Chapter 2. Strengthening regional value chains in the African Continental Free Trade Area
This chapter identifies priority policies to facilitate regional value chains in the context of the COVID-19 pandemic and the African Continental Free Trade Area (AfCFTA). First, it reviews past efforts at continental and regional levels to develop regional value chains and highlights key lessons for implementing the AfCFTA. Second, it offers recommendations on how African policy makers can work with the private sector to accelerate digital adoption and reduce the costs of cross-border trading and production. Third, the chapter reviews public policies to create stronger linkages within African industrial networks. It focuses on policies related to skills development, public procurement and investment.
African governments have committed to developing regional value chains (RVCs) through a number of programmes and strategies both at regional and continental levels. Many initiatives have suffered from implementation gaps. Bridging these gaps requires bottom-up RVC policies including involving the private sector more closely. Better mobilising domestic resources and new sources of financing is equally important to ensure ownership, implementation and adequate results monitoring.
These lessons and the megatrends highlighted in Chapter 1 bring forward two cross-cutting areas for regional co-operation:
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Policy makers and the private sector can work together to reduce the costs of intra-African production and trade. These costs have increased to the levels of 2007. Scaling up innovative solutions in logistics and finance can help lower them. Developing intra-regional Internet infrastructure and ensuring accommodative regulations for cross-border data flow are other necessities in the digital era. In 2020, intra-regional bandwidth as a share of total Internet bandwidth reached 16% in Africa compared to 20% in Latin America and the Caribbean, 56% in Asia and 75% in Europe.
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Policy makers can actively strengthen linkages between workers, domestic producers and multinational enterprises. Countries can take advantage of the AfCFTA process to develop skills, public procurement and common investment frameworks. Focusing on business clusters can help increase domestic competitiveness and facilitate investments. Between 2012 and early 2019, the night light intensity of cluster areas – a proxy for cluster activity and development – almost doubled.
Since the 1980s, African institutions have undertaken initiatives to foster regional and global value chains as part of a broader strategy for productive transformation. Table 2.1 presents those initiatives, along with their main objectives and challenges to implementation. In 2003 for example, the African Productive Capacity Initiative set two targets for regional value chains to achieve by 2015: i) to produce “goods that meet the quality requirements of present markets”; and ii) “to upgrade in order to tap future markets”. Each region was assigned one or more value chains to develop by 2015 (Marti and Ssenkubuge, 2009).
Over the past few years, Regional Economic Communities have defined road maps of specific regional value chains. The regional level offers the opportunity to identify value chains based on comparative advantages, such as those mentioned in Annex 2.A1. For instance, the Southern African Development Community (SADC) Regional Industrialisation Roadmap 2015-2063 aims to develop six regional value chains (agro-processing, minerals and mining, pharmaceuticals, other consumer goods, capital goods, and services). Since 2014, the Economic Community of West African States (ECOWAS) and the West African Economic and Monetary Union (WAEMU) have adopted the West Africa Competitiveness Programme, a six-year plan to support eight selected value chains (cassava, textile and garments, mango, information and communications technology, onion, pineapple, hides, and skin and leather) at the national and regional levels. Following the development of the East African Community (EAC) Cotton, Textiles and Apparel Strategy, the industry emerged as priority sector within national development plans of member countries, with the common target to build a globally competitive textiles and apparel industry.
Despite the rising numbers of initiatives, the majority have fallen short of the expected results so far. Most African economies have not been able to expand their participation in regional value chains (see Chapter 1). Intra-regional trade continues to account for only 15% of Africa’s total trade. The limited domestic fulfilment of many regional and continental commitments has also led to concerns over a “crisis of implementation” (AU, 2017). However, it is important to highlight that the slow pace of economic integration in Africa is similar to most other regional integration efforts across the world. For example, the European Single Market came into existence only some 35 years after the European Economic Community identified the development of a common market as a core objective. Additional challenges such as slow productive transformation have also limited the progress.
These experiences highlight the importance of avoiding a top-down approach in developing regional value chains. Top-down approaches are likely to overlook specific conditions, needs and opportunities for firms when producing and trading across borders in Africa (Hartzenberg, 2011; Ndzana Olomo, 2021a). Furthermore, failing to take into account domestic interests and incentives often results in an implementation gap. Regional initiatives may falter when facing entrenched political and business interests (Byiers et al., 2021).
Limited domestic resource mobilisation has hindered the implementation of past regional industrialisation programmes. Most initiatives have lacked adequate resources and institutional mechanisms for monitoring and evaluating implementation. For instance, many countries have not respected their commitment to the Maputo Declaration that calls for reserving at least 10% of national budgets for agricultural development (AU, 2016). The Industrial Development Decade for Africa was unable to formulate an operational strategy for allocating financial resources. Similarly, many countries have failed to implement programmes of the New Partnership for Africa’s Development (NEPAD), which relied too heavily on unpredictable external financial inflows. Improving domestic resource mobilisation will thus be essential to fund the implementation of regional development strategies. As such, the African Union aims to finance 75-90% of the Agenda 2063 targets through domestic resource mobilisation, with the remainder coming from external financing mechanisms.
Private sector participation is key for developing regional value chains
African institutions can better engage with the private sector in designing and implementing RVC policies. Byiers et al. (2021) propose a six-step adaptive and problem-driven approach for co-operation between public and private sectors. Adopting a bottom-up process driven by the private sector helps sustain political momentum, while better identifying priorities, such as lowering tariffs, providing infrastructure, developing skills and enhancing access to finance (OECD, 2020).
Regional Economic Communities play an important role in facilitating private sector engagement in regional value chains (AfCFTA/UNDP, 2021). In recent years, a number of regional programmes have emerged that provide new platforms for discussion between policy makers, business representatives and relevant stakeholders in strategic value chains. For example, the annual editions of the Banking and SME Fair in WAEMU, begun in 2014, have gathered 525 exhibitors and set up nearly 1 200 business-to-business meetings. Since 2009, the Ghanaian section of the West Africa Competitiveness Programme has facilitated a series of projects to connect the Federation of Ghanaian Exporters, the Ghana Export Promotion Authority and the Enterprise Support Program - Matching Grant Scheme. Such projects can help identify the major constraints and opportunities in production, processing, compliance and access to markets for value chains (WACOMP Ghana, 2020).
Strengthening the institutional representation of small and medium-sized enterprises can ensure the inclusiveness of RVC integration, improve linkages and create more jobs. Better representation of small and medium-sized enterprises in industrial associations can accommodate their interests by increasing their bargaining power and communicating their specific needs in policy discussions. For instance, the Durban Auto Cluster and the South African Automotive Benchmarking Club allow local suppliers in the Durban automotive clusters to interact and collaborate to meet customer demand (UNCTAD, 2010).
Better mobilising domestic resources and unlocking new sources of finance are needed to reduce financing gaps in regional strategies
At the national level, reforms on tax administrations can improve domestic resource mobilisation and strengthen financial resources available to African governments. Some countries have achieved significant progress in expanding their revenues through administrative reforms. In Rwanda, for instance, the digitalisation of tax collection systems has contributed to improve compliance. On average, the tax-to-GDP ratio across 30 African countries increased over the last decade to reach 16.6% in 2019. Nonetheless, this increase remains below the average growth observed in Latin America and the Caribbean and OECD countries during the same period – suggesting room for further improvement (OECD/AUC/ATAF, 2021a). In addition, tackling illicit financial flows helps fight against financial corruption and preserve resources for Africa’s development. In this regard, the African Union, alongside African governments and international partners, is actively working on improving transparency and the cross-border exchange of information in their tax investigations (AU, 2019a; OECD/AUC/ATAF, 2021b).
Diversifying funding sources is crucial in the context of COVID-19 (Ndzana Olomo, 2021b). As the fight against the pandemic has significantly reduced the fiscal space available to African governments, countries need to “crowd in” private investment (see Chapter 1). So far, public-private partnerships remain limited: only seven countries (Egypt, Ghana, Kenya, Nigeria, Tanzania, Uganda and South Africa) accounted for 50.3% of the 759 public private partnerships to develop infrastructure in Africa since 1990. Some recent public-private partnership projects also raise concerns over their fiscal implications for state budgets (IMF, 2019).
Better supranational co-ordination increases the achievement of priorities and broadens the country destinations for public-private partnerships (OECD/ACET, 2020). It also can provide strategic assistance to improve legal, regulatory and institutional frameworks in order to attract new sources of capital to African countries. For instance, the African Development Bank set up the African Financial Alliance for Climate Change, linking stock exchanges, sovereign wealth funds, central banks and other financial institutions. It aims to mobilise capital and shift portfolios towards green investment.
Regional development banks and international partners can play a critical role in this process. Regional development banks and dedicated initiatives such as the Africa50 Infrastructure Fund can facilitate dialogue and matching among potential stakeholders, help develop project pipelines and provide feasibility studies. Addressing uncertainties, such as the public sector’s capacity to design and monitor project development processes, could reduce private investors’ perception of high risk when investing in Africa.
African governments can develop value chains by attracting more investment in green infrastructure projects. The growing attention from public and private investors to environmental, social and governance standards makes green infrastructure projects increasingly attractive to them, generating new initiatives across the continent to tap these financing sources. At the regional level, African heads of state set up the African Adaptation Initiative to mobilise USD 1 billion by 2025 by issuing a continental climate bond. Creating a visible pipeline of infrastructure investment opportunities aligned with environmental, social and governance standards can help attract investors’ attention. For instance, in 2021, the African Development Bank and the European Investment Bank launched a shared pipeline of investment projects aimed at tackling climate change and environmental sustainability. Nonetheless, transparency and impact reporting practices will be crucial to avoid greenwashing (defined as positive communication on projects with poor environmental performance). Most recently, 16 African countries joined the United Nations Sustainable Stock Exchanges initiative to set common standards and co-operation platforms for green bonds issuance.
Beyond resource mobilisation, more effective means of channelling funds and ensuring the bankability of regional projects are needed. Addressing capacity gaps in project cycles can help accelerate quality cross-border infrastructure development. Under the first phase of the Programme for Infrastructure Development in Africa (PIDA, 2012-20), less than half of the projects reached the construction or operational stage. Applying recognised standards of quality, such as the PIDA Quality Label of the African Union Development Agency-New Partnership for Africa’s Development (AUDA-NEPAD), can both enhance the quality of project preparation and reassure potential investors as to the feasibility of the projects (OECD/ACET, 2020).
To encourage investment in regional infrastructure, African countries and their development partners need to apply accurate discount rates in evaluating the costs and benefits of cross-border projects. Discount rates measure the rates at which a society would be willing to forego present consumption for future consumption. Many government agencies in Africa apply discount rates of 10-12% with short evaluation periods when evaluating projects, following norms set by the World Bank and multilateral development banks (UNDP, 2016). However, such a practice prioritises short-term needs and discourages projects with significant immediate costs and long-term benefits, such as infrastructure (especially rail) and climate resilience projects. For comparison, since 2003, the Government of the United Kingdom has lowered the standard discount rate for evaluating public investment from 10% to 3.5% over a 30-year evaluation period.1 The existence of various national rates in Africa also suggests a need to adopt a common discount rate for regional institutions and cross-border infrastructure (as done in the European Union) or to harmonise the principles that determine national discount rates.
Planning and evaluation frameworks should factor in the supra-national benefits of cross-border projects. In cross-border projects where each jurisdiction is responsible for the funding of its national section, project evaluation is fragmented into separate national evaluations of the respective sections. As a result, many countries often fail to factor in the benefits to non-residents, undercounting the net benefits of regional investments. Consequently, when starting the Trans-European Networks Programme in 1997, the European Union adopted new calculations that incorporate the “community component of the social return” in order to properly account for such benefits. These calculations boosted by a quarter the social return from the Paris-London-Brussels-Cologne-Amsterdam high-speed rail project, the first project of the network. Adopting comparable calculations for the cross-border projects of PIDA could better determine their net benefits, in absolute terms and relative to domestic projects.
← 1. The United Kingdom Social Time Preference Rate has two components: a time preference (capturing the preference for value now rather than later) and a wealth effect (reflecting changes to values thanks to expected growth in per capita consumption over time).
Source: Roy, R. (forthcoming), “The case for intra-continental trade: The re-orientation of Africa’s trade and the twin challenges of development and environment”, background paper for Africa’s Development Dynamics 2022.
The COVID-19 pandemic and rising domestic markets are accelerating the digital transformation in Africa. Among others, new digital solutions, especially in logistics and financial services, have the potential to alleviate the high costs of intra-Africa production and trade. This section explores how policy makers can work with the private sector to scale up such solutions by addressing critical issues related to regulation, co-ordination and infrastructure.
Furthermore, the digital transformation of production networks creates new demands for the safe and seamless flow of data across borders. The section explores the various policy options to tackle this challenge at the national, regional and continental levels, especially in the context of the AfCFTA process.
Governments can help scale up innovative solutions in trade logistics and finance
Problems with trade-related services such as logistics, trade finance and payments are major bottlenecks to African exchanges. For example, logistics costs in Africa are three to four times higher than the world average (Plane, 2021). Africa’s trade finance gap, broadly measured by the total value of rejected applications for banks’ trade finance, stood at USD 81.8 billion in 2019 – thus reducing the ability of African producers to compete in international markets. Similarly, cross-border payments in Africa are costly and often delayed (see Box 2.2). These bottlenecks affect micro, small and medium-sized enterprises in particular. For example, those enterprises benefited from only 34% of trade finance in 2019, despite representing 80% of Africa’s firms (AfDB and Afreximbank, 2020). They also create the majority of jobs.
New start-ups are transforming the quality and costs of support services, reducing constraints to cross-border trade. Start-ups in the logistics sector have introduced innovative platforms to connect markets, lower transport costs, and increase service predictability and transparency. For example, the Lagos-based Kobo360 has developed a digital platform using the Global Positioning System (GPS) to connect freight owners and 10 000 truck owners, drivers and cargo consignees, reducing supply chain costs and ensuring traceability of products. In fintech, start-ups such as Asoko Insight, Matchdeck and Fraym are collecting and enhancing information on African businesses to facilitate credit assessment. They propose time- and cost-saving solutions to connect African companies with future stakeholders and democratise access to investment ecosystems like platforms for remote transactions.
Traditional players, especially in the financial sector, are also innovating to respond to the competitive pressure and the challenges of the COVID-19 pandemic. A recent survey suggests that 80% of African banks enable customers to access banking services through mobile or Internet platforms and over 50% provide mobile money wallets. Following the COVID-19 shock, most banks surveyed plan to spend an average of USD 5 million, or 1.2% of their assets, on digitalising their offers and business models by 2022 (EIB, 2021). Applications of advanced digital technologies such as blockchain are also emerging. For instance, Ecobank uses its Omni Platform, and Standard Bank has a Hyperledger Fabric-hosted blockchain platform for payments in foreign currency.
Applying innovative solutions requires overcoming three major challenges to digital adoption across supply chains (see Chapter 2 of Africa’s Development Dynamics 2021 for a detailed discussion):
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First, regulatory barriers continue to slow down the digital adoption in these sectors. For example, only a few countries in Africa (Cameroon, Egypt, Nigeria and South Africa) currently permit e-signatures and electronic authentication of official documents for financial transactions (COMESA, 2020).
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Second, interoperability is key to avoid lock-in to uncompetitive winner-take-all digital platforms and to facilitate cross-border integration of finance, logistics and trade flows. By 2019, 23 African countries had interoperable mobile money systems, increasing peer-to-peer transfer volumes by 25% and flows to and from bank accounts by 32% (GSMA, 2019).
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Third, investment in physical infrastructure remains critical. Modernising customs administration infrastructure is key for enabling digital applications in logistics (e.g. real-time tracking) and in trade finance and payment (e.g. smart contracts). Similarly, logistics costs will not drop off without significant investment in better storage management to ensure the quality of goods and mitigate the effect of price volatility throughout the supply chain.
African countries need to respect the AfCFTA’s protocol on e-commerce to accelerate regulatory harmonisation at the continental level. Enhancing dialogue between regional regulatory authorities, central banks, digital financial intermediaries and the private sector can help harmonise regulations. In some areas, such as trade finance, digital financial intermediaries can play a strategic role in linking a variety of actors with sufficient capital. For payments, a number of initiatives are building integrated regional and continental systems to reduce the time and costs of cross-border payments (Box 2.2).
Cross-border transactions in Africa often involve multiple intermediaries due to different regulations, currencies and time zones, leading to delays and additional costs. In 2017, about 80% of cross-border payments in Africa required an intermediary settlement currency, most often United States dollars, resulting in high transaction fees ranging from 3% to 10% (Swift, 2018).
Scaling up integrated regional payment systems could streamline cross-border payments between suppliers. Multiple regional payment systems have emerged to reduce the costs and time associated with cross-border payments, decrease liquidity requirements from central banks and strengthen regulators’ oversight of cross-border transactions. At the continental level, the Association of African Central Banks, in partnership with the AUC and Afreximbank, set up the African Inter-Regional Payments Integration Task Force to develop an integrated framework to facilitate cross-border payments (AU, 2019b). Existing regional experience offers learning opportunities to support the development of a continental payment settlement system:
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Expanding regional payment systems to smaller amounts to reach sufficient scale and include more small and medium-sized enterprises. Smaller countries might benefit from using regional payment systems infrastructure to scale up domestic retail payments. For instance, the Common Market for Eastern and Southern Africa (COMESA) Business Council aims to develop a low-value regional digital payment scheme to reinforce smaller firms’ inclusion and harmonise regulations by bringing together regional financial services regulators (COMESA, 2021).
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Avoiding overlaps and inefficiencies in national and regional mandates. In the Economic Community of Central African States, for instance, the regional banking sector regulator establishes financial services regulations, while other regulations, such as for data and consumer protection, are set nationally and may overlap or conflict with each other. Capacity building initiatives could also provide guidance on how to set up reliable national banking systems.
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Providing multicurrency cross-border systems. In SADC, the transaction values settled through the SADC real-time gross settlement system have grown over time but still represent only about 1% of the total value transferred. This partly reflects the prevalence of the United States dollar for cross-border payments in the SADC region and the relatively high liquidity management costs for participating banks (BIS, 2020).
Governments can facilitate co-ordination among market actors to increase interoperability across different platforms. Since 2014, in Tanzania, national regulators have supported mobile money providers and local banks have partnered to co-ordinate and offer interoperable peer-to-peer payment services; by 2017, these had reached as much as 30% of total transactions. In logistics, the Kenyan government and the East African Grain Council have been working together since 2008 to create a new warehouse receipt system, resulting in 18 private warehouses certified alongside the state-owned and state-operated warehouses. In 2016, the income of the participating warehouses increased by 14-40% (EAGC, 2016).
The digitalisation of cross-border customs operations can help governments to reduce costs and increase transparency. The Automated System for Customs Data (ASYCUDA) programme adopted by 27 African countries, has helped increase and secure customs revenue, and reduce clearance times and trade costs (UNCTAD, 2020). For example, the Abidjan-Ouagadougou corridor in West Africa experienced a 111% increase in transit documents processed between 2019 and 2020. Other countries, such as Morocco, have implemented their own automated customs systems. Morocco’s system has contributed to a 20% increase in customs duties collected and an acceleration of export procedures from 2-3 days to 15-20 minutes (INSME, 2019).
Co-operation in providing soft and hard infrastructure for data will improve data flow across African countries
Ensuring the safe and seamless flow of data across borders is key to building regional value chains in the context of Industry 4.0. All stages of modern production and supply chain management increasingly depend on generating, sharing and processing digital data (see Chapter 1). Moreover, connecting Africa’s national digital economies through a seamless cross-border data flow will generate economy of scale, attract investment in critical areas such as data centres and boost competitiveness.
African economies need to continue to build hard infrastructure for cross-border data flow. New analysis of Africa’s international Internet bandwidth performed for this report reveals that Africa’s Internet network is increasingly oriented towards other African partners, albeit from a low base. Intra-regional bandwidth has increased in Africa from 11% of total bandwidth in 2015 to 16% in 2020 (Figure 2.1). However, this estimate trails far behind other world regions such as Latin America and the Caribbean (20%), Asia (56%) and Europe (75%). Plugging this gap is particularly important to connect landlocked countries to the undersea cable and to reduce latency for intra-Africa Internet traffic. To do this, the PIDA plays an important facilitator role in attracting new investment to expand the terrestrial fibre-optic network and enhance Internet exchange points among African countries.
Note: Data reflect traffic and bandwidth utilisation over Internet bandwidth connections across international borders. Data as of mid-year.
Source: Authors’ elaboration based on data from Telegeography (2021), Global Internet Geography (database), www2.telegeography.com/telegeography-report-and-database.
Africa’s performance in adapting favourable regulations for data flow is limited. A recent assessment of 28 African countries identifies weak regulations on data protection as one of the main restrictions to digital trade on the continent (OECD/ECA, forthcoming). Another exercise suggests that African countries are less likely to have an open model for domestic and cross-border data transfers than other developing countries (Ferracane and van der Marel, 2021). Open data regulation helps facilitate trade in services and increase the productivity of local firms (Ferracane and van der Marel, 2018).
African countries can rely on a variety of mechanisms to enable cross-border data flows (Table 2.2):
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African countries have been active in using plurilateral arrangements to harmonise approaches to cross-border data flows. However, results have proven uneven. The ratification in 2014 of the Convention on Cyber Security and Personal Data Protection (the Malabo Convention) has stagnated, and adoption of the 2013 SADC Model Law on data protection is limited. So far, only ECOWAS Personal Data Act is in place. The African Union’s Digital Transformation Strategy for Africa (2020-2030), adopted in 2020, is the most recent and ambitious of all pan-African efforts to create a Single Digital Market on the continent.
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The adoption of provisions related to e-commerce and data remains limited among the trade agreements in Africa; partners outside of Africa tend to be given priority. Going forward, the sparsity of e-commerce-related provisions in trade agreements can help avoid overlapping rules, which have often limited integration efforts for trading goods in Africa.
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Regarding unilateral mechanisms, 32 of the 54 African countries have enacted data privacy laws. About half of these laws are not yet in force, or not fully effective, nor are they harmonised between countries in most cases.
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In terms of standards and technology-driven initiatives, Africa has largely adopted global norms in the development of digital technology and infrastructure.
At the national level, establishing a data protection authority (DPA) enables the enforcement of data protection laws adopted by various regulatory mechanisms. DPAs can facilitate enforcing data protection laws by detecting, investigating and penalising violations. They can also help increase awareness of data protection rights and obligations. To date, 15 African countries have established a national DPA to enforce the law with varying levels of capacity (Greenleaf and Cottier, 2020; Ilori, 2020). To ensure greater data protection, more countries need to establish independent DPAs with robust legislative and enforcement frameworks.
Regional Economic Communities can help shift data protection laws from a national preoccupation to a continental-wide concern. For example, the African DPA Network was created in 2016 to share privacy practices, foster co-operation between African DPAs and support countries that may not have the resources and capacity for effective DPAs. Currently, however, only 11 African countries are part of this network. Regional Economic Communities need to expand the scope of existing plurilateral agreements to the continental level to improve customers’ trust and legal certainty for investments. For instance, in Côte d’Ivoire, processing personal data outside of the ECOWAS region requires prior authorisation, as mandated by the ECOWAS DPA. To take advantage of opportunities that arise from continental integration, this approach needs to become an Africa-wide standard.
At the continental level, African governments need to take advantage of the AfCFTA process to adopt a holistic approach to digital transformation. The accelerated negotiation of the protocols on e-commerce allows for discussion of other cross-cutting issues such as service trade, competition and investments. A unified continental approach, combined with the implementation of the African Union’s Digital Transformation Strategy for Africa (2020-2030), is also critical to give African countries a stronger advantage in shaping global data governance (AUC/OECD, 2021). African governments can also future-proof the AfCFTA by including explicit commitments to international data agreements and international mobile roaming services. These issues have featured prominently in recent trade agreements, such as the 2021 free trade agreement between Iceland, Liechtenstein, Norway and the United Kingdom.
Strengthening linkages between workers, suppliers and multinational enterprises is vital to developing regional production networks. However, weak productive capacities and barriers to investments continue to limit their development (see Chapter 1).
This section identifies policies to strengthen RVC participation for workers, local producers and lead firms. First, it reviews policy priorities for developing skills, especially in the context of the digital transformation and opportunities in green value chains. Second, it highlights how public procurement can create a demand-pull for industrial upgrading among regional producers. Third, the section explores how harmonising domestic investment frameworks and facilitating investment among existing networks of industrial clusters can help attract lead firms.
Skills policies depend on the specific needs and upgrading goals in each value chain
A skilled workforce is key to attracting investment and increasing linkages with lead firms. Talent and skills rank among the top four determinants driving foreign investment to developing economies, alongside political and macroeconomic stability and sound regulatory frameworks (World Bank, 2020). Many downstream activities such as sewing (textiles) and assembly (electronics) depend on abundant manual labour as well as supervisors, managers and quality controllers. Participation in higher value-added and knowledge-intensive activities including research and development, industrial design, and aftercare services requires technical and other advanced skills. So far, technical and vocational education and training (TVET) remains limited, and significant mismatches persist between youth education and career aspirations, hindering the potential for upgrading (Box 2.3).
The gap between youth job aspirations and the reality of the labour markets in Africa is large (AU, 2018). Accelerating the creation of quality jobs is crucial to absorb into the labour markets the 29 million Africans reaching working age each year from now until 2030 (AUC/OECD, 2019). Currently, the majority of jobs available remain in agriculture. Globally, over one-third of rural youth work in agriculture, while the share can reach very high levels in low-income countries (e.g. 71% in Uganda and 79% in Madagascar) (OECD, 2018). Around 39% of surveyed youth across ten African countries work in agriculture compared to 14% in manufacturing and construction, 26% in trade and transportation, and 21% in all other services. However, most jobs in agriculture, occupied by women at 54% in 2019 (ILO, 2020), are characterised by low pay and poor working conditions, without formal contracts or basic social protection, making them less attractive for young people.
An OECD study on career aspirations shows large gaps between what young Africans want to do and the reality of the labour markets. Evidence from ten countries – Benin, Republic of the Congo, Egypt, Liberia, Madagascar, Malawi, Tanzania, Togo, Uganda and Zambia – shows that over 80% of youth in school wish to work in high-skilled occupations, while in reality only 8% are able to find such jobs. Job security was noted as the most important driver of job satisfaction, even more than earnings. Indeed, 74% of youth want a job in the public sector for the job security, while only 12% of employed youth are found in this sector. Agriculture-related work or medium-skilled jobs in manufacturing are the least attractive for young Africans.
Even if labour market conditions were to improve, the large gap between aspirations and the reality of the labour markets is likely to persist due to the high level of skills mismatch. According to subjective measures, about 55% of young African workers think that their education is relevant to their job, while the others feel either overqualified or underqualified, with underqualification affecting more young people in low-income countries. When using a normative approach – comparing actual qualifications with the qualifications required for a job – only 29% of young workers are actually qualified for the work that they do.
Long-term unmet career satisfaction can lead to social unrest, and policies are urgently needed to address the misalignment between youth employment preferences and employment opportunities. A two-pronged approach is recommended: i) helping young people shape career aspirations that are realistic and that can fit with the world they will be entering; and ii) improving the quality of jobs with due regard to the job conditions that matter for young people, particularly in agriculture. Agriculture is the main provider of jobs for rural youth in Africa and will remain so for some time. Making farming and related medium-skilled occupations in food processing or food services more attractive for young people means ensuring job security, providing training for skills upgrading, improving farmers’ income and modernising agricultural practices.
Source: Lorenceau, A., J. Rim and T. Savitki (2021), “Youth aspirations and the reality of jobs in Africa”, OECD Development Policy Papers.
Skills policies for value chain development need to be tailored to the specific segments of value chains and the upgrading goals. Figure 2.2 summarises different approaches to address the challenges for upgrading skills in regional and global value chains. In the long term, reforms to education systems are necessary, in particular to improve the quality of education and its alignment with labour market needs (AfDB, 2020) and to include disadvantaged populations (e.g. women, rural dwellers). In the short to medium terms, focusing on upskilling and reskilling, according to sector-specific and socio-economic transformation needs, is crucial.
Notes: RVCs = regional value chains; GVCs = Global value chains; TVET = technical and vocational education and training; STEM= science, technology, engineering and mathematics.
Source: Adapted from Fernandez-Stark, Bamber and Gereffi (2012), “Upgrading in global value chains: Addressing the skills challenge in developing countries”, OECD Background Paper.
Strengthening the collaboration between the private sector, training institutions and policy makers at the sectoral level can help identify the skills needed in the workforce and design appropriate training programmes. In Rwanda, for instance, the government set up the National Agricultural Export Development Board to facilitate dialogue and provide training to private stakeholders and co-operatives involved in agricultural and livestock production for export (World Bank, 2015). In Guinea, the International Finance Corporation and international mining companies have supported more than 100 local suppliers in the mining sector by providing training, building managerial capacity and facilitating access to finance. Through the programme, these local businesses have gained USD 9.1 million in contracts with the lead firms (World Bank/KEDP, 2015). Governments can also promote on-the-job training to upgrade workers’ capabilities. Currently, only 28% of African firms offer formal training to their workers (World Bank, 2020). In South Africa, providing tax incentives has encouraged firms to offer training opportunities to employed and unemployed South Africans aged 16 to 35 (OECD, 2017).
Skills policies need to adapt to new requirements emerging from the digital transformation. Addressing the growing need for digital skills can help workers upgrade their capacities at all levels of a value chain. In the food value chain, for instance, the provision of basic digital skills and foundational skills (literacy, numeracy) could help on-farm workers benefit from new technologies to improve production yields and connect to local markets (AfDB, 2020; Jeehye et al., 2020). In 2021, the African Union, AUDA-NEPAD and UNESCO launched the Pan African Initiative for Digital Transformation of TVET and Skills Development Systems in Africa to reform both formal and informal technical and vocational education and training systems and adapt to the growing transversal and digital skills requirements (UNESCO, 2021).
Policy makers can also design skills policies to tap new opportunities in “green” value chains and to help existing sectors such as agriculture or manufacturing adapt to climate change. Successfully transitioning to environmental sustainability will require reskilling and upskilling the current and future workforce. For instance, Senegal’s National Strategy for the Promotion of Green Jobs (2015-2020) provided support to strengthen skills and capabilities in green industries, which resulted in the creation of over 2 000 green jobs mainly for youth and women (UN, 2019). At the regional level, ECOWAS adopted both the Energy Efficiency Policy and the Renewable Energy Policy in 2013, developing a harmonised framework for qualification standards and skills certification in the renewable energies sector.
Intra-regional skills mobility should be encouraged to alleviate skill shortages and foster further integration. Skills mobility largely determines participation in manufacturing global value chains for African countries (Yameogo and Jammeh, 2019). Existing initiatives by Regional Economic Communities have laid the groundwork for removing restrictions on the intra-Africa mobility of skilled labour and reducing labour market mismatches across the continent. For instance, the East African Community (EAC) implemented sector-specific mutual recognition agreements in accounting, architecture, engineering and veterinary practices. Since 2011, nine SADC countries have started to harmonise their national qualification frameworks, with the aim to improve the comparability and recognition of professional skills (Sawere, 2019).
Modernising and broadening public procurement programmes will help regional producers upgrade their industrial capacity
Public procurement can create a strong demand-pull for local producers. Over the 2015-19 period, public procurement – the purchase of goods and services by governments and state-owned enterprises – accounted for a yearly average of 8.7% of gross domestic product in Africa compared to 8% in developing Asia and 6% in Latin America and the Caribbean (Figure 2.3). Through tools such as “buy national” policies, set-asides for targeted groups (such as small and medium-sized enterprises) and technology transfer requirements for foreign bidders, public procurement contracting can create employment, promote firms’ upgrading and develop regional supply chains (UNIDO, 2017). Findings from a survey across 19 African countries suggest that a 10-percentage-point increase in the share of total output sold to a government is associated with 4% higher productivity (Hoekman and Sanfilippo, 2020). Given the importance of public procurement for industrial development, the African Union recently called upon member states to allocate at least 30% of public procurement contracts to the African private sector, including small and medium-sized enterprises and women- and youth-owned businesses (AU, 2021).
The current use of public procurement in Africa raises concerns over its efficiency and inclusiveness. Calculations based on the World Bank Enterprise Surveys show that 32% of African firms resort to bribery to secure government contracts. Without a competitive and transparent bidding process, preferential procurement policies create dependencies and inefficiencies across the supply chain, reduce the availability of competitively priced inputs and skilled workers, and deter foreign investment. Furthermore, many producers, especially small and medium-sized enterprises, cannot engage in public contracts due to the slow payment process, government arrears, and lack of adequate information, knowledge and skills to successfully tender for government contracts. On average, producers in Africa have to wait six months to receive payments from public contracts (World Bank, 2016).
Note: This figure draws on the OECD methodology to derive general government procurement spending. Africa, developing Asia, and Latin America and the Caribbean (LAC) averages are weighted. Asia includes 11 countries: Afghanistan, Indonesia, Jordan, Kyrgyzstan, Mongolia, Myanmar, Nepal, Philippines, Thailand, Timor-Leste and Uzbekistan. LAC includes 9 countries: Brazil, Chile, Colombia, Costa Rica, El Salvador, Honduras, Mexico, Paraguay and Peru.
Source: Authors’ calculations based on the OECD methodology and data from IMF (2021), Government Finance Statistics (database), https://data.imf.org.
Investment in e-procurement systems can improve timely and transparent payments of suppliers. The use of e-procurement systems stands at less than 25% for most African countries, compared to more than 75% for member states of the European Union and the Association of Southeast Asian Nations (Hoekman et al., 2021). In Cabo Verde, the institutional reform and new e-procurement system encouraged the participation of small and medium-sized enterprises in the bidding processes, from only 15 enterprises in 2012 to 444 in 2015, and stimulated average growth in sales revenue by 43% (World Bank, 2016).
In the context of the AfCFTA, governments could broaden existing public procurement schemes to promote participation from regional firms. Eligibility criteria for preferential treatment can be expanded beyond narrowly defined domestic producers to cover regional actors. Most recently, EAC private sector stakeholders called for a “Buy East Africa, Build East Africa” approach to develop regional supply chains, notably in the pharmaceutical sector (TMEA, 2021). Harmonisation of product standards and mutual recognition agreements will also reduce the costs for African suppliers to participate in regional markets (Box 2.4).
The harmonisation of quality standards makes it cheaper for small and informal businesses to obtain and maintain them. For example, products in the EAC that are certified based on harmonised standards avoid the cost of re-testing. This reduces the cost of complying with multiple quality standards from an average of USD 205 to almost zero and reduces the clearance time for conformity assessment from 38 days to 0.5 days for certified products with notified quality certification marks (TMEA, 2019).
To exploit the benefits from the AfCFTA, governments can harmonise regional standards and accelerate the implementation of mutual recognition agreements. Out of 1 991 products with comparative advantage on the continent, three-quarters have no quality standards harmonised at the Regional Economic Community level. Because the harmonisation of all quality standards at once is not possible, the quality standards harmonisation process at the continental level should prioritise products that have a comparative advantage in at least two Regional Economic Communities and for which quality standards already exist in at least two such communities (UNECA, 2020).
At the same time, African countries need to strengthen their quality standards infrastructure. Twenty-six African countries do not have sufficient quality standards infrastructure such as accreditation, metrology systems and national standard bodies to meet the demands for conformity assessment and quality control. Throughout the continent, clearly delineating the responsibilities in rule-making and verification functions among governments agencies can reduce conflicts of interests and hurdles for necessary compliance (PAQI, 2020). Cross-border sharing of technical capabilities could help bridge the gaps in implementation capacities across African countries and accelerate the co-ordination efforts. For example, COMESA established regional associations of regulatory authorities to facilitate policy and regulatory harmonisation as well as foster capacity building and information sharing between its members.
Furthermore, harmonisation of public procurement regulations can lower the costs of cross-border participation and reinforce the quality and integrity of procurement awards. For instance, COMESA adopted a common framework on public procurement to reform national procurement systems (AfDB, 2018). Similarly, WAEMU’s Regional Public Procurement Enhancing Project aims to harmonise public procurement regulations to alleviate barriers to regional participation. This initiative also led to the establishment of a Regional Observatory of Public Procurement to strengthen oversight mechanisms and transparency across West Africa (Nam, 2019).
Regional efforts in attracting investments from lead firms can benefit from better monitoring and prioritisation
Institutionalising a strong monitoring structure is vital to accelerate the domestic adoption of the Pan-Africa Investment Code
A number of African firms have expanded their geographic footprint beyond their home market, but they remain focused on a few sectors and countries. Table 2.3 provides some examples of such firms in Africa. Many have a strong continental orientation, with African subsidiaries accounting for more than half of their subsidiaries abroad. However, intra-African investments remain concentrated in a few sectors – finance, telecommunication, energy and mining, and retail. South Africa comprises the majority of firms investing in other African countries, reflecting its position as a central node in Southern Africa’s regional production networks (Qiang, Liu and Steenbergen, 2021).
Countries need to take advantage of the Pan-African Investment Code and the AfCFTA to tackle regulatory barriers for investment in Africa (see Chapter 1). Research on foreign direct investment (FDI) location choices of African lead mobile network operators finds that most operators do not expand in geographically close markets; instead, their investments decisions hinge on African countries with better institutional frameworks (Dike and Rose, 2018). While the negotiations on the AfCFTA Investment Protocol were still ongoing at the time of writing (November 2021), early indications suggest that adoption of the protocol and the Pan-African Investment Code (agreed in 2017) will help facilitate investment in Africa. Investment agreements can reduce perceived risks for investors by improving transparency and predictability in policy making and implementation, aligning domestic regulation with international legal frameworks, notably by applying harmonised frameworks throughout the continent, and facilitating access to dispute settlement mechanisms.
Existing regional experience in co-ordinating investment frameworks in Africa offers important lessons to support the implementation of continental initiatives. In 2020, ECOWAS launched the Improved Business and Investment Climate in West Africa initiative to identify barriers to investment and to implement and monitor the results of reforms to the private sector through the ECOWAS Investment Climate Scorecard (ECOWAS, 2020). In 2016, SADC also developed the SADC Regional Action Plan on Investment to facilitate regional co-ordination and exploit economies of scale in improving investment frameworks and policies across its member states.
Establishing monitoring structures can help track progress and ensure domestic adoption of regionally agreed reforms, as SADC has done. The SADC Secretariat, in collaboration with the OECD, developed a set of indicators to benchmark and monitor members states’ progress in implementing the SADC Investment Policy Framework (Table 2.4). The SADC Secretariat should assume the central monitoring responsibility, while devolving specific reporting functions to dedicated national contact points in each member state.
International co-operation can also support the implementation of the AfCFTA’s Investment Protocol and boost investment in Africa. Currently, numerous international initiatives for promoting investments to Africa exist (see Annex 2.A2). The multiplicity of platforms also necessitates co-ordination and experience sharing among African countries and their partners. For example, the AUC-OECD Development Centre Platform on Investment and Productive Transformation aims to facilitate this co-ordination and share experiences between African countries and their development partners.
Policy makers should facilitate investment and develop infrastructure along existing networks of industrial clusters
Africa’s existing networks of industrial clusters provide a critical entry point for facilitating value chain development. According to estimations by the United Nations Conference on Trade and Development, the number of African special economic zones grew from about 20 in 1990 to 237 in 2020 spanning across 38 countries (UNCTAD, 2021). Cluster policies enable governments to concentrate public investment in one location and tackle critical bottlenecks to local competitiveness. The higher density of firms, of services providers and of research institutions can facilitate technology transfers and innovation.
The development strategies of industrial clusters vary across contexts depending on the availability of production factors, market access, strategic location and the local absorptive capacity. For instance, Ethiopia’s clustering strategy relied on low labour costs and tax incentives to attract lead firms like Decathlon, H&M, Primark and Tesco to integrate global textile production networks. In Morocco and South Africa, emerging eco-industrial parks such as Ouarzazate Solar Power Station and Cookhouse Wind Farm help attract green investments, integrate firms into sustainable value chains, and achieve social, environmental and economic targets. In Egypt, the Robbiki Eco-Leather Park aims to develop the local leather industry while lowering local tanneries’ environmental impact. For this purpose, the cluster opened a Leather Technology Transfer Centre involving local and foreign firms to promote the adoption and upgrading of green technologies by local factories (UNCTAD, 2021).
The quality of public infrastructure is critical to the success of special economic zones. Our analysis of night light intensity across 127 African industrial clusters – special economic zones, export-processing zones and industrial parks – showcases the growth in cluster-based economic activities, almost doubling over the 2012-19 period (Box 2.5). While all clusters experienced a drop in night light intensity in 2020, clusters benefiting from better access to communication infrastructure – located less than 10 kilometres from a broadband backbone network – experienced a smaller downturn at the onset of the COVID-19 shock than unconnected clusters (Figure 2.4). This proximity to a broadband network can serve as an indicator of access to other critical infrastructures, such as electricity, that are necessary for industrial development and competitiveness.
Note: Night light intensity is used as a proxy for activity and development across 127 industrial clusters operating in 31 African countries.
Source: See Annex 2.A1.
Industrial clusters exhibited high levels of activity prior to the slowdown in foreign direct investments in 2019. Between 2012 and early 2019, night light intensity almost doubled at the continental level. The cluster’s dynamic activity and development that this implies were mostly driven by African economies’ early industrial development. Egypt, Kenya, Morocco, Nigeria and South Africa hosted more than half (73) of the 127 clusters operating across 31 countries.
The shutdown of the economy caused by COVID-19 halted cluster activity until the end of 2020 (Figure 2.5). Weaker global demand, mobility restrictions and production constraints reduced the level of activity within clusters compared to 2019, resulting in a steady decline in light emissions, with the largest drop (-5.8%) recorded in the second quarter of 2020 compared to 2019, simultaneously with the application of more stringent COVID-19 restrictions (by an average score of 71 on a scale of 100). Clusters’ light emissions bounced back by 5.7% in the last quarter of 2020 as restrictions were progressively lifted.
Note: Light growth emitted from clusters is calculated monthly by comparing 2019 and 2020 figures. The Stringency Index from 0 to 100 is averaged from day to month and records the strictness of government policies during the COVID-19 outbreak. High index values mean that selected African countries adopted stricter rules.
Source: Authors’ calculations based on the night light intensity data from Colorado School of Mines (2021), VIIRS Nighttime Lights (database), https://payneinstitute.mines.edu/eog/nighttime-lights/, and CIIP (2018), “Location of clusters”, Competitive Industries and Innovation SEZ Database, www.theciip.org. The Stringency Index comes from Blavatnik School of Government/University of Oxford (2021), Oxford COVID-19 Government Response Tracker, https://www.bsg.ox.ac.uk/research/research-projects/covid-19-government-response-tracker.
Investment in connective infrastructure among these industrial clusters can help facilitate regional production networks. Several regional corridors have emerged in recent years, such as the LAPSSET Corridor (Kenya-Ethiopia), the Central Corridor (Dar es Salaam-DR Congo), the Maputo Development Corridor (Mozambique-South Africa) and the Walvis Bay Corridor (five SADC countries). In North Africa, road infrastructure development facilitated the emergence and attractiveness to foreign lead firms of technology parks such as Smart Villages between Cairo and Alexandria and the El Ghazala high-tech zone between Tunis and Bizerte. Similarly, in West Africa, public investments in road networks to connect Abidjan to the Lagos-Accra corridor in West Africa significantly boosted FDI inflows (UN-Habitat, 2018).
Investment promotion agencies (IPAs) can further facilitate investment from lead firms into key segments of the value chain. IPAs act as interlocutors between governments and foreign businesses, such as in the area of tax compliance (Box 2.6). They can also provide different types of services such as matchmaking, financial assistance (credit, insurance), market intelligence, local business branding and investor aftercare. Past experiences from developing countries show that governments should focus on the following points when establishing IPAs: i) ensure high-level government support; ii) establish clear targets for investment promotion; iii) consult local public and private stakeholders to ensure strategic alignment; iv) facilitate collaboration with other investment institutions and funds; and v) provide sufficient and sustained financial resources (World Bank, 2020).
Taxation has become an increasingly important issue, and recent years have seen various new principles and reporting standards emerge to help demonstrate and track corporate behaviour on tax. A number of these principles relate to how businesses interact with tax authorities, making it difficult to assess compliance with or the impact of such initiatives, as they relate to confidential interactions.
To help address this issue, the OECD recently carried out a perception survey of more than 1 240 government officials (most of them tax auditors) working in tax administrations in 139 countries (OECD, 2021). The survey included 206 responses from 34 African countries. It aimed to capture tax officials’ perceptions of the tax behaviour of multinational and other large companies against the voluntary principles developed by Business at the OECD (the business representation at the OECD) (BIAC, 2013). The survey highlights various areas for strengthening tax compliance in Africa, such as responding to information requests and addressing tax disputes. In partnership with the African Tax Administrators Forum, the OECD then organised a virtual roundtable that brought together African tax officials and businesses in April 2021 to discuss these results and potential solutions to the challenges identified.
More broadly, building trust and facilitating communication between tax authorities and businesses lie at the heart of many proposed solutions. Only 37% of tax officials in Africa say that most multinational enterprises (MNEs) are not open and transparent. Similarly, 34% of African tax officials do not trust the information they receive from most MNEs. To improve these relationships, tax administrations can make it easier for businesses to comply with tax laws by improving the clarity and specificity of demands made on businesses, while businesses need to ensure information is made available, including in the local official language. One way to improve relations is the use of guidelines for dealing with MNEs and other large businesses. The survey suggests a positive correlation between respondents identifying the existence of specific procedures and guidelines to deal with MNEs and perceiving higher levels of trust in MNEs.
Source: OECD (2021), Tax Co-operation for Development: Progress Report in the COVID-19 Era.
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