Written by Isabelle Durant, Deputy Secretary-General of UNCTAD
Local value chains can develop productive capacity, human capital and intra-regional trade.
Every Monday and Tuesday buyers and sellers gather at the Mombasa Tea Auction, the largest in Africa. In an average week, buyers representing around 50 consuming countries bid on teas from nations including Burundi, the Democratic Republic of Congo, Kenya, Madagascar, Malawi, Rwanda, Uganda, Zambia and Zimbabwe. According to etiquette at the auction, buyers say ‘yes, sir’ to bid on a lot and ‘knock it, sir’ when their bid is highest.
The genteel buzz of activity at the auction is the hub of Kenya’s thriving tea sector. Kenyan farmers sell their tea to packers, which in return provide farmers with inputs. On the demand side, packers sell up to 30% of their tea in Kenya and a further 20% to other countries in Africa. On the supply side, farmers’ direct involvement in value added activities contributes to them capturing approximately 75% of factory-gate prices.
Meanwhile, farmers from neighbouring African countries whose tea is sold in Mombasa capture an average of only 25% of factory-gate prices. Therefore, while the Mombasa Tea Auction is the hub of the dynamic Kenyan tea sector, it also illustrates an underdeveloped regional tea value chain. Other producing countries typically export raw tea to Kenya, where packers refine, clean and package it for sale. In other words, although intra-regional supply and demand has contributed to a growing market for tea in Eastern Africa, the value chain remains relatively undeveloped outside Kenya, with potential for further regional integration.
Whether tea in East Africa, dairy in Central America or automobile parts in Southeast Asia, regional value chains can develop the productive capacity, human capital and incomes in the countries involved. More generally, the resulting increase in intra-regional trade binds trading partners together, providing opportunities for dialogue and ultimately cooperation on crucial issues such as security, migration and environmental stewardship.
In all examples of successful regional value chains, small and medium-sized enterprises (SMEs) represent one of the main channels through which countries derive benefits. Entrepreneurs innovate and take risks to capitalize on new business opportunities. Their businesses create local jobs and retain profits locally. Their participation in regional value chains provides them with access to technological innovation, new skills and alternative sources of capital, all of which improves their competitiveness.
Regional value chains can also provide opportunities for women to participate in trade. Evidence shows that, in general, women draw fewer benefits than men from their participation in trade. In many countries social norms and a male-dominated economy exclude women from formal structures, whether as traders, business owners or salaried employees. As a result, the negative effects of an ever-changing marketplace, including trends such as automation, fall disproportionately on women. As a result, women rely more than men on informal, precarious and lower-paid livelihoods.
In this context regional chains represent an opportunity for governments to implement gender policies on trade, business ownership and labour in a more open policy environment. For example, aligned with a regional plan, national trade and industrial policies can help create more export licences and formal industrial jobs that women can access, while an expansion of social infrastructure allows them to combine paid work with their care responsibilities.
Commensurate with these important opportunities, integrating thriving regional value chains requires considerable investments in both capital and political will. For example, such value chains depend on expensive infrastructure building blocks – roads, ports and warehouses – with, in many cases, costs and access rights negotiated among neighbouring countries. Similarly, these activities require investments in education and training programmes, the curricula of which must be coordinated with the foreign stakeholders and governments involved in the chain. Success also depends on national governments and regional bodies coordinating a coherent and predictable policy environment that attracts investors and entrepreneurs.
SMEs require additional assistance to foster their participation in regional value chains. With their limited administrative resources, for instance, cost reductions from business facilitation can be the difference between a company’s success or failure. The implementation of the United Nations Conference on Trade and Development (UNCTAD) eRegulation programme by the West African Economic and Monetary Union (UEMOA), for instance, contributed to an average rise of 53% in the number of start-ups created in member countries. The business-procedure simplification programme has also contributed to cost savings for SMEs of up to 70% in some programme countries.
SMEs also need skilled workers to compete in regional value chains. Skills development should therefore be an integral part of any enterprise development strategy. Empretec, UNCTAD’s flagship entrepreneurship programme, has been facilitating the training of small business owners in developing countries for almost 30 years and is now established in 40 countries. The programme focuses in particular on training to underserved demographic groups such as women and youth.
Digital skills in particular are of growing importance, as an increasing number of activities and transactions in the value chain are digitized. Estimates show as much as 90% of future jobs will require ICT skills by 2020. Without access to training e-commerce training programmes, SMEs will struggle to enter regional value chains as more and more activities go digital. The Mombasa Tea Auction, for example, is planning to automate trading in 2018.