennium Development Goals (MDGs) in 2015 will encompass environmental, economic and social sustainability challenges for all countries that are much broader than today’s MDGs. Funding these new goals will require inputs from across the board – from public and private sources and from all communities and countries. Development co-operation will have a major role to play in helping to bridge the development–environment divide.

Making ODA fit-for-purpose in the post-2015 world is a major challenge – and a major focus of the OECD in 2014. If we make it work, all countries will benefit.

You can read more about this work programme here.

Useful links

Aiming high: the values-driven economic potential of a successful TTIP deal

About TTIP
Click to find out more about TTIP from the EU

Today’s post is from EU Trade Commissioner Karel De Gucht

A year ago, Presidents Barroso and Obama launched negotiations for a Transatlantic Trade and Investment Partnership, or TTIP. A deep and comprehensive free trade deal in generic terms, but much more than that from political, commercial and civil perspectives. We have now held five formal negotiating rounds, and it’s time to re-state the importance of this deal not only to us in Europe and the US, but for people around the world.

The overall figures are impressive. The EU and the US trade goods and services worth around EUR 2bn every day, and together we make up one third of global trade. Independent assessment indicates that both sides could gain significantly in terms of GDP growth over ten years (EUR 120bn in the EU, EUR 90bn in the US) – and equally so does the rest of the world (EUR 100bn). Such opportunity for growth is not something to leave by the wayside in a time of hesitant economic recovery.

But these macro figures don’t tell the whole story. The EU and the US have much more in common than our trade relationship. We share values: on democracy, on human rights and freedoms, and on a global rules-based trading system. Each of us enjoys a vibrant civil society and business sector, and broad political debate over things that matter. TTIP’s potential to deliver results depends very much on our ability as negotiators to meet the interests of all our stakeholders.

That’s why we are looking at three distinct areas: market access, regulatory cooperation and trade rules. Market access is a traditional element of trade negotiations. Tariffs between the European Union and the United States tend to be low in general but are still very high on certain important products, such as dairy and textiles. Even for products that have lower tariffs, such as chemicals, the volume of trade is so large that the tariffs add up to a significant extra tax on business.

Getting results on market access for our services industries is also important. Both the EU and the US have very strong services sectors, ranging from finance and commercial services, via the professions such as doctors and architects, to transport and environmental services. TTIP would help our world-class industries to be able to establish themselves and work in the US without many of the restrictions that they face today. Furthermore, EU firms are highly competitive in many of the things that governments need to buy: for example energy services, rail transport equipment, aircraft, pharmaceuticals and textiles. TTIP could open up more public tendering by the US federal government and US states to EU bids, generating new contracts and jobs for European firms.

Market access isn’t everything, however. From a global perspective, the regulatory and rules parts of TTIP are key. In the regulatory part of the negotiations, we are looking at how the EU and the US could cooperate better together in the future on new regulations, for example in breakthrough industries such as medical devices. We are also finding ways to align existing regulations, for example to stop unnecessary, unjustified duplication of tests, or to remove barriers to trade caused by two different ways of achieving the same result. These may seem unimportant by themselves, but taken together, reducing these trade obstacles would give a significant boost to transatlantic trade. If the authorities of both sides work together from the early stages, we could avoid problems for businesses, share our limited resources and probably produce better outcomes.

As I have underlined many times, this is not about lowering regulatory standards. Where we agree with each other we will see what we can achieve together; where we don’t, we will continue with our own approach.

Given the economic heft of the US and EU, any shared standards, policies or practices that we can agree in TTIP would almost certainly have spill-over effects on the rest of world trade. Producers in developing countries would not have to choose between US and EU market requirements – they would be able to start selling to the other side without incurring extra regulatory costs. The influence of strong US and EU standards would make it more worthwhile for other countries to develop their own policies based on the transatlantic model. In areas such as trade in raw materials, high environmental and labour standards, the role of state-owned enterprises and the importance of intellectual property rights, a strong transatlantic statement of intent would help steer the multilateral debate in a positive direction for traders, workers and consumers worldwide.

This, then, is our ambition. A trade partnership that opens our markets wide for goods, services and public procurement, that provides a framework for us to cooperate in the long term on regulatory issues affecting trade, and that sets high standards across a range of globally significant economic issues.

After five rounds, we are making good progress – but it won’t be easy. Many of these things are deeply intertwined and we need to work hard to get the right results for our citizens. This is a complicated choreography to work with: with Member States and US states, EU and US regulators, EU and US legislatures, transatlantic business and civil society. That’s a lot of voices to bring together. So a key element to success is making sure that we listen to the important concerns and interests of our stakeholders. This is what I have in mind when talking about the current EU consultation on investment protection, about the importance of safeguarding the EU’s high standards of consumer and environmental protection, and about what TTIP could deliver for the global economy.

In this electoral year for the EU and the US, I want to highlight that it is Congress and the European Parliament – as well as the heads of 28 EU Member States that form the European Council – that will eventually need to examine, debate and approve the deal. The public debate about TTIP is very welcome in this context, and I look forward to continuing to take full part in it.

Useful links

OECD work on the benefits of trade liberalisation

Karel De Gucht on how the European Union sees the TTIP negotiations

Message in a bottle: Producers not taxpayers should pay for the waste they generate

Waste of money
Waste of money

Today’s post is by Maroussia Klep of the OECD Environment Directorate

Have you ever wondered who was paying to recycle that plastic bottle you just threw away? Until recently, it would have been collected and – to the extent possible – recycled by municipalities with the use of public money. But this is changing and today most used bottles are managed directly by their manufacturers.

This evolution came with the introduction of the concept of Extended Producer Responsibility (EPR). Put in simple terms, EPR shifts responsibility away from municipalities onto producers for managing and recycling used products; although municipalities and private recyclers may still be involved for certain tasks. This implies that a soda company is required to finance and organise the recycling of its bottles when they are discarded by consumers. The same applies of course to other sectors.

The movement first started in a few European countries in the early 1990s and developed rapidly across industrialised countries. Today, most OECD countries have implemented EPR policies in key sectors such as packaging, electronics, batteries, tyres and vehicles. In recent years, emerging economies in Asia, Africa and Latin America have also started to follow the move. There are now approximately 400 EPR programmes in place around the world.

EPR policies have proven to be successful in both, increasing collection and recycling rates, and in shifting the financial burden of waste management onto the shoulders of producers. Sharp improvements in recycling rates can indeed be observed following the introduction of such schemes, for example in Japan where the recycling of containers and packaging waste increased by 27% between 1997 and 2000 (1.25 to 1.59 million tons). In addition, these policies can reduce public spending and hence taxpayers’ money spent on waste management activities. In France for example, about 15% of the budget spent on municipal waste management is now financed by producers via EPR policies.

The OECD is playing an active role in encouraging and supporting governments in the implementation of EPR policies. In 2001, the organization published a Guidance Manual for Governments that provided the basic concepts and key policy recommendations on the topic. A Global Forum will take place this month in Tokyo to take stock of the evolution of EPR and will present a unique opportunity for a global, multi-stakeholder audience to exchange on their experience in designing and implementing such programmes. The outcomes of the discussions will help shape updated policy recommendations.

OECD work on EPR forms part of a broader effort to move towards resource efficient societies. The total volume of material resources extracted, harvested and consumed worldwide reached 62 billion metric tonnes (Gt) in 2008, a 65% increase since 1980 and an estimated 8 fold increase over the last century. It is projected to reach 100 Gt per year by 2030, generating increasing pressures on environmental resources as well as waste. Going for green growth and a resource efficient economy is thus a major environmental, development and macroeconomic challenge today. In this context, the use of policies that ensure sustainable materials management, building on the principles of the 3Rs – Reduce, Reuse, Recycle – is crucial. The OECD is therefore advising governments on Sustainable Materials Management (SMM) policies aiming to reduce the amount of resources that human economic activity requires and to diminish the environmental impacts from their production and consumption.

As expressed by Simon Upton, Director at the OECD Environment Directorate, “Sustainable materials management helps to address the social, environmental and economic impacts throughout the life-cycle of a product or material. This can improve resource productivity and competitiveness. EPR policies are an effective tool to engage producers in that process.”

EPR demonstrates that the involvement of all actors – governments, producers, recyclers, consumers – is necessary to address global environmental challenges. So, next time you drink a soda, just bear in mind to throw the bottle in the right bin, and the whole chain will keep running.

Useful links

OECD work on material resources, productivity and the environment

OECD work on resource productivity and waste

Time to terminate termination charges?

See your correspondent and avoid termination charges with the Skype Cinephone!
Avoid termination charges with the Skype Cinematophone!

Today’s post is by Alexia Gonzalez-Fanfalone, Sam Paltridge and Rudolf van der Berg of the OECD’s Science, Technology and Industry Directorate

It used to cost well over $2 a minute to call between OECD countries. The breakup of telecoms monopolies and the introduction of competition means callers now pay as little as $0.01 per minute, or may even have unlimited calls as part of a monthly bundle. Outside the OECD countries, the price has been dropping too, accompanied by a huge increase in traffic. Calls from the United States to India increased eight fold over 2003-2011 for example. But not everybody has benefited. Despite a massive increase in the number of telephones in Africa, international calls to that continent from the United States remained stagnant during this same period.

A new OECD report International Traffic Termination looks at one aspect of why some consumers are losing out: the termination charges imposed on calls coming into a country. The report finds empirical evidence that imposing mandatory higher charges for the completion (termination) of international inbound traffic suppresses demand. Moreover, governments that impose higher termination charges do not see their revenues increase proportionately. Traffic into Pakistan for example has plummeted over the past two years following the creation of a cartel for international telephone calls.

The number of telephone calls from the United States to Asia has dramatically increased in recent years compared with those to the rest of the world. While the spectacular rise in traffic is undoubtedly associated with the growing importance of Asian economies, other factors are at work. One is that much of this traffic reflects tremendous growth in calls between the United States and India. Indeed, people in the United States now make more calls to India than to Western Europe, taking advantage of the growth of mobile telephone penetration. Traffic between the United States and Europe, both of which have high broadband availability, has shifted to substitutable services over the Internet (e.g. VoIP). India still has a low broadband penetration, meaning people in the United States call mobile telephones.

Outgoing calls

High mobile penetration and low broadband availability are, however, only part of the story. Full liberalisation of communication markets plays a role. Africa, like India, has experienced remarkable growth in the number of mobile subscribers but still has low broadband penetration. Yet calls to Africa have not increased in the same manner as for India. International inbound traffic to India (measured by minutes or calls) was less than Africa’s in 2003 but grew to 10 times higher by 2011. At the same time, the rates to call India decreased tenfold. The difference lies in whether governments let the market set the rates for incoming calls or impose a single rate through an official cartel.

Between 2003 and 2011, for example, the termination charges paid by telecommunication operators carrying traffic from the United States to the rest of the world halved on a per minute basis (from around $0.09 to $0.04). For the highly competitive India market, rates dropped from more than $0.14 to less than $0.02 over the same period. In Africa on average, rates increased, suppressing demand for calls to people on that continent.

Fig 2

A growing number of African countries have introduced a government mandated standard termination surcharge for incoming international traffic even though they have liberalised their domestic communication markets. For example, in 2010 Ghana, which has one of the most competitive domestic telecommunications markets in Africa, set a surcharge that raised the international termination rate by 46%-73% for fixed and mobile services respectively from an average of $0.11-0.13 to $0.19. Authorities in other countries, especially in neighbouring ones, take reciprocal action once someone makes the first move, although independent competition authorities see the perils of such approaches, and in Pakistan, for example, have successfully challenged their introduction.

Some argue that raising international termination rates increases the amount of capital available to invest in infrastructure or simply contributes to general government revenue. The OECD report, however, argues otherwise. When Pakistan raised its rates from $0.02 to $0.088 in 2012, traffic fell from more than 2 billion minutes per month to 500 million according to government officials. There was no increase in revenue but rather a massive loss in consumer welfare.

This is partly due to suppressed demand in foreign countries and partly to various players bypassing the system. The price difference between international and domestic termination rates becomes so large that a “grey” market is created to bypass the official rate by terminating traffic at local levels. This criminalises an activity that in a liberalised market would be viewed as a routine practice, and creates costs in monitoring traffic and in law enforcement.

Communication network operators are also disadvantaged. Between 2009-2011, African countries that did not raise termination rates received 36% more termination revenue per line than those that did. Where rates were raised, not only were there fewer calls, they were shorter.

The argument that the burden is progressive since it falls upon those with a greater ability to pay is also false. Customers with the financial and technical means may use broadband and VoIP to bypass the system. The standard rates only come into effect when calls terminate on a public network where the end user may be unable to afford an Internet connection. As a result the users most likely to be affected, are the diaspora calling relatives and friends in such countries. In many cases, therefore, the people most affected at both ends of the call are likely to be those least able to afford increased prices. Unfortunately, the number of countries that have raised termination rates in recent years, by eliminating competition, is expanding.

Two other reports were released by the OECD this week on communication market developments. Access network speed tests reviews the approaches being taken in OECD countries to measure broadband performance by reviewing information on official speed tests. The development of fixed broadband networks examines the development of fixed networks and their ability to support the Internet economy.

Useful links

Internet traffic exchange: 2 billion users and it’s done on a handshake

Developments in mobile termination rates

International cables, gateways, backhaul and IXPs

Navigating OECD’s work on education with GPS

Today’s post is by Andreas Schleicher, Director of the OECD Directorate for Education and Skills

We use GPS as a navigation device all the time, in our cars, our phones and on our computers. Now you can also navigate the world of education through the OECD’s Education GPS. This free online resource connects you to the satellites of OECD’s available data, research and analysis information and provides a mapping tool with real-time evidence to help guide policy-makers in the most efficient way as they plan their reforms. Visualisations and tables provide an interactive experience generating an understanding of education policies and key findings. You can search through a variety of topics such as teachers, finance and equity and find clear and concise insights and policy options or compare information across countries on a wide range of indicators, such as teaching hours per year, attainment of tertiary level education, and private / public expenditure on educational institutions.

The tool is in three parts, the first component, ‘Analyse by country’ allows you to draw from a wide variety of education indicators and data to create your own country report based on your own customizations.

Analyse by country

The second tool, ‘Explore data’ is a wealth of knowledge giving you easy access to the OECD’s educational data from sources such as PISA, Survey of Adult Skills (PIAAC), Education at a Glance and numerous additional data sources. You can compare countries’ education systems through their successes in providing a high-quality education for all.

Explore data

The third and most recent addition to the GPS tool, ‘Review education policies’ allows you to travel through the OECD’s extensive knowledge base of research and analysis of education policies and practices across the world. Through this tool, you can explore numerous topics ranging from equity, finance and funding, teachers, internationalisation, in addition to how each of these topics is interconnected. With ‘Review Education Policies’, you can navigate through related links which take you directly to the relevant publications, where you can explore these sources by author, title and year. You can navigate a handy glossary for statistical terms. There are also sections for Key insights and Policy options that give quick one-liners for easy comprehension.

Review policies

Educating oneself about education is the most powerful tool of all. I encourage everyone to discover the information on education that is available through the Education GPS tool.

Useful links:

OECD’s Education GPS

Analyse by country

Explore data

Review education policies

Is there more to life than football? “Transformar o Jogo Bonito em Vida Bonita”

BLIToday’s post is from Anthony Gooch, Director of the OECD Public affairs and Communications Directorate and joint project leader of the OECD Better Life Initiaitive

In a phrase that has become immortal in football mythology, one of the greatest managers in the history of “O Jogo Bonito” (the beautiful game as Brazilians call it), a Scotsman named Bill Shankly of Liverpool FC, encapsulated its importance for football obsessives the world over: “Some people believe football is a matter of life and death… I can assure you it is much, much more important than that.

Few of us would go that far, but hundreds of millions of people will join in the four-yearly global communion about to begin in Brazil, the spiritual home of “O Jogo Bonito” through whatever means of communication at their disposal all the way through to its climax in mid-July. Football, and sport generally, is hugely important to people’s lives from all sorts of perspectives: whether it is those who derive enjoyment through playing or watching, those who are involved in the enormous economic activity that it generates, or society at large that is heavily influenced by it from the way some people dress to how they speak, the music they listen to and the role models they follow.

As the world prepares for its 4-yearly bout of Football Fever, it’s important to spare a thought for what happens when the final whistle blows, the game is over and the crowds go home. At the OECD, we’ve looked at “the day after”, the legacy of organising big sporting events. In 2010, before the London 2012 Olympics, we produced a review of the possible Olympic and Paralympic legacy for London, arguing that big events can make a positive, lasting contribution to their hosts if they build on strengths that are already there, you don’t have to start from scratch. In London’s case, we said that “it will be important to tell the story of east London’s inhabitants very much better. The area has a rich history as a centre for trade, logistics, and production, for hardworking people of exceptional character, for immigration and asylum… and for making lives worth living in ways they would not have been lived otherwise.”

That last part about making lives worth living in ways they would not have been lived otherwise is the core of the argument. Our Brazilian partner, the Fundacao Getulio Vargas have undertaken analysis on the impact of Football for the Socio-Economic Development of Brazil (FGV Projetos Cadernos 6/13 no22). Like the Olympics, staging the World Cup is expensive. Brazil will have spent BRL26 billion ($11 billion) on football stadiums and airport, port and urban mobility upgrades for the competition. But this accounts for only 0.7% of overall planned investment in Brazil in 2010-14 and most of the impact has already been felt, while for host cities and states, official estimates of World Cup-related spending range from just 0.24% to 12.75% of expected 2014 fiscal revenues.

Even so, 11 billion dollars is a huge sum of money, and millions of Brazilians who have emerged from poverty in recent years may think excessive to spend that much on football. With a growing lower middle class that pays taxes, demand for better education, health and transport is only going to increase. According to a recent survey by the Pew Research Center, over 60% of the population think hosting the event is a bad thing for the country because it takes money away from schools, health care and other public services. Only 34% think the World Cup will create more jobs and help the economy. A similar number (35%) thought hosting the competition would help Brazil’s international image, compared with 39% who said it will hurt and 23% thought it wouldn’t make any difference one way or the other.

The question of what makes life worth living, how best to balance competing interests, capacities and objectives is one that governments are trying to answer all the time. The OECD’s stated aim is to help develop “Better Policies for Better Lives”, but we know that, like football fans debating the greatest team of all time (Brazil 1970? Real Madrid 1960?) there’s no definitive answer. Therefore it is important to give citizens, voters and taxpayers the information and the voice to empower them to communicate to policymakers and shapers all over the world, their opinion about what counts for them.

To do so, we are launching O Indice para Uma Vida Melhor, the Portuguese version of the OECD’s Better Life Index on 9 June with football legend Pelé, Brazil’s Sports Minister Aldo Rebelo and our partners for O Indice the Fundacao Getulio Vargas. The Index is an online instrument that enables citizens the world over to create their Index of well-being and quality of life according to what is important to them. Users of the Index are asked to attribute relative importance to 11 topics that contribute to well-being to generate their Index. These include not only material aspects such as income, jobs and housing, but also quality of life aspects such as sense of community, education, environment, governance, health, safety, work-life balance and, last but not least, life satisfaction or a sense of happiness. Currently the Index captures data for 36 countries worldwide and this number is set to increase over time. An overall description of the quality of life in each of these countries is also provided, including how it performs across each of the 11 well-being dimensions. Freely-accessible OECD reports and other sources of information are provided to empower users.

Since the launch of the first English version, more than 4 million people in 184 countries have used the OECD Better Life Index, which has been referenced internationally as a model for presenting material on measuring well-being. Portuguese will be the sixth language version enabling over 250 million more people to access the Index in their mother tongue as is currently the case for English, Spanish, French, German and Russian speakers.

A completely new feature we are also unveiling now reveals for the first time what more than 65,000 people around the world believe to be the most important factors for quality of life based on the Indexes they have completed and shared with us in the last 3 years. This living database (www.OECDBetterLifeIndex.org/responses), viewable via an interactive map, allows people everywhere to see what matters to users of the Index. For citizens, the Index provides a way to be better informed about policies that that impact their well-being whilst for policymakers and shapers it begins to give a sense of what is most important to the people they work for which should help them improve their performance amd increase citizens’ satisfaction and engagement.

We have chosen the World Cup in Brazil as the ideal moment to launch an online global multilingual campaign “Is there #more2life than football?” to raise awareness not just in Brazil but across the globe on what really matters to people in their daily lives, what constitutes well-being and quality of life in the 21st Century.

For Matias Deodato de Castro e Melo, a character in one of the great Brazilian writer Machado de Assis’ Historias sem data (Stories without a date), “a felicidade é um par de botas” – happiness is a pair of boots. Whatever your team, we hope their boots will bring you some happiness over the coming weeks. Whatever happens to those teams and fans, whether they win or lose, after “O Jogo Bonito” it’s time to build “A Vida Bonita.

Useful links

New evidence on Africa’s integration into global value chains

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