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Promoting agricultural global (regional) value chains in Africa

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Promoting agricultural global (regional) value chains in Africa

Taku Fundira, tralac Associate, comments on the development of agricultural value chains in Africa and policy-related issues to consider for them to be successful

The need for a balanced diet (staples, meats, milk and eggs) in the everyday diet of the population is growing exponentially owing to increase of human population and middle income earners and urbanization. It is estimated that by 2050, the world population would be around 9.2 billion from the current estimate of 7 billion[1] of which 1billion on this increase will be attributed to Arab and African countries, which are urbanizing at a rapid rate and whose numbers of middle income earners is also growing rapidly.[2] These factors thus affect the global demand for agricultural products and also increase the importance of the sector in the economies of most developing countries that still have the majority of population dependent on agriculture.

For Africa, this presents an important opportunity that needs to be capitalised, given Africa’s need to provide employment and eradicate poverty. The significant role played by agricultural farming in rural poverty reduction therefore cannot be overemphasised but demands a sustained increase in production as an essential tool to poverty alleviation and enhancement of food security in sub-Saharan Africa. The importance of the agricultural sector in Africa is recognised at a continental level by African leaders, who under the auspices of the New Partnership for Africa’s Development (NEPAD) Comprehensive Africa Agriculture Development Programme (CAADP) in 2003, acknowledged the importance of agriculture.[3]

We are also witnessing a change in trade patterns in the world economy, reflecting new production structures influenced by new technologies and demand patterns; trade liberalisation and gradual integration of economies into regional and global production chains. Such an economic environment is and has been creating increased opportunities to relocate parts of domestic production abroad. To date, international outsourcing has changed the way trade flows occur (e.g. with an increased proportion of parts and components instead of final goods in foreign trade of some countries).

This emphasises the importance of global value chains (GVCs) that have become a dominant feature of today’s global economy. GVCs refer to the full range of activities to bring a product from its conception to end use, including design, production, distribution and consumer support. Each activity can be contained within a single firm or divided among different firms through outsourcing, adding different amounts of value to the final product. GVCs have risen as production becomes fragmented into specialized and geographically dispersed value-adding activities. This growing process of international fragmentation of production, mainly driven by technological progress, cost, access to resources and markets and trade policy reforms has challenged the conventional wisdom on how we look at and interpret trade and, in particular, the policies that we develop around it. Therefore, traditional measures of trade that record gross flows of goods and services each and every time they cross borders, alone, may lead to misguided decisions being taken.[4]

It is important to note that along the value chain, transaction costs exist, which if not minimised will significantly affect the competitiveness of the final product. To this effect, lowering trade and investment barriers to become more deeply integrated in GVCs is one of the most direct ways for countries to increase global (regional) trade and integration and the benefits can be significant. The UNCTAD (2013) World Investment Report notes that value-added trade contributes on average nearly 30% to developing countries’ GDP; and countries with the fastest growing rates of GVC participation have GDP per capita growth rates 2% above average.[5] GVC participation also exposes firms to new technologies and know-how that might otherwise be unavailable, as well as to new sources of capital. It enables suppliers to meet product standards and technical regulations that permit access to a greater variety of markets. At an economy wide level, GVC participation tends to lead to job creation even if it depends significantly on imported content in exports.

For small scale farmers, participation in GVCs can facilitate the creation of agribusinesses for increased value addition in exported goods. Their participation will enable them to harness the interdependence among the different actors in the value chain; namely the suppliers of inputs, the farmers; the businesses providing technical support for the farmers such as agricultural machinery, the financiers; the wholesale producers of farm products; the processors, and associated sellers. Consequently, participation in GVCs will facilitate small-scale farmers’ access to inputs, financing, and end-markets at the local, national, regional, and international levels, thereby enabling them to have a greater voice in the value chain and enhancing their economic returns.

But there are also potential risks from GVC participation. The value added contribution of GVCs can be relatively small where the import content of exports is high and where GVC participation is limited to low-skill, low-value parts of the chain. Value capture can also be low if value added is generated by affiliates of multinationals that repatriate earnings and leave relatively little value added in domestic hands. Most importantly, countries risk getting locked into these low value added segments, with subsequent implications for potential wage growth. The integrated nature of GVC trade can also amplify shocks, contributing to instability of output and employment in GVCs. Finally, the footloose nature of international investment in some offshored activities commonly traded in GVCs can lead to a “race to the bottom” in terms of fiscal incentives as well as environmental, labour, and occupational standards.

Against this background, it is therefore important that trade agreements are designed in a manner that promote the development and growth of GVCs. Firstly it is important to note that while multilateral agreements are widely accepted as the best way forward, most of the liberalisation outside of purely unilateral opening has occurred at the regional level in the past two decades. Therefore, to promote the expansion of GVCs, regional trade agreements (RTAs) are more effective when their membership is consistent with regional production networks. They also have a role to play in deepening integration provisions: the convergence of standards or the recognition of qualifications can start bilaterally or regionally. But the RTAs of the future should be careful to avoid the pitfalls of distorting firms’ choices and losing the connection with the rest of the value chain. More liberal rules of origin, for example, would make RTAs more GVC-friendly and increase their impact on firm productivity. In the longer term, consolidating and multilateralising RTAs would help turn the “spaghetti bowl” of preferential agreements into a clearer and more efficient trading regime for all actors in GVCs.[6]

Secondly, trade agreements have the largest impact if they cover as many dimensions of in this case agricultural GVCs as possible. While abolishing tariffs is a starting point to offer companies new trade opportunities, the value chain also requires efficient services as well as the possibility to move people, capital and technology across borders. Policy should thus address obstacles at all points of the value chain and remain neutral between trade and investment, letting firms decide which mode is better for accessing foreign inputs and foreign markets. Multilateral agreements covering not only goods but also services, investment, competition, intellectual property and the temporary movement of workers are likely to create an environment where firms can build efficient supply chains. Such a comprehensive approach would amplify the impact of trade liberalisation on investment, growth and job creation.[7]

While noting the importance of trade policy as highlighted above, it is important to note that trade policy is a necessary but not a sufficient condition to draw the benefits from global value chains for inclusive employment and income growth. Public and private investments to upgrade supply side capabilities, and the ability to exploit new market opportunities generally, are also needed. Investments in people are particularly important – education and skills training, active labour market policies, and social safety nets are key ingredients in an effective package of complementary policies.

In summary, therefore participation in GVC-oriented trade requires that countries in Africa consider a number of policy-related issues.

First and foremost, they must understand the changing patterns of trade and how GVCs operate to be able to facilitate or create an enabling environment through policy. More generally, governments also need to develop a better appreciation of how the economy fits into global and regional production chains and recognize the fundamental fact that exports are only part of the story, thus, exploiting the opportunity of GVCs requires equal attention to facilitating imports and investment. Failure to recognize this can lead to inaccurate policy conclusions about the importance of bilateral trade imbalances; to significant underestimates of the cost of protection; and to a failure to appreciate the importance of bilateral or regional trading relationships. Second, the behaviour of the MNCs needs to be understood clearly in terms of how they make investment decisions in terms of where they locate keys aspects of their GVCs. Finally, it is important to remember that most value chains are not truly global but regional. Even in value chains that do span globally most value is traded within regional confines, because the economics of production and distribution, the lead time and flexibility requirements, and the need for proximate interaction typically work against complete dispersion in the case of most tasks and value chains. This means that while the GVC discourse tends to highlight globalization and multilateralism, addressing integration at the regional level is perhaps even more critical.[8]

.


[1] United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision, Key Findings and Advance Tables. Working Paper No. ESA/P/WP.241. [online] https://esa.un.org/unpd/wpp/publications/files/key_findings_wpp_2015.pdf

[2] Hassane M. H. 2013. The Promotion of the Livestock Industry for Food Security in Africa and Arab countries, AU-PATTEC Coordination Office, African union Commission, Addis Ababa, Ethiopia.

[4] Ahmad, N. 2013. Part II: Why and how we measure trade in value-added terms: Estimating trade in value-added: why and how? In Eds. Elms. D.K. Low, P. 2013. Global value chains in a changing world, World Trade Organisation, pp 85, Geneva, Switzerland. [online]: http://www.wto.org/english/res_e/booksp_e/aid4tradeglobalvalue13_e.pdf

[5] The UNCTAD (2013) World Investment Report

[6] OECD, 2013. Trade Policy Implications of Global Value Chains, Briefing Note, Organisation of Economic Cooperation and Development (OECD). [online]: http://www.oecd.org/sti/ind/Trade_Policy_Implicatipns_May_2013.pdf

[7] ibid, OECD (2013)

[8] World Bank, 2015. Factory Southern Africa? SACU in Global Value Chains, Trade and Investment Policy for Global Value Chains. Chapter 6. World Bank Group. [online] http://www.saiia.org.za/non-saiia-publications/969-2016-01-21-saiia-world-bank-factory-southern-africa-full-report/file

Discussions

Promoting agricultural global (regional) value chains in Africa

Promoting agricultural global (regional) value chains in Africa

01 Dec 2016

Taku Fundira, tralac Associate, comments on the development of agricultural value chains in Africa and policy-related issues to consider for them to be successful

The need for a balanced diet (staples, meats, milk and eggs) in the everyday diet of the population is growing exponentially owing to increase of human population and middle income earners and urbanization. It is estimated that by 2050, the world population would be around 9.2 billion from the current estimate of 7 billion[1] of which 1billion on this increase will be attributed to Arab and African countries, which are urbanizing at a rapid rate and whose numbers of middle income earners is also growing rapidly.[2] These factors thus affect the global demand for agricultural products and also increase the importance of the sector in the economies of most developing countries that still have the majority of population dependent on agriculture.

For Africa, this presents an important opportunity that needs to be capitalised, given Africa’s need to provide employment and eradicate poverty. The significant role played by agricultural farming in rural poverty reduction therefore cannot be overemphasised but demands a sustained increase in production as an essential tool to poverty alleviation and enhancement of food security in sub-Saharan Africa. The importance of the agricultural sector in Africa is recognised at a continental level by African leaders, who under the auspices of the New Partnership for Africa’s Development (NEPAD) Comprehensive Africa Agriculture Development Programme (CAADP) in 2003, acknowledged the importance of agriculture.[3]

We are also witnessing a change in trade patterns in the world economy, reflecting new production structures influenced by new technologies and demand patterns; trade liberalisation and gradual integration of economies into regional and global production chains. Such an economic environment is and has been creating increased opportunities to relocate parts of domestic production abroad. To date, international outsourcing has changed the way trade flows occur (e.g. with an increased proportion of parts and components instead of final goods in foreign trade of some countries).

This emphasises the importance of global value chains (GVCs) that have become a dominant feature of today’s global economy. GVCs refer to the full range of activities to bring a product from its conception to end use, including design, production, distribution and consumer support. Each activity can be contained within a single firm or divided among different firms through outsourcing, adding different amounts of value to the final product. GVCs have risen as production becomes fragmented into specialized and geographically dispersed value-adding activities. This growing process of international fragmentation of production, mainly driven by technological progress, cost, access to resources and markets and trade policy reforms has challenged the conventional wisdom on how we look at and interpret trade and, in particular, the policies that we develop around it. Therefore, traditional measures of trade that record gross flows of goods and services each and every time they cross borders, alone, may lead to misguided decisions being taken.[4]

It is important to note that along the value chain, transaction costs exist, which if not minimised will significantly affect the competitiveness of the final product. To this effect, lowering trade and investment barriers to become more deeply integrated in GVCs is one of the most direct ways for countries to increase global (regional) trade and integration and the benefits can be significant. The UNCTAD (2013) World Investment Report notes that value-added trade contributes on average nearly 30% to developing countries’ GDP; and countries with the fastest growing rates of GVC participation have GDP per capita growth rates 2% above average.[5] GVC participation also exposes firms to new technologies and know-how that might otherwise be unavailable, as well as to new sources of capital. It enables suppliers to meet product standards and technical regulations that permit access to a greater variety of markets. At an economy wide level, GVC participation tends to lead to job creation even if it depends significantly on imported content in exports.

For small scale farmers, participation in GVCs can facilitate the creation of agribusinesses for increased value addition in exported goods. Their participation will enable them to harness the interdependence among the different actors in the value chain; namely the suppliers of inputs, the farmers; the businesses providing technical support for the farmers such as agricultural machinery, the financiers; the wholesale producers of farm products; the processors, and associated sellers. Consequently, participation in GVCs will facilitate small-scale farmers’ access to inputs, financing, and end-markets at the local, national, regional, and international levels, thereby enabling them to have a greater voice in the value chain and enhancing their economic returns.

But there are also potential risks from GVC participation. The value added contribution of GVCs can be relatively small where the import content of exports is high and where GVC participation is limited to low-skill, low-value parts of the chain. Value capture can also be low if value added is generated by affiliates of multinationals that repatriate earnings and leave relatively little value added in domestic hands. Most importantly, countries risk getting locked into these low value added segments, with subsequent implications for potential wage growth. The integrated nature of GVC trade can also amplify shocks, contributing to instability of output and employment in GVCs. Finally, the footloose nature of international investment in some offshored activities commonly traded in GVCs can lead to a “race to the bottom” in terms of fiscal incentives as well as environmental, labour, and occupational standards.

Against this background, it is therefore important that trade agreements are designed in a manner that promote the development and growth of GVCs. Firstly it is important to note that while multilateral agreements are widely accepted as the best way forward, most of the liberalisation outside of purely unilateral opening has occurred at the regional level in the past two decades. Therefore, to promote the expansion of GVCs, regional trade agreements (RTAs) are more effective when their membership is consistent with regional production networks. They also have a role to play in deepening integration provisions: the convergence of standards or the recognition of qualifications can start bilaterally or regionally. But the RTAs of the future should be careful to avoid the pitfalls of distorting firms’ choices and losing the connection with the rest of the value chain. More liberal rules of origin, for example, would make RTAs more GVC-friendly and increase their impact on firm productivity. In the longer term, consolidating and multilateralising RTAs would help turn the “spaghetti bowl” of preferential agreements into a clearer and more efficient trading regime for all actors in GVCs.[6]

Secondly, trade agreements have the largest impact if they cover as many dimensions of in this case agricultural GVCs as possible. While abolishing tariffs is a starting point to offer companies new trade opportunities, the value chain also requires efficient services as well as the possibility to move people, capital and technology across borders. Policy should thus address obstacles at all points of the value chain and remain neutral between trade and investment, letting firms decide which mode is better for accessing foreign inputs and foreign markets. Multilateral agreements covering not only goods but also services, investment, competition, intellectual property and the temporary movement of workers are likely to create an environment where firms can build efficient supply chains. Such a comprehensive approach would amplify the impact of trade liberalisation on investment, growth and job creation.[7]

While noting the importance of trade policy as highlighted above, it is important to note that trade policy is a necessary but not a sufficient condition to draw the benefits from global value chains for inclusive employment and income growth. Public and private investments to upgrade supply side capabilities, and the ability to exploit new market opportunities generally, are also needed. Investments in people are particularly important – education and skills training, active labour market policies, and social safety nets are key ingredients in an effective package of complementary policies.

In summary, therefore participation in GVC-oriented trade requires that countries in Africa consider a number of policy-related issues.

First and foremost, they must understand the changing patterns of trade and how GVCs operate to be able to facilitate or create an enabling environment through policy. More generally, governments also need to develop a better appreciation of how the economy fits into global and regional production chains and recognize the fundamental fact that exports are only part of the story, thus, exploiting the opportunity of GVCs requires equal attention to facilitating imports and investment. Failure to recognize this can lead to inaccurate policy conclusions about the importance of bilateral trade imbalances; to significant underestimates of the cost of protection; and to a failure to appreciate the importance of bilateral or regional trading relationships. Second, the behaviour of the MNCs needs to be understood clearly in terms of how they make investment decisions in terms of where they locate keys aspects of their GVCs. Finally, it is important to remember that most value chains are not truly global but regional. Even in value chains that do span globally most value is traded within regional confines, because the economics of production and distribution, the lead time and flexibility requirements, and the need for proximate interaction typically work against complete dispersion in the case of most tasks and value chains. This means that while the GVC discourse tends to highlight globalization and multilateralism, addressing integration at the regional level is perhaps even more critical.[8]

.


[1] United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision, Key Findings and Advance Tables. Working Paper No. ESA/P/WP.241. [online] https://esa.un.org/unpd/wpp/publications/files/key_findings_wpp_2015.pdf

[2] Hassane M. H. 2013. The Promotion of the Livestock Industry for Food Security in Africa and Arab countries, AU-PATTEC Coordination Office, African union Commission, Addis Ababa, Ethiopia.

[4] Ahmad, N. 2013. Part II: Why and how we measure trade in value-added terms: Estimating trade in value-added: why and how? In Eds. Elms. D.K. Low, P. 2013. Global value chains in a changing world, World Trade Organisation, pp 85, Geneva, Switzerland. [online]: http://www.wto.org/english/res_e/booksp_e/aid4tradeglobalvalue13_e.pdf

[5] The UNCTAD (2013) World Investment Report

[6] OECD, 2013. Trade Policy Implications of Global Value Chains, Briefing Note, Organisation of Economic Cooperation and Development (OECD). [online]: http://www.oecd.org/sti/ind/Trade_Policy_Implicatipns_May_2013.pdf

[7] ibid, OECD (2013)

[8] World Bank, 2015. Factory Southern Africa? SACU in Global Value Chains, Trade and Investment Policy for Global Value Chains. Chapter 6. World Bank Group. [online] http://www.saiia.org.za/non-saiia-publications/969-2016-01-21-saiia-world-bank-factory-southern-africa-full-report/file

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