Regional before global: A value chain approach to industrialisation in West Africa
Sustainable Development Goal 9 calls for a commitment to “build resilient infrastructure, promote sustainable industrialization and foster innovation.” Are regional value chains a relevant industrialisation pathway to achieve this goal in West Africa?
Integration into global value chains (GVCs) is often hailed as a key pathway to sustainable industrialisation in Africa, driving private sector development and modernisation, and so fostering job creation and greater participation in the global economy. This is promoted for West Africa, where the share of manufacturing industry in the regional GDP was only around 9 percent in 2015. In order to achieve Sustainable Development Goal 9, which prioritises industrialisation in the battle against poverty and exclusion, the region needs to scale up its industrialisation in an effort to increase employment and social inclusion, particularly among youth.
Although the GVC strategy is relevant, especially at a time when labour costs in Africa are becoming more and more competitive in relation to new industrialised countries in Asia, it has at least three downsides in the short term. First, the fragmentation of potential participant countries into GVCs exposes them to the opportunism of multinational companies in location choice, because new entrants lack bargaining power. Second, linking to GVCs requires quality parameters which are not easy to reach for countries experiencing the infrastructure deficiencies and high levels of informality in the private sector that are seen in Africa. Given that it is impossible to leapfrog the constituent stages of non-price competitiveness in the industrialisation process, the development promise behind integration into GVCs can only be contemplated in the long term. Third, while African countries can look to GVCs to yield higher returns in exports of manufactured intermediate goods, this only partially addresses their trade balance challenges, since consumption goods remain imported, rather than produced locally.
These challenges must not lead West African countries to opt out of GVC strategies, but rather to gradually prepare for them. An alternative approach to value chain development that focuses on regional value chains (RVCs) contains transitional solutions to trigger competitive export-led industrialisation in the region. By focusing on the nature of RVCs and the opportunities they offer to West Africa, this article highlights RVCs as a pragmatic stepping stone for the region in order to more sustainably link to GVCs in the future.
The relevance of RVCs in West Africa
The RVC strategy envisages a production system which is comparable to the global-scaled one of the GVCs, but differs in that it is regionally aggregated and results in end products exported by a country within the region. The idea is to leverage the growing local demand for finished goods to shape regional production chains that are not constrained by the demanding norms required in GVCs, and that centre on the specificities of local demand and consumption practices. While less dynamic than linkages to GVCs due to the smaller size of the end-markets, RVCs could trigger sustainable industrialisation by enhancing integration, productivity, and division of labour in the region and incorporate indigenous firms into a region-wide logistical system that will be gradually optimised. Once the RVCs are established, the end products can also be exported globally, particularly to other developing markets, and this lays foundations for consolidating and upgrading the process so as to link it, as a next step, to GVCs.
This approach is appropriate in the West African context for a number of reasons. First, West Africa reports a low level of trade and productive integration, with one of the lowest regional intra-industry trade scores in the world, and the second lowest score in trade and productive integration in Africa. This situation indicates little participation in RVCs and weak bargaining power for the region, where countries act more as competitors than complementary allies. Implementing RVCs can therefore be seen as a catalyst to regional integration and cooperation.
Moreover, it is generally agreed that to prove successful, RVCs need to revolve around sizeable growth poles, from which the regional chains develop themselves through various channels of transmission from core to periphery. In West Africa, Nigeria represents a typical growth pole, characterised by intense trade activity (export and import) and a large market and population size, attracting capital flows, migrants, and technology. In addition to Nigeria, the region is host to two other promising growth poles, namely Ghana and Côte d’Ivoire, which have recorded strong annual GDP growth rates in the last five years. These countries could assume leadership in the emergence of RVCs involving their periphery, in particular with the landlocked countries of the Sahel.
The level of development and the regulatory context are other sound justifications for the region to focus on RVCs before GVCs. Indeed, 72 percent of West African goods for further exportation are directed to Europe and North America, where non-tariff restrictions, including highly demanding norms to be complied with, undermine their access to the market. As a result, the scope for competing, upgrading, and climbing up the value chain is very restricted for West African firms linked, for example, to a Europe-headquartered GVC. By contrast, dealing with the regional regulations in which they are embedded offers them far more opportunities to grow, with the ability to navigate local institutions, including informal ones, giving them a major competitive advantage over extra-regional competitors. Likewise, the cultural dimension of manufacturing production is a key determinant of RVCs’ relevance in West Africa, since one major aspect is the focus on the regional consumption markets. This gives regionally based manufacturers the opportunity to design and produce differentiated products adapted to the cultural preferences of regional consumers and the needs created by their environment, which provides significant added value in terms of market capture.
Lastly, RVCs can initiate sustainable industrialisation in the region through quantitative spillovers resulting from industrial development, such as jobs and enterprise creation, and increased exports and government revenues. In addition, qualitative spillovers are expected, as greater inter-firm linkages throughout the RVCs (trade and investment) can result in technology and knowledge transfers, enterprise formalisation, and business professionalisation. Eventually, this can lead to a transformation and upgrading of the private sector, entailing higher value-added activities and the creation of higher skilled jobs.
Featuring RVC opportunities in West Africa
In summary, the RVCs pursue two objectives: exploiting complementarities between countries and actors in the region; and leveraging the growing demand for finished goods within the region. In regard to the first objective, it is the purpose of any value chain, whatever the level of aggregation, to make optimal use of the resources and endowments available in the ecosystem it covers, so as to increase efficiency in the production process. In the case of RVCs in West Africa, the need to exploit complementarities can be easily featured through geography, citing for instance de facto complementarities between landlocked and coastal countries of the region. Along with geographic factors, strong complementarities could be harnessed depending on national/subregional specialisations, based on the regional division of factors of production, including natural resources, labour, and capital.
The second objective is determined by the size and pace of growth of household consumption in the region. The McKinsey Institute recently estimated that household consumption should grow by 22 percent in Nigeria by 2025, and by 77 percent in Francophone countries of Central and West Africa, reaching about US$450 billion and US$230 billion respectively. This dynamic, which reflects the region’s growing population and rising household incomes, can provide economies of scale to producers focusing on these local markets, especially if they endeavour to develop an industry not only “made in West Africa”, but also “made for West Africa.”
Several sectoral examples illustrate the relevance to meeting the distinctive needs of regional consumers, such as in pharmaceuticals (drug manufacturing, with a focus on endogenous health issues), textiles (African fabric), construction (local materials), or cosmetics (local products). The food sector best exemplifies this model, however, since nutrition-related behaviours are highly determined by cultural habits. In West Africa, dietary patterns are evolving with urban lifestyles. One major change is the increasing demand for processed products, which account on average for 39 percent of household food consumption in the region – and remarkably for 36 percent in the poorest households. While demand for processed food in the region comes with the expansion of global products, cultural habits remain, with preference for traditional products such as tropical tubers (yam, cassava) and local fish and meat, which are increasingly converted into higher value-added processed products (attieke, garri, smoked or dried fish/meat, etc.). This evolution justifies the development of food and beverage processing activities specialising in West Africans’ needs. As a second step, these products could be exported towards other African regions and developed countries, through the existing ethnic-based commercial networks of the diaspora.
How can RVCs be initiated in West Africa?
Policy recommendations in favour of RVCs do not differ significantly from those that are usually formulated to promote integration into GVCs. The latter, which focus on industrial policies at the national level, and on regional integration at the supranational level, are well known and their application to RVCs can be summarised as follows. First, to foster industrialisation domestically, West African countries need to build strategic infrastructure, improve logistics, encourage private sector development, and invest in human capital. Second, they need to regionally enhance their integration with developing cross-border infrastructures, removing tariff and non-tariff barriers, and implementing the harmonisation of regulations and technical standards, which could make the exchanges within the RVCs more fluid. More specifically, RVC strategies could emphasise the role played by growth poles in the region. These poles, which already benefit from economies of agglomeration and concentrate most of the financial capital, could “headquarter” the RVCs and take the lead in their deployment, primarily by channelling extra- and intra-regional productive investments into the region. Accordingly, an incentivising intra-regional investment framework is a critical tool with which to equip the region.
The second, more original area of intervention focuses on the actors. As explained, regionally based firms have competitive advantages when it comes to capturing local markets. The Boston Consulting Group recently found that African companies, including in West Africa, face down large multinationals in several areas. The reasons for their success lie in four competitive advantages: focus on the local market, where they concentrate their development and branding strategies; mastery of the industrial environment (logistics, suppliers); flexibility, particularly in terms of standards adaptation; and knowledge of the expectations and behaviour of consumers, thanks to the data gathered since they were set up. In other words, with tariff conditions similar to those of foreign multinationals, these local champions find their advantage in their ability to manage non-tariff costs.
This opens a path for RVC policies, already taken up by some institutions. In 2011, the International Finance Corporation invested €11 million to support the expansion of Patisen, a food-processing company in Senegal specialising in the production and distribution of bouillon cubes and chocolate. The purpose of the partnership, which also included technical assistance in areas such as strategic advice and corporate governance, was to accompany Patisen in its regional expansion, while ensuring the company would in turn transfer know-how and sustainability to local suppliers and wholesalers. By demonstrating that local players can be at the heart of an industrial learning process across RVCs, this experience could inspire governments, investors, and development institutions and help them to expand regionally. These local champions could therefore be the interface between the global economy and the regional network of production, initiating technology and knowledge spillovers within the region, and preparing the region’s industrial base for upgrading.
Conclusion: RVCs and sustainability
Promoting RVCs is a relevant pathway to trigger manufacturing development in West Africa and pave the way to greater linkages to GVCs, since this model can be built not against but in tune with the local regulatory and development context. Like any systematic value chain, RVCs can channel knowledge and technology transfers within the region, allowing regional producers to progressively upgrade their production process, climb up the value chain, and reap competitiveness gains so as to further compete in GVCs. Local champions, as key orchestrators of this model, may also be focal points in working towards sustainable industrialisation. In this regard, a possible lever for the development community is to help them appropriate innovation and good practices available elsewhere, in such areas as green industrialisation and corporate social responsibility, as a source of value chain efficiency and inclusive development.
The views expressed in this article are those of the author and do not in any way represent those of the institution with which he is affiliated.
Author: Maxime Weigert, Development Economist, Consultant at the Strategy and Policy Department of the African Development Bank.
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