«Policy Research Paper Industrial Policies for the Structural Transformation of African Economies: Options and Best Practices No. 2 Policy Research ...»
Upgrading along the agricultural value chain For a number of the poorest countries, developing an agro-industry may be the key to take-off (Humphrey and Memedovic, 2006). 48 However, while agriculture is crucial for the growth of African countries, it has to be considered that not all agricultural sectors provide the same opportunities for export-led growth. Over the past quarter-century, there has been a significant transformation of global trade in agricultural products. Indeed, there is a now marked differentiation in world product demand, away from traditional tropical products (coffee, cocoa, tea, sugar, spices and nuts) and towards non-traditional agricultural exports, particularly horticulture (fruit, vegetables and flowers).49 The rapid expansion of global demand for and trade in horticultural and seafood products has created attractive export opportunities, while the relative decline of traditional tropical products, combined with the entry of new competitors for some products, most notably coffee, creates problems. International trade in horticultural products has increased markedly and some African countries have been able to benefit from this trade. In particular, agri-business holds great promise for Africa and the horticulture industry is potentially extremely important for growth in the region.
There are several reasons why the government should intervene in the promotion of agribusiness and agro-industry in Africa and to support firms in upgrading along the global value chain (UNECA; 2009; Wilkinson and Rocha, 2009). For instance, Elhiraika (2008) argues that government intervention in the promotion of horticulture in East Africa is justified in terms of solving a coordination problem. Indeed, for the sector to develop a simultaneous investment in farms, energy, transportation and marketing facilities are required. Humphrey and Memedovic (2006) 48 For instance, the UK Government’s Department for International Development (DFID) argues that: “agricultural growth and increases in agricultural productivity may be a prerequisite to broader-based sustained economic growth and development” (DFID, 2002: p. 9).
49 In the 1980s, traditional tropical products accounted for around 39 per cent of all food exports from developing countries. Twenty years later, this had fallen to around 19 per cent. Conversely, the share of horticultural products in developingcountry food exports rose from around 15 to 22 per cent (Humphrey and Memedovic, 2006).
argue that government intervention is justified by the fact that meeting the market requirements for agribusiness products has become more challenging in recent years. This is one of the effects of the increasing importance of GVCs in agricultural trade (see below).
The importance and complexity of standards has increased and the policy issues for developingcountry governments are numerous and challenging. For instance, as global buyers become more demanding, successful agri-business exporting needs physical and informational infrastructure that will support coordination between enterprises and traders. Luckily, the type of technology needed is not too sophisticated and even a simple ICT infrastructure would bring large benefits.
Still, given the weakness of the private sector, government support will be needed. Moreover, the governments should develop efficient marketing organizations or private-sector institutions.
At the same time, since the issue of the control of standards has become particularly important for success in global agribusiness markets, government should support the development of local consultancy and certification companies. Finally, government could increase the efficiency of firms by fostering collaboration between export enterprises or providing business-oriented extension services to farmers. Since trade in agricultural commodities increasingly depends on industrial capability and capacity, the government should provide services for the agricultural sector. The private sector in sub-Saharan Africa needs more than a deregulated business environment (von Drachenfels and Altenburg, 2006).
There are a number of government projects and plans of action to support the agriculture sector in Africa.50 Nonetheless, the sector still faces difficulties in its growth and in international competitiveness. One of the reasons is that the international context has changed and this is not always taken into account in the design of policies to support agriculture. UNECA (2009) indicates the increasing importance given by international agencies and public and private actors to the development of agribusiness and agro-industry in Africa. The report notes that while the process of creating a regional value chain system is still at the beginning, some steps forward to support it have been decided. UNECA (2009) also acknowledges the importance of strengthening information exchange and knowledge management.
To this end, governments should intervene to protect property rights and brands and facilitate the creation of links between producers as a means of creating value addition. Second, governments should design policies to make SMEs play a prominent role in this process. Third, governments should intervene to link the informal credit systems to the formal in order to develop the possibility for financing innovation and production up-grading. Finally, governments should cooperate in order to reduce the restrictions to trade in goods and services within and between countries in the region in order to create a stable trade environment for promoting agribusiness. There are also a number of development programmes from donors focusing on developing agro-business. For instance, the World Bank AFTFP51 supports agribusiness competitiveness through financing infrastructure investment, government extension services; research and development capacities; disease control; phyto-sanitary and certification systems; custom and fiscal issues; regulatory framework and building capacity and public-private partnerships at local and national levels.
50 Among these the most important are the NEPAD’s Comprehensive Africa Agriculture Development Programme (CAADP) (2005), the Alliance for a Green Revolution in Africa (AGRA) (2006) and the UN, World Bank, and IMF High Level Task Force on the Global Food Crisis (2008).
51 See the website http://go.worldbank.org/NGPCAFWBJ0 As said, one of the major changes that occurred in world trade in recent years has been the increase in the importance of Global Value Chains (GVCs) for agricultural firms in developing countries. One should thus evaluate which are the best policies to support firms in this new context. The agriculture sector is most often characterized by a hierarchical structure (Dolan and Humphrey, 2001). Given the position of African firms in the agricultural GVCs and the characteristics of world trade, Gibbon and Ponte (2005) suggest that African firms should increase specialization, and focus on simple and labour-intensive technologies, trying to access large markets via large-scale retailers. In other words, they should consolidate their role as suppliers of the GVCs. This is what they call “trading down” strategy. On the contrary, Pietrobelli (2008) notes that, while buyers and chain leaders are becoming increasingly more demanding, they often do not transfer knowledge and technological capabilities. Thus local firms need to invest on theirown, in learning and building capabilities to innovate and up-grade. Indeed, the value-addition of African agricultural products is often low.
Yet the search for specific market niches to exploit advanced capabilities always offers potential benefits.52 It follows that a priority of the governments in the regions should be to facilitate agribusiness development, modernizing agriculture along the value chain (from the input markets, through agro-processing to the distribution systems and output marketing). To reach these objectives, a set of policies are necessary. For instance, to overcome the obstacles relating to the small domestic market for agricultural products, UNECA (2009) suggests creating regionally integrated value chains.
There are clearly two opposing views.53 While some authors argue that African firms should focus on improving their performance as suppliers, others state the need for continuous innovation as a way to upgrade and remain competitive, even in the agricultural sector. In the second case government intervention is necessary but a pre-requisite for policy intervention is the development of the necessary government capabilities to design, formulate and implement strategic policies. In this, international cooperation can play a useful role. Thus, the main objective of policy intervention should be the provision of technical assistance to SMEs to meet with sanitary, environmental and industrial standards which characterize both international trade and inter-firm operations within GVCs. Pietrobelli (2008) suggests that this type of intervention is particularly effective if administered at the cluster level and in the form of joint actions involving small growers together with buyers and chain leaders.54 More specifically, to induce such beneficial behaviour, the access to loans and grants for SMEs should be made conditional to the effective implementation and maintenance of quality and sanitary standards. There are already positive experience of policy intervention to support the development of national standards and agencies from which inspiration can be drawn. For instance, in the mid-1980s, the Cote D’Ivoire National Standards and Certification Body (CODINORM) was created by the government to set the standards for Ghanaian products and exports (Oussou et al., 2004). Another interesting case is the policy support to a local certification firm in Kenya, the AfriCert. GTZ was responsible for training AfriCert agents, who offer growers in 52 Fresh vegetables are a good example of a non-traditional agricultural export crop, and they illustrate the potential for agricultural diversification and production of high-value crops.
53 Kaplinsky and Farooki (2010) discuss how the evolution of the recent financial and economic crisis in the global economy may impact on the African firms inserted in the GVCs. They predict that African firms will be forced into lower levels of value added activities.
54 Particularly active in this area are Swedish International Development Agency (SIDA) and the Norwegian Development Cooperation Agency (NORAD) with several programmes developed to target the promotion of African exports through quality and product safety.
Kenya and the region affordable certification in line with internationally recognized standards.
These are experiences that should be taken as examples of successful and useful government intervention to sustain agricultural development along the GVCs.
Interestingly, Humphrey and Memedovic (2006) oppose the view that SMEs may play a positive role in developments that ensure policies to support them are optimal. While there are still some niches for small farmers in global markets (i.e. Fair Trade), major trends in global agribusiness appear to undermine their competitive ability to survive. In this view, not too much emphasis should be placed on sustaining SMEs and their access to developed countries’ markets. Rather, one should devise policies to allow SMEs to increase their presence in the local and regional markets.
Gibbon (2001) argues that the optimal policy in the presence of a GVC is difficult to determine because of the trade-off options. His argument is based on the evidence that African firms belonging to the Fresh Fruit and Vegetable (FFV) value chains have experienced significant upgrading without any government intervention but solely due to their spontaneous organizational learning. It follows that the optimal policy intervention is to promote firms in those subsectors where global chains are driven by developed-country leaders. Because it is the interaction between African firms and leaders in developed countries that brings about improvements for local firms, this learning and up-grading process should be further accelerated.
Governments should therefore intervene to selectively assist local enterprises, help strengthen their links with lead firms in world markets, and support local institutions which could generate joint projects. This strategy poses a problem because it creates a trade-off between upgrading and exclusion. The reason is that (at least in some GVCs) the upgrading of a few (larger-scale) producers implies the marginalization of many (smaller-scale) ones. It follows that, a priori, one cannot exclude the possibility that the involvement in GVCs which are not driven by developed countries’ retailers/traders may have more positive implications for broad-based growth.
A typology of African countries and industrial policies In this section, a methodology to determine the most appropriate industrial policy for African countries is outlined. To this end, as a first step, a new categorization of African countries based on their economic feature is presented. Drawing on the previous discussion concerning the available options for industrial policy in Africa and on the perspective for new approaches to industrialization (i.e. cluster initiatives and policies to upgrade along the agricultural value chain), the typology will be used to determine which industrial policy best fits a specific country.
While most African countries are agricultural based (World Bank, 2008), there are important differences across countries that suggests the need for different types of government interventions. As previously argued the choice of the most appropriate industrial policy to foster economic growth is context-specific and, ultimately, has to be shaped at the individual country level. Yet, the advantage of a typology is to highlight and emphasize the importance of the key features that influence the development paths of different categories of countries sharing relatively similar conditions.
Based on previous studies55 and on the domains of industrial policy analyzed in the previous section, a categorization of African countries based on three elements is proposed:
1) Endowments (resource-rich vs. resource-poor countries: a country is defined resourcerich (resource poor) if more (less) than 10% of the country’s GDP comes from the primary commodity value added.)
2) Geographical location (landlocked vs. coastal countries)