Regional Value Chains: Africa’s Way Forward
Regional Value Chains: Africa’s Way Forward
LONDON: While some observers look at Africa as the next factory of the world for labor-intensive manufacturing activities, African nations may find more success by pursuing regional rather than global value chains.
The concept of regional value chains, increasingly perceived as a viable alternative to the paradigm of global value chains, has long dominated the thinking of international institutions as a primary model for Africa’s industrialization. Indeed, the African Union sponsored African Industrialisation Week in December and focused on regional value chains in the pharmaceutical industry as the theme.
With Africa’s industrialization a priority, development finance institutions promote export-oriented diversification and inclusive and job-generating growth on the continent. A common narrative is Africa pursuing more manufacturing activities as wages rise in China. This scenario promises linking Africa into dynamic global value chains connected to more developed world markets, including China.
Attempting to duplicate China’s industrial experience in Africa as a whole is questionable, even if one sets aside the numerous historical, economic, political, institutional, sociocultural and geographic differences distinguishing the two places. Any such attempt poses two major risks:
● First, African countries are likely to attract low value-added manufacturing activities with low labor costs, requiring unskilled workers as the main production factor. The stage, though probably inevitable, could unleash competitive pressures among countries and result in a race-to-the-bottom on social and labor regulations. The lowest bidder would take all in such a game – especially considering that most countries do not offer lower labor costs than China. The strategy might promote divisiveness on the continent, precisely at a time when African governments are seeking to improve cooperation and deepen regional integration, developing a united front.
● The second risk is less immediately tangible. China started to industrialize during the 1970s, but today’s global industrial outlook is characterized by greater uncertainty. In the medium-term, factory automation and other labor-saving technologies could lead to the disappearance of many manufacturing jobs, particularly lower-skilled ones. For countries hoping to attract labor-intensive activities, this might result in a “premature deindustrialization” for any undertaking the early steps of the industrialization scale. Whereas developed nations, as well as rising powers like China are already designing the future of manufacturing, latecomers such as African countries may not want to rush into a model rapidly becoming obsolete. The same applies to the energy that these industries would consume, with a noticeable – and worrisome – growing appetite for coal-powered plants, many of which are funded by China.
Regional value chains offer a response to both risks. These regional variants of global value chains can be viewed as production systems from input provision to commercialization, spread beyond national borders to exploit existing complementary activities within a region, such as differentiated labor costs and productive capabilities, natural resources or geopolitical features that include maritime access, trade agreements with extra-regional partners and more.
Broadly, target countries can pursue two models of regional value chains, whether they are outward looking and supply global markets or are inward looking with development intended for regional consumption markets.
The first is export-oriented and occurs when countries in the same region combine forces, organizing regional division of labor, collectively strengthening their position to climb a specific global value chain as a regional block. This requires them to coordinate incentives, intra-regional trade agreements, services promotion and shared infrastructure development, to support sector and channel trade as well as investments with extra-regional partners. A typical example of such activity is the integration of ASEAN manufacturers into the electronics global value chain, led by Japan, China and the Asian Dragons. While government support is critical for establishment of regional value chains, these are mainly exogenously-driven by multinational companies’ outsourcing investments. Countries must foster strong ties with multinationals, convincing them to locate massive upstream value chain activities, including raw materials, components and spare parts, and build the required industrial fabric in the region. This is why such regional value chains present limited, albeit promising, opportunities in Africa – for example, the automotive sector in North Africa and the clothing sector in Southern Africa.
The second model focuses on import-substitution – but at the regional scale, offering fresh breath to a classic idea, while avoiding the pitfalls of yesteryear. Import-substitution strategies in the 1970s suffered from small markets and dominance of publicly owned companies. More than 40 years later though, markets are already larger – but more importantly, regional markets, beyond national boundaries, are already established with strong private-sector presence.
Import-substitution regional value chains consider products both produced and consumed within the same region, creating potential complementarities, merging production capabilities with consumption potential. This type of regional value chain has the advantage of being intraregional and, as such, does not face barriers to entry, such as Brazilian soybean or Chilean salmon, largely processed and consumed within Latin America. Even more so, these regional chains are somewhat protected from foreign competition, allowing for gradual development. Furthermore, by focusing on regional sales, these chains do not face the intense and, at times, nakedly superfluous standardization and quality norms and constraints imposed by developed export markets.
Regional value chains are particularly well suited to serve regional tastes and cultural preferences. The food industry offers the clearest example. A number of food crops across the continent produced and consumed regionally such as yam, cassava, potatoes and aquaculture products are hardly subject to international competition – in part due to their perishability – and could thus be developed and grown thanks to regional chains, protected in part by local tastes and dietary habits. This regional model is applicable to other industries where idiosyncratic factors determine consumption behaviors and market opportunities, including pharmaceuticals and tourism.
In many ways, regional value chains are hardly a novelty and already exist on the continent – just without the formal label – including the tea industry in East Africa, livestock between the Sahel and Gulf of Guinea, or cassava in West Africa. Such chains present an opportunity, a starting point several steps ahead, to industrialize these streams of goods and add value to the products. As regional value chains emerge, the more they will organically develop, especially considering unstoppable regional trends of growth, consumption and industrialization. The process requires both state-led integration and private sector participation.
Africa’s private sector firms are the best placed to take on the task of leading the development of regional value chains, thanks to their established presence. They bring hosting experience and ability to navigate their local markets and business environment, both in terms of financing and value creation, making them competitive in local and regional spheres. Nonetheless, these firms face a multitude of challenges – including access to credit, persistently narrow domestic markets, high production costs and low technology appropriation. The benefits offset their technical frailty as innovation for regional value chains will be organizational and operational rather than technological. Such constraint-based innovation allows them to tap into the sizable bottom-of-the-pyramid markets across the continent. To lead on these regional value chains, African governments and their private sectors must pursue new relationships.
Maxime Weigert and Mohamed El Dahshan are partners at OXCON Frontier Markets and Fragile States Consulting. The can be reached on Twitter.