At this week’s 10th World Trade Organization (WTO) Ministerial Conference in Nairobi, Kenya, trade ministers are trying to advance 15 years of Doha Development Agenda talks to reduce trade barriers. The real issue, however, is whether African economies can follow East Asia’s success in global supply chains amid “new normal” growth and rising inequality.
Global supply chains refer to the geographical location of stages of production (design, production, marketing, and service activities) in a cost-effective manner and linked by trade in intermediate inputs and final goods. For instance, the Toyota Prius—a hybrid electric mid-size hatchback car—for the US market was designed in Japan and is presently assembled there, but some parts and components are made in Southeast Asia and the People’s Republic of China (PRC).
East Asia’s shift from a poor, less developed agricultural periphery to a wealthy global factory over the last half a century is an economic miracle. The extent of the region’s participation in global supply chains is significantly greater than elsewhere, and has spurred East Asia’s global rise to the coveted “Factory Asia” league with middle-income status for many economies. In 2009-2013, East Asia accounted for 48% of global supply chain trade, compared with 28% for the European Union and 7% for the United States. Eastern Europe and Latin America each had 6%.
However, Africa is a relatively small player, accounting for less than 1% of global supply chain trade. As wages and other business costs increase in East Asia, there is an incentive for some supply chains in food processing and garments to shift to Africa. Strategically situated, on the way to Europe and blessed with commodities, Africa has more industrially developed economies such as Ethiopia, Egypt, Kenya, Mauritius and South Africa, which are attractive locations.
Smart business strategies and market-friendly national policies have supported East Asia’s achievement in supply chains. Being a big firm naturally creates advantages to participating in supply chains due to a larger scale of production, better access to technology from abroad, and the ability to spend more on marketing. It is crucial for small and medium-sized enterprises (SMEs) to work with large firms. Hence, smart business strategies, such as mergers, acquisitions, and forming business alliances with multinationals or large local business houses are all rational approaches; as is investing in domestic technological capabilities to achieve international standards of price, quality and delivery.
East Asia’s experience suggests that nimble SMEs can also join supply chains by locating to industrial clusters and reap the benefits of interdependence such as co-financing a training center or a technical consultant to upgrade skills. Business associations can facilitate clustering by mitigating trust deficits to cooperation among SMEs, and by coordinating collective actions for cluster formation. For instance, major industrial clusters are visible in Viet Nam near Ha Noi and Ho Chi Minh City, where large firms are surrounded by thousands of SME suppliers and subcontractors making garments, agricultural machinery and electronics goods.
Turning to national policies in East Asia, modern cost-competitive infrastructure is crucial for supply chains. This means investing in world-class ports, roads to ports, logistics, electricity supply and ICT infrastructure. Open trade and investment regimes which encourage investment and transmit price signals are likewise important, as well as sound financial systems which emphasize competition among commercial banks and financial inclusion. High-quality, affordable technical and marketing support services and investing in education to develop skilled labor both help SMES join supply chains.
More controversial is the use of industrial policies in East Asia to target credit and subsidies to particular sectors or firms. Some oft-cited examples of failures include Korea’s heavy and chemical industry push, Malaysia’s national car project (the Proton) and the PRC’s home-grown 3G mobile technology TD-SCDMA. More research is needed on good practices, as there is a high risk of government failure associated with industrial policies.
There is no one-size-fits-all approach for African firms to join supply chains. Smart business strategies, facilitating business associations and market-friendly policies are all useful ingredients, while business and government collaboration is essential to tailor these ingredients to national circumstances.
This article was first published by ADB Development Blog .