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Trade integration and global value chains in Sub-Saharan Africa: In pursuit of the missing link

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Trade integration and global value chains in Sub-Saharan Africa: In pursuit of the missing link

Trade integration and global value chains in Sub-Saharan Africa: In pursuit of the missing link
Photo credit: AfDB

The mid-1990s ushered in two decades of strong and sustained growth in sub-Saharan Africa. The growth takeoff has been attributed to a combination of factors, not least sound macroeconomic policies implemented by the authorities in the region, but also fiscal space created post-debt relief, the strengthening of political and economic institutions, and in a growing number of countries, exit from fragility.

Favorable external conditions have undeniably also played a role, with strong demand from advanced economies until the global financial crisis, and from emerging markets afterward, especially for raw materials. These external conditions have, however, turned far less supportive, with sharply lower commodity prices – for oil, in particular – and tightening global financial conditions.

We investigate the extent of trade integration of sub-Saharan African (SSA) countries in the global economy as well as within the region over the period 1995-2013. To assess integration, we use four key concepts: (1) trade openness, captured by import and export flows; (2) the centrality in the global and regional trade network, a measure that takes into account not only the size of trade but also the number of trade partners and the respective weight of these trade partners in global trade; (3) gravity model estimates that account for country- and region-specific determinants of bilateral trade flows; and (4) global value chain (GVC) integration. Using both existing data and a newly available data set based on multiregion input and output tables, we are able to evaluate these four important dimensions of trade integration and assess the degree of integration globally as well as regionally.

The main findings of the paper are as follows:

  • The region’s trade openness has increased strongly since the mid-1990s, reflecting new partnerships with emerging markets, especially China, and budding intraregional trade. High demand for commodities has played a significant role, in particular for oil-exporting countries. However, the export structure of the rest of the region is less skewed toward raw materials, even for other natural resource exporters.

  • Increased trade has been a powerful engine for growth. Yet over the past 20 years, labor productivity gains have trailed increases observed in other regions. In addition, by being more integrated in the global economy, the region is now more vulnerable to external shocks.

  • Substantial opportunities for further regional and global trade integration still lie ahead. Despite strong growth in trade flows, sub-Saharan Africa’s trade has barely kept pace with the expansion of global trade, even as other regions managed to increase their weight in the global trade network over the same period. Indeed, even after accounting for lower levels of income and economic size, generally longer distances between countries, and a large number of landlocked countries, levels of trade flows emanating from sub-Saharan Africa are found to be only half the magnitude of those experienced elsewhere in the world.

  • Likewise, the region still has ways to go to better integrate in GVCs – a process that has consistently been associated with higher levels of activity and income growth over time –  as has happened in South and East Asia or Eastern Europe. However, while oil-exporting countries are clearly lagging behind, many other countries – both commodity and noncommodity exporters – are showing progress, even if from very low starting points, with the East African Community (EAC) and the Southern African Customs Union (SACU) particular bright spots. In countries that have made the largest strides into GVCs – such as Ethiopia, Kenya, Seychelles, South Africa, or Tanzania – manufacturing, agriculture, and agro-business – and, to a lesser extent, transport, tourism, and textile – have benefited the most from deeper integration. These results highlight the potential sectors where the region could build on its comparative advantages, provided the business environment is sufficiently conducive.

  • In that respect, our analysis suggests that, to leverage the region’s trade potential and ensure strong job creation and durable growth in the process – especially at a juncture when external demand for commodities is far less supportive – it is more critical than ever to make progress in filling the infrastructure gap, lowering tariff and nontariff barriers, and improving the business climate and access to credit, while continuing to enhance education outcomes.

The rest of the paper is organized as follows. In Section 1, we document SSA’s international and regional integration over the past 20 years. In Section 2, we introduce the concept of centrality in the global and regional trade network, which takes into account, for each country, both the size of its trade and the number of its trade partners and their weight on global trade. The third section links trade openness with macroeconomic performances. To investigate the determinants of trade and estimate the order of magnitude of a potential “trade gap” for sub-Saharan Africa, we use a gravity model approach in Section 4, explaining bilateral trade flows with both country- and region-specific determinants. Section 5 assesses the extent of SSA’s integration into global supply chains, using the newly created Eora database that provides multiregion input output tables. Section 6 concludes the paper.

Global Value Chains

Beyond the pure expansion of trade, an additional dimension of globalization over the past two decades has been the emergence of global value chains (GVCs). In an increasingly integrated world economy fueled by technological progress, cheaper transportation and communication costs, and policy reforms in support of trade, production processes have been more dispersed across the globe. This has given rise to systems of supply chains in which value is added at each stage before crossing the border to be passed on to the next stage – GVCs. This process has allowed countries to better exploit their comparative advantages, by giving them the opportunity to join a production chain without having to provide all the other upstream capabilities, and has been particularly at play in South and East Asia around Japan and China and in Eastern Europe around Germany.

For countries with a limited existing manufacturing or service export basis and a large pool of labor such as in those in sub-Saharan Africa, this development can provide a golden opportunity. By specializing on a specific segment of a production chain, each participating country can generate a portion of the goods’ or services’ value added – while producing the whole product from scratch would never have been within reach in an increasingly competitive world – even if that means that a lower share of the value added of exports is captured locally. While certain preconditions such as sufficient levels of capacity, quality, and efficiency are required to join GVCs, these threshold levels can be exceeded over time through technology and knowledge transfers from other countries – most often in the form of foreign direct investment (FDI). Furthermore, knowledge transfers from other producers in the value chain, and, eventually, upgrading to higher value-added segments of the production chain can support productivity and income growth. Asian countries have championed this model, initially contributing to the most labor-intensive activities in the production process and gradually moving into more sophisticated portions of the value chain.

The integration into GVCs has indeed gone hand in hand with a pickup in income levels. In particular, we focus on the measure of backward integration; that is, the FVA that is imported for further processing into exports. By this measure, rising backward integration has been associated with rising income over time for developing and emerging economies. In pursuing a strategy of development anchored around integration in one intermediary link of the value chains, many countries have managed to lift their income levels as they gradually acquired new capabilities, and have benefited from knowledge spillovers and, eventually, from opportunities to diversify production and upgrade quality. In addition, enhanced participation in GVCs has also been associated with more inclusive growth, especially when the sectors targeted are labor-intensive and employ relatively lower-skilled workers.

Where do sub-Saharan African countries stand in that landscape? Using the Eora multi-regional input-output database mentioned earlier, we can provide here a first-time assessment of the region’s positioning in GVC.

Sub-Saharan African countries still generally find themselves at the start of their integration process into GVCs, having also relatively lower income levels than other regions in the world. At 15 percent of exports, the share of foreign value added embedded in the production of exports is low even compared with the 20 percent average observed in developing and emerging market economies. More worrisome is that the depth of its integration has barely increased since the mid-1990s, unlike in other income groups – signaling that the region has yet to join this global momentum and take advantage of it to lift productivity and create jobs. Corroborating that finding, neither the complexity of sub-Saharan African exports – measured as the diversity of products – nor the quality of exported goods – derived from price differences within specific product categories – have been improving over the past two decades. In addition, compared with all other regions in the world, sub-Saharan African exports tend to enter at the very beginning of GVCs (in the form of forward integration), as a higher share of its exports enter as inputs for other countries’ exports, reflecting the still-predominant role of commodities in many countries’ exports in the region.

There is, however, a significant degree of heterogeneity across sub-Saharan African countries, with some countries having fared much better than others:

  • Oil exporters are the least integrated in GVCs in terms of FVA content of their exports. With the exceptions of Cameroon and Congo, this share has even decreased, including in countries such as Angola and Nigeria, suggesting that diversification of trade away from natural resources has stagnated, if not gone backward, over the past 20 years in these countries.

  • However, in the rest of the region, a majority of countries (24 out of 35) have made progress, even if from a low starting point. The improvement is most widespread among non-oil-commodity exporters, with countries such as Burkina Faso, Central African Republic, Democratic Republic of the Congo, Ghana, Guinea, Niger, Sierra Leone, and Zimbabwe all registering progress. This shows that integration in value chains can happen even in countries where commodities play a role.

  • Among the best performers, progress within the EAC has been particularly strong, with Kenya, Tanzania, and Uganda exhibiting solid progress – also a reflection of the benefits of the more general economic integration at play among these countries and their stated intention to further deepen their economic and monetary ties. Likewise, the SACU region exhibits relatively stronger depth of integration, both because its smaller members (Botswana, Lesotho, Namibia, Swaziland) were already quite integrated in the early 1990s and because South Africa did progress over the 1990-2010 period. Conversely, both the CEMAC and the WAEMU continue to exhibit low depth of integration. For the former, this has to do with the high reliance on oil exports for most of its members. For the latter, this suggests that the relatively high level of interregional trade with the currency union does not reflect the emergence of a regional value chain, but rather trade on final goods and services, with the depth of integration particularly low for the two largest countries of the union – Côte d’Ivoire and Senegal.

  • Five countries in particular stand out, having seen the share of FVA in their exports increase by 5 percentage points or more in the past two decades: Ethiopia, Kenya, Seychelles, South Africa, and Tanzania. In these countries, the sectors that have benefited the most from the deepening of integration include agriculture and agro-business (especially in Ethiopia and Seychelles), and manufacturing (particularly in Tanzania), but also textiles, transport, and tourism, although to a lesser extent. These experiences bode well for the region: for one, the increase in depth of integration in some of these countries, at 10 percentage points or more, is of a similar magnitude to that experienced by countries such as Poland or Vietnam that are now success stories within large GVCs. The examples also highlight the sectors – agro-business, light manufacturing, tourism, and textile – in which sub-Saharan Africa has the potential to leverage its comparative advantages.

  • However, to leverage these comparative advantages, the business environment (infrastructure, rule of law, cost and wage competitiveness, and so on) needs to be right. On that front, more still needs to be done, judging from the broader trend decline in industrialization in the region documented in other studies. It should be noted, though, that opportunities to participate in GVCs are not limited to manufacturing. Just as the production of goods has been broken down into different stages, services are increasingly being disaggregated and traded as separate tasks to create service value chains – as championed by India, for example.

The upshot is that the region still has an enormous potential to integrate into GVCs. By leveraging this potential, a better insertion in GVCs may help foster structural transformation, export diversification, and the possibility to absorb technology and skills from abroad. These benefits are especially important for countries with relatively small domestic markets, such as many in sub-Saharan Africa; in addition, the enabling of strong job creation would also allow countries to harness the dividends of the upcoming demographic transition.

An additional question would be which country or region could serve as an anchor for sub-Saharan Africa’s integration into GVCs. Some larger and more advanced economies within the region, most notably South Africa, could be candidates. Alternatively, given growing ties with China and India, including through FDI, these emerging markets could see increasing value in outsourcing some of their economic activities to sub-Saharan Africa, especially as rising wages in the Asian countries could make the region more cost-competitive.

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