Value chains in Africa: what role for regional trade?

By Eyerusalem Siba, Economist and international expert in private sector development, spatial industrial policies and sustainable urbanisation

The Covid-19 pandemic and associated containment measures hit businesses hard, exposing them to record levels of uncertainty, disrupting value chains, and reversing countries’ hard-earned progress in economic and social development. The knock-on effects of these disruptions on GDP, foreign direct investment (FDI), trade and industrial production have been highest among globally integrated economies that have smaller domestic markets, rely heavily on vulnerable sectors and have limited capacity to adjust.

Weak insertion in global value chains  

Africa’s relatively weak performance in global value chain (GVCs) trade (averaging at 8% of GDP, compared to 11% in developing Asia and 14% in high-income countries over 2000-2015 in Figure 1) might have spared it from the knock-on effect of external shocks. However, Africa’s GVCs exports have largely followed global trade trends, which have themselves been buffeted by the 2008 financial crisis, uncertainties around trade agreements, trade conflicts between major trading partners, and the emergence of labour-saving technologies, which have dampened incentives to outsource manufacturing. Africa largely continued to supply raw materials to countries at the high end of the GVCs task chain, while other developing regions deepened regional trade in GVCs.

Notes: The five African Union regions are classified as defined by the Abuja Treaty.
Source: Data presented here are based on the World Development Report 2020 GVC Database, produced by the World Bank.

The pandemic has exacerbated trade tensions, hastened prospects of recalibration of GVCs and accelerated digitalisation. As global supply chain disruptions continue to challenge the recovery of GVCs, countries are increasingly adjusting their GVC participation in search of resilient and sustainable global production networks. The latest investment forecasts foresee a gradual shift in supply chain diversification and regionalisation, as supply chain resilience shapes location decisions on new investments. Meanwhile, major trade initiatives such as the African Continental Free Trade Area (AfCFTA) and the Regional Comprehensive Economic Partnership are expected to influence global trade patterns. The AfCFTA is expected to address key trade barriers, attract critical investments needed to build regional processing capabilities and launch into transformative regional and global value chains.

Reliance on vulnerable sectors

Labour-intensive industries, such as textile and apparel manufacturing, were the most vulnerable to global disruptions caused by the pandemic, while essential goods industries (e.g. pharmaceuticals, food and chemicals) and industries for which the pandemic increased demand (e.g. medical, computers and technology) quickly bounced back from initial disruptions. Meanwhile, the latest WTO trade forecasts indicate a slow recovery of proximity-related services (e.g. transport, travel and tourism), while trade in commercial services and digitally-delivered services remained resilient. The travel and tourism share of GDP in Africa dropped by 49.2% in 2020, in line with the global average, while Africa suffered disproportionately higher job losses (contracting by 7.2 million). Despite a fall in FDI in both manufacturing and services sectors in 2020, the food, beverage and tobacco industry ranked first in the value of net cross-border mergers and acquisition sales (ahead of pharmaceuticals and extractive industries), with ICT topping the greenfield project announcement list.

Africa’s GVCs participation is concentrated in a few resource-based and light manufacturing sectors, with limited representation in advanced manufacturing and services. Nearly 50% of Africa’s GVCs participation was in mining and related sectors (e.g. petroleum and minerals) in 2015. Transport services were among the top five GVCs participation sectors in all African regions except for Southern Africa where finance and business services were in the top five. Light manufacturing (e.g. agro-processing, textile and clothing, and food and beverage industries), which employs a bulk of the labour force and faces high levels of global competition, dominates Africa’s participation in manufacturing GVCs. Africa’s Northern and Southern regions – which are also the continent’s most integrated regions – lead Africa’s participation in electronics, machinery and metal products GVCs, which are among the sectors that registered faster growth globally in the two decades leading up to the pandemic.

UNCTAD’s framework for international production configuration puts a spotlight on GVCs-intensive manufacturing industries highly exposed to potential GVCs restructuring. These include GVCs with a long chain of production stages and those with value added geographically concentrated in few locations. The high-risk capital-intensive sectors are likely to be exposed to reshoring-conditional on recovery policies and investments that prioritise supply chain resilience and self-reliance in strategic sectors, offsetting relocation costs. Meanwhile diversification and redundancy may be a relevant resilience strategy for labour intensive industries (e.g. textile and apparel). Within manufacturing GVCs, regional processing industries trending towards sustainable and local sourcing (e.g. food and beverages), are primed to benefit from regionalisation of market seeking GVCs.

Outside of manufacturing, location bound GVCs (transport and logistics, extractives and agriculture-based industries) will likely remain unaffected by GVCs restructuring. However, the global push for decarbonising transportation and global production networks as well as investments in renewables will shape the future of resource-based GVCs activities and inflow of FDI to these sectors in Africa. Policies to support a just transition to a low carbon economy, as well as to build green industries and renewable energy capabilities, is crucial for the continent.

Financial and business services were among those facing medium exposure to GVCs restructuring and with scope for diversification as a resilience strategy. Commercial services remained resilient due to increased adoption of digital financial services and governments’ Covid response measures against spill overs of the crisis in the financial sector. For instance, the digital economythrived due to increased digital technology adoption, with a significant surge in market valuation of technology enabled services in health and education services, e-commerce, and digital financial services. South Africa remained resilient and gained a reputation as an adaptable business environment and an FDI destination for business process outsourcing (BPO), while Rwanda is making significant investments in its competitiveness and capturing emerging GVCs opportunities. However, Africa’s GVCs trade in services is yet to reach the top of the iceberg.

Limited flexibility to adjust

Business continuity through digitalisation and diversification has boosted the capacity of both domestic and multinational businesses to adapt to the pandemic. However, asymmetric access to digital technologies and finance led to divergent recoveries among vulnerable firms and especially small and medium size enterprises (SMEs). While most countries in the region instituted policy support encouraging business diversification and investment into personal and protective equipment and essential goods and services, firms in developing countries received comparatively weaker support to adapt, recover and future proof their place in the post-pandemic world. With supply chain resilience becoming a top strategic priority for countries and multinational enterprises, location choice of global production networks will increasingly depend on the size of the regional market and the resilience and flexibility of the local industrial base.

As African countries build back, they must address key bottlenecks to trade and industrialisation, reinforce resilient and sustainable GVCs participation and promote new modes of insertion into GVCs, for instance by developing regional value chains, digitally delivered services and the green economy, leveraging ongoing trade policy and economic recovery reforms on the continent. Key to AfCFTA’s success are transparent, simplified and business friendly rules of origin and streamlined cross-border investment promotion policies to facilitate regional production networks, enterprise regionalisation, and cross-border trade-in-services.

Learn more about how developing regional value chains can support a sustainable recovery from COVID‑19 in the forthcoming Africa’s Development Dynamics 2022.