Capturing Africa’s niche in the global value chains: What’s in IT for COMESA?

COMESA 2018 Special Report, By Stephen Yeboah*

COMESA 2018 Special Report

Africa’s participation in GVCs will boost its manufacturing sector, but making inroads into the global economy will require tapping into less-exploited regional value chains across the continent. COMESA has a role to play.

Africa sits on vast resources. Of greater potential than its extractive resources, like oil, diamond, gold, or cobalt, is its population bulge.

By 2030, it is projected that Africa will have 1.7 billion people whose combined consumer and business spending is expected to reach $6.7 trillion. This demographic dividend – if properly harnessed – offers the continent an incredible opportunity to build a strong labour-intensive manufacturing base.

Africa has the fastest-growing youth population in the world; with 60 percent of its population under the age of 24. A robust manufacturing sector could absorb this youth bulge with good jobs while injecting some much-needed diversity into agriculture-reliant African economies.

But on the flipside of this enormous opportunity, the region is heavily under-represented in global value chains (GVCs). GVC comprise all the people and activities involved in the production of a good or service and its global level supply, distribution and post-sales activities. GVCs are a defining element of contemporary globalisation, allowing countries to participate in global trade by specialising in a specific part of the supply chain in which they are most competitive.

But the question is: why are African countries absent from the GVC game? And what role can COMESA play? Africa faces a host of obstacles in developing the competitive edge needed for entering into GVCs. At the heart of the challenge is the need for a coordinated, common trade policy and well-established institutions.

Trade policies and Africa’s GVC potential

Throughout the experiences of Europe, North America and Asia, it is known that building regional value chains (RVCs) is a key step towards participation in GVCs by increasing the market for exports and imports.

But intra-African trade is low at just 9 percent, compared to Asia (54 percent) and Latin America (18 percent). In a recent study, the United Nations Conference on Trade and Development (UNCTAD) estimates that on an average, only 6 percent of the value-added exports to African countries are sourced from within the region.

There are variations across the different regional blocs. In the Economic Community of Central African States (ECCAS), for example, only 3.6 percent of imports were sourced from within in 2016. In the COMESA, 10.5 percent of exports were sourced from within and 5.3 percent for imports. The Southern African Development Community (SADC) is the highest performer in the same period, with 21 percent of exports and 22 percent of imports exchanged within the regional economic community. Namibia, Botswana, and Swaziland happen to be the most integrated countries, owing to their proximity to South Africa, the main SADC hub.

The need for strengthened regional production networks – through trade facilitation – and strong institutions is much more pertinent today if Africa, and COMESA in particular, is to boost its participation in GVCs.

What’s COMESA’s niche?

The blossoming of Kenya’s cut-flower industry, now employing about 1,00,000 direct workers and having the biggest market share for exports to Europe, generated about $500m in sales in 2013. It shows the niche economic opportunities that the Common Market for Eastern and Southern Africa (COMESA) could have. But this is not without challenges.

Tariffs and border inefficiencies still present a major hurdle to intra-trade and regional value chain development. Within the COMESA, it is identified that differing documentation procedures on transport, prolonged clearance processes, and corrupt practices are the three most trade-affecting non-tariff barriers.

For COMESA, there are opportunities to develop, for example, a competitive leather and leather products sector, which experienced a rise in share in global exports from 1.5 percent in 2000 to 3.6 percent in 2011. For this to happen, COMESA requires a functioning institution to drive a common agenda among the countries. The COMESA Leather and Leather Products Institute could be a motor in building such a bond in regional value chain development.

Africa’s free trade vision

There was excitement at the recent signing of the African Continental Free Trade Area (AfCFTA) in Kigali, Rwanda, which forms an integral element of the African Union’s Agenda 2063. The AfCFTA commits countries to phase out tariffs on 90 percent of goods, with 10 percent of "sensitive items" to be phased out incrementally. It will also liberalise trade in services.

The AfCFTA holds tremendous opportunity as it could boost intra-African trade by more than 52 percent, worth about $35 billion per year. Most importantly, it signals a step towards building strong RVCs. Signing the agreement is a major milestone, but it will take the political will of African leaders to ratify and bring it into operation.

Fostering Africa’s RVCs will require building strong institutions that will regulate and facilitate the production and distribution of goods and services. A major bottleneck to a functioning institution is the unavailability of adequate infrastructure. The continent has a huge infrastructure gap, at $130–170 billion a year, which cuts an estimated 2.6 percent of its GDP growth every year. Playing host to many small-sized economies, cross-border infrastructure investment in Africa is significant to attracting investments, creating economies of scale and boosting participation in RVCs.

Investing in infrastructure is also linked to developing a skills-based economy that prioritises technical and vocational training. Key to participating in GVCs is digitisation, which is a workforce skilled in information and communication technology. Yet, the ICT sector receives the lowest amount of allocated spending across Africa, with a total of $853 million in 2016. It is important that governments and private partners increase investments in ICT infrastructure.

This is where institutions like the African Development Bank come into play. Increasing the financial portfolio for transformative infrastructure would place the region in a better position to develop regional value chain and, consequently, compete favourably in GVCs. The African Development Bank’s High 5 agenda offers an important vehicle for unleashing innovative finance to boost infrastructure.

Conclusion

Africa’s participation in GVCs will boost its manufacturing sector, but making inroads into the global economy will require tapping into less-exploited regional value chains across the continent. COMESA has a role to play in this. Given the region’s demographic structure and immense natural resource potentials, the world stands to gain from a strong manufacturing base through increased participation in regional and global value chains. n

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