World Bank says SACU should focus on services to enter global value chains

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A new World Bank report advises that a practical vision for the Southern African Customs Union (SACU) to take advantage of global value chains (GVC) hinges not around factories at all, but around services.

The report titled “Factory Southern Africa: SACU in Global Value Chains” proposes a SACU that is built around a ‘gateway model’. This gateway model suggests that even if the immediate region is not always ideal for GVC-oriented production, the region may still integrate with GVCs as the host of ‘command-control’ and facilitating (services) functions of global supply networks. Key components of a gateway are, therefore, transport infrastructure and advanced producer services, such as banking and consultancy, which enable multinational corporations (MNCs) to coordinate their networks.

“Global value chains may represent a significant opportunity for the Southern African Customs Union (SACU) to improve the region’s prospects for expanding non-commodity exports. Such an expansion would support growth, diversification, and, ultimately, job creation,” stated the report which was released late last week.

As an example, the report mentions that in the past, for a country to become an apparel exporter, they would need everything from design capabilities through to textile mills. Similarly, to export in the automotive sector a country would need to produce engines and all subcomponents on a scale to support assembly.

“Under GVC dynamics, a country can specialise in certain activities, such as sewing, specific components, or subassemblies, and import the necessary inputs. While such a situation does not guarantee significant value capture and upgrading by developing economies, it does provide a vital first step on the ladder. Nowhere has this been more evident than in China, and more widely across East Asia. In these regions, GVCs are at the heart of the open-economy model that was responsible for the growth and poverty reduction success story of the region in recent decades,” reads the report.

The report further notes that estimates suggest that 85 million manufacturing jobs will migrate from coastal China over the next 20 years with Sub-Saharan Africa expected to be a major beneficiary of this migration. “The SACU region—with its abundance of natural capital and surplus labour, along with relatively good infrastructure and a quality institutional environment—should be in a good position to attract investment for GVCs.”

However, the report mentions that at the moment the SACU region remains at the margins of most production networks. It points out that while South Africa has a strong position in the European-centered automotive value chain, and Lesotho and Swaziland feed into the US-based apparel value chains, for the most part the SACU region, like the rest of Sub- Saharan Africa, has yet to become established as a significant node in GVCs.

“As the region looks to GVCs, it must consider both joining GVCs and the more difficult challenge of upgrading them—in terms of moving to higher value-added activities, and generating productivity spillovers and higher-quality jobs.

The task-based nature of GVCs creates opportunities for developing countries to establish very quickly a position in global trade within a sector in which they may have had no previous experience. Such a position brings with it exports and jobs, but does not guarantee their quality or sustainability,” warns the report.

Furthermore, the report, which was prepared by the staff of the Trade and Competitiveness Global Practice, used Lesotho as a good example. It noted that in many respects, Lesotho’s entry into the global apparel value chain has been a huge success. However, almost 30 years after receiving its first investments in the sector, Lesotho still has no locally-owned exporters or even subcontractors and no local firms providing any strategic goods and services inputs to the sector.

“The failure of Lesotho to upgrade its position in the sector forces it to rely on wage restraint, trade preferences and fiscal incentives to maintain its tenuous position,” the report states.

“For SACU countries, and for South Africa in particular, joining GVCs is not enough; they must establish value-adding positions in these production networks, and upgrade continuously if they are to use GVCs effectively as an instrument for inclusive growth,” says the report.

To test the productivity impact of GVC participation in developing countries, the report took a cross-section of more than 25 000 domestic manufacturing firms in 78 low- and middle-income countries from the World Bank’s Enterprise Surveys (2006–10) and estimated the impact of a domestic firm’s export share and share of imported inputs (as proxies for GVC participation) on labour productivity.

“We tested the results for the 78 countries overall and then specifically for countries in the SACU region—Namibia, South Africa and Swaziland. The results show a clear, positive association between GVC integration and labour productivity in the overall sample and in the SACU countries, where the spillover effects are highest in Namibia, slightly lower in South Africa, and very low in Swaziland. This suggests that while all three countries are benefiting from productivity spillovers from GVC participation, firms in Swaziland face significantly higher hurdles to turn their GVC integration into productivity gains,” reads the report.