Opportunity 2: Trade in tasks
With globalisation and the rapid improvement in transportation and communication technologies, international trade is increasingly characterised by trade in intermediate goods with different countries contributing to the production of a final good. A product might read “Made in China” or “Made in Japan” when in actual fact it was made in two, three, sometimes four countries with each country specialising in the production of a specific task or input along the value chain. This process is generally referred to as trade in tasks or trade in intermediates.
Trade in tasks is the way through which most East Asian nations climbed the global value chains ladder. It is also likely that most opportunities for African firms to integrate global value chains will be through trade in tasks. After all, focusing on the production of a “task” or “input” along the production chain is far less daunting and capital intensive than breaking into global markets with a final product like a personal computer or a television. Once plugged into a global value chain and as technological know-how increases, African firms may then look for opportunities to move up the value chain.
The concept of trade in tasks for goods also applies to services value chains. According to Organisation for Economic Cooperation and Development estimates, the global offshore services industry has grown from a little less than $50bn in 2005 to more than $250bn in 2010. Depending on a country’s endowments (its language, availability of skills, etc.) policymakers may wish to explore opportunities to tap into information technology outsourcing (ITO) or business process outsourcing (BPO) markets. In BPO services, firms could capture many of the lower-value chains such as network management, payroll and call centres, accounting or document management. In ITO, some of the higher value-added activities such as support to IT infrastructure and software development are within the range of certain firms and countries.
Opportunity 3: Industrial migration
Finally, industrial migration, particularly from Asia may offer opportunities for African countries with conducive investment climates to rapidly upgrade their production systems. This is because currency appreciation and/or rapid increases in wage rates in Asia are likely to push labour-intensive firms to relocate to countries where labour costs are lower.
Industrial migration may also be driven by Africa’s rising consumer spending levels which are projected to surpass $1tr by 2020. Countries with enticing business environments could position themselves as future manufacturing hubs for either regional or global exports and we may already be witnessing a move in that direction.
In 2008, the Chinese electronic company Hisense set up shop in Egypt and together with its local partner Sun TV is currently estimated to produce 100,000 LDC TVs a year. In Kano, Nigeria, Hong Kong-based Lee Enterprises produces plastics, steel, ceramic tiles and leather hides. There are many more such examples on the continent.
Industrial migration is happening, creating numerous opportunities for value chains upgrading and the structural transformation of African economies. Whether African countries benefit from this process will depend on the extent to which industrial migration happens within a policy framework that encourages local production, employment and gradual technological transfer.
Analytical research needed
Africa’s current trade structure is unsustainable. Policies and incentives must be put in place at national level to restructure the composition of exports and gradually move from the production of primary commodities towards more value-added goods and services. In this particular regard, there may be a need to reconsider the adequacy of existing investment, export and industrial promotion frameworks to see whether they provide all the elements needed to accelerate industrialisation.
In many ways, the most important success factor in whether African countries succeed in climbing value chains will be the extent to which policy makers invest resources in enhancing their understanding of global trade and production patterns. Increasing analytical capabilities on trade and production patterns would enable African policymakers to identify niche markets they could tap into and industries that they could attract in the relatively near future. Failing to do so will almost surely lead to poor policy interventions and inefficient resources utilisation.
Jean-Guy Afrika is a senior trade policy analyst at the African Development Bank. This article first appeared on the AfDB blog.