What Is Africa’s Experience in Global Value Chains? Are Nontariff Measures Limiting the GVC Participation of Firms in

links were broken. The need to customize inputs, coupled with quality sensitivity, makes matching buyers and sellers particularly important.

If demand for a firm’s goods suddenly increases, the firm cannot easily scale up by buying more foreign inputs from some centralized market.

Typically, only a handful of suppliers worldwide can provide the additional customized inputs to scale up. 3. Exchange of intangibles. Furthermore, firms in GVCs do not trade only in tangible goods with other members of their value chains.

GVCs often involve large flows of intangibles, such as technology, intellectual property, and credit. The exchange of these intangibles is much more complex than that of simple goods or services. 4. Limited contractual security. The lock-in effects and flows of intangibles within GVCs are particularly relevant given the limited contractual security governing transactions within these chains. GVCs often involve transactions that require a strong legal environment to bind producers together and preclude technological leakage. Yet they often lack this strong legal environment because cross-border exchanges of goods cannot generally be governed by the same contractual safeguards that typically accompany similar exchanges within borders. As a result, GVC participants have repeated interactions to provide implicit contract enforcement. As with matching frictions and relationship specificity, this force contributes to the “stickiness” of GVC relationships.

This concluding chapter explores some concrete questions to assist African policy makers in promoting regional and global value chains. First, what has been Sub-Saharan Africa’s experience with GVC participation so far? For example, many Sub-Saharan African countries are producing and exporting agricultural products, but they are only marginally involved in food GVCs. Could NTMs be one of the reasons for such limited participation in food product GVCs? Furthermore, could restrictive services sectors explain the overall limited GVC participation of SubSaharan African firms in general? Finally, what will it take for Africa to create regional value chains? To that end, which regional policy options would complement the 2019 entry into force of the African Continental Free Trade Area (AfCFTA)?

What Is Africa’s Experience in Global Value Chains?

As documented in World Development Report 2020 on GVCs, Africa has joined GVCs in the apparel, food, and automotive industries and in some business services (World Bank 2020). But the region remains a small actor in the global economy, accounting for just 3 percent of global trade in intermediate goods.

Leading Sectors for GVC Participation

African countries’ exports tend to enter at the beginning of GVCs, where a high share of their exports enter as inputs for other countries’ exports, reflecting the still predominant role of agriculture and natural resources in the region’s exports. Botswana, the Democratic Republic of Congo, and Nigeria have become integrated into GVCs through exports of oil and other natural resources. But Ethiopia, Kenya, and Tanzania have seen faster GVC integration, sourcing foreign inputs for their export-oriented businesses. Most of their integration has occurred in agribusiness and apparel, especially in Ethiopia and Kenya; in manufacturing in Tanzania; and also, although to a lesser extent, in transportation and tourism. Overall, GVC participation in some of these countries (Ethiopia, Kenya, South Africa, and Tanzania) grew by 10 percentage points or more between 1990 and 2015, close to what Poland and Vietnam—now success stories—experienced over the late 1990s and 2000s, respectively.1

Regarding overall participation in agriculture GVCs between 1990 and 2015, countries such as Ethiopia, Ghana, Kenya, and Rwanda stand out, with increases in GVC participation close to 10 percentage points or more. In contrast, Madagascar and resource-rich economies like Sudan have seen their integration in agriculture value chains drop by 5–30 percentage points.

African countries integrated in food value chains include Ethiopia, Kenya, and Tanzania, suggesting that those countries have been successfully developing food processing industries. Importantly, for most low- and middle-income countries (LMICs) involved in agriculture and food GVCs, their participation is largely forward looking, being limited to the supply of a specific product such as coffee in Ethiopia and Uganda and cocoa in Côte d’Ivoire and Ghana.

Challenges to GVC Participation

The automotive sector is more challenging for African countries because it relies strongly on fairly short regional value chains, which makes efficient regional logistics all the more important. Automotive components like car seats or engines can be heavy, bulky, and easily damaged, increasing transportation costs. Just-in-time production and high product variety often require the assembly of subcomponents to be close to final assembly. And final assembly often happens in large end markets with local content requirements in return for market access, as in Brazil, China, India, and South Africa. Morocco has taken advantage of its geographical proximity to the European Union (EU) market and in 2017 became Africa’s largest producer of passenger vehicles, surpassing South Africa. Moroccan efforts to attract major manufacturers in the automotive industries over the past decade have continued to pay off, as with the 2019 arrival of a new

Peugeot facility, following in the footsteps of another French automaker, Renault-Nissan.

Similarly, slow and unpredictable land transportation keeps most SubSaharan African countries out of the electronics value chain. And, although air transportation could help bridge slow land transportation or long geographical distances, its high cost limits LMICs’ exports to goods of very high unit value (such as gold and silver), time-sensitive goods (such as fast-fashion clothing), and perishable goods (such as cut flowers). World Development Report 2020 estimates that a day’s delay in transit due to a different transportation mode choice has a tariff equivalent of 0.6–2.1 percent, and the most sensitive trade flows are those involving parts and components (World Bank 2020).

Moreover, high logistics costs inhibit landlocked countries from participating in GVCs for electronics and fruits and vegetables. World Development Report 2020 estimates that the average number of days from an origin country’s warehouse to a destination country’s warehouse in 2006–15 varied greatly by the type of GVC participation (World Bank 2020). Imports by countries engaged in innovative GVC activities (with relatively higher intensity in intellectual property and research and development) such as the Czech Republic, the Republic of Korea, and Singapore need fewer than 9 days on average to reach the importing firm’s warehouse, but one additional week is needed by countries specialized in GVCs with high manufacturing and services links, such as the Philippines, Portugal, and Thailand. By contrast, the average time to import exceeds one month in countries specializing in commodity-linked GVCs (those with relatively higher intensity in raw materials and other minerals)—for example, 42 days in Ghana and 92 days in Iraq. A large portion of the long transportation times in Sub-Saharan Africa is attributed to relatively lengthy cargo dwell times at the port.

Some Initial Approaches to GVC Advancement

Relational GVCs—those that facilitate the flows of investments, technology, and know-how, particularly within a single multinational firm across multiple countries—may be a particularly powerful vehicle for technology transfer along the value chain for African countries to consider. It is well understood that real income grows when episodes of trade liberalization boost the diffusion of new technology. But relational GVC trade can multiply the positive effects. Interdependent firms may share knowhow and technology with suppliers because this boosts their own productivity and sales, leading to faster catch-up growth across countries. This occurs because, unlike traditional trade formulations in which firms of different countries compete with each other, GVCs constitute networks of firms with common goals—such as minimizing the production costs or maximizing profits along the entire production chain of which the firms are part.