2024

Authors:

Horman Chitonge

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Structural Transformation in the Zambian Economy

Abstract:
Youth unemployment has been increasing in Africa. It is particularly pervasive in South Africa, where the youth unemployment rate is persistently high, posing considerable socioeconomic challenges. In response, the government introduced the Employment Tax Incentive (ETI) program in 2014 to boost employment opportunities for youth. This study examines the extent to which the ETI program increases youth employment by looking at hiring and separation rates. The study also examines whether the program displaces non-youth workers—one of the main concerns among unions in South Africa. We take advantage of detailed employee-firm matched panel tax data from the National Treasury and the Revenue Service covering the 2011-2018 period and estimate a Difference-in-Difference model. We find that the program is associated with a 0.003 probability points higher of hiring youth in the 18-24 age bracket. However, we find a significant reduction in both hiring and separation rates for workers in the 24-29 and 30-44 age groups, suggesting some displacement effects not only on at-risk non-youth workers but also youth in the older age bracket. We also find that the overall positive effects of hiring rates of younger workers are driven by microenterprises, typically referred to as mom-and-pop businesses. Overall, the paper uncovers important heterogeneity in the impacts that could inform policymakers to reconfigure the program for better targeting.

Authors:

Horman Chitonge

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Agro-Processing Industries in the Zambian Economy

Abstract:
The agro-processing sector has been recognized in most of Zambia’s development policy documents as a priority sector. The strategic importance of agro-proessing industries in the Zambian economy is attributed to the sector’s potential to contribute to economic structural transformation, diversification and inclusive growth. In this chapter, we highlight the importance of the agro-processing sector in the Zambian economy, and we show that the sector has not only been the biggest segment of the manufacturing sector since independence, but also that it has great potential to contribute to creating the much-needed employment in the country. We show in the chapter agro-processing industries (particularly textile, clothing and leather, and wood and wood products) are the most labour-intensive, with an average of 18 workers per every K1 million kwacha invested compared to just 9 workers in the non-agro-processing manufacturing industries. Using trade data, we also show that the country has revealed comparative advantage in a number of agro-processing products including animal feed, essential oils, cereals and milled flour, soya cake, non-alcoholic beverages, sugar and confectioneries, and a huge untapped potential (latent comparative advantage) in wood and wood products, fabrics, synthetic fibers, footwear and manufactured tobacco products. In view of this, we argue in the chapter that agro-processing offers great potential for Zambia to tap into the large and expanding regional markets. But to realise this potential, the country has to address some of the enduring challenges which make local agro-processing firms less competitive at the regional level.

2023

Authors:

Mike Morris and David Walwyn

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Aligning Renewable Energy Value Chains and Innovation Systems to Build South Africa's Manufacturing Economy

Abstract:
The decline of South Africa’s manufacturing sector, and its consequences for the economy, have been well documented. Investment in technological innovation has been promoted as a means, at least in part, of reversing its long-term decline. However, the sector itself has been sceptical of this policy, arguing that its introduction has failed to address systemic weaknesses and adverse policy effects. In response, the National Advisory Council on Innovation has supported a series of studies looking at different aspects of innovation and (re)industrialisation, including the study as reported in this chapter, focusing on the important role of logistics and production systems in innovation-led industrialisation, and particularly whether links to global value chains (GVCs) could act as agents of change for the development of South Africa’s manufacturing sector. Two different cases were considered, namely the photovoltaic and the wind energy value chains, from which relevant policy principles were extracted. Our recommendations (13 altogether!) are divided into three categories, firstly GVC management and stimulation in South Africa, with specific reference to localisation, secondly management of innovation vis-a-vis innovation systems, and finally the key priorities for research and development in support of logistics/GVCs. We urge the state to respond proactively to these principles, including such aspects as green certification, policy consistency, more effective use of localisation and greater support for business services in addition to product development.

Authors:

Lawrence Edwards, David Fadiran and Godfrey Kamutando

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Quantifying Tariff Revenue Losses from the African Continental Free Trade Area

Abstract:
This paper presents estimates of customs revenue losses for 45 African countries associated with the phase-down of tariffs under the African Continental Free Trade Area (AfCFTA). Unlike previous studies, the trade and revenue estimates are based on the Provisional Schedules of Tariff Concessions offered by each African state or regional economic community (REC) and therefore map closely with the expected tariff reductions from the AfCFTA. The results show that the removal of tariff barriers under the AfCFTA will be effective in raising and diversifying intra-Africa imports. The customs revenue losses after the phase-down of tariffs are likely to be minor, making up less than 0.2 percent of total government revenue for most African countries. Moreover, many African countries have insulated themselves from tariff revenue losses by excluding revenue-sensitive products from the agreement (Schedule C) and by backloading tariff reductions on revenue-sensitive products (Schedule B). Not all countries are affected equally. The Congo, D.R., Cameroon, Republic of Congo and Zimbabwe are found to be vulnerable to large decreases in the dollar value of customs revenue and declines in the share of customs revenue in total government revenue. While absolutely revenue losses are low for smaller countries, including Malawi, Liberia, Central African Republic and Sierra Leone, these decreases, nevertheless, constitute high shares of total government revenue. Overall, the results indicate that for most African countries, revenue losses should not be a major obstacle towards the commencement of trade under the AfCFTA. These findings also serve as an important input into the design of the proposed AfCFTA Adjustment Fund, which is intended to support those countries that are most vulnerable to revenue shocks.

Authors:

George Awuah

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Rethinking African electrification and power sector decarbonisation strategies and support in an era of just transition partnerships

Abstract:
The Just Energy Transition Partnership between South Africa and several international partners has garnered significant global interest as a model for supporting energy transitions in developing economies. This paper discusses the diversity of energy system challenges across Africa and the differences enabling environments for energy transition and identifies countries that require and have the enabling environment for an accelerated phase-out of fossil fuels under JETP-like structures. The paper also analyses the status and trends in electrification in Africa, particularly in Sub-Saharan Africa, and outlines the constraints to rapid electrification, the shortcomings of past external support to Africa's power sector, and the key megatrends are crucial to energy system planning in the region. The policy implications of the constraints, shortcomings, and megatrends, including JETPs and the role of external development partners, are also discussed. Overall, it is argued that while some African countries may benefit from JETP-like structures, the majority may not need bilateral agreements such as JETPs and that their energy needs would be better served by prioritising the development of regional electricity markets and addressing the constraints and shortcomings that have led to poor electrification outcomes in the past.

Authors:

Andinet Woldemichael, Hammed Amusa and David Fadiran

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Mom-and-Pop Jobs: Wage Subsidies and Youth Unemployment in South Africa

Abstract:
Youth unemployment has been increasing in Africa. It is particularly pervasive in South Africa, where the youth unemployment rate is persistently high, posing considerable socioeconomic challenges. In response, the government introduced the Employment Tax Incentive (ETI) program in 2014 to boost employment opportunities for youth. This study examines the extent to which the ETI program increases youth employment by looking at hiring and separation rates. The study also examines whether the program displaces non-youth workers—one of the main concerns among unions in South Africa. We take advantage of detailed employee-firm matched panel tax data from the National Treasury and the Revenue Service covering the 2011-2018 period and estimate a Difference-in-Difference model. We find that the program is associated with a 0.003 probability points higher of hiring youth in the 18-24 age bracket. However, we find a significant reduction in both hiring and separation rates for workers in the 24-29 and 30-44 age groups, suggesting some displacement effects not only on at-risk non-youth workers but also youth in the older age bracket. We also find that the overall positive effects of hiring rates of younger workers are driven by microenterprises, typically referred to as mom-and-pop businesses. Overall, the paper uncovers important heterogeneity in the impacts that could inform policymakers to reconfigure the program for better targeting.

Authors:

Hammed Amusa and David Fadiran

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The Efficiency of Public Expenditures on Basic Services: The Case of South African Municipalities

Abstract:
In this paper, we investigate the efficiency of South African municipalities in providing key basic services of water, solid waste removal, sewerage (& sanitation) and electricity. We construct a composite index of municipal service provision and compute output-oriented efficiency in services for South Africa’s 213 local and metropolitan municipalities. This approach accounts for quality of service provision and allows for a particular municipality’s efficiency scores to be benchmarked against a sub-sample of relatively more efficient peer municipalities. The results indicate that for municipalities surveyed over the sample period, the number of efficient municipalities is highest in the delivery of electricity services (at 35%) and lowest in the provision of waste services (at 22%) . The results also indicate that two municipal categories – municipalities with large towns at their cores and municipalities covering small urban towns, account for the bulk of efficient local governments.

Authors:

David Fadiran and Adeola Oyenubi

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Institutional Heterogeneity and Intra-sub-regional Trade

Abstract:
We explore how differences in institutional environment within a region affects the level of trade between countries. We construct a measure of differences in the quality of institutions between countries, that allows us to employ the gravity model of trade in an empirical assessment of the relationship between institutions and intra-sub-regional trade. In this regard, the overall impact of the quality of institutions is examined, as well as the impact of the difference in quality of institutions between trading countries, on bilateral trade within the ECOWAS (Economic Community of West African States) region. The empirical results show evidence of significant negative impact of differences in the quality of institutions on intrasub- regional trade. We also explore heterogeneity in the effect across member states and find that the negative impact is somewhat driven by, and greater between farther and more populated countries.

2022

Authors:

Godfrey Kamutando and Lawrence Edwards

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Allocative Efficiency between and within the Formal and Informal Manufacturing Sector in Zimbabwe

Abstract:

Resource misallocation has the potential to reduce aggregate total factor productivity and undermine industrial development. These effects can be particularly pronounced in emerging economies where large market frictions impede efficient resource allocation. This paper investigates the extent and nature of resource misallocation between and within the formal and informal manufacturing sector in Zimbabwe. Applying the approach developed by Hsieh & Klenow (2009) to firm-level microdata, the results reveal extensive resource misallocation in both the formal and informal manufacturing sector. Misallocation is more pronounced in informal sector firms and is associated with relatively large capital market distortions. Further, misallocation is more pronounced amongst relatively productive firms, thus exacerbating aggregate losses in total factor productivity (TFP). Estimates indicate that aggregated gains in TFP of 126.7% can be realized through efficient resource allocation.

Authors:

Jing-Woei Chien, Harriet Conron, Lawrence Edwards and Godfrey Kamutando

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Trading up: Harnessing the AfCFTA for growth in Uganda

Abstract:

African economies, including Uganda, have embarked on an ambitious programme of regional integration in the form of the African Continental Free Trade Area (AfCFTA). This paper uses newly sourced transaction level trade data for Uganda, and a partial equilibrium simulation model to assess the trade and revenue implications of reductions in tariffs and improvements in trade facilitation under the AfCFTA for Uganda. The analysis reveals that Ugandan exports are already regionalised with exports to its major market, the East Africa Community (EAC), driven by a large number of firms, exporting many products at low values under high preference margins. While the AfCFTA opens up new export markets to Ugandan exporters, preference erosion in the EAC market exposes regional exporters to increased competition. Simulations indicate that the gains to Uganda from the AfCFTA rise dramatically with implementation of a trade facilitation agreement as covered in Annex 4 of the trade protocol.

2021

Authors:

Horman Chitonge

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The Agro-processing Sector in the South African Economy: Creating Opportunities for Inclusive Growth

Abstract:

This Paper provides an overview of the agro-processing sector in South Africa. The paper highlights the sector’s potential to contribute to promoting inclusive growth. Drawing from time series data, the paper shows that agroprocessing industries in South Africa have been the largest component of the manufacturing sector since the 1970s, accounting for about one-third of value added and employment in the sector. In 2018, the agro-processing sector accounted for 2.7 Percent of gross Domestic Product (GDP) and 3.2 percent of total employment. The paper argues that apart from being the largest segment of the manufacturing sector (accounting for an average of one-third of Manufacturing output since the 1970s), agro-processing industries have the potential to contribute to the broader national objective of transforming the economy through the creation of jobs and business opportunities for small and medium enterprises. In terms of employment creation, the potential of agro-processing industries lies in the fact that many industries, including textile, tobacco, wood and wood products, rubber products, and leather industries, tend to be labour intensive. On average, agro-processing industries use almost 30 percent more labour per unit of capital compared to the manufacturing sector as a whole. However, the challenge is that several of the most labour-intensive agroprocessing industries are experiencing declining or stagnating output, investment and most importantly, employment. Identifying and promoting the growth of high-value added activities in the sector can assist in realising the potential of agro-processing industries in the country. Coordinated implementation of policy strategies aimed at reviving the dynamism in labour-intensive industries is needed to exploit the sector’s potential.

Authors:

Mike Morris, Justin Barnes and David Kaplan

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Value Chains and Industrial Development in South Africa

Abstract:

This paper focuses on the dynamics of global value chains (GVC) engagement and industrial development in South Africa through two case studies - the automotive and textiles/apparel sectors. The further industrialisation and development of South Africa and of the Southern African region will depend heavily on further developing their engagement in GVCs and simultaneously upgrading their capacities into higher valued and more skill intensive activities. The automotive industry is import and export intensive, offering the potential for technological advancement, increasing skill intensity and upgrading, and positive economic spillovers. Apparel is domestically market oriented, sourcing domestically, regionally in Southern Africa, and from Asia. It is an example of a low technology, labour intensive industry, exhibiting lower levels of managerial capabilities and skills. It is challenged by rising capabilities to meet new value chain requirements and extending the supplier base to increase value addition (and by implication employment) in the economy.

Authors:

J. Paul Dunne and Elisabeth Sköns

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New Technology and the Changing Military Industrial Complex

Abstract:

This paper considers what could be a fundamental development in the defence industrial base (DIB), namely the increased involvement of commercial technology companies in military-related business. It focusses on developments in the US, recognizing that these are often the precursors of change in the international arms industry. After an outline of the dynamics and longer-term post-Cold War developments in the international arms industry, it investigates recent changes in the Pentagon's attitudes and policies to gain access to new technologies from the commercial and academic sectors. It also considers the military, technological and political drivers that have led to these technologies being sought from commercial companies for military use. It then considers the recent engagement of the major commercial technology companies in activities for the military sector and what is driving them to take up military contracts. The review is based on open source information as available in official government reports and data, conference reports, academic literature, and specialist and ordinary news items. Finally, it considers what these developments imply for the dynamics of the arms industry and the relationships within the DIB and the military industrial complex (MIC).

Authors:

Lawrence Edwards

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South Africa's International Trade

Abstract:

This chapter uses South Africa’s integration in the global economy as a lens to understand the dynamics behind South Africa’s current economic performance. It first presents the historical context, commencing from the country’s position as a gold exporter pursuing an import substitution industrialization strategy, to its transition to a more open economy with the ending of sanctions and tariff liberalization from the early 1990s. The focus then shifts to a critical assessment of South Africa’s trade performance and trade policy in the post-apartheid period. This covers the impact of government policies, such as the multilateral tariff liberalisation from 1994-2000, preferential tariff reform from 2000 and sector driven industrial policy from 2007, as well as the dramatic changes in the global trading order – the rise of China from 2001, and the emergence of global value chains. To illustrate these relationships, the chapter draws on new insights using disaggregated product and firm level trade data.

2020

Authors:

Refilwe Lepelle and Lawrence Edwards

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Gendered Effects of Tariff Liberalisation on the Sectoral Structure of Employment in South Africa

Abstract:

This paper investigates the effects of tariff liberalisation on services sector employment over the period 1996 to 2011 in South Africa. This period corresponds with substantial reductions in tariff protection, low employment growth and declines in the manufacturing share of total employment. Following a local labour market approach, we empirically examine whether reductions in employment-weighted tariffs at the municipality-level led to structural shifts in employment from manufacturing to services, and whether these shifts differ by gender or race. The paper draws on a database comprising of 234 municipalities that is constructed using South African Population Census data for 1996, 2001 and 2011. Consistent with theoretical expectations, the paper illustrates that tariff liberalisation was associated with strong increases in the services to manufacturing employment ratio, but this shift was not driven by the absorption of employment in the services sector. Employment in the services sector also fell in regions experiencing relatively large tariff reductions. We demonstrate that the decline in services employment was driven by lower derived demand, income, and infrastructure investment linked to the decline in manufacturing from tariff reductions. Finally, we show distinct differences in the impact of tariff liberalisation across gender and race. We find evidence of tariff-induced structural reallocation towards services that is more pronounced among Black women while negative tariff effects on services employment is found among Black men and White women. Overall, we show that that spillover effects from the decline in manufacturing diminished the absorption of labour by the services sector, thus exacerbating the regional employment impact associated with tariff liberalisation.

Authors:

Mike Morris, Glen Robbins, Ulrich Hansen and Ivan Nygaard

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Energy and Industrial Policy Failure in the South African Wind Renewable Energy Global Value Chain: The political economy dynamics driving a stuttering localisation process

Abstract:

This paper utilises a combination of a political economy approach and a GVC framework to analyse the dynamics of the wind energy value chain in South Africa. The paper focuses on the complex intertwined interplay between energy and industrial policy and shows how they negatively impacted on efforts to increase localisation of domestic manufacturing and services industries. It discusses the opportunities and constraints, success and failures of a localisation process contained arising from the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). It finds that early modest industrialisation gains, linked to the local content requirements in the REIPPP auctions, notwithstanding the policy shortcomings, did have a notable localisation impact but fell short of the ambition in broader policy documents. Nonetheless, these signs of progress from foreign lead firms, large global 1st tier suppliers, and local firms, were substantially undermined, in some cases reversed, as a consequence of the political choices to suspend the renewable energy programme. It shows how political economy dynamics resulted in a failure to ensure continuity and predictability of the auction bidding process within REIPPPP, and how this cascaded down the wind energy value chain constraining the initial localisation processes. These dynamics also resulted in a failure of the South African government to prioritise, develop, and embed renewable energy within its industrial policy framework. As the economy emerges from the Covid-19 crisis this will pose political economy challenges as coalitions of South African stakeholders struggle over the task of breaking from a carbon intensive path dependency and inaugurating a new green industrialisation path.

Authors:

J. Paul Dunne, Elisabeth Sköns and Nan Tian

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The Changing Economics of Global Arms Production

Abstract:

This paper provides an analysis of the development of international arms production and changing nature of the industry. It begins with an explanation of the basic terms used and the status of data in this field. It then moves on to a description of the international arms market, considering its characteristics and the relation between companies, the state and the military. An analysis of the size and structure of the international arms industry is then provided using the limited data available, followed by a review of the main developments in arms production and the arms industry since the end of the cold war. This includes a review of the driving forces at work, the restructuring that has occurred, the changing composition of the industry and the outcomes of these changes. Finally, an assessment is made of the economic impact of arms production.

Authors:

Gibson Mudiriza and Lawrence Edwards

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The Persistence of Apartheid Regional Wage Disparities in South Africa

Abstract:

Despite the ending of apartheid, regional wage disparities remain prevalent in South Africa with the former homelands characterised by persistently low wages and incomes. In this paper, we use a new economic geography (NEG) model to estimate the extent to which the persistence in apartheid regional wage disparities are an outcome of economic forces such as access to markets. We estimate a structural wage equation derived directly from the NEG theory for 354 regions over the period 1996 to 2011. We find support for the NEG model in explaining regional wage disparities across regions in South Africa, although the market access effects are highly localised in view of high distance coefficients. We also find a wage deficit in homeland areas even after controlling for NEG and other region-specific characteristics. Average wages of workers in homeland areas were 11.8% lower than predicted in 1996, with this gap rising to 13.3% in 2011. This gap remains using alternative estimation approaches and the inclusion of controls for infrastructure, removal of incentives under the deconcentration policies and local amenities.

2019

Authors:

J. Paul Dunne, Guy Lamb and Eftychia Nikolaidou

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The Development of South Africa’s Arms Industry

Abstract:

South Africa is the second largest economy in Africa (after Nigeria) and one of the most industrialised countries in the African continent, ranked as an upper middle income economy by the World Bank. It is also the second largest military spender in Sub-Saharan Africa, and has the most developed arms industry on the subcontinent, with a range of capabilities and has seen considerable change since the end of the ‘apartheid’ regime that was in place over the period 1948-1994. This paper provides an overview of the evolution of the industry and an analysis of the present nature of the industry and its performance and behaviour.

Authors:

Anthony Black, Justin Barnes, Brian Makundi and Tobias Ritter

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Electric two-wheelers in Africa? Markets, production and policy

Abstract:

The current dominant vehicle technology globally is the internal combustion engine. But electric cars and two wheelers are rapidly making headway and in China there are already over 250 million electric two wheelers in use. Africa constitutes the last frontier for the automotive industry. Current levels of motorization are still exceptionally low, but vehicle transport is growing rapidly. With rapid economic and population growth, this is set to continue. Two questions then arise in the African context. Firstly, how rapid will the take up of electric vehicles be, in particular two wheelers? Secondly, where will these vehicles be produced? This paper explores these two questions and then goes on to argue for policies which will maximize the possibilities for the continent to leapfrog to electric technology for motorcycles by adopting proactive polices which yield not only environmental benefits but also potentially industrialization possibilities.

2017

Authors:

Dennis Davis, Raphael Kaplinsky and Mike Morris

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Rents, Power and Governance in Global Value Chains

Abstract:

This paper addresses the generation of rents and the distribution of gains in the global operations of governed Global Value Chains (GVCs) and seeks to provide an architecture for analysing the governance of GVCs. It distinguishes between four sets of rent (gifts of nature; innovation rents; exogenously defined rents; and market power) and three spheres of governance (setting the rules - “legislative governance”; implementing the rules - “executive governance”; and monitoring rules and sanctioning malfeasance - “judicial governance”). The exercise of governance power in GVCs over the generation, protection and appropriation of rents is considered though the lens of four sets of key GVC stakeholders – the corporate sector, civil society organisations, the nation state and supranational institutions. This general analysis is given flesh through three case studies – food-safety standards in GVCs; taxation policies and competition policies. In these sectors, the corporate sector is generally much more effective in governing rent generation and appropriation in the global operations of GVCs than are the three sets of non-corporate stakeholders. From this observation we offer an hypothesis that the capacity of non-corporate stakeholders to govern GVCs is contingent upon the extent to which this coincides with the interest of the corporate sector. However, as noted, this balance of power between private and non-corporate actors is a contested terrain and dynamic in nature.

2013

Authors:

Cornelia Staritz and Mike Morris

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Capturing The Gains - Working paper 20

Abstract:

Many low-income countries (LICs) are integrated into apparel global value chains (GVCs) through foreign direct investment (FDI). This is also the case in Lesotho, which developed into the largest Sub-Sahara African (SSA) apparel exporter to the US under the African Growth and Opportunity Act (AGOA). More recently, a new apparel export market opportunity has emerged in Lesotho, that of the regional market of South Africa. The two export markets, the US and South Africa, are supplied by different types of FDI firms, affiliates of largely Taiwanese transnational producers and of South African manufacturers that are incorporated into distinct value chains. This paper assesses the implications for upgrading integration into these two value chains in Lesotho, the first value chain characterized by Taiwanese investment and feeding into the US market under AGOA and the second characterized by South African investment and feeding into the South African market. These value chains differ with regard to ownership patterns, end markets, export products, governance structures and firm set-up, investors’ motivations and perceptions on the main challenges. These different characteristics have crucial impacts on upgrading possibilities, including functional, process and ‘local’ upgrading. Thus, from the perspective of upgrading and sustainability, ownership patterns, local embeddedness and market diversification matter. The emergence of South Africa as an alternative end market and the different value chain dynamics operating in the South African retailer-governed value chain open up new opportunities away from those of the AGOA-/Taiwanese-dominated value chain.

Authors:

Cornelia Staritz and Mike Morris

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Capturing The Gains - Working paper 21

Abstract:

Over the past decade, several Sub-Saharan African (SSA) countries have developed or expanded export-oriented apparel industries in the context of the Multi-Fibre Arrangement (MFA) quotas and preferential market access, most importantly under the African Growth and Opportunity Act (AGOA). Madagascar is different to the other main SSA low-income country (LIC) apparel exporters – Kenya, Lesotho and Swaziland – given its more diverse end markets and ownership structures and the political instability that led to the loss of AGOA status at the end of 2009. This paper assesses the development of Madagascar’s export-oriented apparel industry and economic and social upgrading dynamics in particular in the context of the AGOA loss. It identifies four types of firms and value chains that differ with regard to ownership patterns, end markets and, most importantly, ‘local embeddedness’, with important implications for both economic upgrading dynamics and possibilities and the sustainability of the industry. The paper concludes that, despite the contraction in the export-oriented apparel industry post-AGOA, Madagascar is still a more successful apparel producer in terms of economic upgrading than the other main apparel-exporting LICs in SSA. The key to this trajectory lies in the differentiation of global value chain (GVC) relationships, local embeddedness and export diversification.