Global value chains and Aid for Trade: An African perspective

4 July 2013

Although global value chains (GVCs) have existed for decades now, interest in the literature has reignited in recent years, particularly since the global financial crisis. Policy makers have sought to better understand the dynamics and governance of GVCs as well as the opportunities and constraints that this type of trade poses for firms in the various stages of participation. Since the fragmentation of production means that global trade is now characterised by trade in tasks, it is important for policy makers in sub-Saharan Africa (SSA) to identify potential GVCs in which they can effectively participate, as well as obtain a better position within existing GVCs and improve outcomes overtime.

Who governs GVCs?

At a fundamental level, all trade takes place within a value chain. Therefore, one approach to analysing GVCs is to simply link suppliers of a good or service to end users and consumers. However, the analysis is more complex: it must deal with the type of relationships that exist between suppliers and consumers: how trade is organised, and who controls it through exerting power on suppliers, consumers, or new entrants. The GVC literature recognises that the benefits for producers from participating in one type of value chain as opposed to another are related to who governs it. This means that attention must be drawn to how the integration process of producers in SSA with this type of trade is currently managed, as well as how it has occurred in the past.  Why do governance structures matter? Because of the increasing consolidation of marketing and retailing nodes of GVCs located in developed-country markets, there has been considerable debate as to the best means of engaging with the types of GVCs which may exhibit more hierarchical governance structures. Much attention in the GVC literature has been given to the link between shifts in the pattern of global trade and qualitative changes in the governance structures of GVCs. As the share of intra-firm trade has increased in recent years, the drivers of GVCs are increasingly lead firms and transnational corporations (TNCs). Given this increase in coordination, some authors suggest that this presents new challenges for producers in SSA; others, however, argue that new opportunities have arisen.

For example, although some authors posit that the now recognised phenomenon of trade in tasks may be a potential lifeline to SSA, discussion on how this region already trades within GVCs is generally avoided. The presumption - not entirely wrong - is that specialization in specific tasks according to patterns of comparative advantage has resulted in SSA producers being confined to the low-end of the value chain, often entailing heavy concentration in commodity exports, with little prospects of upgrading.

There has been a limited ability of producers in SSA to tap into the modern export sector. Where movement into non-traditional exports has been achieved, it has typically been facilitated by preferential access into developed-country markets. This has provided a form of locational advantage to attract investment, and has taken the form of outsourcing production through developing contractual relations between firms across borders, or of offshoring and the relocation of production from one country to another.

Because governments set the rules for private sector actors, they can in turn influence the relationships between firms in GVCs. To some extent, such external governance - ‘external' because the government is outside of the value chain - of a given value chain matters the most because it influences the bargaining power of domestic producers. This can affect not only relations between firms and, therefore, internal GVC governance, but also developmental outcomes more broadly, including through enabling firms to upgrade and obtain a more secure supplier position.

Donor intervention in GVCs

A recent review of LDC participation in GVCs finds that donor interventions to improve the position of LDC producers generally focus at the production node, and are concerned primarily with building productive capacity. However, in other cases, governments have made more targeted attempts at influencing the governance structures within which firms trade. Some examples of upgrading experiences of SSA firms within GVCs are discussed below. These experiences draw attention to why not only does what you export matter, but also how you export it.

Ethiopian horticulture

Ethiopia's cut flower industry has recently emerged and successfully penetrated EU markets at a time when standards, delivery requirements and the capabilities demanded from producers are high. Entering this market required a multitude of capabilities at firm, sector and national levels, many of which were absent or weak domestically. The trigger factors for the emergence of the flower industry in Ethiopia include several factors, such as natural endowment and generous government incentives for all export activities. Producers also organised effectively so as to lobby for government assistance, which was in turn supported by donors, in particular the Dutch.

The Dutch have played a triple role in Ethiopian horticulture: as investors, an end-market and as a donor. They provided the technology and investment to start off the horticulture industry in Ethiopia; they also trained local workers, including at the higher end, through training programs at state universities. The Dutch-Ethiopian cooperation has been win-win on many fronts. Ethiopia benefits from a more diversified industrial base, job creation and foreign exchange earnings while the Dutch enjoy the security of a high-quality supply base for their world-leading flower auctions. Ethiopia's experience highlights how the distribution of power along value chains and between different types of actors must be taken into account by governments and mediated.

Lesotho's clothing

Lesotho's export success for garments really took off after the African Growth and Opportunity Act (AGOA), which offers duty-free, quota-free (DFQF) to African exporters, was put in place in 2000. This export success was driven mainly by Asian investors serving the US market. However, because of recent changes in the South African operating environment - characterised by high costs and increasing labour market rigidities -,Lesotho has become an attractive location for South African apparel manufacturers. These firms aim to transfer further production as well as some higher value-adding pre-and post-production functions, such as pattern making, fabric management and logistic coordination, from South Africa to Lesotho. The government of Lesotho is actively trying to attract these investments.

Services

Services such as logistics and transport are integral to the connection to external markets of all LDCs and to their participation in value chains (regional or global), and are not separate value chains as conventionally understood. Increasing the number of functions undertaken in a given value chain may mean taking responsibility for sourcing and directly supplying buyers, which may require new technologies and investment in logistics. Developing logistics and transportation systems may enable producers to subsequently obtain more functions within and across a given value chain (e.g. tourism, horticulture or textiles and clothing). Therefore, interventions related to logistics and transportation can assist African producers in terms of upgrading their position within a given value chain, but also ensuring that more value added is created domestically through making interventions that can benefit many value chains.

Conclusion

Assisting producers in improving their capabilities at one node of production in a given value chain may subsequently help in the development of other value chains. Engaging businesses and governments with the concept of economic and social upgrading within GVCs and attempting to influence this trajectory seems to be a good starting point for designing Aid for Trade interventions. That is, improvements in soft infrastructure such as availability of vocational training and accreditation may subsequently increase the quality of production, economic returns, and domestic value added.

It is important to look objectively at the evidence of what really obstructs trade by African producers in order to draw conclusions on whether aid can help and, if so, what types of aid - including Aid for Trade. The importance of looking at a value chain holistically, rather than at individual stages of production or products, suggests that approaches to trade capacity building should start from a broad view of how a country is trying to change its trade, and then an assessment of the obstacles to this.

It is in this sense that greater consideration must be given to how governments can be better assisted in performing this role, including through the provision of Aid for Trade. This will inevitably mean looking beyond making investments in hard infrastructure, such as transportation, to also developing soft infrastructure, such as developing the capabilities of suppliers so that they can meet the standards demanded by their clients. It will also mean developing the capabilities of governments so that they can effectively influence GVCs with a view to shaping developmental outcomes. This may entail creating dialogue with the private sector so as to facilitate upgrading processes and enhance the potential positive spillover effects on other sectors.

Author: Jodie Keane is a research fellow with the trade programme of the International Economic Development Group at the Overseas Development Institute.

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