By Yeo Dossina, Head of Economic Policy and Research, African Union Commission, Arthur Minsat, Head of the OECD Development Centre’s Unit for Africa, Europe and Middle East and Rodrigo Deiana, Consultant, OECD Development Centre
Africa’s value chains hold the key to unlocking its productivity, deepening its economic integration, and strengthening its resilience to shocks. Yet regional value chains accounted for just 2.7% of Africa’s total value chain participation in 2019, compared to 26.4% in Latin America and the Caribbean and 42.9% in developing Asia according to the latest edition of Africa’s Development Dynamics, a joint report by the African Union Commission and the OECD Development Centre.
This means that African producers are only marginal actors in international production networks. The entire continent accounted for 1.7% of global value chain participation in 2019 compared to 1.5% in 2000. Currently, African countries mostly participate in global value chains by exporting raw natural resources and agricultural commodities, which other countries then process and produce.
The COVID‑19 pandemic was a reminder of just how important regional value chains are for economic resilience. New night light data showed that economic activity rebounded more quickly from the economic crisis in cities and industrial clusters that are better connected, and therefore more likely to participate in value chains.
Building local production capacity in strategic sectors like food and pharmaceuticals can help African countries lower their vulnerability to future crises by reducing an excessive reliance on imports. Currently, African countries import up to 90% of their pharmaceutical products, while 40% of their food imports in 2019 came from Asia. In 2020, nearly two thirds of African countries were net importers of basic food while the number of hungry people has risen to 250.3 million – roughly one fifth of Africa’s population.
Local production can also create better employment opportunities. In the case of agri-food value chains, jobs in food processing, marketing, transport and retail can generate up to eight times more output per worker than jobs in farming.
The good news is that the African Continental Free Trade Area (AfCFTA) offers new opportunities for regional value chain integration. To seize them, policy makers must tap into the strengths of Africa’s diverse regions and economies.
For example, Southern Africa plans to double employment in the automotive sector by 2035 thanks to its Automotive Master Plan, which hinges on well-integrated economies and cross-border production networks.
North Africa has huge potential to create jobs by transitioning to green energy sources. Each additional megawatt of renewable energy can generate five temporary jobs during the construction phase of renewable technology or infrastructure and two permanent jobs for operation and maintenance.
Central Africa’s forestry and timber sector already provides over 200 000 formal jobs. If properly regulated and managed sustainably, the sector can help preserve biodiversity and strengthen climate resilience whilst creating formal jobs and boosting tax revenues.
With more liberalised continental trade, East Africa could increase its exports to the rest of Africa by about 16%, with particular potential for its textiles (+30%) and agri-food sector (up to +26%). Similarly, West Africa can build on its food economy, which represents around 35% of regional GDP and accounts for two thirds of employment.
Meanwhile, the COVID‑19 pandemic has accelerated digitalisation and the demand for more sustainable production. While more needs to be done, Africa’s communication infrastructure and online traffic has grown rapidly. The share of internet traffic generated by African websites in the region grew from 11% in 2015 to 16% in 2020.
Stronger continental co-operation can bring about solutions to economic development issues that are more efficient and sustainable – both financially and environmentally. Whilst responsible for about 4% of global carbon and greenhouse gas emissions, Africa is extremely vulnerable to climate change and is having to deal with other environmental issues: in 2019, the number of premature deaths attributable to atmospheric and household air pollution in African countries was over one million[1].
We believe that boosting regional value chains in Africa hinges on three key priorities: private sector engagement, resource mobilisation, and continental integration. In practice, measures could include:
- Engaging the private sector to streamline business processes (e.g. logistics) and facilitate the adoption of digital solutions. Co-operation and partnerships on a project-by-project basis have not worked so far: seven countries account for 50% of PPP infrastructure projects in Africa. Rather, guaranteeing seamless and securing data flows within the continent can encourage the uptake of digital solutions to enhance productivity.
- Mobilising domestic resources, for example to boost regional production through public procurement, by expanding budget allocations for producers within the AfCFTA. Countries’ ability to raise revenue is already increasing: tax-to-GDP ratio in Africa rose from 14.8% in 2010 to 16.6% in 2019. Additionally, African countries are pursuing efforts to curb illicit financial flows.
- Reversing increases in trading costs to enhance regional production of strategic goods, and rationalising a fragmented intra-African investment landscape of currently almost 170 bilateral investment treaties.
Africa cannot afford to delay its productive transformation. Strengthening regional value chains is an attainable way of accelerating the push for prosperity across the continent.[2]
[1] Roy (forthcoming), Africa’s twin challenges of development and environment, OECD Development Centre.
[2] On 10th June 2022, our African Union Commission-OECD’s Africa Forum will seek ways to strengthen Africa’s place in the “emerging global economic order”.