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

Hope for Africa’s youth

Click to go to the African Economic Outlook site

Today’s post is from Roopa Chauhan, in collaboration with the OECD Development Centre

If Mohammed Bouazizi had lived in Dar es Salam, Tanzania or Durban, South Africa, he might still be alive today. Like millions of young Africans, Bouazizi didn’t have a regular job, but managed to scrape by as an informal market trader, selling vegetables out of a wooden cart. Being fined repeatedly and having his stock confiscated proved too much to bear and Bouazizi committed suicide by setting himself on fire. He would have remained just as anonymous as countless other victims of injustice had news of his death not provoked the protests in Tunisia that led to the Arab Spring.

Youth employment is the special theme for this year’s African Economic Outlook. It analyses the economic factors that indirectly contributed to Bouazizi’s demise, namely a rigid formal sector unable to provide sufficient employment opportunities for Africa’s youth. Yet, the AEO remains positive in its overall assessment of Africa’s prospects, which are generally good even though the Arab Spring set growth back from 5% in 2010 to 3.4% in 2011. Commodity prices, key to many African economies, have also dropped recently and may continue to fall, but their levels are still relatively high and have so far supported growth in exporting countries.. Despite this and other issues related to the global recession (inflation, the rise in food and fuel prices, etc.), Africa’s economy continues to expand, creating favorable conditions for governments to tackle unemployment, a serious problem in most African countries, especially for youth.

A discouraged youth population is the risk governments face if their policies don’t become more inclusive and fail to stimulate employment creation. So, how can African countries unlock the potential of their youth and offer them a hopeful future? The solutions and problems differ depending on the level of development. The rate, quantity and quality of employment differ depending on a given country’s income level, and the policy challenges are therefore also different. In middle-income countries, the quantity of employment is more of an issue than in lower-income countries, where the quality of employment is a problem for first-time job seekers. Formal employment is higher in middle than in low-income countries, but overall employment is lower because middle-income countries do not provide as many informal employment opportunities as LICs, which creates an “employment bottleneck” to accessing the formal sector.

Generally, all African countries, need to recognise the economic benefits of the informal sector where millions of Africans find their first jobs and where those with the talent build successful businesses. The formal sector needs to be flexible enough to absorb the informal sector. One way of accomplishing this is to encourage private sector growth, which is “the most important vehicle for creating jobs for young people in Africa”. However, until the private sector can do this, those employed in the informal sector need adequate government support. For example, in Dar es Salaam, Tanzania and Durban, South Africa local governments provide licenses to street traders. This practice legitimises their status, strengthens their ties to local authorities and renders them less vulnerable to harassment. Bouazizi would have certainly benefitted from such a license.

Education should also be high on African policymakers’ agenda. African youth need skills that match employers’ expectations. For many African countries, graduates with degrees in engineering and information technology are more likely to find jobs than those who have degrees in the social sciences or humanities. In order to encourage students to obtain degrees in science and technology and produce employable graduates, the Ethiopian government introduced a policy designed to shift the balance of subjects in all public universities away from the humanities’ on a 70:30 basis.

Finally, the dynamism of the rural sector needs to be exploited. It provides employment not only in agriculture, but in small-scale, non-farm related activities (mechanical repair shops, hair dressing, handicrafts, textiles, etc.). It has “potential as an engine of inclusive growth and youth employment”. Youth in rural Africa are endowed with the entrepreneurial spirit, more so than their urban counterparts: 23% of youth in rural areas have plans to start their own businesses; in urban areas only 19% have similar ambitions. Their creativity can benefit the African economy as a whole, so it needs to be channeled in the right direction.

The bottom line is that African economies are expanding. They have weathered the global economic crisis rather well with a projected growth rate of 4.5% in 2012 and 4.8% in 2013.  This growth needs to be accompanied by job creation so that all Africans can reap the benefits, not just the elite.

Today, Africa has 200 million young people, which makes it the youngest population in the world. By 2045, this number will double. African youth are also becoming more educated: 42% of 20-24 year olds have a secondary education. In 2030, it will be 59%. Who would like to see a vibrant, capable generation of workers sacrificed because of inadequate policy choices? Hopefully, not African politicians. The stakes are too high and economic outlook is too positive for those in power not to take advantage of their best resource: Africa’s youth.

Useful links

The 2012 International Economic Forum on Africa: Promoting Youth Employment

Development Centre Director Mario Pezzini talks about youth employment

Africa: Towards Sustainable Growth and Economic Diversification

Today’s post is contributed by Karim Dahou, Executive Manager of the NEPAD-OECD Africa Investment Initiative. Click on the logo to go to the Initiative’s website.

 There is a new mantra in this post-crisis world: the road to global growth and development is now officially a two-way street. In this changing world order, the so-called “advanced” economies are more dependent than ever on developing countries’ growth for global economic stability. For Africa, analysts are now predicting that even the poorest countries have a role to play in global recovery. But to make the most of these new prospects, Africa will need to diversify its economies, reduce reliance on natural resource revenues and encourage sustainable growth in key strategic sectors for sustainable growth and development, such as telecommunications, agriculture and tourism.

These issues will be at the heart of discussions on Africa at the UN headquarters in New York on October 11, when three key partners for Africa’s development will launch new analysis on how African governments can make the most of their growth and development potential. Led by the NEPAD-OECD Africa Investment Initiative and the United Nations Office of the Special Adviser on Africa, the work aims to improve recognition of the increasingly important contribution of Africa to global economic growth while providing advice on how to reduce vulnerability to external shocks and food price instability.

In addition to releasing a joint report on economic diversification in Africa, the UN, NEPAD and the OECD will present policy briefs on issues including foreign direct investment, infrastructure, debt, and aid in the continent. Economic diversification requires physical infrastructure, technical skills, knowledge of outlet markets and access to finance. But Africa suffers from inadequate infrastructure, weak regulatory frameworks, expensive credit and a lack of risk-mitigation instruments. While more foreign direct investment could bring much of the missing finance, knowledge and skills, regional co-operation may help provide economies of scale, reduced costs and improved market access.

There is unlikely to be much room for dissent on the study’s findings on the benefits of economic diversification for Africa. The continent’s dependency on the exportation of natural resources and primary commodities has been bluntly exposed by the global financial and economic crisis. The decline in demand and prices of oil and minerals was largely responsible for reducing Africa’s growth rate from 5.7% in 2008 to 1.9% in 2009. As a result, many of the continent’s economies have suffered a severe setback in their efforts to meet the Millennium Development Goals by 2015. Economic diversification could reduce Africa’s vulnerability to external shocks and contribute to achieving and sustaining long term economic growth and development in the continent. Only broad-based economies, active in a wide range of sectors, and firmly integrated into their regions, can develop robust growth that is less dependent on the vagaries of the global markets.

Useful links

The OECD Factblog gives more details of investment flows to Africa 

African Economic Outlook

OECD work on development issues

OECD Development Co-operation Directorate

OECD Development Centre

The Sahel and West Africa Club (SWAC/OECD)