Harare – Global value chains (GVCs) are key for promotion of foreign direct investment in Africa, the World Bank says.
In its recently published Africa Pulse report, the World Bank said manufacturing-led growth would be optimised by policies that foster participation of local firms in GVCs and promote FDI.
Most FDI into Africa south of the Sahara is concentrated in natural resources and has low impact on employment and technology transfer, and experts say investment in secondary and tertiary sectors will have greater economic impact.
“These policies need to be complemented with improvements in the business environment – infrastructure investments (electricity, transport, and logistics) and supportive trade policies. Participation in GVCs can help create jobs by; raising firm productivity through the technological, sectoral, and spatial transformations of the economy, and generating spillovers from backward and forward linkages within the value chains,” the World Bank said.
The report said Ethiopian manufacturing firms participating in GVCs tended to be more productive and, hence, employed more workers and paid higher wages than other firms.
Africa’s participation in GVCs, it was noted, remained too limited.
For instance, the share in world trade of Sub-Saharan African firms was very low in sectors like apparel (2.5 percent of final exports and 0.5 percent of intermediate apparel and footwear exports) and automobiles (1.3 percent of final exports and 1.0 percent of intermediate exports).
For low-income countries in the region, participation in GVCs was being driven by sectors like textiles and apparel (Ethiopia and Lesotho) and agribusiness and horticulture (East Africa).
“Developing countries have engineered sustained growth through GVC participation thanks to actions that ensure low unit labour costs rather than low wages. This may present a challenge to lower-income countries in Africa that do not have a comparative advantage in (labour- and/or capital-intensive) traded goods compared with developing countries in other regions.
“For example, some Sub-Saharan African countries have higher labour and capital costs relative to some Asian countries. Gelb et al. (2017) document that capital costs in Kenya are more than nine times those in Bangladesh. Yet, manufacturing job growth in countries like Ethiopia and Côte d’Ivoire has been fuelled by ample labour supply at relatively low wages.
“Job creation came with rising profits per worker for these firms. Their higher profits were associated with increased average labour productivity amid relatively low wages. Seizing the opportunity to participate in GVCs requires a series of complementary policy actions in areas like standards, internet and physical infrastructure connectivity, education, and skills,” said the report.