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The international dimension of industrial policy: Opportunities and challenges from the new global environment

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Title: The international dimension of industrial policy: Opportunities and challenges from the new global environment


1
The international dimension of industrial policy
Opportunities and challenges from the new global
environment
  • Bineswaree Aruna Bolaky
  • Africa Section
  • Division for Africa, LDCs and special programmes
  • United Nations Conference on Trade and
    Development UNCTAD

2
Outline of Presentation
  • The multilateral system at the WTO
  • Rising powers of China, India and others
  • Climate change
  • Global Value-Chains
  • Source UNCTAD (2011).
  • Note
  • Any use of the material from this presentation
    must be please referenced as UNCTADs work.

3
Purpose of presentation
  • Examines the challenges and opportunities facing
    African countries stemming from current and
    emerging international trade rules the rise of
    industrial powers from the South concerns about
    climate change and the phenomenon of
    global-value chains.
  • Makes suggestions on how African countries could
    either overcome the challenges or seize
    opportunities created by the changing global
    environment to push their industrialisation
    agendas forward

4
The WTO and the shrinking of policy space
  • Over the past two decades, the global environment
    has changed significantly in many respects.
    International trade is increasingly under
    regulation in ways that limit the policy space
    available to governments, and developing
    countries are beginning to play important roles
    in the global market for manufactured goods, with
    consequences for the ability of African countries
    to penetrate export markets. In addition, concern
    for climate change is generating interest in the
    use of environmentally-friendly technologies and
    methods of production. Furthermore, production is
    increasingly being fragmented and located across
    national borders thereby intensifying
    competition.
  • The strategic design and implementation of
    Africa's industrial development programmes will
    have to take into account these new realities
    because they have implications for the choice and
    feasibility of policies to promote
    industrialisation.

5
The WTO and the shrinking of policy space
  • Since the establishment of the World Trade
    Organisation (WTO) in 1995, the scope of the
    rules-based-trading system has shifted from a
    narrow focus on trade in goods, under the General
    Agreement on Tariffs and Trade (GATT), to broader
    issues such as trade in services, intellectual
    property rights, and trade facilitation.
  • Furthermore, unlike in the GATT, there has been
    more enforcement of compliance with trade
    regulations under the WTO (DiCaprio and Gallager,
    2006).
  • There are concerns that the widening scope and
    enforcement of trade agreements and rules have
    limited the set of instruments and policies that
    developing countries could possibly use to
    promote industrialization (Njinkeu and Soludo
    2001).
  • With respect to Africa, the shrinking of
    industrial policy space under current and
    emerging trade rules is evident in the following
    areas
  • - The imposition of tariff cuts under the
    emerging, but not yet finalized,
    "Non-Agricultural Market Access" (NAMA)
    negotiations
  • - Regulations on subsidies imposed under the
    Subsidies and Countervailing Measures (SCM)
    Agreement
  • - The Trade-Related Investment Measures (TRIMs)
    Agreement
  • - The Trade-Related Aspects of Intellectual
    Property Rights (TRIPS) Agreement and
  • - The replacement of preferential trade
    agreements with reciprocal Economic Partnership
    Agreements (EPAs) in conformity with WTO rules.

6
The WTO and the shrinking of policy space
  • 1. Tariff liberalisation under NAMA
  • Under the emerging NAMA rules in the Doha round
    negotiations, developing countries, with the
    exception of LDCs, have to reduce their import
    tariffs on industrial products and bind tariff
    rates below a certain ceiling. Developing
    countries have the option, however, of applying
    deeper cuts in tariff lines in exchange for
    greater flexibilities and vice versa.
    Flexibilities are in the form of exempting a
    certain percentage of sensitive product lines
    from tariff cuts as long as their import shares
    in total NAMA imports do not exceed a certain
    threshold. However the exemption of a whole
    sector from tariff cuts will not be possible.
    This implies that non-LDC African countries will
    have less room for pursuing import-substitution
    strategies behind high tariff barriers or through
    gradual and selective tariff liberalisation. This
    is further compounded by the insertion of the
    "national treatment" principle in WTO laws,
    whereby foreign firms and foreign goods are to be
    granted the same treatment as local firms and
    locally produced goods in the country.
  • Developing countries will apply tariff cuts
    according to a "Swiss" formula. Countries that
    apply the deepest tariff cuts will be able to
    "make smaller or no cuts in 14 of its most
    sensitive industrial tariff lines, provided that
    these tariff lines do not exceed 16 percent of
    the total value of its NAMA imports".
  • That country can also keep "6.5 of its tariff
    lines unbound or exclude them from tariff cuts,
    provided they do not exceed 7.5 percent of the
    total value of its NAMA imports" (WTO). LDCs
    will not face tariff reductions but will have to
    raise the percentage of their tariff lines that
    are bound.
  • The WTO text mentions that additional
    flexibilities will be negotiated at a future date
    for South Africa, Botswana, Lesotho, Namibia,
    Swaziland and members of the South African
    Customs Union (SACU). According to the WTO, "the
    tariff reductions will be implemented gradually
    over a period of five years for developed members
    and ten years for developing members, starting 1
    January of the year following the entry into
    force of the Doha results".

7
The WTO and the shrinking of policy space
  • Proponents of NAMA reforms argue that, in a
    low-tariff world, developing countries will
    benefit in the form of increased market access
    for their industrial products to other countries,
    especially developed countries. For instance, in
    developed countries the proportion of industrial
    imports entering on a duty-free basis has jumped
    over the last fifteen years from 20 to 44.
  • However, critics of NAMA reforms argue that the
    emerging rules will lead to de-industrialisation
    in countries that are in their early stages of
    industrialisation (Shafaeddin 2006).
  • Furthermore, they argue that the parameter of
    interest for developing countries should not be
    the average industrial tariff rate imposed by
    developed countries on imports but the actual
    rates imposed by the latter on the exports of
    interest to developing countries. It is not
    clear that such rates have been considerably
    lowered in return for increased market access.
  • There is also the fear that NAMA liberalisation
    will lock poor developing countries into their
    current or existing patterns of export
    specialisation. In order to build dynamic
    comparative advantage in higher value-added
    activities, entrepreneurs need to be rewarded
    with higher expected returns in exchange for the
    higher risks involved in undertaking strategic
    investments in new industries and new
    technologies. However the emerging trade rules
    will make it harder for developing countries to
    turn to selective tariffs and subsidies to
    provide such returns to their entrepreneurs
    (Shafaeddin 2006).

8
The WTO and the shrinking of policy space
  • 2. Subsidies
  • With respect to the use of subsidies as a tool
    for promoting industrial development, under WTO
    rules subsidies linked to either export
    performance (export subsidies) or the use of
    domestic over imported goods (local content
    subsidies) are prohibited, except for LDCs and
    countries with less than US 1,000 GNI per
    capita.
  • When linked to export performance, export
    subsidies can provide appropriate incentives to
    domestic firms to invest in building their
    competitiveness rather than stay complacent.
    However, such type of subsidies can no longer be
    used. Other types of subsidies, for example
    production subsidies, are allowed but are now
    actionable which means that their use can be
    challenged if deemed to damage the interests of
    other parties. In import-competing industries
    with high sunk costs, there may be a case for
    subsidizing production by domestic infant firms,
    albeit temporarily, in order to promote greater
    entry and more competition in the long-run. As a
    result of WTO rules, it is now more difficult to
    nurture local infant industries through subsidies.

9
The WTO and the shrinking of policy space
  • 3. Investment measures
  • The Trade-Related Investment Measures (TRIMs)
    Agreement under the WTO prohibits countries from
    using local content or trade balancing
    requirements. In addition, as discussed in the
    preceding section, countries cannot subsidise
    firms to favour use of domestic inputs over
    imported ones.
  • This means that these industrial policy
    instruments used by currently advanced and
    emerging economies, are no longer available to
    the non-industrialised countries. While Brazil
    for instance was able to use local content
    requirements to establish a local auto
    manufacturing industry, Indonesia had to review
    the local content provisions of its National Car
    Program in 1999 under the WTO (DiCaprio and
    Gallager, 2006).
  • Under the TRIMs agreement, countries can no
    longer use local procurement programs to minimize
    import leakage rates, optimize the domestic
    value-chain and promote the building of
    production linkages across sectors in their
    industrial policy programs.
  • TRIMs also prohibits the use of performance
    requirements in FDI policies for the purpose of
    maximising benefits from FDI such as promoting
    use of local industrial products, inserting local
    enterprises in the production chain of
    transnational corporations (TNCs) and
    facilitating technology transfer to local
    suppliers.

10
The WTO and the shrinking of policy space
  • How developing countries have used FDI to
    promote industrial development?
  • Amsden (2001) identifies 2 groups of countries
  • The independents whose characteristics are (i)
    minimal reliance on FDI and MNCs (ii) technology
    development of the country relies on
    strengthening domestic firms and a heavy emphasis
    on domestic skill building and RD (iii) a
    pervasive use of industrial policies to create
    national champions. In some cases the state acts
    as a venture capitalist or as a pioneer.
  • The second group, called integrationists, itself
    comprises 2 groups
  • Active integrationists rely on spillovers from
    MNCs to access new technology and make a
    significant use of selective policies to move
    into high value-added activities
  • Passive integrationists do not select MNCs but
    attract them through the use of a large number
    of welcoming policies, offering a stable
    macro-economic environment, low wages,
    disciplined and semi-skilled labour and a good
    location

11
The WTO and the shrinking of policy space
  • How developing countries have used FDI to
    promote industrial development?
  • South Korea clearly belongs to the independents
    group. FDIs were permitted only if they were the
    only way of obtaining some technologies or
    gaining access to world markets. But even in
    those cases, they were subject to tight state
    control
  • During the industrialization process, the
    Taiwanese government also made a substantial
    effort to attract FDI in technologically advanced
    sectors in which domestic firms were still very
    weak.
  • The government sought to maximize benefits from
    FDI for domestic firms by (i) promoting local
    sourcing and subcontracting (ii) imposing local
    content rules and (iii) introducing the
    obligation for foreign firms to transfer skills
    and technology to subcontractors, with the
    objective to raise the technological capabilities
    of domestic firms.
  • At the other extreme, Singapores technological
    upgrading process has been dominated by MNCs
    which provided state-of the art technologies and
    access to global networks. Singapores government
    attracted MNCs by using a wide set of welcoming
    policies, selective instruments in skills,
    technology and infrastructure. All these policies
    were directed at meeting the specific needs of
    selectively targeted FDI.

12
The WTO and the shrinking of policy space
  • 4. Intellectual property rights
  • The "Trade-Related Aspects of Intellectual
    Property Rights" (TRIPS) agreement, through its
    strict intellectual property protection regime
    (IPR), makes it harder for developing countries
    to access and adapt foreign technology for local
    industrial development purposes.
  • India was able to take advantage of a weaker
    intellectual property regime under GATT to
    develop a local pharmaceutical industry based on
    generic drugs. Such a scenario would not have
    been possible under TRIPS.
  • It has been pointed out that countries such as
    Japan, Korea, Taiwan or even the USA would not
    have been able to achieve their current levels of
    technological sophistication had they faced IPRs
    of the strength required by TRIPs in their early
    stages of industrialisation.
  • Furthermore, there is the concern that IPR can
    prevent developing countries from engaging in
    technological learning through imitation and
    reverse engineering of mature foreign products in
    the early stages of industrialisation (Lall and
    Albaladejo 2003 Kim 2002).

13
The WTO and the shrinking of policy space
  • 5. Economic partnership agreements and WTO
    compatibility
  • The preferential trading arrangements that
    existed between the European Union (EU) and
    Africa under the Cotonou and Lomé accords have to
    be replaced by the so-called Economic Partnership
    Agreements (EPAs) in order to make them
    compatible with WTO rules.
  • Although full EPAs are yet to be finalised
    between the EU and most African countries,
    decisions reached in the negotiations will have
    important repercussions on the future industrial
    policy space of African countries.
  • For example, while some proposed EPAs allow the
    use of export taxes in special circumstances such
    as protection of infant industries, they also
    specify that export taxes cannot be allowed to
    increase or that their use is subject to periodic
    review.
  • In addition, the EPAs contain stand-still clauses
    that do not allow countries to increase or
    re-impose tariffs that had been eliminated and to
    introduce new tariffs once the EPAs have been
    signed.

14
The WTO and the shrinking of policy space
  • 5. Economic partnership agreements and WTO
    compatibility
  • These two instances represent an important loss
    of policy flexibility for countries in the course
    of implementing their industrial strategies and
    adapting such strategies to changing
    circumstances. Export taxes have historically
    been used as a means to support local infant
    industries, generate value-added by promoting the
    local processing of raw materials into industrial
    goods, and raise government revenues.
  • Successful examples include support to the
    plywood industry in Indonesia in the 1980s, and
    support to the textiles industry in England in
    the period 1275-1660 (Third World Network 2009).
  • Furthermore, the EPAs contain a "Most Favored
    Nation" (MFN) clause which obliges African
    countries to extend to the EU any concessions
    granted to other development partners, whether on
    tariffs or non-tariffs issues. This may
    compromise the ability of African countries to
    grant preferential treatment to
    developing-country partners such as China, India
    and Brazil that could play an important strategic
    role in Africa's industrialisation.

15
The WTO and the shrinking of policy space
  • The emerging rules guiding trade and investment
    under the WTO and EPA will no doubt constrain the
    industrial policy space of African countries.
  • However, the following points should be noted.
  • First, the negotiations under the WTO and the EPA
    are still ongoing and have not yet been cast in
    stone. Therefore, African countries still have an
    opportunity to influence the final outcomes of
    these negotiations to ensure sufficient
    flexibility in designing and implementing their
    industrial policies.
  • Second, despite the limits imposed by current and
    emerging trade rules, there remains some scope
    for African countries, particularly the LDCs, to
    engage in industrial policy-making.
  • Third, a few of the WTO rules, such as the
    provision of the TRIPS agreement related to
    technology transfer from developed countries to
    LDCs, offer opportunities for African countries
    to engage in industrialization, as long as they
    are creative enough in harnessing such
    opportunities to their own benefits.

16
The WTO and the shrinking of policy space
  • Policy recommendations
  • Promote industrial growth by strengthening
    regional integration.
  • Make better use of instruments allowed under
    existing rules.
  • Foster South-South cooperation.
  • Seize opportunities created by the special
    treatment of LDCs
  • Use WTO provisions to further economic
    development objectives

17
Rising powers of China, India etc
  • The growing role of large developing countries
    such as Brazil, China and India presents
    opportunities as well as challenges for
    industrialisation in Africa
  • Opportunities Through the attraction of foreign
    direct investment and non-equity modes of
    investment such as alliances, partnerships and
    subcontracting, Africa can benefit from its
    developing-country partners' expertise, skills
    and technology in designing industrial programmes
    adapted to its specificities and endowments.
    Furthermore, through partnership with
    developing-country TNCs Africa could develop
    technologies that are adapted to its industrial
    needs and produce industrial products adapted to
    the requirements of its low and middle income
    consumers.
  • Challenges However amidst the opportunities also
    lie challenges. For example, there is some
    evidence that the rise of the large
    developing-country partners, particularly China,
    in the global market for light manufactured goods
    has had a harmful effect on sub-Saharan
    manufacturing exports

18
Rising powers of China, India etc
  • Within the South-South partnerships, Africa's
    relations with China and India assume paramount
    importance for 4 reasons.
  • First, China and India can be co-operative
    partners as well as the main competitors to
    Africa in industry especially manufacturing.
  • Second, like most investors in Africa, Chinese
    and Indian interests in Africa lie primarily in
    exploiting Africa's natural resources and this
    represents a danger in that further development
    in the Africa-China and Africa-India partnerships
    may accentuate the trend of Africa being a
    primary commodity exporter and an importer of
    manufactures (EDAR 2010), thereby delaying the
    structural transformation that industrialization
    is meant to engineer. Africa's pattern of being
    commodity dependent in its trading relations with
    the North should not be replicated with its
    Southern partners.

19
Rising powers of China, India etc
  • Third, as finance and investment with China and
    India rise at the expense of development
    assistance flows disbursed on governance
    conditionalities by Northern partners, there is
    the danger that this may undermine incentives for
    African governments to improve governance and
    overall competitiveness in Africa. As mentioned
    previously, improving competitiveness is an
    important element for attracting investments in
    industry.
  • Fourth, as China and India rise in pre-eminence
    in Global-Value Chains, whether as producers or
    consumers, this has important implications for
    Africa in terms of harnessing its partnerships
    with the two Asian countries to position itself
    in these GVCs as suppliers.

20
Rising powers of China, India etc
  • FACTS AND FIGURES ON INDIA/CHINA
  • China and India in 2009 accounted for 13.7 of
    global manufacturing exports and judging by the
    phenomenal growth rates of their manufacturing
    sectors over the past 10 years, expectations are
    that this share will increase further in coming
    years.
  • Manufacturing value-added growth in China
    averaged a yearly 12.9 for 2005-2008 and 11.1
    in 2000-2005. In India yearly manufacturing
    growth averaged 8 for 2005-2008 and 6.9 in
    2000-2005. Comparable figures for the world were
    1.5 and 2.9 respectively, for Africa 5.9 and
    2.9 and for developing countries bar China 5.4
    and 4.3.

21
Rising powers of China, India etc
  • FACTS AND FIGURES ON INDIA/CHINA
  • China is a world production leader in several
    2-digit ISIC lines of production such as textiles
    (accounting for 43.2 of global production),
    wearing apparel (38.7), leather, leather
    products and footwear (43.2), chemical and
    chemical products (21.1), basic metals (41.6)
    and electrical machinery and apparatus (27.8)
    (UNIDO 2010).
  • Among developing countries, China has no major
    close competitor in most lines of products.
  • The share of China in Sub-Saharan African (SSA)
    world manufacturing imports rose from 4.5 in
    2000 to 15.1 in 2009 while India's rise was more
    modest shifting from 2.4 in 2000 to 5.3 in 2009.

22
Rising powers of China, India etc
  • Impact of China and India on African
    manufacturing
  • There are claims backed by empirical evidence
    that cheap Chinese goods are flooding African
    markets thereby displacing local African
    industrial products and undermining
    intra-regional trade in Africa.
  • At a country level, there is evidence for
    instance from Ethiopia that small and medium
    enterprises in the footwear sector were forced to
    close or rationalize activity due to direct
    competition from Chinese imports (Tegegne, 2006).
  • Similar crowding out of African manufacturing
    exports by primarily Chinese competing imports
    are said to be occurring in Africa's traditional
    export markets such as the EU and the U.S and
    especially in low-cost manufactures such as
    footwear, clothing and textiles (Geda and Meskel,
    2007 Giovannetti and Sanfilippo, 2009).
  • The case of the garment industry in Lesotho has
    been much cited as a victim of Chinese
    competition in third markets (Jenkins and
    Edwards, 2005).

23
Rising powers of China, India etc
  • Impact of China and India on African
    manufacturing
  • Terms of Trade The rise of China and India on
    the global manufacturing stage has led to a
    reversal of a trend in the manufacturing-commodity
    terms of trade.
  • While historically the case for industrialization
    has been grounded on the premise that
    manufactures are income-elastic and commodities
    are price elastic (Prebisch-Singer hypothesis),
    China and India have of late turned this
    hypothesis on its head.
  • By increasing demand for primary commodities and
    flooding markets with manufactures, China and
    India have been behind a decline in the terms of
    trade of manufactures relative to primary
    commodities (Kaplinsky, 2008). Given the size of
    their populations and their appetites for
    commodities, it is likely that the current terms
    of trade reversal may be more than a transient
    phenomenon.

24
Rising powers of China, India etc
  • What are the implications of China and India on
    Africa's industrial strategy?
  • First, newly industrializing African economies
    may find it hard to engage in the traditional
    industrial growth trajectories based on
    developing first stepping-stone industries such
    as clothing, textiles, furniture and shoes and
    other low-cost segments due to intense Chinese
    competition in those basic industrial sectors
    (Kaplinsky and Morris, 2007).
  • African countries may need to adopt
    industrialization strategies that are from the
    start based on product differentiated,
    innovation-intensive, or technology-intensive
    niche products that offer continuous upgrading
    opportunities and with a marketing strategy
    emphasizing quality and branding

25
Rising powers of China, India etc
  • What are the implications of China and India on
    Africa's industrial strategy?
  • However Chinas threat in manufacturing to
    developing countries should not be exaggerated
    neither.
  • Research by Hanson and Robertson (2008) for
    instance demonstrates that Chinas increased
    export supply capacity in manufacturing was only
    a modest negative shock to the 10 countries that
    were the most specialized in export manufacturing
    for the period 2000-2005.
  • There is evidence from the study by Geda and
    Meskel (2007) that, in the clothing and
    accessories sector, India's manufacturing
    exports were complementary rather than
    competitive towards African exports in third
    markets and that the displacing effect of Chinese
    manufactures on African exports were declining
    over time, even reversing to complementarity by
    2004.

26
Rising powers of China, India etc
  • What are the implications of China and India on
    Africa's industrial strategy?
  • Over time both China and India are likely to aim
    at moving up in the product value-chain,
    graduating away from producing low value-added
    labor-intensive products towards fabricating high
    technology, high capital--intensive goods and
    eventually acting as lead designers in GVCs, if
    not even move to other GVCs.
  • Such an upgrading by China and India will open up
    opportunities for Africa to integrate in GVCs and
    fill the manufacturing gap left behind by these 2
    Asian giants in certain segments and categories
    of GVCs (e.g. manufacturing and assembly segment
    for labor intensive or medium-technology
    products).

27
Rising powers of China, India etc
  • What are the implications of China and India on
    Africa's industrial strategy?
  • Second, in Africa export-orientation policies
    will have to be mixed with domestic-demand driven
    strategies, with the latter becoming more
    important as incomes rise on the continent and
    regional integration accelerates.
  • African firms will be facing increasingly
    competitive manufacturing export markets subject
    to increased volatility. Inroads in these export
    markets will depend on the region's ability to
    significantly improve its competitiveness and in
    being innovative at creating niche production
    lines in sectors facing rising world demand in
    order to stay ahead of the industrial curve.
  • The region should also consider diversifying into
    non-traditional export markets especially
    targeting the growing middle class in emerging
    economies.

28
Rising powers of China, India etc
  • Third, at a political level, the African
    continent needs to establish room for negotiating
    with China and India on economic-related matters
    and to do so with a coordinated voice.
  • Fourth, Africa needs to stand ready to exploit in
    turn the large industrial markets that China and
    India will create as its urban middle classes
    expand in years ahead. It is estimated that by
    2030, 59 of the global middle class will
    originate from Asia compared to 23 in 2009, due
    to burgeoning emerging middle classes from China
    and India (Kharas, 2010). Buyer-driven GVCs will
    gravitate from Northern markets to the South
    (Kaplinksy and Farooki, 2010) with implications
    on the nature of industrial import demand.
  • While emerging economies such as Brazil, China,
    India, Malaysia and South Korea have a clear
    strategy in Africa, Africa does not seem yet to
    have a strategy towards them (UN, 2010). As
    stated in EDAR2010 report, African countries must
    harness and use its development partnerships to
    further its long-term development goals and doing
    so requires African countries to take a
    pro-active approach to the partnership process.

29
Climate change
  • Constraints
  • Current and future international obligations on
    climate change mitigation and adaptation imposes
    constraints on how Africa should industrialize.
  • Imposition of environmental standards by
    developed countries on imported products
  • In the future environmental friendliness can
    become another dimension of industrial
    competitiveness, even more so if climate policies
    are linked to trade policies. Industries that
    fail to go green may be at a competitive
    disadvantage in the global marketplace. As the
    momentum to transit to low-carbon economies
    gathers pace, African industries may have no
    choice but to go green in the future in order
    to be competitive on world markets
  • But climate change also presents opportunities
    for Africa

30
Climate change
  • In particular, obligations to mitigate and adapt
    to climate change and to go green, though
    costly, can actually represent an opportunity for
    African countries.
  • As a latecomer in the industrial game, Africa has
    indeed an opportunity to be at the forefront of
    the green industrial revolution by implementing a
    green industrial development based on low
    energy-intensity, low carbon emissions and clean
    technologies.
  • While industrially advanced economies will have
    to bear the costs of transiting towards a low
    carbon economy in the medium to long-run, the
    continent has the opportunity to avoid such
    adjustment costs by leapfrogging directly into a
    clean industrial development right from the
    start.
  • Doing so will allow the region to develop
    first-mover advantages over other
    industrialized economies while waiting for
    investment and trade to be integrated in
    climate-friendly global policies. Future global
    policy developments for instance may link trade
    preferences accorded to developing countries to
    their mitigation and adaptation efforts

31
Climate change
  • Opportunity Greening" industrial growth
    implementing green industrial policies
  • Africas green industrial policy can be couched
    within a three-pronged approach that aims at
  • 1. Powering industrial production in Africa with
    clean, renewable energy sources such as solar,
    wind power or bio-fuels over fossil fuel sources.
  • While historically, the African continent,
    especially Sub-Saharan Africa has not been a
    major emitter of GHG due to its low
    electrification rate and energy use, it is
    potentially the region, bar South Asia, where the
    highest growth rate in GHG could originate in the
    future, should the continent succeed in
    increasing access to electricity for its 587
    million citizens that still live without it.
  • Africa cannot industrialize unless it secures
    access to energy and water for its entrepreneurs.
    However in order not to impede world-wide efforts
    against climate change mitigation, that increased
    energy use needs to be mostly non-fossil based.
    While Africa needs to industrialize to achieve
    poverty reduction and development, it has to do
    in a sustainable way that limits the carbon use
    of its industry.

32
Climate change
  • 1. Powering industrial production in Africa with
    clean, renewable energy sources such as solar,
    wind power or bio-fuels over fossil fuel sources.
  • The development of the renewable energy sector in
    Africa needs to go hand in hand with its
    industrial development. Africas green
    industrial policy needs to be accompanied by a
    renewable energy policy. Renewable energy is
    needed to fuel the regions industrial growth
    while by itself the renewable energy sector can
    be a significant component of Africas industry.
  • Initiatives such as the one led by Desertec that
    aims at producing clean solar and wind energy in
    Northern African deserts to supply the EU-MENA
    region needs to be multiplied

33
Climate change
  • 2. Lowering the energy intensity, resource
    intensity and carbon footprint of African
    industry, especially manufacturing by stimulating
    investment in, and adoption of, clean and
    energy-efficient technologies and methods of
    production
  • 3. Positioning African industry as a supplier of
    environmental industrial products that targets
    green customers as part of Africas niche
    production export strategy.
  • -identify potential green niches
  • - integrate into green global value-chains

34
Climate change
  • So far only 13 African countries have established
    National Cleaner Production Centers (NCPC) that
    can assist in the promotion of clean production
    methods and environmentally sound technologies
  • The NCPC programme was established by UNIDO and
    UNEP to provide assistance to business,
    government and other stakeholders in implementing
    cleaner production methods, practices, policies
    and technologies in their home country. The
    programme now covers 47 developing and transition
    countries including in Africa Cape Verde, Egypt,
    Ethiopia, Kenya, Lebanon, Morocco, Mozambique,
    Rwanda, South Africa, Tunisia, Uganda, United
    Republic of Tanzania and Zimbabwe.
  • Throughout the region, greater investment is
    needed in Research and Development in the private
    sector and in Science and Technology at
    educational institutes.
  • To succeed on its green industrial pathway and be
    process and product innovative, the region will
    have to devote more resources at strengthening
    the nexus between universities, research
    institutes and business and at training
    scientists and researchers.

35
Global Value-Chains (GVCs)
  • What is a Value-Chain? The value chain describes
    the full range of activities that firms and
    workers carry out to bring a product from its
    conception to its end-use and beyond. That
    includes activities such as design, production,
    marketing, distribution and support to the final
    consumer.
  • An important feature of the new global
    environment is the increased internationalization
    of industrial production.
  • Production is being increasingly segmented in
    different stages located in different countries,
    according to the competitive advantages of each
    location. This so called globalization of the
    value-chain (or Global Value Chains) allows
    producers to improve on competitiveness by making
    better strategic use of available global
    endowments, skills and capabilities to lower
    costs.
  • It also creates opportunities for a greater
    number of countries to take part in the global
    industrialization process and in so doing spur
    their own national industrial development.

36
Global Value-Chains (GVCs)
  • See UNCTAD LDC Report 2007 Knowledge,
    Technological Learning and Innovation for
    Development (Chapter 2 and Chapter 3 on IPR)
  • Opportunities from GVC
  • GVCs often represent one of the very few options
    or perhaps the only one for local firms and
    suppliers to secure access to larger
    (international) markets and to innovative
    technologies.
  • LDC firms can enhance their technological
    capabilities by exporting (learning-by-exporting)
    or, alternatively, they can become marginalized
    from GVCs.
  • Participation in GVCs may be associated to the
    upgrading of firms. In this perspective, four
    types of upgrading have been distinguished from
    enterprises (Humphrey and Schmitz, 2000)
  • - Process upgrading is transforming inputs into
    outputs more efficiently by reorganizing the
    production system or introducing superior
    technology.
  • - Product upgrading is moving into more
    sophisticated product lines in terms of increased
    unit values.
  • - Functional upgrading is acquiring new,
    superior functions in the chain, such as design
    or marketing, or abandoning existing
    lower-value-added functions, so as to focus on
    higher-value-added activities.
  • - Inter-sectoral upgrading is applying the
    competence acquired in a particular function to
    move into a new sector.

37
Global Value-Chains (GVCs)
  • For small firms in less developed countries,
    participation in value chains is a means of
    obtaining information about the needs of global
    markets and gaining access to those markets.
  • Although this information has high value for
    local small and medium-sized enterprises (SMEs),
    it is less clear what role the leaders of the
    GVCs play in fostering and supporting SMEs
    upgrading process.
  • Whether LDCs firms and farms will benefit from
    the relationships with foreign buyers depends on
    a number of circumstances that may or may not
    arise. The upgrading process is fraught with
    difficulties and obstacles, which are
    particularly great for LDC firms.
  • Issues How to participate into buyer-driven
    GVCs? Barriers to entry, importance of reputation
    and trust (high transaction costs), Risks of
    exclusion and marginalization
  • Issues Asymmetric power relations and the
    distribution of rents, switching costs
  • Issues Upgrading and technological learning

38
Global Value-Chains (GVCs)
  • Issue 1 Participation of LDCs in GVCs
  • Access to the fastest-growing market segments
    depends upon satisfying the demands of retailers
    and competing with other suppliers. Large
    retailers become gatekeepers to markets,
    hindering and/or fostering access. These
    difficult changes represent opportunities but may
    also threaten exclusion for those suppliers that
    are unable to respond to the challenge.
  • Since the mid-1980s lead firms have required more
    functional capacities (i.e. the range of
    activities, and the related conditions and
    skills, that suppliers are required to carry out)
    from first-tier suppliers in all cases, and
    sometimes also from second- and third-tier
    suppliers. At the same time, lead firms require
    higher performance levels from second-tier
    suppliers (i.e. compliance with standards for
    carrying out those activities). These increasing
    demands by buyers differ by sector and by
    specific value chain.
  • Buyers and chain leaders are becoming more and
    more demanding, but they do not necessarily
    provide support or transfer knowledge and
    capabilities. The key agents for knowledge
    transfer and organization vary from chain to
    chain.

39
Global Value-Chains (GVCs)
  • The lead firm may not be responsible for
    ensuring technical competence along the supply
    chain. In fact, much of the work of value chain
    organization and management is being outsourced
    by lead firms, which establish a first tier of
    suppliers and push responsibility towards them to
    an increasing extent. First-tier suppliers in
    turn increasingly rely on a series of second- and
    third-tier suppliers. Firms from LDCs rarely
    qualify that is, they do not have the capacity,
    skills and volumes to become first-tier
    suppliers, and in the best case may become
    second- or third- tier suppliers.
  • According to most recent empirical evidence, by
    far the most demanding entry barrier increases
    have been for first-tier suppliers (Gibbon and
    Ponte, 2005). This is perhaps less worrying for
    LDCs, as no firms from those countries play the
    role of leader, and very few that of first-tier
    (or often even second-tier) supplier.
  • What are the consequences of those increasing
    demands by buyers for second-tier suppliers in
    LDCs? The risks involved have been described as
    the risks of marginalization and exclusion
    (Gibbon and Ponte, 2005). The former refers to
    the possibility of downgrading within the same
    GVC and being relegated to less remunerative and
    more vulnerable segments of activity, while the
    latter refers to the eventual inability to enter,
    and being utterly excluded from global chains.
  • Public policies explicitly directed to favoring
    SME inclusion into GVCs may help

40
Global Value-Chains (GVCs)
  • See UNCTAD 2010 Integrating developing countries
    SMEs into Global value-chains
  • UNCTAD (2010) highlights a series of policy
    recommendations that are relevant for African
    industries.
  • It notes that promoting an enabling business
    environment is a prerequisite for SME's to
    integrate into GVCs.
  • This can range from stable macroeconomic
    policies streamlining and efficiently applying
    business procedures, laws and regulations
    setting up complementary policies in competition,
    trade and investment to supporting human resource
    development and improving access to finance.
  • Public policy interventions to support SMEs,
    should, according to UNCTAD (2010b), focus on
    skills development and training, investments in
    appropriate technologies for continuous
    technological upgrading, enhancing compliance
    with international standards, fostering linkages
    between SMEs and MNEs via specific promotion
    measures especially targeting MNEs that are known
    to establish linkages with SMEs, setting up
    business development services, promoting clusters
    such as setting up science and technology parks
    or industry villages, enhancing intellectual
    property protection and developing productive
    capacities.

41
Global Value-Chains (GVCs)
  • The uncertain support provided by global buyers
    and their variable engagement with local
    suppliers lead some authors to argue that
    LDCs-based firms should aim at trading down
    (Gibbon and Ponte, 2005).
  • This means consolidating their suppliers role,
    focusing on economies of scale, high
    specialization, and simple and labour-intensive
    technologies, and aiming at mass markets via
    large-scale retailers. However, if trading down
    implies withdrawing from the attempts to develop,
    strengthen and deepen technological capabilities,
    it should clearly not be the strategy for LDC
    suppliers. The search for specific market niches
    to exploit advanced capabilities always offers
    potential benefits.
  • However, if technological capability development
    comes together with trading down that is, a
    focus on high specialization, economies of scale
    and firm-size expansion this may be an option
    to choose on the basis of a very pragmatic and
    ongoing assessment.

42
Global Value-Chains (GVCs)
  • One of the few cases of detailed studies of
    specific GVCs in sub-Saharan Africa analyses
    cotton, clothing, citrus, coffee, cocoa, and
    fresh vegetables GVCs, concluding that there have
    been relatively few examples of clearly
    successful upgrading (Gibbon and Ponte, 2005).
  • Acquiring larger volumes and economies of scale
    appears central in most cases, and this
    sometimes suggests an interesting scope for
    regionalization (large regionally integrated
    markets) and for SMEs growing to medium-sized
    status.
  • Several Kenyan exporters consolidated their
    supply of fresh vegetables to United Kingdom
    supermarkets in the late 1990s by expanding their
    scale (including through investments in the
    United Republic of Tanzania), improving quality
    assurance, and diversifying into snow/snap peas
    and cut flowers.
  • Regarding cotton, the experiences from the United
    Republic of Tanzania and Zimbabwe are the
    opposite. While the former experienced
    downgrading in the 1990s, the Zimbabwean company
    Cottco consolidated its minor first-tier supplier
    status by vertically integrating into spinning of
    cotton knitting yarn, acquired a cotton
    concession in Mozambique and gained economies of
    scale in the regional market.

43
Global Value-Chains (GVCs)
  • Main strategy Target niches and strengthen
    technological learning for upgrading
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