Regional value chains, a new opportunity for North Africa’s economies

Believe the expert’s word: The emergence of North Africa’s countries can only be done through a deep transformation of their economies and raises the question of processes that are needed to guide these structural changes and achieve their objectives.

Even though this is an old topic, the economic transformation of North Africa through industrialization as a key driver has been for several years at the center of debates and economic policies. Nevertheless, this transformation has remained low despite encouraging and relatively strong growth rate, which is estimated to reach approximately 4% in 2014, if the political situation evolves towards more stability and clarity.

It is recognized that one of the levers that guided the structural transformation of many developing countries is their growing participation in global trade through the export of more diversified and sophisticated products. But the economies of the North African region have not fully exploited the potential of this lever, even though since the seventies, these countries have embarked on the path of diversification. Hence, Morocco and Tunisia for example have developed import substitution strategies, while Algeria and Egypt have developed and applied heavy industrialization strategies.

Over the decades, we witnessed the development of both the industrial sector and services which is reflected in higher diversification indexes, including in Egypt and Tunisia. This growth, however, has not changed the yet very marginal share of the concerned countries in the global market for manufactured goods (more than 1% between 1975 and 2008, while the share of Eastern Asia has increased from 1.7 to 20%). It is therefore worth noting that despite efforts made, North African economies are not sufficiently diversified, given their specialization in less dynamic and low added value sectors or products in general. Their performance remained altogether very dependent on commodity prices or weather conditions.

However, the acute unemployment problem in the region requires creating several million jobs in the next few years, and it is only through what we call "explosive growth" that we will meet the challenge. This type of explosive growth is only identified within experiences based on the development of industrial sectors and services that accompany these changes, hence the urgent need for the region to accelerate the pace and extent of diversification of products, by combining it with a more vigorous international integration through the strengthening of regional value chains (RVC) and a better integration into global value chains (GVC).

The Value chain approach

It is necessary to have a common understanding of the significance of the value chain and its related concepts. Value chain encompasses a wide range of activities and services that a product or service must undergo, from its conception to its commercialization in the local, national, regional or global market. The value chain is supported by a variety of technical, business and financial providers, and its structure is able to influence the behavior of business enterprises which, in turn, affect the performance of the same value chain. It is basically a tight partnership between the several links of the supply chain, in order to meet the consumers' demands and create values and benefits.

What about North Africa?

Until the 2000s, North African countries did not have consistent strategies to diversify their economies, and only few countries have made attempts to diversify through active public policies, especially in the fields of funding, research, access to foreign markets or integration of global value chains. But starting from the early 21th century, these countries have adopted ‐ with determination‐ industrial modernization processes, by developing multi‐sectoral industrial strategies and establishing special economic zones. Their goal was to integrate the world industrial production process and take advantage of the international value chains.

According to Dr. Carlos Lopes, Executive Secretary of ECA, "the consistency of industrialization policy has the potential to create powerful forward and backward linkages between manufacturing and food‐industry activities which are able to stimulate investments in the manufacturing sector, as well as employment and production in this sector. In this context and at the regional level, the manufacturing of olive oil in North Africa illustrates the possibilities of integrating the rural world in the global economy through global value chains. The acquisition of new skills for the final operations of the supply chain will help the region create sustainable competitive advantages”.

At the national level, some experiences are worth mentioning:

‐ In Morocco, the industrial strategy has made steady progress in terms of growth and leadership, and has led to a gradual strengthening of production tools and a policy promoting the launch of ambitious partnerships. Thus the phosphate industry, for example, is present at all stages of the value chain, from the production of fertilizers to phosphoric acid and other derivative products. The Cherifian office for phosphates (which started with a turnover of three million dollars and some hundreds of employees) achieved in 2010 a turnover of US. $ 5.4 billion and is employing nearly 20,000 people.

‐ In Egypt, the policies implemented to increase textile production led to a growth of the added value in 2011, thus representing 5.6% of GDP, 27% of industrial production and 18% of gross domestic product for the non‐oil primary commodities.

‐ Some countries in the region are considering measures relating to the management of trademarks, the development of new medical and cosmetic products, as well as the control of the distribution chain.

The missing piece of the puzzle: the regional dimension However, this approach favouring integration in the process of global industrial production and targeting international value chains remained essentially at the national level and was hampered by the small size of the region’s economies, as well as their low capacity to integrate the most profitable global value chain niches. This approach poorly exploited the existing potential because it has neglected the integrated regional approach of development in North Africa, hence the need for the region to develop regional policies in order to exploit the substantial asset offered by the special activities and expertise that exist only in the North African region. By exploiting this asset, it will help create regional value chains, as well as enhance the attractiveness of the region for international companies (a mix of qualifications, policies to promote entrepreneurship and the creation of new areas of economic activity, etc.).

How to strengthen relations?

Developing regional integrated offerings, diversifying economies, moving upscale, exporting more values to international markets, creating more decent and quality jobs and increasing the opportunities for graduates, are all messages regularly heard in North Africa and represent numerous challenges. To cope with these challenges, would there not be a way to develop collaboratively regional value chains that will generate new comparative advantages, accelerate the strategic diversification and sophistication of products and services, and create a new economic dynamics in the region?

In fact, the low level of trade integration in North Africa, coupled with the relatively significant infrastructure development, suggests significant potential for the development of intra‐regional value chains. Another potential worth exploring and exploiting, given the accelerated pace of development the Continent is witnessing: the development of regional value chains with Western Africa, our immediate neighbour.

This implies the establishment of an operational strategy based on existing potentials, economic priorities of the countries of the region, the requirements of both regional and international markets, as well as available human resources and institutional mechanisms in charge of implementing this strategy. These are some points to be discussed at the round table on the theme "Developing regional value chains to accelerate diversification and sophistication of the north African economies", to be organized in the framework of the 29th session of the intergovernmental committee of experts (ICE) in North Africa (March 4‐6, 2014).