Value chains encompass all the processes which bring a raw material to a final product, for example from cotton to clothing in the textile industry. Global and regional value chains are often spearheaded by an international or regional lead firm which invests in part of a product’s production process, such as garment production, in a developing country. This has the potential to bring labour-intensive manufacturing, diffusion of knowledge and technology, and local supplier linkages to developing countries.
Over the past 15 years SADC’s international trade and investment flows have grown considerably, however, integration into value chains remains low compared to other regions in the world. The bulk of foreign investment still accrues to resource sectors which are less conducive to high value linkages. This then raises questions as to how to spur a greater number of value chains, and also more inclusive and value-added value chains, in the SADC region.
Barriers to linking into value chains
The OECD and the South African Institute of International Affairs recently undertook a pilot study in the SADC region to search for answers and better understand both international and local firms’ perspectives on the challenges and prospects for inclusive global and regional value chains in SADC.
Many of the challenges that investors face are well-known and span across multiple industries, including unreliable regional infrastructure, political uncertainty, capacity and skills gaps within SADC, and lack of knowledge and information on SADC markets.
Additionally, for existing value chains in manufacturing industries, the local linkages are incredibly difficult to forge and spill overs touted to be major benefits of value chains are not automatic. In sectors such as textiles and automotives, where supply is largely dominated by foreign multinationals, local suppliers are unable to compete with their scale of production, quality standards, financial resources, knowledge necessary to enter the market, as well as these big firms’ established relationships with suppliers.
SADC has made progress in building its Standardisation, Quality assurance, Accreditation and Metrology programme (SQAM), established in 2006. Quality standards were highlighted as a key bottleneck for value chains by investors in SADC, as they currently have to seek accreditation for their products from foreign firms. This represents an even bigger barrier to local suppliers who cannot afford such certification and the requisite capacity building, and therefore cannot connect to global and regional value chains.
The programme has seven bodies to facilitate cooperation on standards, quality assurance and metrology. However, little tangible progress has been made so far as no SADC country has internationally recognised SQAM measures outside of South Africa. One of the big challenges in getting this off the ground has been achieving buy-in from member states and therefore the programme lacks adequate resources.
It is important to explore the greater role that SADC can play in bridging these barriers. Recognising the historic difficulties of achieving SADC member commitments to binding initiatives, softer commitments to efforts such as regional learning and capacity building can go a long way. The achievements of the Association of Southeast Asian Nations’ regional capacity building is a good example.
For example, Mauritius has been highly successful in attracting investment, and has been acknowledged by the World Bank and other institutions as having the best business environment on the continent. This is in part due to the country’s well-functioning Investment Promotion Agency, an area where stakeholders interviewed in other SADC countries indicated they would appreciate support.
Stakeholders in Mauritius indicated willingness to share experiences in the region, as a part of their own strategy to forge better regional linkages in SADC and spearhead regional value chains. SADC can therefore play a key role in facilitating regional learning workshops in areas of mutual interest among SADC countries such as this.
A workshop where South Africa shares experiences in designing policies to link local suppliers to multinational-driven value chains such as automotives and textiles could be another example.
SADC’s Centres of Excellence, initiated in the body’s March Action Plan for the Industrialisation Strategy, can also promote regional learning and resource/information sharing. Our interviews highlighted the need for vocational education to support manufacturing activities in value chains, which should be a focus of one of the centres. This speaks to the alignment of education curricula with industry needs. The centres should not only consider core manufacturing, but also focus on high-value support industries around these such as IT and machine repair. These centres must also anticipate and incorporate the new wave of technological advances across industries, deemed the 4th Industrial Revolution, which has been a key focus of Industrialisation Week so far.
Commitment from member states is essential for any of these initiatives to succeed.
Many of the takeaways from this and other studies converge on one fundamental point: despite much research on value chains, as well as efforts from SADC and development partners to address private sector constraints, it is ultimately the role of SADC countries themselves to adopt a “regional perspective” and prioritise these initiatives in order to reap the benefits of value chain-driven industrialisation.
Chelsea Markowitz is a visiting researcher under the Economic Diplomacy programme at SAIIA. This article was first published with Business Day.