Why it's time for Africa to climb higher in global value chains

Your smartphone: bought in Washington, with a supply chain crossing South Korea and Indonesia, before assembly in China. The coltan in the electronics, meanwhile, comes from Africa.

The African continent has succeeded in joining certain global value chains (GVCs) but remains, nevertheless, a small actor in the global economy, accounting for just 2-3% of the global trade in intermediate goods. Poor infrastructure, a lack of local capacity and the “China price” have been among the constraints keeping African countries on the bottom rung of the manufacturing ladder.

This may be about to change, however. While Africa’s share of GVC trade remains low, growth has been substantial (60% between 1995 and 2011). Part of this growth stems from the rise of Chinese wages, which comes as a plus for Africa. The continent, as a whole, is also the seeing faster growth in “backward” integration (the sourcing of foreign inputs for export-oriented businesses), than in “forward” integration (the provision of inputs for other countries’ exports). The overall result for the continent is greater integration in GVCs.

Leading the pack are the southern African and Mediterranean-coast economies, which together account for more than 78% of Africa’s total value-chain trade and may be able to further “thicken their industrial base by moving into adjacent products, such as agricultural machinery”, says Acha Leke, a director at McKinsey based in Johannesburg, South Africa.

Moving an economy up the value chain is not just a matter of low-cost labour. As Mexico has shown , cheap power can bring investors, too. Morocco’s minister of trade and industry, Moulay Hafid Elalamy, calls it “right-shoring”, or the choice of localisation based on cost and efficiency. Such strategies become particularly important for moderate- and high-value-added industries like transport or power equipment manufacturing, which are among Africa’s most integrated industries and where other factors, such as access to inputs and infrastructure, can be just as significant as low-cost labour.

Clearly, the private sector has an important role to play in helping African countries integrate further into global value chains. And, although much of the effort so far has focused on helping countries export low-added-value goods like commodities, some efforts are also being directed at helping them develop their production capacity. US firm GE, for instance, is investing $250m by 2018 in a multimodal facility in Calabar, Nigeria, to service the power and oil and gas sectors in West Africa. The Calabar plant will partner local engineering talent with international companies to sell into GE’s supply chain across the region, helping small Nigerian companies skill up and scale up, according to Thomas Konditi, GE’s head of transportation for Africa.

Still, the private sector can do only so much on its own. Issues like trade barriers, notably, require governments to step in. Despite some good progress on the continent, much more remains to be done in this regard. Liberalising trade policies, for instance, could enable Tunisia to increase its GVC participation by 15%, according to a recent report by the World Economic Forum. More important, tariffs for intra-regional trade remain extremely high—in some cases up to four times the level of tariffs for exporting outside the continent. The same goes for logistics and infrastructure costs, although here the private sector can help in the financing.

The nimblest administrations will foster development clusters, often through public-private partnerships. Morocco, which paid a billion euros ($1.1bn) to build infrastructure and a training school to Renault’s specifications in 2012, for instance, is now reaping the rewards with the arrival of a Peugeot facility, which will begin production in 2019 with an initial capacity of 90,000 units per year.

South Africa also offers duty-free access for 20% of components to encourage car manufacturers to site production in the country. But, while auto parts are a traditional entry route into GVCs, South Africa illustrates the continent’s challenges in miniature, with a lack of skills, uneven input availability and pricing, high overheads and low innovation capacity all restraining competitiveness.

Meanwhile, the new CEO of African lender Ecobank believes that governments need to stop propping up currencies if they want a competitive edge: “manufacturing will only happen if prices are allowed to find their level”.

In any case, Africa cannot rely solely on a new forest of factory chimneys to kick-start economies and provide jobs. Research by Dani Rodrik, a professor of political economy at Harvard University, points to data that show manufacturing will be far less of an engine for development going forward, with its share of employment peaking ever-lower as new countries emerge. With 910m workers expected to join the continent’s workforce by 2050, governments will need to look for other sources of jobs.