A Policy Framework for Industrializing along Global Value Chains: Integrate, Compete, Upgrade, Enable

for the region to negotiate and implement policies on tariffs, nontariff barriers, and competitive exchange rate regimes. Such policies would facilitate more open, predictable, and transparent trade relations; expand market access with trading partners; and build and strengthen existing links to GVCs. Reducing trade barriers is a necessary condition for integrating into GVCs and strengthening links, particularly for resource-rich countries that need to import production equipment and intermediate inputs at lower costs to add value to natural resources for export, because high import barriers directly influence firms’ costs of importing or exporting and, hence, participation in GVCs.

Furthermore, external trade policies that facilitate access to export markets would be beneficial to firms in manufacturing GVCs that engage in textiles and apparel exports, agro-processing, and processing of natural resources before export, activities in which Sub-Saharan African countries have a natural comparative advantage and where they can leverage the most gains.

A regional industrial policy in the context of the African Continental Free Trade Area could bolster scale economies and complementarities to drive more production, processing, and higher-value exports from the region, and facilitate industrialization through GVCs. In addition, the agreement should be designed to promote, produce, and export specific manufactured products within the regional market based on country-specific comparative advantages (Odijie 2018). In this respect, countries in the region are heterogeneous and have different comparative advantages that can be exploited to develop regional value chains in manufacturing.

A Policy Framework for Industrializing along Global Value Chains: Integrate, Compete, Upgrade, Enable

The prospects for industrialization in African countries depend on their capacity to participate and upgrade in manufacturing GVCs and are bound to vary across countries based on resource endowments, geography, and level of development. Building that capacity, however, requires an appropriate industrial policy package that combines soft policies and hard policies.

Soft industrial policies aim to support the growth and productivity of all sectors in the economy, whereas hard policies focus on developing traditional manufacturing, building sectors with some characteristics of manufacturing, and promoting indigenous entrepreneurship in small-scale manufacturing. The design of such policy configurations must factor in, and be consistent with, country-specific characteristics, given the wide variation in resources, income, size, and level of industrialization across countries in Sub-Saharan Africa.

Thus, industrial policies and strategies in Sub-Saharan African countries must exploit current comparative advantages while developing capabilities to compete in high-skill and knowledge-intensive industries. In essence, dynamic comparative advantages must be at the core of policy packages for industrializing along manufacturing GVCs.

Furthermore, emerging megatrends, such as changing technologies, shifting globalization patterns, climate change, and global pandemics, need to be accounted for in the design of policies to promote industrialization.8

A set of overarching policy implications that emerge from the analysis can be summarized within a policy framework that consists of four pillars: Integrate, Compete, Upgrade, and Enable, or ICUE (figure O.9). • Integrate. The integration pillar captures policies that promote GVC participation as well as overall integration into regional and global economies through trade and FDI. These policies include trade liberalization, trade diversification toward emerging market economies, and regional trade agreements. • Compete. The competition pillar is the set of policies that aim to reduce market distortions through reforms of state-owned enterprises and credit markets and improvement of the investment climate, and that aim to ease licensing requirements to facilitate the entry, survival, and growth of new and young establishments. • Upgrade. The upgrading pillar encompasses policies that promote both industrial and GVC upgrading and that facilitate industrial shifts in employment shares and value added creation. Industrial upgrading is the rapid growth (in relative terms) and redistribution of employment and value added toward knowledge-intensive industries (for example, electrical and machinery and transport equipment) and away from agriculture-based, labor-intensive industries (food and beverages, textiles and apparel, and wood and paper) and mining-based, capital-intensive industries (chemicals and nonmetals and metals). GVC upgrading denotes the movement of workers into more sophisticated business functions in GVCs, such as when firms in an industry move from performing assembly activities to product design and redesign, logistics, after-sales services, and repairs. Policies that promote upgrading include subsidizing research and development and innovation, supporting human resource management practices, and leveraging urbanizing and developing economic clusters. • Enable. The enabling pillar is the set of policies that support and promote investment in enabling sectors, including digital infrastructure, energy, finance, transportation and logistics, and skills development. These sectors are cross-cutting and capable of improving productive and absorptive capacity in agriculture and services, strengthening their links with manufacturing, and supporting inclusive and better job creation.

Figure O.9 Policy Framework: Integrate, Compete, Upgrade, and Enable

Increased job creation, productivity growth, and structural change

Impact on GVCs

Policy entry points GVC integration

• Reduce trade restrictions • Leverage trade agreements • Exploit comparative advantage • Support young firms • Reduce market distortions • Promote entry of new firms

Integrate

Policies that promote GVC participation as well as overall integration into the regional and global economies through trade and investment

• Push for a regional industrial policy, for example, the African

Continental Free Trade Area (AfCFTA) to bolster scale economies and complementarities in processing high-value exports • Develop RVCs by reducing trade barriers on inter- and intraregional trade to improve access to imported inputs • Gain market access through favorable trade agreements (preferential tariffs, less restrictive nontariff trade barriers, and simplified rules of origin) • Strengthen the reliability and efficiency of logistics and other trade facilitation services, including customs and border management, port efficiency, and transit services • Target entering and expanding activities in high-growth markets (for example, East Asia)

Compete

Policies aimed at reducing market distortions to facilitate the entry, survival, and growth of firms and industries

• Ease licensing and entry requirements to increase entry rate of new establishments and support incumbents, especially younger firms • Reduce market distortions by reforming state-owned enterprises • Establish labor market regulations to enhance labor mobility and entrepreneurship via better hiring and firing practices, effective training, and skills-development programs • Improve the business environment through easy access to finance, property rights protection, market regulation, and a well-functioning legal system

Source: Original figure for this publication. Note: GVC = global value chain; RVC = regional value chain.

GVC upgrading

Create comparative advantage

• Support innovation • Build knowledge • Develop skills • Enhance digital infrastructure • Improve physical infrastructure

Upgrade Enable

Policies that promote industrial upgrading and facilitate sectoral or within-sector shifts in employment and value addition

• Develop industry-specific training programs to enhance skills for upgrading in tasks within industries • Promote intra- and interregional migration of skilled labor to facilitate skill and technology transfer and build capacity in high-skill industries • Support firms upgrading to new activities within a sector (for example, agri-food processing) or to a new sector with potential for upgrading and value addition • Invest in cross-cutting and enabling sectors such as digital infrastructure, energy, finance, and transportation and logistics • Narrow the infrastructure gap by increasing public investments and adopting appropriate public sector management systems • Provide support to improve human resource management practices • Facilitate learning and the acquisition and transfer of technological capabilities • Streamline the fiscal incentives framework to encourage the adoption and transfer of production technologies