Chapter 1. Why regional value chains matter for Africa’s recovery

The COVID-19 pandemic is setting back Africa’s economic convergence with the world economy. African economic growth will reach 3.9% in 2022, one percentage point lower than the growth rate for the rest of the world, which stands at 4.9%. In 2022, Africa’s gross domestic product (GDP) as a share of the world GDP is expected to fall to 4.7%, the lowest level since 2002. This reverses the catching-up process that had been underway: between 2000 and 2010, Africa’s global economic weight steadily increased from 4.7% to 5.3% of the world’s output (Figure 1.3).

Efforts to overcome the health pandemic, accelerate vaccinations and lift barriers to African production will be critical to ensure near-term recovery. Domestic factors – including the necessary social distancing and unavoidable disruptions to local production – accounted for two-thirds (64%) of the growth shortfall in a sample of ten African countries (Figure 1.4). This finding underlines that domestic demand and local production are strategic for Africa’s growth, as seen in the first edition of this report (AUC/OECD, 2018). Resuming economic convergence will require tackling the pandemic and speeding up vaccine roll-out on the continent (other world economies were able to resume economic activity through massive vaccination campaigns). As of 19 October 2021, only 5% of Africa’s population were fully vaccinated despite representing about 18% of the world’s population (Mathieu et al., 2021).

A global recovery will boost Africa’s growth if domestic policies remove constraints on local production. The recovery in China, Europe and the United States (US) can help Africa’s growth reach 2.25% by 2022, according to our forecast for ten African countries. Nonetheless, this forecast remains 1 percentage point below the pre-pandemic forecast of 3.25% (Figure 1.4). Additional domestic policies, including ways to increase domestic production and restore export competitiveness both regionally and globally, are strategic to return to an expected growth of 3.55% by 2022.

The relative importance of domestic and external factors on growth shortfall varies across countries. In Cameroon, Egypt, Kenya, Mauritius, Morocco, Namibia, South Africa and Tunisia, domestic factors accounted for 66% of the growth shortfall on average during the second quarter 2020. In contrast, in Botswana and Ghana, domestic factors were a source of real GDP growth, while external factors induced a decline in economic activity (Figure 1.5). The latter might experience a faster recovery as external factors return to pre-pandemic levels if they manage to maintain an enabling domestic environment.

African exports have been lagging behind the recovery in global demand. Bilateral trade data on 49 African countries suggest that global demand for their products suffered a large decline in the second quarter of 2020 (Figure 1.6, Panel A). While global demand rebounded in the latter half of 2020, Africa’s exports lagged behind this recovery. Mining intermediate goods, which accounted for 33.9% of Africa’s global exports in 2019, exemplified this pattern (Figure 1.6, Panel B). Mining intermediate goods faced the largest decline among all goods categories until May 2020. They then rebounded with the rise in global prices for mining commodities and raw materials, albeit at a slower pace. This trend during the global shock in 2020 highlights the vulnerability of the African mining sector to exogenous shocks. Other types of intermediate goods have faced even more difficulties in keeping up with the global demand (Figure 1.6, Panel D), particularly agricultural intermediate goods (Figure 1.6, Panel C).

African countries risk losing market shares to other regions such as Latin America and the Caribbean, in the global production networks. Africa and Latin America and the Caribbean (LAC) each account for about 2% of European and US imports. However, Africa’s exports to the European Union and the United States slowed down in 2020 without a sign of recovery, compared to LAC. LAC’s exports to the European Union and the United States experienced a V-shape recovery, dropping by 1.3 percentage points in May 2020 compared to May 2019 but recovering to levels similar to the previous year by September. In contrast, while Africa’s exports to the European Union and the United States were already lower in the first quarter of 2020 compared to the previous year, the pandemic accentuated this decreasing trend, stagnating at around -0.5 percentage points until the end of 2020 without a sign of recovery (Figure 1.7).

Lifting local production constraints will be critical to accelerate Africa’s economic recovery, reduce poverty and create jobs. Analysis for this report, based on World Bank’s Enterprise Surveys collected during the first month of the COVID-19 outbreak, suggests that African exporters were more likely to close their businesses temporarily and to experience decreases in input supply and demand for their goods and services (World Bank, 2021b). In addition, limited production technologies prevent African exports of agricultural and other intermediate goods from keeping up with the recovery in global demand (Figure 1.6, Panels C and D). For example, many African exporters of agricultural goods did not possess the production and supply chain capacity to deal with trade disruptions and meet the higher sanitary and phytosanitary demands from importers during the crisis. Finally, the number of extremely poor people likely increased by at least 34 million in 2020 alone (Lakner et al., 2021). To create quality jobs and reduce poverty, productive transformation in Africa is ever more important, particularly as funding for social spending is shrinking (AUC/OECD, 2019).

Africa’s existing patterns of participation in global value chains (GVCs) have not been conducive to productive transformation that would speed up economic recovery and create jobs. Forward participation – the use of exported inputs in production by other countries – accounts for almost 6% of Africa’s GDP, mostly as exports of raw natural resources and agricultural commodities such as unprocessed cocoa for further processing in partner countries (Figure 1.8). In contrast, backward participation – the use of foreign inputs for domestic processing (e.g. the apparel sector in Mauritius sourcing fabric in Asia) – represents only 2% of Africa’s GDP. As a result, forward participation is three times more important than backward participation, a considerably higher ratio than elsewhere.

Africa’s GVC participation patterns have remained unchanged over the last two decades. Africa’s limited backward linkages have remained at 2% on average since the early 2000s, while forward linkages have stayed around 6.3% (Figure 1.9). This stagnation showcases the need to rethink integration strategies to better benefit from GVC participation and accelerate productive transformation. Compared to forward participation, backward participation is more conducive for domestic firms to develop essential production capabilities and acquire knowledge about foreign markets, which will enable them to increase their competitiveness and upgrade in the value chains.

Africa’s integration into global value chains struggled to create quality employment and social upgrading. Globally, a 1% increase in GVC participation is estimated to boost per capita income by more than 1%, with a higher increase in backward participation than forward participation (World Bank, 2020a). However, employment in global manufacturing value chains in African countries lags behind the global comparators largely due to their low competitiveness (Pahl et al., 2019). Among the four African countries in review – Ethiopia, Kenya, Senegal and South Africa1 – only Ethiopia recorded employment growth thanks to higher global demand for textile final goods. Nonetheless, the more labour-intensive buyer-driven value chains such as apparel and garments create limited scope for upgrading and long-term development along the chains thus leading to concerns over job quality and footloose investment (Gereffi and Luo, 2014). For instance, Lesotho’s integration into the global apparel sector in the late 1990s generated over 50 000 manufacturing jobs – employing up to 10% of the country’s workforce. Yet the removal of Lesotho’s trade preferences to the US market has led to a “boom and bust” pattern for the sector (Fernandes et al., 2019).

African economies mostly integrate into international production networks outside the continent, where upgrading in global value chains is difficult. African regions are sourcing a large share of their inputs as well as exporting their intermediate inputs to traditional trade partners such as OECD members including European countries and the United States (Figure 1.10). Overall, large gaps in productivity between African firms, higher import standards on product and process quality, and high trade costs have limited Africa’s ability to upgrade its participation in global value chains. The ability to upgrade depends on various factors specific to each value chain, such as its governance structures and its embeddedness in the local economy.

Recent integration into East Asia’s production networks has not helped Africa to diversify or upgrade its production capability. As the centre of global production shifts toward East Asia, China and India have become Africa’s two largest trade partners, accounting for respectively 15% and 6% of Africa’s total exports in 2020 (AUC, 2020). Despite increased GVC trade flows, African producers mainly supply raw materials and low value-added products with limited skill content to Asian global value chains (Tang et al., 2021). Unprocessed resources and agricultural commodities account for 84% of Africa’s exports to China and 72% of Africa’s exports to India.

Creating new regional value chains can support Africa’s existing participation in global value chains. Global markets will remain essential for the continent’s productive transformation, providing access to higher-quality inputs and opportunities for upgrading. Morocco or South Africa have successfully upgraded their automotive production to supply European and other highly competitive markets. Nevertheless, developing regional value chains can be a valuable strategy for progressively entering highly competitive global value chains. Currently, African countries import only 15% of their intermediate goods from within the continent, compared to Southeast Asia’s 22% (AUC/OECD, 2019). Among all African regions, only Southern Africa has a sizeable flow of import and export of intermediate goods with other countries in the region.

Regional processing offers opportunities for adding value to Africa’s agricultural and raw materials and for increasing backward participation in global value chains. Processed and semi-processed goods accounted for 79% of intra-African exports in 2019, compared to 41% of Africa’s exports to other destinations. When meeting local demand, producers can exploit their proximity to final consumers to specialise in the downstream segments of sequential value chains (Antràs and de Gortari, 2020). Regional processing to serve global markets may also benefit from the recent “GVCs for LDCs” proposal, which allows least developed countries’ value-added embedded in exports by middle-income African countries to qualify for preferential schemes such as EU’s “Everything but Arms” (Antimiani and Cernat, 2021).

Exploiting regional complementarities creates new competitive advantages for African countries. The integration of markets provides the critical mass of consumers, skills, suppliers and other resources needed to develop and scale up knowledge-intensive sectors such as automotive and pharmaceutical value chains. Combining key natural resources available across African countries can create unique competitive advantages in high value-added activities such as battery production (see Chapter 3 on Southern Africa). Smaller economies could benefit from access to larger markets, enhancing local productive capacities by attracting new intra-African investments and gaining in efficiency from specialisation. In the digital sector, for example, start-ups in smaller African economies can take advantage of having access to high-performance data centres, which are largely concentrated in Egypt, Nigeria, Kenya and South Africa.

Regional markets are more conducive to the development and discovery of new productive capabilities. The physical, cultural and institutional proximity and access to existing networks of contact reduce the costs for African firms to experiment in regional and continental markets. Intra-regional exports by African firms are 4.5 times more diverse than their exports outside of Africa (AUC/OECD, 2019). The new capabilities that firms acquire from serving regional markets help firms to grow and better survive when they expand to more demanding markets such as those in high-income countries (Carrère and Strauss-Kahn, 2017).

The entry into force of the African Continental Free Trade Area (AfCFTA) in January 2021 opens up new opportunities for integrating into regional value chains by expanding access to markets, inputs, technology and investment. The AfCFTA aims to boost intra-African trade by connecting 1.2 billion people and a combined GDP of over USD 3 trillion. It is the deepest regional trade agreement in Africa to date, as it includes important commitments in areas such as sanitary and phytosanitary standards, technical barriers to trade, intellectual property rights, and investment (World Bank, 2020b).

Negotiations around the AfCFTA’s implementation are scheduled in phases, with the overarching goal to establish common positions on multiple aspects of regional integration. Phase I covers trade in goods and services, Phase II intellectual property rights, investment and competition policies and Phase III e-commerce (Figure 1.11). In December 2020, the African Union Assembly of the Heads of State and Government decided to fast-track negotiations on digital trade by merging Phases II and III in response to the COVID-19 pandemic (AU, 2020).

Other continental initiatives are also aiming to transform African economies through industrialisation and regional value chains. For example, the third Specialised Technical Committee of the Ministers of Trade, Industry and Minerals gathered policy makers in September 2021 to build quality infrastructure for the continent, add value to Africa’s mineral and energy resources, map regional value chains in Africa and prepare a continental automotive strategy. More recently, the Summit on Africa’s Industrialisation and Economic Diversification, taking place in Niamey, Niger, from 20 to 24 November 2021, further cemented such commitments. Other initiatives such as the joint Programme for Infrastructure Development in Africa (PIDA) support the development of strategic regional corridors. Led by the African Union Commission, the African Development Bank and the African Union Development Agency-New Partnership for Africa’s Development (AUDA-NEPAD), PIDA prioritises 69 cross-border infrastructure projects in the sectors of energy, transport, transboundary water, and information and communications technology (ICT) that will deepen continental integration (AU/AUDA-NEPAD/AfDB, 2021).

COVID-19 shock is pushing African entrepreneurs to adapt, generating new opportunities to engage in higher value-added activities and create jobs. Africa’s entrepreneurial base has actively sought out new opportunities in response to the COVID-19 crisis: 53% of African exporters surveyed by the World Bank adjusted or converted their production or services, compared to 39% of exporters in other developing countries (World Bank, 2021b). Some activities even grew during the pandemic and contributed to inclusive job creation. For example, South Africa’s business process offshoring sector created 17 354 new jobs in 2020, primarily in frontline voice-based services for the retail (28%), utilities and energy (23%) and telecoms (19%) industries. Youth workers aged 18 to 35 account for 87% of these new jobs, and female workers 65% (BPESA, 2021).

The global context of rising regionalism increases the need to strengthen intra-African integration. International trade and production networks between neighbouring countries have become more common as they realign in a gravity theory of international trade (see Box 1.1). This trend reflects the shift from multilateral integration through the General Agreement on Tariffs and Trade or the World Trade Organization towards a Balkanisation of trade agreements among smaller blocs of geographic regions. In this context, continental co-ordination among African countries is thus important not only to ensure access to inputs and markets for African producers but also to increase the collective negotiation power of African countries in the global economy.

In Africa, the growing importance of domestic markets increases the gravitational pull for intra-continental trade. The dynamics of Africa’s demography and urbanisation open opportunities to meet regional demands for essential goods and services, specifically agro-food processing, construction materials, garments and pharmaceutical products. For instance, in the last decade, Africa’s import of food for household consumption increased from USD 24 billion in 2009 to USD 32 billion in 2019. While intra-regional sourcing grew from 12% to 16% over the same period, in 2019 about 40% of food imports originated from Asia. Upgrading food value chains will be crucial to tap increasing regional demand and offer additional opportunities for producers. Chapters 5 and 7 further explore the potential and related policies to develop agro-processing value chains in East and West Africa.

Value chain development also features prominently in national development plans. A review of existing industrial strategies in African countries and regional economic communities reveals considerable overlap in priority sectors (AUC/OECD, 2019). Realigning national interests to develop regional value chains could help pool resources and deliver better development results than competing for investment and technology transfer. Chapter 2 draws lessons from these policy experiences in Africa.

High trade costs continue to hold back regional value chain development. High trade costs restrict production networks because the costs compound each time products cross-international borders. High trade costs are also more detrimental for backward participation than for forward participation (Antràs and de Gortari, 2020). While intra-African trade costs decreased until 2012, today they returned to levels nearly equivalent to 2005 (Figure 1.12). Due to the COVID-19 crisis, disruptions to transport and travel, restrictive trade policy and heightened uncertainty are all expected to further increase global trade costs (WTO, 2020).

Most African firms lack the minimum productivity levels, skills and organisational capability required to export directly or form strategic relationships with multinational enterprises. The relatively high fixed costs of exporting and importing activities imply a minimum efficient scale to amortise the investments needed for internationalisation. The few firms actively engaged in global value chains are often older (at least five years old), larger establishments with over 100 employees and local affiliates of multinational enterprises (Abreha et al., 2020). Few are deeply embedded in the local economy, thus limiting the potential for indirect participation in global value chains of tier 2 and tier 3 suppliers. For example, 66% of intermediate goods and services for foreign direct investment (FDI) firms in Kenya are imported, compared to 25% in Viet Nam (Newman et al., 2019).

Strengthening economic governance is key to attracting lead firms to international production networks. Strong economic governance reduces the risks and uncertainty for multinational enterprises operating abroad, which account for roughly one-third of global output and two-thirds of global exports (Cadestin et al., 2021). Recent surveys suggest that multinational enterprises focus mostly on aspects of economic governance such as political stability and macroeconomic stability when choosing their locations (World Bank, 2020a and OECD, 2021a). Furthermore, when delegating segments of their production to another entity, multinational enterprises value the enforceability of contracts and other legal instruments through formal institutions. These include intellectual property rights and rule of law because international production involves not only the flow of tangible goods but also intangibles such as intellectual property, technology and credit.

While legal instruments offer essential guarantees for multinational enterprises, cultivating informal ties, partnerships and trust is equally important for the smooth operation of international production networks. The demand for such relations is particularly high in knowledge-intensive value chains due to concerns over technological leakage and to the difficulties in codifying contract specifications and in anticipating contingencies.

Continental co-ordination is crucial to meet these interlocked challenges. The scale of the challenges and the social benefits derived from developing regional value chains (such as job creation and industrialisation) call for public interventions, but national governments cannot provide all the solutions on their own. The lack of competitive domestic producers in certain strategic sectors such as pharmaceuticals require co-ordinated policy action, in order to attract investment and target capacity building (Box 1.2). Finally, new modes of production necessitate enhanced co-operation: the smooth flow of goods, services, data and finance across borders depends on international co-operation to overcome bottlenecks across the whole supply chain (see AUC/OECD, 2021 on e-commerce).

The link between regional value chains development and macroeconomic resilience is complex. First, regional value chains can diversify the sources of demand and supply for African producers and reduce their exposure to country-specific shocks (Caselli, Fracasso and Traverso, 2019; WTO, 2020). In Kenya, for example, producers serving multiple export destinations in the tea and horticulture market enhanced their product sophistication by 40% after the 2008-09 global financial crisis and the 2011 drought. In contrast, single-destination firms experienced a decrease of around 30% in product sophistication (Krishnan and Pasquali, 2020).

Policy makers need to be aware of the contagious risks transmitted through international production networks. Regionalisation may reduce the physical length of supply chains but not their fragmentation, since products may cross borders at every step in the transformation process. The inter-dependence of firms and countries within an international production network synchronises their economic activities, making them more vulnerable to shocks in the countries where parts of the production chain are located. To the extent that African economies, especially resource-rich countries, have more volatile GDP growth than those in other regions (AUC/OECD, 2018), regional value chains can expose their economies to contagious risks from regional macroeconomic shocks.

The governance structure of regional value chains can help firms withstand shocks. A 2020 study of the apparel regional value chain in Southern Africa suggests that South African retailers honour their contractual agreements and provide support to their larger, direct suppliers, partly to preserve long-term relationships. In contrast, smaller producers that sell their products to retailers via intermediates face severe price cuts and no support from downstream partners (Pasquali and Godfrey, 2021). Reviewing the existing literature, Bacchetta et al. (2021) conclude that the propagation of shocks through supply chains depends on the complementarity of production sequences, the concentration of suppliers or customers in each segment, and the type of shocks (location-specific versus globally synchronised). Macroeconomic surveillance should carefully monitor supply chains characterised by low diversity of suppliers or buyers and the systemic implications of a network’s central hubs. Governments can actively work with firms to improve risk preparedness and provide temporary support during emergency situations (OECD, 2021b).

While the AfCFTA has the potential to create jobs in Africa by liberalising trade, the quality of such jobs remains a concern. Recent modelling by Bengoa et al. (2021) shows that full implementation of the AfCFTA could boost employment by 2.1% compared to the benchmark year of 2014. Smaller economies, such as Benin and Togo, are expected to capture the largest gains from trade liberalisation. Projections from the World Bank (2020b) also suggest there will be a large job reallocation across sectors, with a net increase in the volume of workers in energy-intensive manufacturing (such as steel and aluminium), public services, trade, and recreational and other services. Institutions to safeguard labour regulations will be increasingly necessary to ensure quality job creations in regional value chains. Surveys of 31 apparel firms in Eswatini and Lesotho serving both global and regional markets indicate no substantial differences in labour conditions between regional and global value chains (Pasquali, 2021).

Proactive efforts to improve social upgrading in regional value chains are critical to ensure an inclusive transformation. Economic upgrading from higher value chain integration does not guarantee improved working conditions and incomes for informal firms and workers. A study of Moroccan garment factories shows that global fast-fashion buyers offer stable contracts and better social protection for their high-skilled workers but simultaneously employ casual contractors (especially in packaging and loading segments) with poor working and contractual conditions (Barrientos, Gereffi and Rossi, 2011). Policy makers need to address challenges ranging from property rights to labour protection to ensure a fair distribution of benefits to producers at the bottom of the value chains (Meagher, 2019). Better consideration of informal cross-border traders, which are often not captured by official statistics (see Box 1.3), could help improve inclusiveness and resilience to shocks. Anecdotal evidence from East Africa suggests that informal cross-border traders nearly collapsed in the early stages of the COVID-19 pandemic (Box 1.3).

The development of regional production networks entails further risks for environmental sustainability. Numerous environmental problems can emerge from participation in global value chains, ranging from more frequent and longer droughts, to soil toxicity caused by metals, dyes and bleaching agents used in the textiles industry to coastal habitat degradation from intensified aquaculture. A recent modelling exercise suggests that while trade liberalisation and changes in the productive structures induced by the AfCFTA can lead to a 21.5% decline in air pollutants, it should increase CO2 emission by 0.3% and non-CO2 greenhouse gas emissions by 19.6% (Bengoa et al., 2021).

Unlike developed world regions that were able to respond to environmental and developmental pressures sequentially, Africa needs to address environmental challenges alongside its development. For instance, while Africa contributes to only 3% of global CO2 emissions, new evidence for this report shows that the air pollution burden has been growing worryingly in the last decade. By 2019, ambient particulate matter pollution (APMP) – partly due to expanded economic activity and transport2 caused at least 383 000 premature deaths in Africa, representing about 7.4% of the total premature deaths due to APMP in the world, up from 3.6% in 1990. This trend is happening at a faster pace, albeit from a lower base, than in other world regions: over the 2010-19 period, the growth in the death toll from APMP in Africa outpaced that of the world by 30% and that of China by 50% (Figure 1.13).

The scale of the challenges that African governments face and the limited funds available call for better mobilising domestic resources and integrating the private sector into financing the development of regional value chains. For instance, closing Africa’s infrastructure gap, crucial to the development of value chains, would require USD 130-170 billion annually. Due to the COVID-19 crisis, public revenues contracted by 13% and could take until 2024 to return to pre-pandemic levels. At the same time, total external debt service by African countries increased from 3.1% of GDP in 2019 to 4.0% of GDP in 2020, the highest level since 2000. Strategic partnerships with private sector will be key to unlocking new sources of financing for regional value chains, especially given that private funds account for only 7-8% of infrastructure investments in Africa (Ndzana Olomo, 2021).

COVID-19 significantly disrupted external financing flows to Africa; these also require attention from policy makers. Total FDI flows to Africa, including both investment into new facilities as well as mergers and acquisitions of existing facilities, dropped by 18% as a result of the initial COVID-19 shock. This sharp fall, from USD 46 billion in 2019 to USD 38 billion in 2020, followed the global downturn in FDI at the start of the COVID-19 pandemic (UNCTAD, 2021). In addition, both remittances and portfolio flows to Africa decreased in 2020. While the global outlook for investment has stabilised compared to the early periods of the pandemic, African governments need to update their investment strategies to benefit from the reorganisation of global supply chains and the global minimum corporate tax.

The AfCFTA could increase Africa’s attractiveness for investors and generate new opportunities for intra-African investments. The integration of African markets could attract additional productive investments in existing regional production networks (e.g. agro-food processing) and emerging regional value chains (e.g. pharmaceutical). Currently, intra-African greenfield FDI accounts for only 6.8% of the total in 2018, compared to 50% in Asia (AUC/OECD, 2019). However, estimates based on the gravity theory (Box 1.1) suggest that by liberalising trade in goods and services and implementing its protocols on investment and intellectual property rights, the AfCFTA could increase intra-African greenfield FDI by 14% compared to the 2018 level (Shingal and Mendez-Parra, 2020).

Establishing a common investment framework can help reconcile the fragmented investment environment in Africa. African governments have agreed to 854 bilateral investment treaties (512 in force) of which 169 are intra-African (44 in force). Harmonising domestic investment legislation according to the AfCFTA Protocol on Investment could boost intra-African investments as it protects foreign investors and reduces risk and uncertainty for all investors (see Box 1.4).

Experience suggests the need to strengthen linkages between African lead firms and local suppliers. Where lead firms and fast-growing start-ups in Africa expand their presence to other African destinations, their backward linkages with local suppliers can remain limited. An example is the expansion of South African supermarket chains to SADC countries, led by big market players like Shoprite. Local content requirements and import duties have limited supply opportunities, while insufficient financing, training and networking opportunities have prevented domestic suppliers from competing and meeting standards (UNCTAD, 2021; Nickanor et al., 2020).

Greenfield FDI to Africa - reflecting future investment trends - have followed a downward trend since 2017. Figure 1.14 presents the slowdown in greenfield FDI that began in Africa and Asia-Pacific before the COVID-19 pandemic. The inflows targeting Africa dropped from 12.3% of the global market share in 2017 to 5.1% in 2020, the lowest level since 2004. The fall in average returns on FDI – principally in the extractive and mining sectors, currently at less than 2% – might explain the downward trend affecting greenfield FDI to developing countries, especially commodity-dependent African economies (Evenett and Fritz, 2021). Relatively higher returns on investment in the manufacturing sector, at 7%, could potentially strengthen the shift observed in Africa from extractive activities towards manufacturing and services (AUC/OECD, 2021).

Potential adjustments from multinational enterprises to raise the resilience of cross-border supply chains to shocks could attract new investments in Africa. For example, increasing the investment in African countries by European multinationals could reduce the distance between suppliers and clients (near-shoring) without moving all operations back to the home countries (re-shoring) (EU, 2021). In North Africa, Morocco’s Tangier Automotive City continued to attract over 50 companies during the 2020 shock triggered by the COVID-19 pandemic, due to the country’s proximity and well-established logistics connection to Europe, competitive labour costs, and political stability. However, cross-border supply chains remain complex and are not easy to reconfigure in the short term.

ICT and Internet infrastructure remains attractive to foreign investors. Despite the general downward trend observed in greenfield FDI to Africa, investments to the continent’s ICT industries increased in 2020, which could accelerate Africa’s digital transformation (Figure 1.15). In addition, African start-ups securing funding increased by 44% in 2020, riding five-year growth at a rate six times larger than the global rate (Maher et al., 2021). According to projections, Africa’s Internet economy could reach 5.2% of continental GDP by 2025 and increase to 8.5% by 2050, up from 4.5% in 2020 (Google/IFC, 2020).

The introduction of a global minimum corporate tax, agreed in July 2021 and expected to take effect in 2023, will reshape Africa’s attractiveness to multinational enterprises. The international co-ordination to apply a global minimum corporate income tax will help limit harmful tax competition and increase tax revenues for African governments (see Box 1.5). Other factors such as the quality of public economic institutions, domestic markets sizes, and access to inputs and skilled labour will become even more important for African economies to attract multinational enterprises.

However, the risk exists that other harmful practices for attracting FDI may continue, for example by lowering labour and environmental standards to attract FDI. Investment co-operation thus needs to include social and environmental safeguards to avoid a race to the bottom in these areas. For instance, incorporating labour standards into AfCFTA investment policies, as was done in other trade preference agreements with the European Union (Everything but Arms) and the United States (African Growth and Opportunity Act) will help reduce potential social pressures arising from the need for FDI.

COVID-19 is accelerating Africa’s digital transformation as explained in AUC/OECD (2021). At the firm level, more than one in five firms in Africa started or expanded their use of digital technology in response to the COVID-19 shock, according to the World Bank Enterprise Surveys (World Bank, 2021b). The use of digital financial services also surged. The value of mobile money transactions across Africa increased by 28% from 2019 and reached a total of USD 45.4 billion in December 2020. In addition, several African governments are emphasising the digital transformation as a critical component of their COVID-19 recovery plans (Table 1.1). The AU Digital Transformation Strategy for Africa 2020-2030 is also essential to give African countries a stronger advantage in shaping global data governance. Chapter 1 of Africa’s Development Dynamics 2021 proposes several policy areas to boost the regional digital economy and bridge the digital divide.

The digital transformation can strengthen the competitiveness of Africa’s producers. In the agriculture sector, for example, digital solutions can help improve agricultural productivity, market linkages and financial inclusion (AUC/OECD, 2021). Traditional manufacturing also increasingly depends on digital-deliverable services such as ICT, marketing and distribution services. Digital delivery accounted for 57% of Africa’s exports in ICT and business services such as insurance, pensions and finance in 2017.

Digital technologies can reduce costs of cross-border trade by increasing the efficiency of support services such as logistics, trade finance and payments. Technologies such as distributed ledger technology (blockchains) permit smart contracts that make cross-border payments faster, cheaper and more efficient. In March 2021, OCP executed the first blockchain-based intra-African commercial transaction from Morocco to Ethiopia with a value of USD 400 million (OCP, 2021). In logistics, digital services contributed to maintaining essential economic activities during lockdowns. For instance, TradeDepot, an e-logistics platform for micro retail distribution in Nigeria, partnered with the Lagos State Government as part of the latter’s emergency food response strategy.

Adoption of new technologies can make trade-related institutions more efficient and facilitate the implementation of the AfCFTA. Blockchain-enabled solutions can serve in applying rules of origin by generating, storing and sharing information, which allows for real-time and low-cost verification of a product’s provenance. Adopting paperless processes and smart clearance technology can also streamline and accelerate customs procedures. For example, the automated customs system in Morocco allows businesses to finish export procedures in 15-20 minutes instead of the 2-3 days previously needed to collect paper documents (INSME, 2019).

New digitally enabled business models allow firms to work around constraints in formal contract enforcement and to integrate informal actors. Such models facilitate co-ordination, communication and monitoring among different actors (such as multinational enterprises and their suppliers) and stages in value chains. At the same time, smart contracts and reputation systems in digital platforms and marketplaces provide alternative mechanisms for identifying reliable partners and ensuring accountability without resorting to judicial processes. This is especially important for integrating informal African producers into regional value chains. For example, more than 13 000 farmers and 6 000 suppliers in Kenya now use the mobile-based platform Twiga Foods to sell their products directly to 2 000 sales outlets each day.

Realising productivity gains, streamlining cross-border trade and engaging in digitally enabled activities requires expanding the digital economy across borders. Research on African marketplaces shows that 91% of transactional marketplaces on the continent are solely national in scope (ITC, 2020); this highlights the difficulties for digital solutions to scale beyond their home market. Policy makers can help develop the digital economy across their borders by providing accommodative regulation (especially in the area of digital taxation), facilitating standards setting for interoperability and encouraging innovative start-ups to enter decisive services such as finance and logistics (AUC/OECD, 2021).

Ensuring the safe and seamless flow of data across borders is key for competitive regional value chains. The flow of information between buyers and sellers underpins all decision-making, production processes and value-addition in the context of Industry 4.0. In 2020, the demand for international Internet bandwidth (proxied by peak traffic) increased by 50% or more in 42 of the top 100 international Internet routes in Africa. Connecting Africa’s national digital economies to regional ones should boost their competitiveness. New hub and spoke patterns are emerging, with large countries such as South Africa and Kenya having dense connections to other African economies (Figure 1.16). Beyond hard infrastructure for data flow, a robust continental governance framework that balances the economic, privacy and data sovereignty concerns is also crucial.

The digital transformation risks preventing the vast majority of African firms and workers from participating in international production networks. Adopting digital technologies requires fixed investments and skills beyond the capacity of most African actors, further limiting their opportunities to integrate into international value chains. For example, only 31% of firms in Africa currently have their own website, compared to 39% in developing Asia and 48% in Latin America and the Caribbean. Excessive concentration in digital e-commerce platforms can also lead to dependency of smaller suppliers and can reduce their ability to upgrade. Globally, technical change in global value chains is increasingly biased against the use of low-educated workers in favour of high-educated workers, thus limiting the potential of global value chains to create jobs for low-skilled workers in Africa (Reijnders, Timmer and Ye, 2021).

Finally, digitally enabled automation can affect Africa’s attractiveness to global investments and increase inequalities in the labour market. Recent research suggests that large-scale automation, while technologically feasible, may require 10-15 years before becoming economically viable in Africa’s labour-intensive value chains such as textile (ODI, 2018). Automation typically replaces unskilled labour with skilled labour, thereby increasing wage inequality between skilled and unskilled workers.

Increased global demand for socially and environmentally conscious production and consumption creates new chances for African producers to exploit higher value-added activities. The emerging opportunities include developing environmental products, local production modes (e.g. recycling) and renewable energy, as well as adopting eco-labelling, certification in manufacturing and new financing sources. The five regional chapters of this report offer fresh insights into the roles that regional integration can play in taking advantage of these new sources of demand and pursuing higher value-added activities. Chapter 3, for example, highlights the potential of the Pan-African Automotive Pact to respond to the growing demand for electric vehicles, and Chapter 5 explains the potential of renewable energies for North African economies.

This global shift raises pressure on producers, particularly multinational enterprises, to meet environmental, social and corporate governance (ESG) standards. Since the onset of the pandemic, 48% of surveyed multinational enterprises operating in developing countries have increased their focus on the sustainability and decarbonisation of supply chains (Saurav et al, 2021). Some governments are setting legally-binding instruments to ensure human rights and environmental due diligence in corporate supply chains, such as the EU’s proposed mandatory Human Rights and Environmental Due Diligence framework. Implementing norms of corporate social responsibility and ESG standards can help improve labour conditions for workers, generate more value for suppliers and avoid environmental degradation in international production networks. For instance, extraction of raw materials for export often involves the highest share of child labour (ILO/OECD/IOM/UNICEF, 2019). Currently, between 28% and 43% of child labour indirectly contributes to exports at an early stage of supply chain production (such as extraction of raw materials or agriculture). These structural characteristics have challenged the upgrading of value chains for several African countries that depend on the exports of raw products.

New sources of finance are available for green, social and sustainable investments. Impact investing offers new sources of finance for firms that place green, social and sustainability goals at the core of their business models. Fifty-two percent of global impact investors plan to expand their allocations to sub-Saharan Africa by 2025 (Hand et al., 2020). At the country level, green bonds for public investment, especially into infrastructure, are increasingly attractive for institutional investors such as pension funds and insurance companies. Since 2020, France’s Sovereign Green Bond programme has expanded the list of eligible projects – financed by issuing bonds to international investors – to the environmental component of official development assistance. This is an important step forward that could herald a substantial increase in green finance funds for Africa if other institutions replicate this model. Despite the potential gains, between 2012 and 2020 only seven African countries issued green bonds, for a total of less than USD 4 billion (Amundi/IFC, 2021).

The fiscal stimulus component of COVID-19 recovery plans can incentivise the development of regional value chains in this sector. African governments at both the national and continental levels are providing fiscal support to invest in green infrastructure and energy in response to the COVID-19 crisis (see Table 1.2). Appropriate public procurement regimes can utilise such funds and political momentum to create a demand pull for developing regional productive capacity in this domain.

Public policies play a vital role in facilitating the adoption of standards among African producers. Policy makers can promote upgrading through support in product labelling, international certification, trademarks and branding. The success in applying such standards depends on the specific value chains and on local contexts. For example, local producers often lack awareness and understanding of the processes for adopting these standards and have limited skills and access to finance for investment and implementation (AUC/OECD, 2019). Strengthening the institutional capacity in infrastructure for metrology, standardisation and accreditation is also critical to ensure the competitiveness of local producers, prevent dumping of harmful products (e.g. electronic products) and avoid attracting industrial activities that cause pollution.

Unlocking sustainability-linked financing also requires proactive policy interventions. Co-ordination between African governments, public development banks and donors is necessary to attract further private investment, mitigate risks, address supply constraints and avoid “greenwashing”.3 At the same time, the implementation by multinational enterprises of corporate social norms could benefit from stronger domestic regulatory frameworks and co-ordination with local governments to improve their visibility of the supply chains. Finally, using public procurement to support the development of regional value chains requires strengthening governance to avoid corruption and to expand firms’ eligibility beyond national providers (see Chapter 2 on policies).

Since its introduction by Nobel Prize laureate Christopher Sims in 1980, the vector autoregressive (VAR) model is the par excellence of econometric tools for the empirical or data-driven analysis and forecasting of the macroeconomic dynamic of countries (Sims, 1980). A global vector autoregressive (GVAR) model shifts the VAR from its original single-country setting to a multi-country setting (di Mauro and Pesaran, 2013). In technical terms, a GVAR model is a suite of interconnected VARX models – a VAR model that includes a block of exogenous variables – where each VARX corresponds to an individual country. A VARX summarises the historical data available on the interrelationships between the country’s domestic macroeconomic variables (such as output and inflation), as well as the interrelationships between them and the corresponding macroeconomic variables of the rest of the countries in the GVAR.

Our GVAR modelling exercise include ten African countries (Botswana, Cameroon, Egypt, Ghana, Kenya, Mauritius, Morocco, Namibia, South Africa, and Tunisia), China, member countries of the European Union and the United States. The individual VARX for Botswana summarises the interrelationships between the domestic macroeconomic variables with each other and with the weighted averages of the same variables for all the other countries. The weights are derived from the importance of the bilateral trade (imports and exports) between Botswana and each of the other three countries in the total trade of Botswana.

The specific characteristics of our modelling exercise, the OECD-African-GVAR-1.0 model, are as follows:

  • estimation sample: quarterly time series for the period 2000 Q1-2019 Q3.

  • variables (details by country in Table 1.A1.1): gross domestic product (GDP), consumer price index (CPI), local currency exchange rate against the United States dollar divided by domestic CPI, long-term interest rates.

  • variable transformation: the first difference of log GDP, the first difference of log CPI for non-African countries, the second difference of log CPI for African countries and Pesaran’s transformation of the interest rate: 0.25 x log(1+r/100) where r is the nominal interest rate in percentage points.

  • estimation details: ordinary least squares equation by equation, excluding co-integration terms.


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← 1. The comparator countries include Bangladesh, Brazil, China, India, Indonesia, Malaysia and Viet Nam. Both the African and Asian countries were selected based on data availability.

← 2. According to a modelling exercise (, Africa’s main source of air pollution mortality is mineral desert dust (natural), followed by industrial/domestic air pollution – industrial production, energy generation, transportation emissions, household emissions (other than fires) – and finally biomass burning. In South Africa, air pollution mortality is dominated by the industrial and domestic sectors, leading to 15 000 premature deaths.

← 3. Greenwashing refers to the practice of providing misleading information regarding the sustainability credentials of their products.

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