Working Paper by Building Bridges

THE AfCFTA AND TRANSFORMATIVE INDUSTRIALISATION WEBINAR SERIES

THE AfCFTA AND TRANSFORMATIVE INDUSTRIALISATION: WORKING PAPER

2021, Cape Town

Linkoping House 27 Burg Road Rondebosch 7700 Cape Town T +27 (0) 21 650 1420 F +27 (0) 21 650 5709 E mandelaschool@uct.ac.za www.mandelaschool.uct.ac.za

Design: Mandy Darling, Magenta Media

Contents Introductory Note................................................................................................................................. 2 AfCFTA and Transformative Industrialisation ................................................................................ 2 1. Introduction.................................................................................................................................................. 3 2.

Transformative industrialisation in Africa: Theoretical framework and review of literature................................................................................................................................ 5 Transformative industrialisation: What is it?................................................................................... 5 Industrialisation development in Africa: From the post-colonial era to structural adjustment programmes..................................................................................................................... 5 Industrialisation development in Africa: Post-structural adjustment ....................................... 7

Taking industrialisation policy to the regional level: A conceptual approach to the selection of priority sectors................................................................................................................ 8 Industrial development discourse: From national to global and back to regional................. 8 Regional value chain promotion: Identifying priority sectors..................................................... 8 Regional value chain promotion: Making a case for the identified priority sectors............... 9

Challenges and opportunities in three African regional value chains .....................................13 Pharmaceutical and healthcare ........................................................................................................13 Cotton, textiles and clothing ........................................................................................................... 14 Agriculture and food processing..................................................................................................... 14 A summary of the discussion ...........................................................................................................15

Overview of key policy insights and recommendations............................................................. 16 Recommendations from the AfCFTA Secretary-General.............................................................17

The Way Forward................................................................................................................................ 19

References ......................................................................................................................................................21

Introductory Note AfCFTA and Transformative Industrialisation Dear Reader, 2020 proved to be a challenging year for people across the world. Of note the impact of the Covid-19 pandemic on families, communities and nations reminded us of the need to strengthen democratic governance and pursue development sustainably. The African Continental Free Trade Agreement presented a unique opportunity to explore the challenges and opportunities for better integration of regional value chains in the pharmaceutical, agricultural and textile industries. Successful delivery of our four-part webinar series was made possible through partnership with the Centre for Competition, Regulation and Economic Development (CCRED) at the University of Johannesburg, the Centre for Comparative Law in Africa (CCLA) and the Policy Research in International Services and Marketing (PRISM) at the University of Cape Town, Trade and Industrial Policy Strategies at the University of Pretoria, the Toyota Wessels Institute of Manufacturing Studies (TWIMS) in Durban, the Nigerian Institute of Advanced Legal Studies and the Africa International Trade & Commerce Research in Nigeria. We are especially grateful to our distinguished speakers who shared their experience and

recommendations, thereby contributing to vibrant discussions during our webinar series. We had the opportunity to relay these recommendations to the Secretary General of the AfCFTA Secretariat, H.E. Wamkele Mene, in December 2020. This Working Paper collates key themes and recommendations, which emerged during the webinar series. We would like to thank Mr George Awuah, Mr Babatunde Abiola and Ms Nobuntu Phali, members of our research team on the AfCFTA and Transformative Industrialisation Project, who compiled this working paper. This work forms the foundation in our efforts to build a network of experts working on issues related to transformative and sustainable industrialisation through the Industrialisation and Development Forum. In 2021, we will continue this series to explore digitisation and opportunities for green industrialisation. We hope you enjoy reading this report and look forward to your comments. If you would like to receive more information about this ongoing project, please contact Ms Mabel Nederlof-Sithole, who is leading our Building Bridges Programme (mabel.sithole@uct.ac.za). Click here to view webinar videos. Warm regards, Faizel Ismail

The AfCFTA and Transformative Industrialisation • WORKING PAPER

1. Introduction Transformative industrialisation remains a crucial development challenge for Africa. Over the last two decades, impressive growth numbers recorded on the continent have largely been driven by gains in primary resource exports (Dinh et al, 2013). The levels of industrialisation have been low and manufacturing’s value-added share of gross domestic product (GDP) has declined, accounting for only 11.3% of GDP in 2017 (Lopes & te Velde, 2021). Today, examples of dynamic industrial clusters, large scale indigenous manufacturing firms and domestic technological development are few and far between (Markowitz & Black, 2019). In effect, there is a heavy import dependence on manufactured goods, including essentials such as clothing, food and medicines. More importantly, due to poor industrial development, economic growth on the continent has failed to translate into significant social development and the creation of decent jobs (AfDB, OECD & UNDP, 2016; Lopes & te Velde, 2021). While reasons adduced for Africa’s poor industrial growth performance are broad, one obvious factor is the failure of many African countries to prioritise industrialisation and value addition as a critical element of their development strategies. Over the past four decades, the design and practice of industrial policy, if undertaken at all, have focused on general investment climate issues with too little attention to targeted, facilitatory actions (Lopes & te Velde, 2021). The promulgation of the African Continental Free Trade Area (AfCFTA), however, constitutes a potential game-changer, allowing for an optimistic outlook on the possibility of transformative industrialisation (Kende-Robb, 2021). In addition to boosting intra-regional trade, the AfCFTA affords an opportunity for the continent to recommit itself to transformative industrialisation. By building a unified market of 1.3 billion people with a potential GDP of US$3.4 trillion across the 55 member states of the AU, the free trade area creates economies of scale and facilitates significant investment in manufacturing across the conti-

nent (Maliszewska & Ruta, 2020). Some observers have argued that the AfCFTA represents a significant industrialisation opportunity through the creation of competitive regional value chains (RVCs) that exploit existing comparative advantages and complementary features within the region, including differentiated labour cost, productive capabilities, natural resource endowment and geopolitical advantages (Weigert 2016; Weigert & El Dahshan, 2019). Indeed, in terms of Africa’s disappointing industrial development, the more conspicuous failing, as Markowitz and Black (2019) aptly note, is the virtual absence of RVCs, which have been an integral aspect of rapid industrialisation success in Asia (UNESCAP, 2015)1. For Africa, the appeal of RVCs as an industrialisation pathway, especially within the context of the AfCFTA, is four-fold: (i) it will aid in mitigating negative distributional impacts of the free trade area (Ismail, 2018); (ii) it will serve as a transitional solution for competitive integration into global value chains (GVCs) (Weigert, 2016; Slany, 2019); (iii) it will afford an opportunity to diversify from global supply chains and their risk (Banga et al, 2020); and (iv) it will aid the evolution of industrial sectors unique to the continent (Weigert & El Dahshan, 2019). To realise the gains that the free trade area promises for regional production networks and transformative African industrialisation, research and policy insights are required to guide the implementation of active and pragmatic policy programmes. It is in this context that the Nelson Mandela School of Public Governance at the University of Cape Town launched a webinar series on the theme, “The AfCFTA and Transformative Industrialisation” in partnership with: the Policy Research in International Services and Manufacturing (PRISM), the Centre for Competition, Regulation and Economic Development (CCRED, University of Johannesburg), Trade and Industrial Policy Strategies (TIPS, University of Pretoria), the Centre for Comparative Law in Africa (CCLA, University of Cape Town), Africa International

1 Trade in value-added products within the region is by far the lowest in comparison with Asia and Latin America (Slany, 2019).

Trade and Commerce Research (AITC), the Nigerian Institute of Advanced Legal Studies (NIALS) and the Toyota Wessels Institute for Manufacturing Studies (TWIMS). The webinar series of the Mandela School created a platform for dialogue to address the question of how the AfCFTA can advance transformative industrialisation in Africa. Each webinar focused on the potential for the development of regional production networks in one of three priority sectors: i) pharmaceuticals and healthcare; ii) cotton, textiles and clothing, and iii) agriculture and food processing. The webinars included the participation of representatives of various constituencies from the business community, trade and industry experts, trade unionists and manufacturing associations. Insights from the webinars fed into policy briefs that are to be shared with relevant stakeholders, including the AfCFTA Secretariat. This paper summarises the main insights from the webinar series and identifies some key policy proposals for Africa’s policymakers, academic researchers and other stakeholders. This paper is structured as follows: • Section 2 outlines the theoretical framework underpinning transformative industrialisation in Africa and evaluates the experiences and performance of Africa’s industrialisation policies and strategies. • Section 3 explains the needs-based conceptual approach to the selection of priority sectors for RVC promotion. • Section 4 presents a synthesis of the key insights from the webinar series pertaining to the three priority RVCs. • Section 5 presents some recommendations for policymakers, academic researchers and other stakeholders that emerged from the fourth webinar. • Section 6 makes some concluding comments and suggests a way forward.

The Nelson Mandela School of Public Governance has identified three priority sectors that were perceived to have high potential for regional value chains (RVCs) in the context of the AfCFTA. They include: 1. Pharmaceuticals and healthcare

2. Cotton, textiles and clothing

3. Agriculture and food processing

The AfCFTA and Transformative Industrialisation • WORKING PAPER

2. Transformative industrialisation in Africa: Theoretical framework and review of literature Transformative industrialisation: What is it? A central insight of the literature on economic development is the idea that development entails a structural change of moving labour and other resources away from low-productivity activities in agriculture and informal services, toward high-productivity activities in industry (McMillan et al, 2014; Caselli, 2005; Herrendorf, Rogerson & Valentinyi, 2013; Restuccia, Yang & Zhu, 2008). Such an approach to structural transformation, which is deemed to be growth-enhancing, is argued by these writers as a key driver of development and has typically been the experience of highgrowth countries including the Asian tigers. In contrast, for African (and Latin American) countries, the broad patterns of structural change since 1990 have been growth-reducing with labour moving from high-productivity sectors to low-productivity sectors, including, most notably, informal services (McMillan et al, 2014). It is on the basis of the relatively higher productivity gains in industrial activities that industrialisation has generally been synonymous with development. And, whilst industrialisation entails much more than manufacturing, in any industrialisation effort, manufacturing historically emerges as the desired industrial activity because of its relative pro-development potential in generating spillovers and providing dynamic gains to growth and development (Lopes & te Velde, 2021). The characteristics underpinning the manufacturing sector’s relative pro-development potential include higher employment creation potential, with greater scope for absorbing unskilled workers at a productivity premium; high tradability in

international markets, which is indicative of greater potential for spillovers; and greater scope for innovation and technology diffusion2 (Hallward-Driemeier & Nayyar, 2018). It is not surprising, then, that manufacturing has been synonymous with industrialisation and by extension, development. Indeed, economic history demonstrates the potential of manufacturing to foster development. From the Industrial Revolution in the 18th century to the more recent economic take-off circa 1960 that resulted in East Asia’s growth miracle, some of the biggest development gains in history have been associated with export-led manufacturing. Today, almost all high-income countries have industrialised with manufacturing, at its peak, accounting for 25-35% of GDP3 (Hallward-Driemeier & Nayyar, 2018).

Industrialisation development in Africa: From the post-colonial era to structural adjustment programmes For Africa, the literature describes failed attempts at industrialisation with economic production remaining largely agrarian and subsistence-based with limited value addition (Mkandawire, 2001; Chang, 2013; de Vries et al, 2013; Elhiraika et al, 2014; Lopes, 2015; Lopes, 2019; Lopes & te Velde, 2021). Reasons adduced for the failure of transformative industrialisation in Africa include a weakly articulated policy notion of comparative advantage; domestic programmatic failure, such as unsustainable subsidies of production inputs; inappropriate monetary and fiscal policies, which are linked to political economy issues; and structural

2 These characteristics are in comparison with the same measures for agriculture, services, and natural resources and mining sectors. 3 Few countries have reached high-income levels without developing a manufacturing base. Norway attained high-income status through natural resource extraction whilst Singapore, for instance, did so through exploitation of it locational advantages.

impediments such as infrastructure and human capital deficits (Stiglitz et al, 2013; Mkandawire, 2014; Chang, 2013; Lopes & te Velde, 2021). The effect of Africa’s failure to industrialise, as McMillan et al (2014) note, is that the continent has undergone a growth-reducing structural transformation, with labour moving from high-productivity industrial activities to low-productivity service and informal sector activities. Indeed, it is observed, based on manufacturing value-added share of GDP, that manufacturing in Africa has either stagnated or declined over time. As Lopes and te Velde (2021) rightly point out, however, the decline in the share of industry (and agriculture) in Africa’s GDP is largely due to the worldwide surge in the value of services – not a decline in manufacturing value-added per se. From a historical perspective, manufacturing in Africa recorded substantial growth in the early post-independence period of the 1960s where there were significant state-led investments and highly protective trade policies. The first

oil price shock of the 1970s, however, created an adverse environment as interest rates shot up and other commodity prices collapsed. These developments placed limits on state interventionism which, coupled with corruption and inefficiency, eventually occasioned the era of structural adjustment policies (Lopes & te Velde, 2021). The structural adjustment programmes proved inimical to the emergent African manufacturing sector for a number of reasons (Signe, 2018; Lopes et al, 2018; McMillan et al, 2014). For one, the use of industrial policies to promote economic transformation was largely ignored – or even vilified – during the structural adjustment era and this remained unchanged until the end of the last century (Byiers et al, 2018). In a sense, therefore, the post-structural adjustment period provides a better and more balanced view of the role industry has played in Africa’s growth trajectory (Lopes, 2019; Lopes & te Velde, 2021).

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Industrialisation development in Africa: Poststructural adjustment Since the turn of the 21st century, while industrial growth measured in terms of manufacturing value-added as a percentage of GDP has shown a relative decline, the per capita contribution of manufacturing at constant 2010 US dollars has increased as the real level of production has grown every year.4 Thus, the picture of Africa’s industrial growth performance is much more complex than the narrative of the continent’s transformative industrialisation failure suggests. What is plain, though, is that the manufacturing sector in Africa has not grown as expected, particularly if compared to the recent economic accomplishments of East Asian countries. For instance, while globally the quantity of manufactured goods produced has been rising faster than other goods and services, according to UNIDO (2018), manufacturing growth in Africa is lagging in most countries. That notwithstanding, there are a variety of performance patterns within the African continent as a few countries, such as Rwanda, Ethiopia and Tanzania, have posted acceptable growth (Signé, 2018; Lopes & te Velde, 2021). Besides the binding constraints, a major factor underpinning Africa’s somewhat disappointing industrial growth in the post-structural adjustment era is the failure of most African countries to prioritise industrialisation and value addition as critical elements of their development strategies. Too many African countries have focused on general investment climate issues and too little on targeted, facilitatory actions for specific sectors. In countries where industrial development was prioritised, they mostly involved the adoption of the special economic zones (SEZs) approach in the hope of mimicking their success in South East Asia, China, Brazil and Mexico. However, few African countries succeeded, whilst most were disappointed (Newman & Page, 2017; Kweka & te Velde, 2020; Lopes & te Velde, 2021).

Most African countries, therefore, missed the opportunities to commit to transformative industrialisation by leveraging their abundant natural resources, adding value to them or supporting the development of infant industries. It is this failure that has driven most countries into higher economic dependence and stagnation, which has been painfully exposed by the Covid-19 pandemic. Today, transformative industrialisation remains imperative for Africa if the recent modest growth rates are to be translated into significant social development and the creation of decent jobs. The disappointing industrial growth performance ought not to be seen as proof of the declining importance of industrialisation. Indeed, as McMillan et al (2014) reports, while the pattern of structural change in Africa since 1990 has been growth reducing, structural change since 2000 has contributed positively to Africa’s overall productivity growth as manufacturing has been rising, albeit from a very low base and at a very low pace. This suggests an enormous potential for growth in productivity through increased manufacturing. What is required then is a renewed effort and additional policy focus to promote industrialisation. The African Union and African countries have expressed a strong desire for industrialisation5. The promulgation of the AfCFTA, therefore, allows re-committing to transformative industrialisation by adopting both national and regional strategies. Past industrial experience suggests moving beyond general investment climate policies to target policies that involve strategic government interventions in the economy’s productive structure (Oqubay & Ohno, 2019; Lopes, 2019; Ansu et al, 2016b). More importantly, correct identification of economic opportunities and sectors that avoids negative policy and economic considerations is essential for success.

4 Over the past decade, for instance, most African countries, with the exception of the Gambia, Sierra Leone, Lesotho, Somalia and Tunisia, have had manufacturing sector growth ranging from 0.1% in Mozambique to 14.6% in South Sudan (RMB, 2020). 5 The return of industrial policy as a priority across Africa for job creation and poverty reduction is underpinned by multiple factors: the end of the commodity super-cycle, which has underscored the need for economic diversification and transformation; the great need for job creation emanating from demographic growth that vastly outpaces economic growth; and frustration with ‘Washington Consensus’ policies that regulated industrial policy (Byiers et al, 2018).

3. Taking industrialisation policy to the regional level: A conceptual approach to the selection of priority sectors Industrial development discourse: From national to global and back to regional The emergence of global value chains (GVCs) as conduits for global economic activity has fundamentally changed the discourse on how Africa (and other developing countries) can foster industrialisation. With GVCs, it is assumed African countries can integrate with the global economy by specialising in specific tasks that are in line with their comparative advantages as part of a global production network (Baldwin, 2013). In reality, though, due to poor firm-level capabilities to meet quality standards and conform with formal requirements, African countries are often caught in the low-value-added, ‘upstream’ end of GVCs, supplying raw materials such as minerals and agricultural goods (Byiers et al, 2018). RVCs are, therefore, emphasised as providing a more accessible way for African firms to build capabilities through learning-by-exporting, but with lower barriers to entry, such as less stringent quality standards (UNCTAD, 2013; Weigert, 2016). In addition, since the 2008 global financial crisis, in what has been termed ‘slowbalisation’, the growth of international trade has been sluggish and the expansion of GVCs has stalled (Chandy & Seidel, 2016; World Bank, 2020). In line with geopolitics, slowbalisation has led to more regional cross-border commerce as multinational activities and the legal and diplomatic framework for investment and trade flows are becoming more regional (The Economist, 2019).

In this context, the recent coronavirus outbreak has brought into sharp focus the vulnerabilities in GVCs and the potential of rapid shifts from globalisation towards regionalism. For global lead firms, the pandemic has exposed the implications of the different institutional contexts and political economies in which different parts of their chains are located (Azmeh, 2020). In response, prior adoption of Industry 4.0 technologies and, more importantly, reshoring are likely to be intensified to mitigate supply chain risks and increase flexibility (Seric & Winkler, 2020). In a sense, production networks are likely to become more regional than global.

Regional value chain promotion: Identifying priority sectors For Africa, the relevance of RVCs, especially in the context of the AfCFTA, has been explained elsewhere (Ismail, 2018; Weigert, 2016; Slany, 2019; Baldwin, 2006; Banga et al, 2020; Weigert & El Dahshan, 2019). Closely related to the regional industrial strategy of RVC promotion, however, is an emphasis on mapping priority RVCs and raising awareness among stakeholders. The ultimate goal is to address regional coordination failures in such priority sectors (Byiers et al, 2018). The Mandela School’s AfCFTA and Transformative Industrialisation webinar series followed a basic needs approach to identify priority sectors for RVC promotion. The basic needs approach reflects the popular arguments for light manufacturing on the continent6. Specifically, the literature points to low-tech, labour-intensive, raw material-oriented manufacturing as a

6 Consumer goods or ‘light’ industries include paper, textiles, food processing, drugs, leather, printing and daily necessities (Singh, 1976).

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viable route to continent-wide transformative industrialisation given Africa’s industrial experience, its comparative advantage, and current trends in international manufacturing exports. Stated differently, it is argued that given the continent’s abundance of natural resources, inexpensive and low-skilled workers, and the continuing erosion of China’s competitiveness in light manufacturing exports (owing to a steeply rising labour and land cost, and regulatory compliance), there is an opportunity for Africa to pursue light manufacturing and create productive jobs for its teeming population (Dinh et al, 2013; McMillan et al, 2014). The availability of raw materials presents an opportunity to expand manufacturing capacity in labour-intensive sectors not only to provide high-paying jobs for the massive pool of workers in agriculture and the informal sector but also to replace imports and capture overseas markets for processed agricultural goods, food and beverages, medicines, and textiles and garments. For low-skilled workers, light manufacturing with skills requirements that are not too different from their current skills could be a source of more productive employment. Additionally, for countries without distinct comparative advantage, light manufacturing can replace import, serve the domestic market

and help conserve foreign exchange (Dinh et al, 2013). Indeed, the industrial experience of the successful late industrialisers suggests that successful transformation from a traditional agrarian economy towards a modern one involved light manufacturing, which invariably preceded heavy industry (Ozawa, 2007).

Regional value chain promotion: Making a case for the identified priority sectors The specific priority sectors identified reflect basic needs – food, health and clothing (Figure 1) – with several other recent trends that provide Africa with unprecedented opportunities in these sectors. Let us consider the case of pharmaceuticals. The pharmaceutical industry in Africa is one of the fastest-growing industries in the world, with the prospect of growing even stronger, driven by rapid urbanisation, the expansion in healthcare capacity and the maturing of the business environment (Holt, Lahrichi & Santos da Silva, 2015). Despite the continent’s relatively small pharma market – projected to be between US$40 billion and US$60 billion, compared to US$393 billion for the US and US$123 billion

Pharmaceuticals, Health Care Value Chain and Health Resilience

Health Building the Cotton Textiles and Clothing RVCs

Clothing

Food

Agriculture – Food Processing Value Chains (including retail) and Food Security

Figure 1: Basic needs approach to African industrialisation (2021)

for Japan – it holds great promise as it is estimated to grow at a compounded annual rate (CAGR) of 9.8%, compared with just 2% for the US and 1% for Japan. Besides, with slow and stagnating growth in the established pharmaceutical markets, emerging markets are increasingly considered the next frontier (Steele et al, 2020). Coupled with the opportunities in the African pharma industry are the continent’s multiple challenges of disproportionate global disease burden and lack of access to affordable and quality-assured medicines for nearly half of the population. Africa also suffers from import dependence on medical and pharmaceutical products, and limited local pharmaceutical production (UNECA, 2020; Banga et al, 2020; UN, 2020; Chaudhuri et al, 2010; Leive & Xu, 2008). These weaknesses represent a significant industrialisation opportunity if competitive pharmaceutical RVCs can be developed to meet this growing demand. The recent pandemic has indeed amplified the urgency to build a competitive and robust African pharmaceutical industry. The promulgation of the AfCFTA constitutes a boon to regional pharmaceutical production as it affords economies of scale in overcoming the market size constraints commonly cited as an obstacle for pharmaceutical manufacturers on the continent (Chaudhuri, Mackintosh & Mujinja, 2010; Kaplan & Laing, 2005; Banga et al, 2020; Steele et al, 2020). For cotton, textiles and clothing, the importance of building a competitive African production network is underpinned by a number of factors. For one, the cotton, textile and clothing sector, according to the African Development Bank, represents the second-largest sector in developing countries after agriculture and, thus, presents a unique opportunity for countries seeking to pursue industrialisation as these sectors have the potential for value-added manufacturing. Also, this sector is composed of mainly micro, small and medium enterprises, which can rapidly generate decent jobs – both skilled and unskilled – especially for youth and women. Yet, the largest cotton exporting regions on the continent are largely confined to the production of cotton fibres exported to markets outside of the continent – about 70% of cotton exports from Africa are made up of primary intermediates embodying limited value addition. In effect, while the continent is

a net exporter of cotton fibres, it consistently reports a trade deficit in yarn, and even more so in cotton fabrics (UNCTAD, 2019). Even worse, intra-regional trade accounts for just 15% of cotton exports and 12% of imports, highlighting weak integration of regional production across the cotton, textiles and apparel value chain. Despite these weaknesses, there are various new opportunities that could stimulate the revival of national cotton, textile and apparel sectors if regional production networks can be evolved. First, Africa is one of the fastest-growing consumer markets in the world, with consumer expenditure growing at a compound annual rate of 3.9% since 2010 and expected to reach US$2.1 trillion by 2025 and US$2.5 trillion by 2030. With the implementation of the AfCFTA, a single continental market for goods and services is coming into being (Signé & Johnson, 2018). Second, continuously rising labour and production costs in Asia are forcing textile and apparel manufacturers to consider relocating their operations, and many African countries provide suitable operational locations due to their existing productive capabilities and lower, competitive wages. Indeed, Asian textile and apparel manufacturers have already started shifting operations to Africa. Third, African traditional and cultural textiles are becoming increasingly part of international fashion with an increasing global demand for African textiles that motivates African textile production (Hagen-Jurkowitsch & Sarlay, 2010). Fourth, the textile and apparel sector has been designated as a priority sector for export, employment generation and industrial development by many governments across the continent (Commonwealth Secretariat, 2015; International Trade Center, 2016; Advisors & Vaid, 2011). Fifth, over time there has been significant investment in infrastructure across the continent in the form of SEZs and export processing zones (EPZs) that provide textile and apparel manufacturers with an opportunity to take advantage of subsidised production for local and export production (Traub-Merz & Jauch, 2006; International Trade Centre, 2016; AUC & OECD, 2019).

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Finally, there is an increasing call for sustainable and responsible sourcing practices which provide an opportunity for Africa to differentiate its value chains based on sustainable production (McKinsey, 2019). Overall, however, the pandemic arguably constitutes the loudest amplification of the need to build a competitive African textile and clothing value chain. Disruptions to global supply chains have highlighted the need for access to suppliers closer to production. This has highlighted the need to strengthen RVCs to diversify risk, reduce vulnerability, increase resilience and foster industrial development (Fortunato, 2020; Pasquali & Godfrey, 2020). With the pandemic coinciding with increased regional integration afforded by the AfCFTA, there is perhaps no better time than now for promoting an Africa cotton, textile and clothing production network. Finally, for agriculture and food processing value chains, lessons from successful industrial experience in Asia, particularly China, as well as the continent’s own past industrial failure highlight the importance of agriculture to transformative industrialisation (Dollar, 2008). As Singh (1976) notes, an important success factor in China’s transformative industrial development has been a close integration between industrial and agricultural development expressed in the Maoist slogan: “Taking agriculture as the foundation, and industry as the leading sector”. For Africa, whilst agricultural production has increased steadily, there has been very little improvement in production factors (labour and land) such that agricultural growth is generally achieved by cultivating more land and by mobilising a larger agricultural labour force, which produces very little improvement in yields. Compared with Asia, cereal yield on the continent, for instance, is on average less than those obtained in Asia (Blein et al, 2017). Even worse, agricultural growth in Africa has occurred in an unprecedented demographic context where population on the continent has doubled overall and tripled in urban areas. The combined effect of low crop yield and exponential population growth is that the continent now has more mouths to feed.

From cereals to processed products and meat, Africa has become a net importer with imports competing with domestic products. Yet, agriculture constitutes a critical sector for Africa. It forms a significant portion of all African economies and can therefore contribute remarkably towards continental priorities, such as poverty and hunger eradication, intra-Africa trade and investments, rapid industrialisation and economic diversification, sustainable resource and environmental management, job creation, human security, and shared prosperity (Blein et al, 2017). Additionally, women constitute close to 70% of the agricultural workforce in Africa and, thus, mainstreaming their participation and empowerment would advance Africa’s agricultural revolution. Thus, Africa has enormous potential, not only to feed itself and eliminate hunger and food insecurity but also to be a major player in global food markets. The potential lies in opportunities afforded by the low population density, large useable agrarian land, relatively young workforce, low labour cost, abundant natural resources and raw materials, significant productivity gap in the production of horticultural products, rising global food demand and the continent’s own rising net food import, diversified ecosystems, and, now, the huge markets – thanks to the AfCFTA. Drawing on the momentum generated by the Comprehensive Africa Agriculture Development Programme (CAADP)7, the free trade area provides an opportunity to accelerate the continent’s drive for food security, become a net exporter of food, and add value to Africa’s agricultural products through the development of regional production networks in agriculture and food processing. To summarise, the priority sectors identified under the AfCFTA and Transformative Industrialisation webinar series are critical to meeting the continent’s objectives to improve access to medicine, create jobs and eradicate poverty and hunger.

7 The Comprehensive Africa Agriculture Development Programme (CAADP) is Africa’s policy framework for agricultural transformation, wealth creation, food security and nutrition, economic growth and prosperity for all. Over the last decade, countries such as Ghana, Togo, Zambia, Burundi, Burkina Faso, Mali, Niger, Congo, Senegal, Ethiopia and Malawi that increased investments in agriculture as per CAADP targets have seen reductions in hunger and poverty, and increases in productivity.

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4. Challenges and opportunities in three African regional value chains RVCs in Africa are poorly exploited although the great world factories in Europe, North America and Asia show they could serve as a step towards transformative industrialisation and competitive integration into GVCs. Presently, the share of intra-African trade in valueadded is just 9%, compared to 45% in Asia and 18% in Latin America (Slany, 2019). The AfCFTA and Transformative Industrialisation webinar series sought to engage with this opportunity by adopting a sectoral approach to identify specific market failures and policy measures required to address them. In terms of constraints, common challenges to the emergence and development of regional production networks were identified by the participants in these webinars. These include demand-side constraints to industrial development, such as limited market integration, stark differentials in economic development across countries, poor infrastructure development, and a general lack of institutional capacity to promote and advance industrialisation and trade. Some challenges to the development of RVCs are also sector-specific. Specific policy insights that emerged in the first three webinars dedicated to each of the sectors are summarised below.

Pharmaceutical and healthcare

responsibility of ensuring public health. Second, for ultimate health security on the continent, the development of local and regional capacity to produce active pharmaceutical ingredients (APIs) is a sine qua non. This is essential to reduce the current excessive external dependencies and can be accomplished through a collective regional effort as well as collaboration between government laboratories and private industry. Third, there must be a rethinking of policy approaches to market competitiveness and how to attract FDI by providing appropriate incentives for companies to sell into smaller markets. Suggested government incentives include setting up pharmaceutical manufacturing facilities such as industrial parks. To promote local production and enhance the competitiveness of local manufacturers, it was highlighted that governments should consider policy frameworks that give preference to locally produced medicines in terms of public procurement, as well as re-examine tariffs on API imports to enable local firms to produce at competitive prices. In terms of export orientation, the need for government policy support to focus on developing competitive export-orientated value

For pharmaceuticals and healthcare, it emerged that it is important to recognise that the government has a greater role in the pharma industry than in other sectors, owing to the sensitivity of the sector and high setup costs. For instance, while in other industries like clothing and apparel the government may have to provide incentives to boost production and exports, in the case of the pharmaceutical industry, the government has multiple responsibilities as a regulator and a buyer due to its

chains was emphasised as essential to ensuring industrial competitiveness. Furthermore, regional strategies and harmonisation of regulations were emphasised. It was noted, however, that individual countries would have to exploit domestic linkages and across sectors, as weak domestic linkages would imply building RVC on a weak foundation. Thus, working on verticality by developing and improving the domestic linkages is essential for boosting the dynamism of the RVC. Drawing from the Ethiopian experience, the following relevant policy thrust and strategies for national pharmaceutical industrial development were identified: • Focus on large manufacturers with export orientation as a source of productive investment;Build the pharmaceutical industrial ecosystem through the establishment of an industrial park; Promote human resource development; • Review procurement policy to support the local pharmaceutical firms; and • Linking the pharmaceutical industry with export logistics to enhance tradability.

Cotton, textiles and clothing For cotton, textiles and clothing, besides addressing the binding supply and demand constraints, it was remarked that a good starting point for developing RVCs would be to map out the imports and exports of cotton textiles and apparel-related products by African countries. This mapping will help

identify import substitution opportunities and indicate which products can be sourced from within the region. Trade union representatives at the webinar stressed the importance of incorporating labour provisions in the AfCFTA protocols to ensure a high level and harmonised labour standards across the African continent. Such a commitment would combat the danger of the race to the bottom, which constitutes a threat to creating and maintaining decent work.

Agriculture and food processing For agriculture and food processing, suggested requirements for building a competitive RVC include: • Build robust linkages between the food manufacturing industry and the rural world; • Adopt digital and biological technologies such as genetic engineering in agriculture; • Support and invest in irrigation infrastructure, transport, and storage facilities; • Engage smallholder farmers to transition into mechanised farming for better yields; • Remove restrictions on maximum equity ownership investments by foreign investors to ensure free capital transfer; • Zero GT for agricultural machinery and equipment; andCreate a dispute resolution mechanism under the AFCFTA, which will help regulate regional interactions fairly and efficiently.

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A summary of the discussion There was consensus amongst panellists that there is a compelling case for building RVCs in Africa. It was recognised that the integration of African manufacturers into GVCs is ultimately dependent on multinational corporations’ decision-making. Panellists also argued that there are non-tariff barriers that prevent the entry of African firms into GVCs and lock African economies into low-value-addition activities. However, the rising labour costs in China and Southeast Asia have created favourable conditions for the labour-absorbing manufacturers to move to Africa. Thus, panellists were optimistic about the development of regional production networks on the continent. It was highlighted by some panellists that moving towards regional integration and

creating a continent-wide free trade area are consistent with the path that emerging economies in South East Asia have undertaken in the last ten years. In the case of countries such as China and India, they also have the option of increasing domestic consumption and exploitation of their large domestic markets as exporting finished goods to developed countries is becoming increasingly difficult due to protectionism in the North. For the three sectors explored, it was noted that they are a good starting point for discussing RVCs in the context of the AfCFTA, namely because the sectors meet local domestic needs, absorb labour, have low barriers to entry, promote sustainable production practices, and provide manufacturers with the opportunity to gain competitiveness and enter GVCs.

5. Overview of key policy insights and recommendations Some general insights emerged on how competitive RVCs can be evolved and sustained in the context of the AfCFTA. For one, it was remarked that the AfCFTA represents a significant step towards an integrated market on the continent, characterised by regionalism and transformative industrialisation. Yet, it was acknowledged that full market integration and industrialisation will take a long time to be achieved and will require determined, resolute effort and decade after decade of clear industrial development action plans and complementary interventions. Specific strategies for developing RVCs were identified, including deepening industrialisation, specialisation and fragmentation of production processes, with the AfCTFA being instrumental in providing access to markets. Another is coordinating policies that promote regional production, efficient logistics chain and improved business environment. An overview of key policy recommendations emanating from the webinars can be grouped into national, regional, general and sector-specific suggestions. At the national level, it was emphasised that African governments and policymakers should develop precise, targeted and consistent industrial policy geared towards developing strategic sectors and value chains by addressing demand- and supply-side constraints. Of particular concern is the need to develop domestic productive capabilities by exploiting domestic linkages within and across sectors to reduce dependency on expensive imported inputs. Further, technological advances provide unique opportunities to develop RVCs. As late industrialisers, African governments and policymakers can leverage technological developments to easily shift to sustainable infrastructure, which considers environmental concerns; renewable energy at competitive prices without completely overhauling the tax system and incentive mechanisms; methods of work that are much easier for younger people

than older people; and export-oriented trade. For specific industrial strategies that will assist in diversifying African economies and product offerings, promote intra-African trade, and promote the development of RVCs, a targeted sectoral approach is required. This implies focusing on developing sectors where competitive advantage is already present. For many African economies, this means focusing on labour-intensive sectors. Yet, focusing on labour-intensive sectors requires governments to assess the skill level present in their labour force. Given the skills gap challenge to industrial development on the continent, what is required is that public investment supports industries that can absorb the existing labour force while training the labour force for tomorrow’s industries. From a macroeconomic perspective, policy measures should focus on the terms of trade and the real and effective exchange rate as they have implications for productivity and external competitiveness. This requires careful attention to monetary policy and exchange rate policies. Also, trade policy measures should not only focus on reducing tariffs but also on reducing non-tariff barriers by building up production capabilities and economies of scale. This will allow African manufacturers to trade regionally within the continent and focus on building capabilities for exporting to large global markets such as China, Europe and America, which have higher purchasing power. Finally, the AfCFTA agreement must include an adequate understanding of the rules of origin framework as well as removal of all non-tariff barriers for an efficient and free flow of trade. For the successful implementation of such an agreement, capacity- and knowledge-building interventions are required to ensure that rules are adhered to in order drive economic growth, build trade relationships across borders and reduce mistrust amongst countries. At the regional level, an approach that could

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be undertaken to develop RVCs would be to design regional industrial policies, establish regional payment systems, coordinate incentives, harmonise regulations, create procurement tools, develop financing for regional projects and not underestimate the importance of services. Some of the proposed policy interventions were sector-specific. For pharmaceuticals and healthcare RVCs, suggested interventions include employing policy frameworks that give preference to locally produced medicines in terms of public procurement; developing regional capability in API manufacturing while re-examining tariffs on API imports; enhancing national incentives packages to attract foreign direct investment, including setting up manufacturing facilities. In terms of cotton, textiles and clothing value chains, incorporation of high level and harmonised labour standards into the AfCFTA protocols across the African continent was emphasized to mitigate the danger of the race to the bottom and ensure decent work. Mapping the imports and exports of cotton, textile and apparel related products on the continent was also suggested to help identify import substitution opportunities and to indicate which products can be sourced from within the region. Finally, for agriculture and food processing value chains, unique policy interventions proposed include the adoption of digital and biological technologies, effective engagement of smallholder farmers to transition into mechanised farming, removal of restrictions on maximum equity ownership investments by foreign investors to ensure free capital transfer and building robust linkages between the food manufacturing industry and the rural world.

Recommendations from the AfCFTA Secretary-General At the fourth webinar, the AfCFTA Secretary-General, Wamkele Mene, provided an overview of some interventions and initiatives undertaken to promote the AfCFTA and transformative industrialisation agenda. First, Mr Mene emphasised the importance of harmonised and implementable industrial action plans for the continent if there is going to be any move

from policy to realising the benefits of regional economic and market integration. He identified the development of implementable industrial action plans as the next step that Africa should take and in this regard announced his intention to establish an Industrial Development Forum. It is envisioned that the Forum would comprise thinkers, intellectuals, development economists, policymakers, the private sector and governments and provide a platform for these stakeholders to collaborate and collectively work towards finding solutions to Africa’s industrial development challenges. For Mr Mene, this Forum is crucial to create a dialogue amongst African stakeholders in the public and private sectors on Africa’s challenges. Second, he noted there is a range of complementary policies required which will require collaboration from various stakeholders, particularly regarding trade facilitating, financing and investment. To this end, the AfCFTA Secretariat is working with the African Development Bank on developing a regulatory framework to support the AfCFTA cross-border payments, financing needs and complementary measures for finance. It is envisioned that this regulatory framework will form part of the services chapter and protocol of the AfCFTA. Third, he indicated that over US$500 million have been secured to establish a pan-African platform to address payments and settlement constraints, and to ensure that trade on the continent is cheaper, affordable and more efficient. This platform was adopted by the heads of states and launched in 2019, and will be rolled out in early 2021. The platform will require interoperability of the payment systems across regions, which could be challenging. However, this technical component and teething problems can be resolved. Fourth, there is a “variable geometry” in the AfCFTA to accommodate the vast differentials in the levels of economic development, and thus regulatory institutional readiness, across countries. This will allow countries that do not have trade remedies regimes and competition policy frameworks the space to develop the required regulatory capacities. Fifth, he noted that regional or pan-African trade remedies authorities will be developed to enforce the rules of origin to the extent that transshipment from third parties is prevented

and to ensure that customs authorities have functional trade remedies. Finally, an adjustment facility and a cushioning mechanism are being established in collaboration with the African Development Bank to assist countries in adjusting to revenue loss resulting from reduced tariffs under the free trade area. He noted that thus far the African bank has mobilised close to US$1 billion for

this adjustment facility and work is currently underway to outline modalities for the facility. The facility will be made available to countries who have ratified the agreement and countries that experience revenue shortfalls. The facility will not provide budget support and transfers to central banks, but instead support investments which build productive capacity in a particular country, region and even at a sectoral level.

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6. The Way Forward This paper has argued that for sustainable and inclusive growth in Africa, transformative industrialisation is a prerequisite. At the continental level, RVCs can provide local firms with access to foreign markets and inputs, thereby freeing them from the constraints of small domestic markets and providing them with opportunities to benefit from economies of scale and ‘learning-by-doing’. In a sense, regional industrialisation strategies such as RVC promotion are an attempt to address coordination failures between countries through selection of priority sectors. The challenge, however, is that such strategies largely ignore the competition dynamics between states in specific sectors as well as the possibility that RVCs, even when highly developed, are likely to be concentrated in one or few member countries. For Africa, the huge economic diversity among countries in terms of size, structure and endowment implies differential country benefits from regional industrialisation strategies such that countries with a fragile industrial base become losers. Concerns about the distributional implications of such regional strategies, far from altering or circumventing political economy challenges at national level, would rather reinforce them, leading to piecemeal and fragmented support for the strategy (Byiers et al, 2018).

by multinational companies and their sourcing decisions. There is, therefore, the need to mobilise domestic capital through innovative and productive state-business relations that balance efficient information sharing and cooperation with the risk of capture. This requires some form of ‘embedded autonomy’ of public and private actors to avoid collusion and the risk of state capture (Rodrik, 2004).Finally, the development of RVCs involves coordinating different national actors and systems. A crucial aspect is coordinating private investments to enhance their profitability. Past industrial experience shows the failure of regional industrial strategies due to lack of private sector consultation on actual needs (Byiers et al, 2018). Private sector engagement at both national and regional level is, therefore, critical for success.

Addressing possible adverse distribution implications, for instance, through compensation funds, is essential to avoid perpetuating the existing intra-regional economic disparities (Woolfrey, 2013).

Besides the three sectors, technological advances afford opportunities to not only enhance the development of the identified value chains but also build distinct value chains in the digital economy space to leapfrog economic and social development on the continent. Similarly, the continent can take advantage of its large irradiance exposure and untapped hydropower and geothermal energy to pursue green industrialisation by building a production network for green technologies. Together, the digital and green economy revolutions constitute complementary avenues to building transformative industrialisation on the back of the AfCFTA.

Relatedly, it is important to note that if industrial policy faces political and economic challenges at the national level owing to disparate interest and incentives (Whitfield et al, 2016), a regional approach to industrial policy adds more actors and factors operating between countries. Thus, even though regional approaches such as RVCs may broaden the potential benefits of overcoming coordination failures between countries, the increased number of actors can also make this more challenging. Further, while RVCs imply division of particular tasks and production processes among regional partners, such decisions are not made by governments and bureaucrats, but

The above concerns notwithstanding, the development of RVCs may indeed prove to be an effective way to promote intra-regional trade and economic development in Africa. What is clear, however, is that much thought still needs to be given to how to translate the goals and principles of RVC development into concrete actions that yield tangible results for the region.

The Nelson Mandela School, therefore, seeks to provide a platform to explore the potential for evolving competitive production networks for these sectors in subsequent webinars under the AfCFTA and Transformative Industrialisation project.

In sum, the AfCFTA represents a significant step towards an integrated market on the continent. Yet, achieving full market integration and transformative industrialisation on the continent, as AfCFTA Secretariat Secretary-General Wamkele Mene noted, will take a long time to achieve and requires “ a determined and resolute effort”. On the part of the Nelson Mandela School of Public Governance, the goal is to support the AfCFTA and transformative industrialisation agenda by acting as a bridge, facilitating dialogue with policymakers and sector experts. The School seeks to achieve this through the creation of platforms such as the webinar series for conversations and dialogue. Other efforts include facilitating the creation of a continent-wide network of experts committed to building the productive capacity of the continent, and the provision of research and policy insights through publications and information sharing.

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