Integrating ACP countries into global and regional value chains

The changing nature of global trade

Global trade has been changing dramatically in recent decades. Production processes are being sliced up and are changing ever more quickly. This has led to the evolution of global value chains (GVCs). Due to the emergence of GVCs, Cattaneo et al. (2013) see four detailed paradigm changes, which can be used to identify the challenges ahead. They are particularly important for developing and emerging economies, which want to upgrade in GVCs:

1. A change of the relevant strategic focus from countries to networks, GVCs, or firms reflects the trend that specialisation intensifies and comparative advantages are ever more dynamic.
2. A change of the economic framework from industries to tasks and functions implies that the relevant units of decision-making become smaller and that production processes are shared by small units. Put differently, in the old Heckscher-Ohlin-world, goods were produced in one country and traded across borders. This can be interpreted as the movement of factors (labour, human capital, and capital) incorporated into the goods (less so services). In the new GVC-world, the movement of factors of production is being supplemented by the movement and exchange of skills and tasks.
3. A shift of the relevant economic assets from (factor) endowments and stocks to flows shows the enormous increase in speed and the dynamic nature of production today; knowledge has to be written off faster and acquired continuously.
4. Finally, a change of relevant barriers and stimuli from public to private shows that trade policy moves from taxing goods and services at the border to a broader set of measures, which are complicated and interdependent. Because of the fragmented production process, granting effective protection is getting more difficult. Private standards may well replace or add to official non-tariff trade barriers. These changes may occur individually or even jointly.

Preconditions to integrate into GVCs

A range of preconditions that enable participation in GVCs must be met. They address a country’s attractiveness to foreign firms and investments, and ensure a business and trading environment that allows local suppliers to meet the criteria of multinational companies (MNCs) as the major players in GVCs. The preconditions are:

1. General market access conditions and a country’s openness to foreign direct investment (FDI). For market access, both domestic conditions – in terms of tariffs applied – and foreign conditions – in terms of tariffs faced – must be considered. Furthermore, with FDI being a main driver for the development of GVCs, openness to FDI is crucial.
2. Infrastructure services play a key role. These include transportation and logistics, telecommunication, finance and insurance, and energy. Their quality and efficiency determine the business and trade environments, and company performance.
3. The business and trade environment is furthermore crucially influenced by the institutional framework of the target countries. The framework comprises the existence of the rule of law, of property rights, a proper health system, education and innovation policies, a transparent tax environment as well as administrative capacity. Together, these institutions influence country, and company, attractiveness for value chain participation. Providing an efficient and secure business environment as well as the protection of property rights are all the more important in the context of offshoring and outsourcing decisions of MNCs.
4. Beyond that, further factors influencing a country’s trading environment such as the efficiency of border processes, customs practices, and domestic regulations have to be considered. In addition, speedy and low-cost access to capital goods and intermediate products is essential for plugging into GVCs, particularly for export-oriented FDI. Therefore tariff barriers on these categories of goods need to be minimised if not eliminated.
5. Next, and qualitatively different to 20th century globalisation, the workforce is relevant. Whereas in the past, FDI in developing countries was driven either by trade barriers (tariff jumping) or cheap labour, today much more emphasis is laid upon the education of workers. In particular when planning to plug in and/or to upgrade in value chains, governments should consider the level of education in their countries. These considerations should also contain the innovative potential within the country. In connecting to GVCs, education is important as it determines where a country can ‘anchor’ itself in a value chain, that is, in which processes/areas will it be perceived as attractive for FDI. From that point on, upgrading is the challenge. The significance of upgrading is also pointed out by Bernhardt (2013), who concludes for a sample of developing countries in the global apparel industry that economic upgrading seems to be conducive to social upgrading.

ACP countries in GVCs

In the literature concerning the impact of GVCs on developing and emerging economies, there is a consensus that participation within these networks is crucial for securing enhanced access to markets and knowledge networks, and new opportunities for production capability formation by local suppliers (Ernst and Kim 2002). However, most developing countries, among them African, Caribbean, and Pacific (ACP) countries, perform relatively poorly, facing a number of barriers to trade comprising geographical, institutional, and infrastructural aspects (Mumuni 2013). The need to tackle these barriers is especially relevant in light of the recent developments of GVCs, comprising trade in services and the shifting geography of locations, which might offer new opportunities for the ACP countries to finally plug-in or upgrade within existing value chains (Draper and Lawrence 2013).

It is impossible to measure the integration of all ACP countries into GVCs, since the necessary input-output data are only available to a limited extent. In Draper et al. (2014), in order to classify the ACP countries according to their current degree of global integration, we used the KOF Index of Globalization. This is based on three dimensions: economic, social, and political (Dreher 2006).1 Our analysis makes use of the overall globalisation index in order to take account of the whole extent of integration. Three groups are identified: highly globally integrated, highly regionally integrated, and weakly integrated countries. In order to identify global integrators, the global median over all country indices available in the data is taken as a benchmark. For regional integrators, the regional median of the index serves as a benchmark. Countries below the regional median are classified as weakly integrated countries. Annex 1 lists the ACP countries grouped according to this classification.

How do the ACP countries perform regarding the requirements mentioned above?

1. Market access in general is not considerably restricted; for services, professional services are heavily restricted to FDI and movements of natural persons.
2. Major constraints in infrastructure, especially the quality and availability of transport infrastructure exist.
3. Institutional settings are rather bad (corruption is a general problem; quality of institutions and granting of property rights are major problems as well).
4. All ACP countries perform rather poorly for the indicators reflecting the business sophistication capacities, including workforce.
5. There are gradual differences – highly integrated countries perform a bit better.

Differentiated policy measures

The classification of the ACP countries according to their current degree of global integration, as applied in this column, is indicative of the basic mutual challenges each group faces. Striving for upgrading opportunities, the basic challenge of the highly integrated ACP countries is increased business sophistication and innovation capacities. For that purpose, opening professional services sectors to commercial presence is desirable, if sometimes politically fraught. In addition, opening to temporary movement of natural persons is a vital step. However, the group of weakly integrated countries faces for the most part basic challenges of infrastructure development and improvement of institutional settings in order to facilitate value chain participation and to ensure adequate responsiveness to stimuli by surrounding growth poles. An improved institutional framework is also the major challenge for the group of small and mostly remote islands.

It should thus be clear that all measures to enhance integration into GVCs heavily depend on the institutional quality and governance structure in a country. However, given the difficulties outlined above, for ACP countries even better institutions may not be sufficient. Integration into regional value chains (RVCs) seems more appropriate. This includes regional integration, growth triangles, special economic zones, and development corridors. The relevance of RVCs is amplified by the regional impact some ACP countries have – among them South Africa, Kenya, and Nigeria. Regarding MNCs, ACP countries should aim at attracting second- and third-tier firms. From the perspective of ACP countries, there is another aspect to be considered. It has been suggested (Kaplinsky and Morris 2001) that ethnic and/or cultural links between producers and customers may play a role.

Even though market access did not emerge as a major constraint, it is our opinion that governments should minimise political barriers to trade. This includes tariffs, subsidies, and other non-tariff barriers. Their dismantling is crucial for domestic productivity.

References

Bernhardt, T (2013), “Developing countries in the global apparel value chain: a tale of upgrading and downgrading experiences”, Capturing the Gains Working Paper 2013/22, New School for Social Research, New York. 

Cattaneo, O, G Gereffi, S Miroudot, and D Taglioni (2013), “Joining, upgrading and being competitive in global value chains”, World Bank Policy Research Working Paper 6406. 

Draper, P, A Freytag, and S Fricke (2014), “The potential of ACP countries to participate in Global and Regional Value Chains: A Mapping of Issues and Challenges”, Study for the ACP MTS-Programme, Jena and Pretoria. 

Draper, P and R Lawrence (2013), “How should Sub-Saharan African countries think about global value chains?”, Bridges Africa Review, 2(1).

Dreher, A (2006), “Does Globalization Affect Growth? Evidence from a new Index of Globalization”, Applied Economics, 38(10): 1091–1110.

Ernst, D and L Kim (2002), “Global production networks, knowledge diffusion, and local capability formation”, Research Policy, 31: 1417–1429.

Kaplinsky, R and M Morris (2001), “A handbook for value chain research”, Report prepared for the International Development Research Centre. http://www.prism.uct.ac.za/Papers/VchNov01.pdf

Mumuni, A M (2013), “Opportunities offered by South-South trade for the economic and trade development of ACP states”, Keynote address by the Secretary General at the 4th Global Review of Aid for Trade: Connecting to Value Chains, Geneva, Switzerland, 9–10 July.

Annex 1. Classification of ACP countries into global and regional powers according to the KOF Index of Globalization 2012

Globally important

Regionally important

Source: Dreher (2006).

Notes: Missing countries: Republic of the Congo, Somalia, Antigua and Barbuda, the Bahamas, Barbados, Belize, Guyana, Cook Islands, Federated States of Micronesia, Marshall Islands, Nauru, Niue, Tonga, and Tuvalu.

Endnotes

1 Other databases, such as the OECD/WTO Trade in Value Added or the UNCTAD Eora database are either restricted to OECD countries, not comprehensive enough, or arbitrary in the choice of non-OECD countries.