How should Sub-Saharan African countries think about global value chains?

globe puzzle

There is a surge of interest in the implications of global value chains. These encompass a wholesale reconceptualisation of trade statistics, a renewed focus on the importance of services in economic development, and the possibilities for leveraging GVCs to drive rapid and sustainable growth in income and employment, particularly in Sub-Saharan Africa.

The global value chain ‘narrative’ is contested. There is concern that it is being proffered to support the case for developed countries to bypass the WTO’s Doha Round, and that it is simply the latest effort to impose an ill-advised liberalisation agenda on developing countries.

We outline a case for Sub-Saharan Africa to take the GVCs ‘narrative’ seriously. In doing so we address the criticisms highlighted above. We emphasise that GVCs are a critically important feature in today’s world economy, not an ideologically-driven policy prescription. They have to be taken into account by any country seeking to develop exports and grow its economy. Acknowledging the existence and importance of GVCs need not prevent active government intervention to affect resource allocation. On the contrary, GVCs can help shape such measures, but ignoring their importance will doom African countries to failed strategies.

How ‘global’ are GVCs?
Strong forces are driving countries towards increased global integration. Reductions in transportation and communications costs have allowed firms to operate GVCs that take advantage of differences in national comparative advantage both through intra-firm trade and through networks that link teams of producers.  Increasingly, countries specialise in tasks rather than products.

These chains have created what Richard Baldwin calls ‘factory America’; ‘factory Europe’; and ‘factory Japan’ with China, Mexico, and parts of Southeast Asia acting as sourcing hubs lower down the value chain. China is the fulcrum of these sourcing networks, and as it moves up the development ladder an emerging ‘factory China’ is taking shape. Mexico is overwhelmingly a sourcing hub for US corporations, so its insertion into value chains is best considered regional. Similarly, Southeast Asian countries such as Thailand are integrated predominantly into Japanese value chains, while South Korea and Taiwan have emerged as significant outward investors within the Southeast Asian region and China, based on their own selective incorporation into GVCs. India plays an important role in services GVCs.

Other significant regional players such as Brazil and Russia, notwithstanding their economic weight and potential, are largely peripheral to this picture, particularly in manufacturing, although Brazil is a significant player in global agricultural value chains. Nonetheless, both countries are increasingly important outward investors in their regions, operating regional value chains centred on their domestic markets.

The success of China in particular – it has become the world’s largest exporter – shows how countries can flourish by integrating into GVCs. It is also a clear demonstration that exploiting the potential of these chains does not necessarily imply following the “neo-liberal” model.

Should Sub-Saharan Africa aim to ‘plug in’ to GVCs?
Sub-Saharan Africa, including South Africa, has not participated extensively in GVCs. Instead, the region has specialised mainly in exporting commodities to world markets. This need not necessarily inhibit development if resource endowments are well managed in the national interest. Nonetheless, increasing exports of manufactures is a priority for all African economies.

Unfortunately, this has proven problematic. To manufacture most products completely requires a diverse range of inputs, but in the first stages of development, these are unlikely to be produced locally.  Indeed, it is common for African countries to be unable to meet rules of origin that require local content as low as 30 percent of value-added.

It would seem to be more promising, therefore, to import complementary components and specialise initially in a particular segment of the value-chain. Relying on imported inputs requires low trade transactions costs. However, despite numerous regional trade agreements, the sub-continent remains fragmented by factors that raise trade costs, such as bad infrastructure, weak regulatory environments and poor border administration. It also scores poorly in international measures of connectedness.

This “trade in tasks” perspective will not reassure those who advocate high trade barriers. Nevertheless, across-the-board import substitution is simply not an option for countries that have very limited production capacity; it is not realistic for African countries on their own to attempt to develop GVCs on the scale of those coordinated by major multinational corporations (MNCs). With the exception of South Africa, no southern African economy could drive a GVC that might come close to reaching global scale and efficiency.

The more promising strategy, therefore, is to integrate into existing MNC value chains by building capabilities in specific tasks, on a globally competitive basis, and as part of a broader diversification strategy out of resource exports. The good news is that in the medium term an opportunity is emerging to leverage GVC relocations out of China, in response to the escalating “China cost”. This process is already underway, with the primary developing country beneficiaries to date being Vietnam, Cambodia and Mexico. In time, and if Sub-Saharan countries in a position to do so make themselves attractive enough to targeted MNCs, such investments could come the way of the sub-continent.

The qualifications are important: Sub-Saharan countries are not equally endowed in terms of the resources, institutions and geographic locations to attract manufacturing GVC investments in particular. Export-oriented FDI – the kind central to China’s development success – will require abundant, cheap and productive labour supplies suited to assembly-based manufacturing; good and cost-competitive infrastructure and logistics; and, most likely, coastal locations. Much also depends on the kind of GVC being targeted – a subject beyond the scope of this essay. But clearly such GVC investments are likely to concentrate in a few locations – raising the stakes for inclusive regional integration arrangements designed to share the benefits beyond the host country.

Policy toolkits
So what policy approaches will contribute towards building these kinds of dynamic comparative advantages?

First and foremost, multinational corporations operating global value chains need to import intermediate inputs, as cheaply and effectively as possible, in order to export. A blanket import-protection agenda logically entails keeping out imports, and thus undermines the rationale behind GVC attraction. Second, MNCs need access to cost-effective and reliable network services infrastructure – telecommunications; transport; energy; and possibly finance.

Such services, and the manufacturing operations they support, require skilled professionals to operate them. In most Sub-Saharan countries the necessary infrastructure is in short supply, finance is constrained, and domestic professional and technical services human resource pools are small. Third, operating just-in-time manufacturing operations requires speedy delivery of both imports for domestic value-addition, and exports of the resultant components. Therefore regulatory barriers at the border – particularly those associated with customs and various standard-setting bodies – can be crucial. Finally, if an MNC is to expose itself to sub-continental countries through FDI it will need assurances that its investments will be protected from arbitrary expropriation, and that the business case for the investment is not undermined through arbitrary policy or regulatory changes.

Deriving from these MNC needs flow several policy implications; herewith a non-exhaustive list:

  • Import liberalisation of goods, particularly those required for input into assembly processes. This is best done on an economy-wide basis, in other words not just to favour MNCs, but with a view to lowering costs in the economy as a whole. This could be supplemented by establishing special economic zones that promote manufactured exports and allow duty free imports.
  • Services liberalisation focused on attracting network services FDI and temporary importation of skilled personnel. This should not entail giving up the right to regulate, or promote private monopolies – in other words the liberalisation design should be properly conceived and implemented. The ensuing investments would benefit the country as a whole, not just MNCs.
  • Up-scaling investments in domestic education systems in order to train the skilled personnel required to work in the evolving modern parts of the economy that could service integration into GVCs.
  • Reform of customs and standards implementation agencies in order to build real trade facilitation attitudes and practices.
  • Cementing appropriate investment protection regimes.
  • Revising and simplifying rules of origin in destination markets, recognising that low shares in the value-added in particular products are not incompatible with substantial and genuine domestic production.

Furthermore, policymakers should be in constant contact with current and prospective investors to identify what they believe are binding constraints. Private-public collaboration is vital, and industrial policies require effective feedback mechanisms to ensure policies are effective and relevant.

Some of these proposals will serve as red rags to a bull. We don’t expect agreement from those advocating import-substitution behind high barriers, or “strategic industrial policies”, that pick “sectors” as winners. Certainly, attracting GVC investment requires strategic choices. Decisions about which MNCs to target for promotion efforts, and which types of public goods should be provided (e.g. infrastructure, regulations, schools, etc.) require a degree of selectivity. However, we draw the line at the point where it spills over into “picking (sectoral) winners” because we are deeply sceptical that Sub-Saharan countries have the ability to do so in weak institutional contexts that invite rent-seeking of the worst kind.

Similarly, building investment protection regimes does not mean selling the store to foreign companies. Investor responsibilities are an important part of the equation, and there are various international codes that should be drawn on to build checks and balances into investor protection regimes.

And measures that will attract GVCs such as improving institutions, investing in infrastructure, skills development, and private-public partnerships are all well recognised features of good development policy, and do not necessarily constitute a “neo-liberal agenda” per se.

Is our agenda designed to pull the wool over African (and other developing country) eyes in the World Trade Organization (WTO) Doha Round? The “new trade narrative” associated with the GVCs discourse has been portrayed simply as a stalking horse for one-sided trade liberalisation by developing countries, to make the world “safer” for developed country exports of goods, services, and capital.

In fact, while the Doha Round does encompass trade facilitation, most of the controversial issues are unrelated to the deeper integration measures required for the effective operation of GVCs. Indeed, the failure to develop agreements that do meet these needs is a reason why the round is stalled and as a response, unfortunately, the firms and countries that are developing GVCs are negotiating deeper regional trade agreements to meet their needs, bypassing the WTO in the process.

What we advocate is not incompatible with a WTO in which developing countries adopt diverse approaches. The desire for deeper integration and the concerns for policy space for some developing countries should both be respected. Instead of a system in which all members, both developed and developing, are required to adhere to all rules, a more attractive approach entails a variable geometry with mandatory core commitments supplemented by plurilateral agreements to which only some members belong. In the aftermath of a successful round, the WTO should become a forum, which members can use to negotiate agreements that would allow the WTO to compete with regionalism more effectively.In at least the area of trade facilitation, an additional plurilateral agreement could be very beneficial to developing countries since it would almost certainly be bundled with aid for trade investments.

Nonetheless, while agreements can promote the operation of GVCs, many of the measures we have advocated can be taken unilaterally. Ghana, for example, does not need to negotiate with anybody in order to reduce its import barriers on key inputs, protect investors, open markets to FDI, or improve customs procedures. Furthermore, such liberalisation would not necessarily diminish negotiating capital, since WTO market access negotiations take place on the basis of bindings – tariffs for goods and regulations for services

Concluding remarks

It is unfortunate that GVCs have been portrayed as simply the latest version of a Washington Consensus agenda rather than being recognised as providing opportunities that could help African countries achieve the goals of diversification and development.  African countries should be advised on which policies would be most effective in allowing them to exploit these opportunities, rather than being drawn into tired old debates about free trade versus protection. The old paradigm based on thinking about products and growth up clear vertical value chains, needs to be replaced by a new paradigm that thinks about “specialisation in tasks” and recognises that growth can take the form of horizontal participation in GVCs. It should also be noted that many of the measures that would enhance African participation in GVCs would also remove barriers to regional integration.

Peter Draper, Senior Research Fellow, South African Institute of International Affairs

Professor Robert Lawrence, Professor, Harvard Kennedy School and Senior Fellow, The Peterson Institute for International Economics.

These issues and more are covered in a recent World Economic Forum report which the authors of this piece participated in. World Economic Forum (2012) ‘The Shifting Geography of Global Value Chains: Implications for Trade Policy’, Geneva. Also see the World Trade Organization’s ‘Made in the World’ initiative (http://www.wto.org/english/res_e/statis_e/miwi_e/miwi_e.htm) and many reports produced by the Organization for Economic Cooperation and Development.

Ismail, F (2012) ‘Towards an alternative narrative for the multilateral trading system’, South Centre: Southviews 40(7), November.

World Trade Organization and Japan External Trade Organization (2011) ‘Trade Patterns and Global Value Chains in East Asia: from trade in goods to trade in tasks’.

Baldwin, R and J Lopez-Gonzalez (forthcoming) ‘Supply-chain trade: A portrait of global patterns and several testable hypotheses’, mimeo.

Lehmann, JP (2012) ‘China and the Global Supply Chain in Historical Perspective’, in World Economic Forum, op.cit.

Stephenson, S (2012) ‘Services and Global Value Chains’, in World Economic Forum, op.cit.

See, for example, the latest ‘Global Connectedness Index’ released by DHL, in which the sub-continent scores lowest of all regions.

World Economic Forum, op.cit.

Department of Trade and Industry (2009) A Trade Policy and Strategy Framework. Pretoria: Department of Trade and Industry.

Ismail, op.cit.

Robert Z Lawrence, ” Competing with Regionalism by Revitalizing the WTO”  in The Future and the WTO: Confronting the Challenges”(Geneva:The International Centre on Trade and Sustainable Development)  2012

This article was originally published in Bridges Africa. The full PDF of the latest issue of Bridges is available below.

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