How Africa can move up the value-chain

By John Stuart, tralac Associate[1]

Africa is a resource-rich continent, specialising in fuel, mineral and agricultural exports. Statistics on revealed comparative advantage (RCA) show that Africa exports proportionally more primary products than most other regions. Crude materials, which include ore, metal, wood, cotton and other raw textiles, are the continent’s dominant product category, followed by tobacco, various agricultural products and fuel. One consequence of specialising in primary product exports is that other countries get to enjoy the benefits of the value they add to these raw materials. These benefits can range from higher profits for their corporations to a more diversified industrial base and consequently better insulation from economic shocks, as well as a more highly skilled, higher-earning workforce.

The countries that benefit most from global value chains are those that buy raw materials, or partially beneficiated materials, and transform these into finished products. In the language of value chain analysis, these countries have a high level of backward participation in global value chains. African countries, by contrast, currently have a high level of forward participation in global value chains; they sell intermediate products to other countries, which add a far greater amount of value to the materials than their original cost.

The process by which countries advance from being mostly forward-participants to mostly backward-participants, is called upgrading, and it is the goal of manufacturing-driven development. When it comes to Africa, certain production sectors are in fact more backward than forward, such as textiles and clothing, transport equipment and an aggregate of smaller manufacturing sectors, according to the World Bank.

However, African countries currently do not have a competitive advantage in any of these backward-participating production sectors. Additionally, the size of these sectors is not significant when compared with Africa’s primary-producing sectors. This suggests that Africa could upgrade its manufacturing production by:

  1. Becoming more globally competitive in Africa’s more backward-participating sectors: textiles and clothing, transport equipment and ‘other manufacturing’.
  • Developing production based on African countries’ own primary resource sectors. Given that Africa is so abundant in natural resources, transport costs can be lower[2] and supply chain shocks are less likely. Getting rid of non-tariff barriers within a country or the African Continental Free Trade Area (AfCFTA)[3] will further facilitate the flow of these products.

The above may be good advice, and the time is ripe as the AfCFTA opens the door to free trade within the continent and with it, freeing-up movement of merchandise and raw materials. But it is much easier said than done. Upgrading involves myriad policy measures with desired (but not necessarily achieved) responses from investors and corporations. The global trading system is ruthless and competitive; unless revisited, laissez-faire policies will work to keep Africa as a primary product producer.

However, a number of policy actions can be taken as a starting point:

  • Reforming tax, trade and industrial policies in favour of investment and business creation and expansion. This means creating tax and other investment incentives, ensuring the use of special economic zones, sectoral policies to coordinate upstream and downstream production and the removal of tariff or non-tariff barriers.
  • Paying attention to human capital by developing skills and investing in education, for instance, by subsidising education in fields such as engineering, ICT and management.
    When it comes to low- and medium-skilled labour markets, labour legislation should be designed to balance worker rights with the need of firms to hire and fire.
  • Since upgrading involves high-skilled workers, and global markets for these workers are competitive, African countries must create working environments that are attractive to them. Modernised urban and suburban areas with proper municipal services, desirable neighbourhoods, fixed broadband, schools and good transport networks will not only help to attract immigrants but also to retain domestic talent.
  • Avoiding over-regulation and regulatory intrusion. Governments and authorities should avoid the temptation to increase the effective tax burden on small, medium and micro businesses through compliance burdens and spurious permitting and tariffing. These policies do nothing but suppress business activity or keep business activity in the informal sector. Entrepreneurs should be given support and encouraged to grow start-ups.

According to the World Bank, a 1% increase in value chain participation could boost per capita incomes by more than 1%. The benefits of upgrading in value chains are clear, but the path to achieving this is difficult given that most African countries remain primary product producers. But with bold policy action and hard work, African countries can seize the unique opportunity the AfCTA presents to move up the value chain.

[1] Learn more about how developing regional value chains can support a sustainable recovery from COVID‑19 in Africa’s Development Dynamics 2022 (overview).

[2] Distances between production nodes in Africa are undoubtedly shorter, but to realise the potential of lower interior transport costs, more investment into infrastructure is needed (I am grateful to Sébastien Markley for this point). One region where good quality and extensive infrastructure does aid intra-REC trade is the Southern African Customs Union (SACU).

[3] The AfCFTA aims at duty-free trade in goods and services between the 55 members of the African Union and has already entered into force.