In 2013, member states of the African Union agreed upon "Agenda 2063: The Africa We Want", working towards an integrated, prosperous and peaceful Africa, driven by its citizens, representing a dynamic force in the international arena. In line with this vision, developing integrated and complementary value chains for sustainable recovery and reinforcing operationalization of the AfCFTA will expand trade across the continent, which is crucial for Africa's development.
Over the years, world economies have become deeply integrated and interdependent, with global production networks and value chains (GVCs) amongst the major drivers of structural economic changes at the industrial, national, regional and global levels. Therefore, through leveraging of advancements in transport and communication technologies, multinational enterprises (MNEs) have the ability to offshore and outsource key components of their global strategies, through which they can increase their foreign direct investments (FDIs) and intra-firm international trade.
However, considering how the COVID-19 pandemic has crippled nearly every economy across the globe, there is consensus across the African continent on the need to build a strong and resilient economy to withstand future shocks. This will include developing an integrated and complementary African value chains, for successful operationalization of the African Continental Free Trade Area (AfCFTA).
A good example of mobilizing a value chain for the purposes of responding to the COVID-19 crisis is the case of pharmaceuticals in Africa, of which 90% come from imports. The African Medical Supplies Platform exemplifies continental cooperation on technology and connectivity for development of pharmaceuticals. Other examples include local development of COVID-19 tests in Ghana and Senegal, repurposing of idle factory to manufacture Personal Protective Equipment in Kenya and public-private collaboration to design and manufacture over 20 000 low-cost ventilators in South Africa.
The COVID-19 crisis gave further impetus for the development of digital trade in Africa. As early as March 2020, Africa’s businesses, with government support, were using new technologies that mitigated supply chain disruptions and facilitated trade in essential products such as pharmaceuticals. The creation of a continental e-platform procuring diagnostic tests and medical equipment from certified suppliers on the global market is an example of this. Businesses and populations also strove to adapt to the “new normal” by accelerating their adoption of technologies. In Ghana, more than a third of over 4000 firms surveyed implemented digital solutions during the pandemic. In Rwanda, mobile money payments transactions grew by 85% in 2020. On the 1st January 2021 the AeTrade Group in partnership with Ecobank, Ethiopian Airlines and DHL announced their partnership to support the Sokokuu.Africa E-Commercce Platform, a social enterprise designed to promote “Made in Africa” products and services to boost intra-African trade with an inclusive focus on SMEs, women and youth. Such interventions are coming forth inspired by the significant market opportunities which are brought about by the AfCFTA. Overall, the acceleration of Africa’s digital transformation led African policy makers to fast-track Phase III of AfCFTA negotiations to establish a continental Protocol on E-commerce to fully leverage the potential of intra-African digital trade.
The COVID-19 crisis combined with the implementation of the African Continental Free Trade Area (AfCFTA) beginning in January 2021, call for innovative policies to realize Africa’s full potential. Emerging trends in global investment and technologies cast doubt on the potential of past strategies to succeed in the new global and continental context.
For these reasons, the 2021 African Union Specialized Technical Committee (STC) on Finance, Monetary Affairs, Economic Planning and Integration will be held under the theme, “Developing Integrated and Complementary Value Chains for sustainable recovery and reinforcing operationalization of the AfCFTA.” The goal is to explore how the African continent can develop an integrated continental value chain to build a resilient economy; how digitalization of the African economy can help firms play a more active role in GVCs; develop the necessary logistics and infrastructure to facilitate international production networks and integration of value chains; and reinforce public and private financing to invest in African value chains.
Full details can be found in the Concept Note and working documents attached at the bottom of the page.
Here is an overview of the three thematic areas:
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Global Value Chains (GVCs) Conceptual framework
Currently, global trading in goods and services account between USD$18 - 20 trillion (WTO World Trade and GDP, 2019-2020) in global gross exports, with about US$5 trillion of this amount resulting from double counting. Double counting occurs when raw materials and intermediate inputs are imported for processing into one country, whose products are again exported for further processing or final consumption in another country. These cross-border production chains comprising several countries, regions or global networks is what is referred to as global value chains (GVCs). This comprises the full range of activities performed in the areas of design, production, marketing and distribution performed by firms, to bring a product from its inception to end use and beyond.
Within the context of globalization, activities that require value chain analysis are often carried out in inter-firm and intra-firm networks on a global scale, by focusing on the sequence of tangible and intangible value-added activities from conception of production to end use. Through GVC analysis, a holistic view is presented of how global industries govern their global-scale affiliates and supplier networks, as well as managing the business decisions which affects the trajectory of economic and social dynamics. In this regard, the GVC methodology explores four basic dimensions (Gereffi and Fernandez-Stark, 2011) which are as follows:
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Input-output Structure
This involves the input-output process of developing a product or service from its initial conception into a final product. For this process, a set of interconnected value chains are employed to add value as input passes through each stage. The specific segments for this chain may vary from industry to industry, however the main segments include research and design, input (raw materials), production, distribution, marketing and sales and in some cases recycling after use.
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Geographic Scope
Due to the concept of competitive advantage, value chains today are globally dispersed where different activities are performed in different parts of the world, based on the participating country’s leveraging assets. Usually, developing countries tend to offer raw materials (input) and low labor cost, while developed countries that are technologically inclined have a competitive advantage in the areas of new product design, research and development. As a result, the location/ site of some value chains are determined after geographical analysis is conducted to identify the lead firms of each segment of the value chain within a country, as well as data on industry exports and the segments where they are concentrated.
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Governance Structure
This process involves analyzing how the value chains are controlled and coordinated, when certain actors on the chain have more power than others. According to (Gereffi 1997), “governance structure” in this context refers to the authority and power relationships that determine how financial, material and human resources are allocated and flow within the chains. Usually, global commodity framework governance is described in terms of “buyer-driven” or “producer-driven” chains (Gereffi, 1994). This often requires suppliers to meet certain standards and protocols despite the fact that they are limited or the production capacity is scant. On the other hand, “producer-driven” chains are more vertically integrated along segments of the value chain, with the focus being leveraging technology and scaling advantages of integrated suppliers in the production of goods and services. Therefore, understanding GVC governance and how supply chains are controlled, helps determine a firm’s entry and development within the global industries.
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Institutional Context
This is the last GVC dimension which looks at how the local, national and international conditions and policies shape globalization for each stage of the value chain (Gereffi, 1995). As the insertion of GVCs depend heavily on local conditions (economic, social and institutional dynamics) to be fully operational, it is necessary that all required economic inputs (raw material, labor); infrastructure and financial resources are provided. This will require performing a local dynamic analysis by examining all actors involved, thereby opening the doors to carry out a more systematic comparative analysis to identify the impact of different features of the institutional context on relevant economic and social outcomes.
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Overview of Regional and Global Value Chains in Africa
Africa is relatively integrated in GVCs, largely forward integration. Recent estimates show that by 2015, around 42% of Africa’s gross exports either embodied foreign imports or went into further processing in destination countries, up from 40% in 2000 and higher than developing Asia’s (39%) and Latin America and Caribbean (34%). Forward participation accounts for 69% of Africa’s participation in 2015, largely through the exporting of natural resources and agricultural commodities. However, this seems to be changing as Africa’s backward integration has been growing faster than its forward integration, accounting for 80% of growth in GVC participation between 1995 and 2011. Several African countries such as Egypt, Morocco and South Africa have developed certain manufacturing industries that are highly competitive and integrated in GVC. The overall increase in participation has been almost entirely with partners outside the region, rather than with geographically close partners.
Regional value chains in Africa are more diversified with services and manufacturing sectors playing an important role. Manufacturing shows the highest level of global and regional value chain participation, agriculture the lowest. Vehicle manufacturing leads in terms of foreign value added embedded in exports, reflecting the structure of Africa’s automotive operations as assembly hubs in the production networks of the large international car companies. Among services, regional African value chains in finance shows a much higher share of value added from other African countries in a country’s exports than any other sector, attesting to the strength of regional banking groups.
Agriculture value chains also play a key role for economic and social upgrading in Africa. The sector employs more than 50% of the African population, agricultural value chain is critical to generate more job opportunities, promote development and reduce poverty within the region (African Agriculture Status Report, 2018). Over the years, business communities involved in the agribusiness sector in Africa have seen a resurgence of interest in promoting and enhancing value chains, as an approach to add value, reduce cost, diversify rural economies and increase income for rural households (Webber & Labaste, 2010). With an increase in demand for high value agro-products, plus an increase in sourcing of agro-products from Africa by international traders, domestic and regional markets in Africa saw an impressive growth for the African agricultural sector.[1]
Therefore, the goal is to ensure that renewed engagements will lead to an increase in financial resources and technical assistance, devoted to supporting market-driven and competitive value chains throughout the African region. In this regards, several African countries are trying to revive national and regional level industrialization efforts, through value chain development. Though most of their efforts are smallholder based and labor intensive, mostly centered on agriculture and raw material extraction, several countries have achieved success in joining GVCs in the apparel, food, automotive and sometimes business services.
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Opportunities for Value Chain Integration in Africa
Global Value Chains have steadily become a dominant feature of world trade and investment, comprising of countries from developing, emerging and developed economies. As the process of producing goods and services from raw materials to finished products has become increasingly fragmented, with production taking place where the needed skills and materials are available, both small and large companies have to participate in GVCs, by engaging one of the many types of chain activities, in order to reduce cost and increase quality.[2] However, geographical location, factor endowment and the type of product manufactured will determine whether a country’s value chain will be regional or global in nature. Nonetheless, there are immense opportunities to be harnessed by African countries, should the continent prioritize regional value chain development as a strategy to facilitate operationalization of the AfCFTA.
Through GVCs, developing countries have the opportunity to provide specific skills and high-quality products at least cost to GVCs, without having to create an entire industry in order to be competitive at the world market. Further to this, exposure to international markets opens the door for learning-by-doing to take place, where technology transfer and spillover effects allows for best practice management and learning of business methods between countries to materialize. Africa’s accelerated digital transformation is an opportunity in that context for all types of policies - from knowledge transfer, broad-based education and skills policies, financing value chains penetration, to products promotions and economies of scale (AUC/OECD, 2021).
Additionally, regional value chains can build on the comparative and competitive advantage of different countries to benefit from economies of scale. This can be achieved through the provision of regional infrastructure and support services which connect domestic private sectors providers to regional and global chains. These investments are critical to improve competitiveness of national economies, and enhance the flows of goods and services trade on the continent.
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GVC impact on employment, living conditions and economic growth
The emergence of global value chains has offered Africa new opportunities to integrate into the global economy. However, major challenges remain: the Africa’s Development Dynamics report show that Africa’s trade with the global economy has not led to the expected level of growth sustainability, poverty reduction and social equality (AUC/OECD, 2018). The outcomes associated with participating in GVCs are couched in terms of economic and social “upgrading”. Economic upgrading is associated with productivity gains, and income growth (more than standard trade). According to WDR (2020), in its cross-country studies, a 10 percent increase in the level of GVCs participation was estimated to increase average productivity by close to 1.6 percent and per capita GDP by 11–14 percent – or much more than the 2 percent income gain from increasing trade in products produced through comparable advantage and hyper-specialization.
Alongside productivity and income gains, GVCs can support social upgrading by delivering more (better) jobs and wages. Gains in domestic value added in exports are necessary but limited in Africa due to several important factors, such as gender imbalances, skills deficits, prevalent informal employment and unequal power relationships within value chains (AfDB/OECD/UNDP, 2014). Nonetheless, there are notable examples of successes in economic and social upgrading. Between 2000 and 2014, for example, the labour force of Ethiopian firms that were importers and exporters – a proxy of GVC participation – grew by 39 percent relative to when they were non-traders[3]. This increase in labour force further delivers better living conditions. Empirical evidence suggests that within three years of joining a manufacturing GVC, a country is more than 20 percent richer on a per capita basis, improving workers’ livelihoods and those of their families (WDR, 2020).
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Value Chains reinforcing AfCFTA operationalization
Beyond its ground breaking size, the AfCFTA signals a paradigm shift and a commitment to deeper integration of the continent by negotiating goods and services concurrently and mitigating the issues of multiple overlapping trade agreements on the continent. It is thus hailed as an economic game-changer for Africa’s development owing to its potential to boost intra-African trade and enhance value chains within the continent. It is estimated that implementing the AfCFTA will increase the volume of intra-African trade by 81% by 2035, and increase the volume of total African exports by 29% (World Bank, 2020). It is also envisioned that the AfCFTA agreement will yield economic gains for the African continent, including $16.1 billion welfare gains, a GDP growth of 1 to3%, employment growth of 1.2%, and a 50% decline in Africa’s trade deficit (WEF, 2021). Simulations by the IMF also show that AfCFTA may significantly increase Africa’s ranking on the Global Competitiveness Index[4].
Strengthening RVCs can help exploit complementarities between different economic activities within Africa. Trade can deepen regional production systems and the linkages between complementary factors, which include: differentiated labour costs and productive capabilities, disparities in natural resource endowments, geographic issues such as maritime access, as well as existing geopolitical issues and trade agreements. However, the average level of regional sourcing currently remains under 15% in Africa (AUC/OECD, 2019). Besides, the overall increase in GVC participation has been driven mostly by partnerships with actors outside of the region.
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Challenges for value chain integration in Africa
Despite these significant opportunities, Africa is still confronted with numerous challenges which could hamper the benefits of value chain development within the region.
One of the fundamental challenges facing Africa’s value chain is how to achieve structural transformation on the continent and raise domestic value addition in Africa’s exports. A large share of exports of the region comprises basic commodities with very little value addition. For instance, of all the challenges facing Africa’s agribusiness sector, the failure to add value to crops before they are exported has proved the most intractable. West Africa is the world’s largest producer of cocoa, with Côte d’Ivoire, Ghana, Cameroon and Nigeria producing over 70% of global output but around 75% of the crop is exported as raw beans to Europe and Asia, with only a quarter staying in the region for processing into cocoa butter, powder and (a little) chocolate. This leaves the lion’s share of value addition to be captured by the confectioners and retailers at the end of the value chain.
Poor infrastructure also hinders the flows of production and trade, as well as the competitiveness of African producers, both soft and hard infrastructure are pertinent. There are challenges of inadequate storage facilities for perishables; inadequate fulfilment systems including branding and packaging services, poor communications systems; and deficient maintenance of road, rail and port networks. There is also an underinvestment in quality infrastructure in Africa.
Furthermore, access to finance is a critical constraint for African producers and processors, especially SMEs. The 44 million micro, small and medium-sized enterprises in Africa needed USD 404 billion of finance in 2017, creating a financing gap of approximately USD 331 billion, or 16% of the continent’s GDP (AUC/OECD, 2021). Uncertainty in the production process and value addition, the lack of collateral among SMEs and underdeveloped financial market makes it difficult for banks to finance value addition, all the more so in the context of the economic crisis brought about by the COVID-19 pandemic.
The lack of capacity and skills, particularly for SMEs, has been a limiting factor in Africa’s participation in GVCs. Human capital development has a positive effect on the performance of SMEs and their integration into the global supply chain (ITC, 2018). Investment in formal and on-the-job training is necessary for the growth and development of SMEs.
