Global Policy Volume 10 . Issue 1 .

February 2019
29

Development Unchained: Trade and

Industrialization in the Era of International
Production

Research Article
Richard Kozul-Wright and Piergiuseppe Fortunato
UNCTAD

Abstract
Following a period of strong growth across all developing regions during the first decade of the millennium and a rapid
rebound from the 2008 financial crisis, a combination of falling commodity prices, increasing financial market volatility and
weak global demand has negatively affected growth performance in recent years. This growth slowdown has exposed the
absence of structural transformation in many developing countries even under robust growth conditions. As a result, increasing
attention has turned to the trade and industrialization opportunities offered by participation in global value chains (GVCs). How-
ever, while the evidence suggests a positive association between participation in GVCs and increased exports and inward FDI
flows, evidence on their supporting structural transformation is weak. This paper discusses strategic approaches to participation
in GVCs as part of a broader development agenda. In particular, it focuses on the opportunities offered by regional value chains
(RVCs) and South-South cooperation and examines the role of industrial policy, with reference to the case of Southern Africa.

Policy Implications
• Targeting the growth of export-oriented manufactures or increasing participation in GVCs offers neither automatic nor
straightforward pathways to industrialization. It is the type of participation in GVCs, the tasks that can be acquired and
the linkages across these tasks, that matter.
• Developing economies need to find the right mixture of (i) effective public agencies able to bargain with footloose firms
and (ii) support measures to build the clusters and linkages leading to industrial diversification.
• Industrial policy is critical to ensuring that mixture but its effectiveness depends on complementary macroeconomic, trade
and technology policies.
• It is of critical importance to leverage strategic links between production for GVCs or RVCs and domestic demand; for
example, adopting industrial policies towards priority export sectors that strategically link policy incentives that push for
exporting along with measures to expand the domestic market.

For a brief period from the start of the new millennium, the
combined influence of a ‘great moderation’ in the macroe-
conomic environment (Bernanke, 2004) and a strong growth
recovery from the dot.com crash, reinforced support for the
promise, long held by supporters of hyperglobalization, of a
new international economic order. Developing countries
appeared to be the big winners in this new environment
leading to much talk of a ‘great convergence’ (Wolf, 2011).
Thanks to a combination of rising commodity prices,
increased capital flows and strong export demand, growth
across all the developing regions picked up sharply, in some
cases reaching historic highs (Table 1). These economies
also showed considerable resilience in the face of financial
shocks that followed the sub-prime meltdown and subse-
quent economic turmoil of 2008–09. As advanced countries
struggled to find economic traction, the idea that emerging
economies had ‘decoupled’ from the travails of the
advanced economies gained an attentive audience. This has
proved short-lived.
The weak recovery in the advanced economies has since
given way to worries about secular stagnation, marked by
low investment rates, a productivity slowdown and height-
ened policy uncertainty. In its wake, growth in many devel-
oping economies has suffered knock-on effects with some
countries entering recession in 2016. Moreover, the slow-
down has raised fears that debts accumulated over the pre-
vious decade are becoming unsustainable along with a
growing realization that, despite their strong growth perfor-
mance, many developing economies had failed to undergo
the kind of structural transformation that could underpin
sustained growth in to the future. Against this more chal-
lenging background, hopes have been placed in the trade
and industrialization opportunities offered by global value
chains (GVCs) coordinated by multinational enterprises
(MNEs) through networks of affiliates, contractual partners
or arms’ length suppliers (Dollar et al., 2017).
GVCs have been around for centuries (Gereffi et al., 2001),
but began to play a more visible role in the late

Global Policy (2019) 10:1 doi: 10.1111/1758-5899.12601 © 2018 University of Durham and John Wiley & Sons, Ltd.
 Richard Kozul-Wright and Piergiuseppe Fortunato
30

Table 1. Average annual per capita growth rate by region, 1971–2016 (%)
Developed Developing Transition Northern Sub-Saharan
World countries countries countries BRICS LDCs LAC Africa Africa Asia

1970s 2.1 2.9 3.5 4.0 3.7
0.7 3.6 4.2 0.6 3.1
1980s 1.2 2.3 1.2 3.0 3.1
0.4
0.1 0.1
0.7 2.5
1990s 1.2 1.8 2.9
4.7 5.6 0.1 1.1 1.0
0.6 2.1
2000s 1.3 1.0 4.1 5.8 6.3 4.0 1.6 3.0 2.6 3.0
2010–16 1.5 1.3 3.6 1.5 5.1 2.3 1.1
0.3 1.2 3.6

Source: UNCTAD Stat.

industrialization experience of the first-tier East Asian econo-
mies in sectors such as electronic goods and components,
clothing and leather products (Helleiner, 1973) and rising to
prominence with a new generation of manufacturing expor-
ters in South East Asia and Central America following the
debt crisis of the early 1980s. As a result, not only did global
trade accelerate much faster than global output (Figure 1)
but the nature of trade was transformed as products made
in one country and shipped to another for sale were
replaced by a multistage iterative process, traversing several
geographic and organizational borders, each stage adding
value to a semi-finished product before reaching their final
market.
These chains now span all sectors of the economy and
according to the World Bank (2017) the result is a win-win
world for international firms and the countries where they
locate their activities, ‘firms that have internationalized have
increased their productivity and efficiency by mixing and
matching comparative advantages from different locations.
In developing countries, GVCs have allowed suppliers to not
only increase productivity but also upgrade production into
higher-value segments of their respective industries’. The task
for policy makers in developing countries is to ensure that all
firms and households are ready and incentivized to make use
of these opportunities so as to leave no one behind.
At the same time, the external context for industrialization
in developing countries has changed significantly for rea-
sons other than the rise of GVCs. Today’s global economy is
a much more open and contested space than when the East
Asian late industrializers began their successful ‘catch-up’ in
the 1960s, not only because of their success but also
because of the subsequent liberalization drive across the
world and the entry of former centrally planned economies
into the global trading system with a concomitant rise in
the global supply of low-skilled labour. At another level, a
combination of new information and communication tech-
nologies (ICTs), stronger intellectual property rights and
weakened labour laws have shifted the balance of power
towards larger firms with dominant market positions and an
attendant ability to generate super profits (UNCTAD, 2017).

Figure 1. Ratio of world merchandise trade volume growth to world real GDP growth, 1981–2016.

Source: WTO Secretariat.

© 2018 University of Durham and John Wiley & Sons, Ltd. Global Policy (2019) 10:1
 Trade and Industrialization
This partly explains the fall in labour shares for low and
medium-skilled workers that took place since the early
1990s (Timmer et al., 2013). In the face of fewer restrictions
on how these firms can move capital across borders, not
only has it become easier and cheaper to organise far-flung
production networks but to govern those networks in ways
that further skew the benefits in favour of lead firms.
In this paper, we examine the main challenges and
opportunities faced by developing economies trying to
industrialize under the current global economic scenario. We
discuss the downsides of GVCs in a developmental perspec-
tive and consider why regional value chains (RVCs) and
South-South cooperation might be more conducive to inclu-
sive growth and development. We then looked carefully into
one specific region which presents interesting, and unex-
ploited, potential to strengthen trade and productive inte-
gration: Southern Africa. We use trade data to assess the
prospects of this region vis-a-vis the rest of the continent
and present a simple simulation exercise based on the pro-
duct space methodology to assess the benefits of further
integration. We also discuss in detail the role that modern
industrial policy can play to turn integration and upgrading
in RVCs into a driver of economic development.
GVCs, productive capacities and development
From their modest start mostly in the clothing and con-
sumer electronics industries in the late 1960s, exchanges
within international production networks have now spread
to many other industries, albeit with a noticeable concentra-
tion in capital and technology-intensive industries such as
automobiles, ICT and machinery. While there is little doubt
that the rise of GVCs, measuring their economic significance
with precision is not an easy task. On one level, the growing
importance of GVCs can be gauged by the large volume of
trade in intermediate goods, which amounted to 46 per
cent of total merchandise trade in 2014. However, this
increased volume of traded intermediaries can result in
Figure 2. Foreign value-added as % gross export, 1995-2011.
Source: OECD-WTO TiVA Database.
Global Policy (2019) 10:1
31
exaggerated counting in official trade statistics, as intermedi-
ates cross borders many times in the process of production
in value chains. The recently developed OECD-WTO Trade in
Value Added database (TiVA) can help avoid some of these
pitfalls and represents an important starting point to better
understand the impact of GVCs. TiVA identifies GVCs by the
country-industry where the last stage of production takes
place before the product is sold (the so-called country-
industry-of-completion). It is therefore able to provide data
on foreign value added (FVA), defined as the value added
generated outside the country-of-completion.
Based on TiVA, Figure 2 depicts changes of FVA between
1995 and 2011. It shows that the foreign content of exports
has increased significantly in many, particularly Asian,
economies but also in Europe and North America over the
last two decades. Foreign content shares for example dou-
bled over the period in India, Poland and Turkey, Korea, and
Vietnam and trebled in Cambodia, with significant increases
also observed in OECD economies, such as Germany, whose
foreign content share increased by 10 percentage points, up
to 25 per cent in 2011. It is worth noting that, on this mea-
sure, the variation in both levels of participation and the
changes over time are considerable.
GVCs are often taken to be an inevitable outcome of
technological changes and a natural evolution of the global
trading system; as such they are presented as a promising
basis for further trade and investment liberalization (OECD,
2013; WTO et al., 2013). From a development perspective,
GVCs are often seen to present an attainable first step on
the industrialization ladder and to offer a more productive
integration into the global trading system (Baldwin, 2016);
rather than having to develop an entire product or break
into an extremely competitive market on their own, coun-
tries can specialize in specific tasks or components of a mul-
titude of value chains, starting at the relatively accessible
bottom, leveraging the advantage of cheap labour and stea-
dily building up capacity in more skill intensive and higher
value added activities.
© 2018 University of Durham and John Wiley & Sons, Ltd.
 Richard Kozul-Wright and Piergiuseppe Fortunato
32
However, the association between participation in GVCs
and development is not a straightforward one. As summa-
rized by Hanson (2005), beyond the immediate firm-level
transactions, whether FDI can help generate wider spillovers
to the local economy is still a controversial issue from an
empirical point of view. UNCTAD (2016), for example, shows
that when increases in the foreign value added of exports
occur in a larger context of greater production and exports
of manufactures (as in much of the Asian region, for
instance), GVCs participation can complement industrializa-
tion and structural change. However, when increasing partic-
ipation in GVCs reflects a reduction of domestic sourcing in
a context of weak export performance of manufactures,
GVCs participation may even delay structural transformation,
as in the case of many developing economies in Africa and
Latin America.
This is illustrated in Figures 3 and 4 below which plot the
association between changes in manufacturing value added
as a share of GDP and changes in the import content of
export-oriented manufactures (i.e. foreign value addition
(FVA)) between 1995 and 2011, for Asian economies and for
the remaining developing countries and economies in tran-
sition for which data are available. Much of the Asian region
shows a clear and strong positive association between GVC
participation and industrialization, while developing coun-
tries in other regions show the opposite relationship.
Claims for how GVCs can strengthen productivity (and
contribute to economic growth) are largely based on con-
ventional trade models (see, for instance, OECD, 2013);
besides adopting an exclusively supply-side focus on the
productivity challenge these models tend simply to assume
that the package of assets and skills associated with FDI
automatically spillover in to the local economy. Empirical
evidence to support this view is limited (see, for example,
Winkler and Farole, 2015). From a development perspective,
Figure 3. FVA in manufacturing exports and manufacturing value
added; Asia.
Source: UNCTAD TDR 2016.
© 2018 University of Durham and John Wiley & Sons, Ltd.
Figure 4. FVA in manufacturing exports and manufacturing value
added; other developing economies.
Source: UNCTAD TDR 2016.
the particularities of GVC structures and the consequent dis-
tribution of power along the value chain require a more
nuanced analysis of corporate structure and behaviour. This
was already apparent to developmental economists, such as
Paul Streeten, in the 1970s, when the emergence of such
chains first became apparent (Streeten, 1973).
In the context of the contemporary value chain landscape
that implies examining the changing corporate strategy of
lead firms. The underlying corporate rationale for GVCs, par-
ticularly in more capital and technology intensive industries,
is that while most industries contain low-skill tasks that are
sensitive to wage costs, they also include intangible tasks
(R&D, design, marketing and branding) based on unique
resources and capabilities that other firms find difficult to
acquire; these are the basis of superior returns (Kaplinsky,
2005) which often take the form of rents1 (UNCTAD, 2017).
On the financial side, a combination of outsourcing and
rent-seeking creates super profits, and because there is less
need for reinvestment in production capacity, those profits
are increasingly devoted to returning shareholder value. This
dynamic is becoming more and more prevalent in the cur-
rent era, which is characterized by growing market concen-
tration and high profitability but little investment and an
emphasis by financialization on turning profits into cash
returns (Milberg and Winkler, 2013).
As mentioned above, GVCs lower barriers to entry at the
bottom of the value chain, making it easier for developing
countries to break into global exports of manufactures than
in the past. However, the conditions that ease access can
also act as barriers to upgrading since more accessible parts
of the value chain are associated with few forward and
backward linkages, limited institutional development, and lit-
tle possibility for knowledge externalities in the wider
Global Policy (2019) 10:1
 Trade and Industrialization
33

economy. Indeed, technological upgrading can be more dif- capital and high-skilled labour raised from 60.6 to 65.5 per
ficult for economies that are used by TNCs primarily as cent (Table 2).
bases for exports to third markets than for economies where Turning more towards regional markets in the South may
FDI is of the market-seeking, tariff-jumping kind. Since the offer an alternative setting to build more inclusive and sus-
latter form of FDI is more dependent on the domestic econ- tainable industrial activity. East Asian countries, particularly
omy, it gives the host country government greater bargain- South Korea, Taiwan, Singapore but also China – despite its
ing power for using FDI selectively to ensure that it will global reach in terms of exports and imports – have long
create spillovers and linkages with domestic industry in the recognized the importance of the East Asian regional pro-
context of a broader industrialization strategy. Most exam- duction network. Furthermore, in response to the collapse in
ples of successful use of FDI in industrialization and techno- trade after the financial crisis of 2007–08, also several suppli-
logical progress are from countries that have exploited this ers in other developing regions shifted their end markets
advantage effectively.2 from the North to the South in an effort to regionalize their
Developing economies with limited productive capacities supply chains. For instance, South African clothing manufac-
can therefore remain trapped in, and competing for, the turers moved into other countries in sub-Saharan Africa such
lowest value-adding activities at the bottom of value chains, as Lesotho and Swaziland, leading to an expansion of the
which can ultimately result in ‘thin industrialization’ and regional value chain led by South African retailers (Gereffi,
slow economic growth (Gereffi, 2014; UNCTAD 2014). These 2014).
activities are also detrimental from a dynamic perspective Regional value chains (RVCs) can be instrumental in
since they do not generate those local productive capacities, increasing value added in the developing regions. Given the
which are essential to meaningful development. size and productive capacities of many developing coun-
Participation in GVCs also carries the additional risk of tries, a local industrial strategy might quickly reach its limits.
specialization in only a very narrow range of production This can be overcome through a regional perspective as dif-
activities with a concomitantly narrow technological base ferent complementary advantages in the region could be
and overdependence on MNEs for GVCs access (OECD, leveraged and economies of scale, vertical integration and
2013). Such shallow integration also manifests itself in asym- horizontal specialization could be promoted. This is particu-
metric power relations between lead firms and suppliers larly important for smaller countries, which see regional con-
and in weak bargaining positions for developing countries. nections as crucial to complementing their own capacities
For example, the experiences of Mexico and Central Ameri- considering supply-side constraints.
can countries as assembly manufacturers have been likened RVCs are characterized by the end-product being
to the creation of an enclave economy, with few domestic exported by a country within the region, more often to a
linkages. The same can be said about the electronics and regional partner, and with many high value-adding activities
automotive industries in Eastern and Central Europe. In also undertaken within the region. They can therefore signif-
these cases, there has been significant ‘internal upgrading’ icantly contribute to the creation of value at the local level
within MNE affiliates, but this has involved very few spil- and offer more opportunities to participate, gain experience
lovers to the local economies in the form of productivity and build those local capacities needed to compete globally,
improvements and imitation by domestic firms, partly due thus serving as a stepping stone into GVCs (UNCTAD, 2015).
to limited linkages of MNEs with local firms and labour mar- Regional markets might also exhibit better upgrading
kets.3 Moving up the chain into more capital-intensive or
higher value-added production is particularly challenging in
such an environment, because it necessitates relationships Table 2. Factor shares in global value chains of manufactures,
with lead firms at the top that are ultimately focused on by region
maintaining their profitability and flexibility. Indeed, these Value added in value 2008 minus
firms sometimes intentionally use GVCs to induce and inten- chains of manufactures 1995 2008 1995
sify competition among suppliers and countries for their
In high-income countries $4,863 $4,864 $1
own benefit (Phillips and Henderson, 2009).
(billion US$)
Changing corporate behaviour has emerged as a major By:
source of the rising trend in inequality (Stiglitz, 2015)4 and it capital (%) 35.9 38.7 +2.9
seems likely that GVCs have been a (related) contributing high-skilled labour (%) 16.8 21.8 +5
factor to this worrisome trend, both in the advanced and medium-skilled labour (%) 33.3 30.3
3.0
developing countries (UNCTAD, 2016). As shown by Timmer low-skilled labour (%) 14 9.1
4.9
et al. (2013), in fact, we are witnessing a bifurcation in the In other countries (billion US$) $1,723 $3,820 $2,097
By:
factor content of GVCs with increasing capital and high-
capital (%) 55.2 58.4 +3.2
skilled labour income shares matched by declining shares high-skilled labour (%) 5.4 7,1 +1.7
for medium and particularly for low-skilled labour. According medium-skilled labour (%) 15.6 17 +1.4
to their estimates in high-income countries together capital low-skilled labour (%) 23.8 17,5
6.3
and high-skilled labour captured 52.7 per cent of manufac- Worldwide (billion US$) $6,586 $8,684 $2,098
tures value in 1995, increasing to 60.5 per cent in 2008; in
Source: Timmer et al. (2013).
low and middle-income economies, the share accruing to

Global Policy (2019) 10:1 © 2018 University of Durham and John Wiley & Sons, Ltd.
 Richard Kozul-Wright and Piergiuseppe Fortunato
34
potentials particularly in terms of functional upgrading,
including design, marketing, branding and distribution.
Recent evidence, however, suggests that despite their
advantages RVCs are by far less developed than GVCs (Los
et al., 2015).5 As a matter of fact, in the last couple of dec-
ades the gap between the two has been widening rather
than shrinking and, excluding Europe, in all of the world
regions covered by the TiVA dataset the extra regional com-
ponent of foreign value addition is significantly higher than
the intra-regional one (Figure 5). Understanding the new
markets and the investment and sourcing policies of lead
firms and buyers selling in these markets will be a key in
the future to foster the expansion RVCs.
Regional value chains in Southern Africa
Over the past two decades, the shares of Africa’s exports to
its traditional trading partners – the EU and the United
States – declined. The EU was the destination for 50 per
cent of Africa’s exports in 1995 but only 36 per cent in
2013. For the United States, this percentage dropped from
15 per cent to 9 per cent over the same period. In the
meantime, China has emerged as Africa’s largest single trad-
ing partner, absorbing 16 per cent of Africa’s exports in
2013 and developing countries as a whole now account for
46 per cent of Africa’s merchandise exports and 53 per cent
of its imports, up from 27 per cent and 34 per cent respec-
tively, only 15 years earlier (UNECA, 2015). Geographic diver-
sification of Africa’s trade partners has not however been
accompanied by diversification of its exported products: pri-
mary commodities still accounted for 77 per cent of the
continent’s merchandise exports over the period 2000–13.
Partly as a result of the commodity price boom in the early
2000s, manufacturing sector continued its decline started in
the 1990s; its share of Africa’s exports decreased from 26 per
cent in 1995 to 21 per cent in 2004 and to 18 per cent in
2014 (Pesce et al., 2015).
Against this background, intra-African trade and regional
production networks can be instrumental in increasing the
industrial content of Africa’s exports and ultimately foster
Figure 5. Extra- and Intra-regional foreign value-added as % gross
export, 1995-2011.
Source: OECD-WTO TiVA Database.
© 2018 University of Durham and John Wiley & Sons, Ltd.
structural transformation in the region. Unlike extra-regional
trade, intra-regional trade in Africa, although limited in size,
gravitates around exports of manufactured and more
sophisticated goods such as construction materials and food
processing (Fortunato and Valensisi, 2011). Indeed, in 2013,
about two-thirds of intra-African trade was in manufactured
goods (UNECA, 2015). However, intra-African trade has
grown only modestly over the past decade and remains sig-
nificantly below the share of exports directed towards more
developed regions, such as developing Asia and Europe,
and even Latin America.
Raising internal demand, if sustained with adequate policy
measures, can in principle support an expansion of intra-
regional trade and production networks. Africa’s rapid
urbanization and its higher (albeit erratic) economic growth
since the start of the millennium have underpinned the ris-
ing demand for goods and services in the region, particu-
larly from an expanding middle class. This is evident in
Southern Africa, where a seven-fold increase in consumption
of high-value processed foods is forecast by 2040 (Tschirley
et al., 2013). High demand growth in the Southern cone has
also underpinned the development of RVCs driven by South
Africa’s apparel retail chains, supermarkets and agro-proces-
sing corporations.
This represents a welcome novelty in the regional landscape
since domestic markets are too small to support significant
industrial upgrading and scale economies in most Southern
African countries. As a matter of fact, industrial growth in
Southern Africa has been lower than in the other parts of the
continent since the early 2000s, averaging 4 per cent annual
rate in the period 2000–12. The manufacturing sector, in par-
ticular, has underperformed, recording an average rate of
around 1 per cent. Services are absorbing most of the jobs
moving out of agriculture leaving employment in industry
stagnant at around only 8.4 per cent of the total labour force.
This hampers development prospects as most services jobs
are informal and display low productivity and wages.
Nevertheless, Southern African economies seem well
placed for developing value chains at the regional level. As
shown by UNECA (2015), together with Eastern Africa, the
Southern part of the continent stands out both in terms of
integration and trade complementarity and, indeed, the
share of intra-regional trade is higher in SADC than in any
other African Regional Economic Communities (Figure 6).
The potential for the development of value chains in the
region emerges clearly when comparing the pattern of
industrial trade within the SADC area with the industrial
exports directed to outside commercial partners. As docu-
mented in Figure 7, the latter have been steadily decreasing
along the last twenty years and, more importantly, they are
dominated by mining exports which explains almost half of
total industrial exports towards non-SADC economies in
2016. Conversely, agro-industry and labour-intensive manu-
factures (light industry) have been on a decreasing trend
and became marginal during the last decade.
When we look at trade flows within SADC the picture is
undoubtedly rosier; mining industry here plays only a sec-
ondary role while agro-industry, light-industry and even
Global Policy (2019) 10:1
 Trade and Industrialization
35

Figure 6. Share of intra- regional exports in African economic communities, 2014.

Source: UNECA (2015).

Figure 7. SADC industrial exports to non-SADC economies.

Source: COMTRADE (2018).

more capital-intensive exports like the one taking place in
the machinery and equipment sector have been more
prominent over the entire period under scrutiny and
together accounted for almost the 80 per cent of total
industrial exports in 2016 (Figure 8).
The ‘special’ condition of the southern cone of the conti-
nent, and the opportunities offered by further integration,
emerge clearly also when we look to the data from the per-
spective of the product space literature (Hausmann and Kli-
ger, 2007 and Hausmann et al., 2007). This literature sees
production possibilities as a space in which economies
move. More specifically, the product space is an illustration
of all goods exported in the world, where the distance
between two goods is defined as the probability of export-
ing one of the goods if an economy already exports the
other. In this framework, structural transformation entails
moving from goods that countries already export to others
that are close enough, where ‘close enough’ is defined
based on the knowledge and capabilities needed to pro-
duce a certain set of products. This ultimately configures a
network of products, a sort of map in which economies
move from one point to another, leading to diversification
and production of increasingly sophisticated goods. There-
fore, mapping a country’s exports in the product space

Global Policy (2019) 10:1 © 2018 University of Durham and John Wiley & Sons, Ltd.
 Richard Kozul-Wright and Piergiuseppe Fortunato
36
Figure 8. SADC industrial exports to other SADC economies.
Source: COMTRADE (2018).
allows us to study how difficult it can be for that country to
diversify and succeed in exploiting new production and
exporting opportunities.
Figure 9 displays all non-exported products and products
exported with a revealed comparative advantage (RCA)
below 16 for five Southern African economies (South Africa,
Tanzania, Mozambique, Mauritius and Zambia) and for a
hypothetical country, resulting from the combination of the
five economies. This combination is obtained considering a
‘best case scenario’ in which the RCA for each commodity is
set at the maximum level observed among the five
Figure 9. An experiment of regional integration: export opportuni-
ties for a combined group of countries.
Source: UNCTAD (2018).
© 2018 University of Durham and John Wiley & Sons, Ltd.
countries. The hypothetical country obtained merging the
five different export baskets would export 674 products with
RCA below 1 and would not export 18 products. Moreover,
and more importantly, it would be much better positioned
to exploit existing opportunities for export diversification.
The large increase in the density of products outside the
export basket, evident from the figure, suggests the exis-
tence of complementarities between the productive struc-
tures of the five economies. Such complementarities would
create a larger and more diverse pool of resources and
capabilities. This, in turn, would make products relatively clo-
ser, thus facilitating export diversification.7
Recognizing the peculiarities of the region and the impor-
tance of regional productive integration as a means to revi-
talize the industrial sector and foster economic growth, the
Southern Africa Development Community (SADC) has
recently launched a common industrial strategy with the
goal to promote development of an integrated industrial
base within SADC through the exploitation of regional syn-
ergies in value-added production and enhancement of
export competitiveness, including via collaboration in the
development of regional value chains with targeted inter-
ventions (SADC Industrial Development Policy Framework,
2013–2018).
Whether this initiative will finally succeed or not crucially
relies on the stance of the dominant economy of the region.
South Africa’s history of industrialization, labour policy and
infrastructure development has profoundly influenced the
economic and political relations in neighbouring countries,
and the country continues to dominate in the current con-
text (Zalk, 2012). Indeed, the significant asymmetries
Global Policy (2019) 10:1
 Trade and Industrialization
between South Africa and the remaining economies of the
region might partly explain why the potential trade comple-
mentarities discussed above have not been exploited fully
and failed to become an engine for industrialization.
A prominent example of such a dominance comes from
the agro-processing sector, where South Africa represents
by far the leading exporter and the largest market for pro-
cessed food. During the last decade, South Africa’s exports
of processed food recorded a remarkable 18.4 per cent
annual growth rate rising from US$273 million to US$1.25
billion. A great contribution to this large increase in exports
was made by the expansion of South African-owned super-
markets across the region. Promoting partnerships between
supermarkets chains and domestic new processors would
favour a more equilibrated distribution of benefits in the
region, but unfortunately attempts in this direction are only
at an embryonal stage.
Oilseeds, animal feed and poultry, is undoubtedly one of
the chains with the highest potential in the sector (Pare-
moer, 2018). Indeed, many South African poultry producers
have already established operations in other SADC member
states and significantly increased investment into down-
stream activities. Upstream integration, on the contrary, is
absent and South Africa is still importing the soya oilcake
needed for poultry feed from Argentina despite the capaci-
ties existing in other SADC economies. High intra-regional
transport costs are certainly responsible for this paradoxical
situation, but problems are exacerbated by the pervasive
informational asymmetries and lack of transparency
which increase the search cost faced by small suppliers and
transporters.
Another significant barrier in regional food markets is rep-
resented by health standards and product specifications
which limit the ease with which products can be traded
across borders as they undergo multiple testing procedures
in different countries. The East African Community is
addressing this constraint through a coordinated Standards
Harmonization and Conformity Testing Programme. After its
first 2 years, the programme reported a 59 per cent reduc-
tion in testing costs and a 74 per cent reduction in average
testing time in the region. An independent analysis on the
benefits of a similar programme within the SADC region
should be undertaken, particularly with reference to highly
traded products (like edible oils, sugar and processed food).
South Africa is also leading in the mining equipment sec-
tor, particularly in mineral processing and deep mining. As a
matter of fact, the great majority of the original equipment
manufacturers (OEMs) operating in the region are based in
South Africa to supply the regional market and include both
South African OEMs and global OEMs. Unless a regional
approach to the regulation and oversight of RVCs is
adopted, there is an ongoing concern that these firms will
capture most of the value created in the emerging chains
with only limited trickle-down effects on the other econo-
mies of the region.
A promising indication for the future is that, while the ini-
tiative on the regional industrial strategy was taken by Zim-
babwe that successfully put industry on the SADC agenda
Global Policy (2019) 10:1
37
under its presidency, South Africa is now taking the lead in
this process. In fact, the South African Department of Trade
and Industry, which has a long tradition in using and com-
bining different policy tools to strengthen its manufacturing
sector and enhance employment, has fully embraced the
regional perspective and is pushing to put industrial policy
at the core of the regional integration agenda.
Southern Africa’s industrialization will ultimately depend
also on the progresses made on the integration agenda
with other African economies. An ambitious agenda which
has been progressing fast along the last decade, but much
work remains to be done. The COMESA-EAC-SADC Tripartite
Free Trade Area (TFTA), for example, which brings together
26 African countries, and 58 per cent of the continent’s
GDP, was signed in 2015 and ratified already by 22 coun-
tries. Bringing together countries which already belong to
different trade regimes is not an easy task however; for
many tariff lines negotiations are still undergoing and liber-
alization is expected to take place only over the next 5 to
8 years (UNECA, 2015).
The TFTA negotiations have taken place alongside negoti-
ations for the Continental Free Trade Area (CFTA) which
were finally launched in March 2018. Before the agreement
can become operational, however, member states need to
submit their schedules of commitments for goods and ser-
vices and to work on the harmonization of rules of origin
across the various regional economic communities. This pro-
cess is proceeding slowly since member countries prioritize
different sectors and negotiations are therefore proceeding
in parallel on multiple fronts. The leadership of the largest
economies of the region, such as South Africa, Nigeria and
Kenya, will be on crucial importance to untangle this knot.
Industrial policy to turn GVCs into drivers of
development
Today’s policy makers can no longer expect export-led pro-
duction and trade of manufactures that fuelled industrializa-
tion in the East Asian tigers to produce similar outcomes.
Indeed, as noted earlier, targeting the growth of export-
oriented manufactures or increasing participation in GVCs
linked to manufacturing offers neither automatic nor
straightforward pathways to industrialization and develop-
ment. This does not imply that countries should no longer
seek export markets. Rather, a more strategic approach is
needed in which countries are more selective in their
choices of processes, products and markets since both the
composition of export-oriented manufactures – the more
technologically intensive and sophisticated the better – and
the share of domestic value added determines whether
and to what extent exporting will induce structural change
and productivity growth (Fortunato and Razo, 2014).
The type of participation in GVCs is crucial in this respect.
Countries able to develop productive capacities in sync with
those needed by international production networks, and
position themselves at a relatively high level in the world
distribution of tasks, should be well placed to sustain a
more inclusive growth process. However, from an industrial
© 2018 University of Durham and John Wiley & Sons, Ltd.
 Richard Kozul-Wright and Piergiuseppe Fortunato
38
policy perspective, simply complying with the demands of
lead firms in these chains is unlikely to facilitate the emer-
gence of the kind of industrial base necessary for sustained
growth and inclusive development. There is a little evidence
of technological and other spillovers from MNEs in the
absence of effective government bargaining and policy
measures, even when greenfield investments have involved
a fuller range of industrial activities, and evidence of
upgrading within value chains is equally elusive. A ‘develop-
mental state’ has therefore still a critical role to play espe-
cially in favouring the emergence of a vibrant industrial
base, robust local markets and a dynamic enterprise sector
(Kozul-Wright and Fortunato, 2015; UNCTAD, 2016).
The selection of the relevant sectors and industries for
industrial policy support varies from country to country
according to their pre-existing areas of strengths and poten-
tial for upgrading, dynamic comparative advantage and, in
the larger economies, creation of national champions that
can become major players in the international markets. In
South America, Brazil, a country with an already large indus-
trial base, prioritizes sectors such as capital goods, electron-
ics and pharmaceuticals, while Uruguay, a small country in
the same region, is promoting biotechnology, ICTs and cul-
tural industries, but also the automotive industry within a
broader framework of regional productive integration, in
recognition of the limitations imposed by its small domestic
market.
New industrial policies are evolving over time, embodying
some but not all characteristics of successful development
strategies of the past, showing the ability to adapt both to
technological changes and to local conditions and circum-
stances (Andreoni and Chang, 2016). Trade and investment
agreements at the bilateral, regional and multilateral levels
have restricted policy space in some key areas (Wade, 2003;
UNCTAD, 2014) while the slowdown in developed countries,
and the possibility that they have entered a period of secu-
lar stagnation, is constraining export possibilities to these
economies. Accordingly, developing countries must design
their industrial policies in this more constrained environ-
ment and respond to it through the adoption of innovative
policies – or policy tools less subject to restrictions by inter-
national agreements–and by exploring new pathways for
industrial development.
The experience of Vietnam after its accession to WTO, fol-
lowed by a reduction in the simple average tariff rate from
18.5 per cent in 2007 to 10.4 per cent in 2013, may serve to
illustrate this point. Vietnam has indeed made an effective
use of some of the flexibilities still allowed under WTO rules
and commitments. The difference between bound and
applied tariff rates, for example, allowed the modulation of
applied tariffs with a view to controlling energy prices and
protecting certain industries from import competition. In
addition, the country managed to provide sectoral support
in several forms and to sustain R&D and infrastructure devel-
opment in disadvantaged areas of the country through sub-
sidized loans and investment guarantees.
Given the new constraints in the external environment,
South–South cooperation is opening new opportunities to
© 2018 University of Durham and John Wiley & Sons, Ltd.
bolster regional trade and productive integration in support
of structural transformation. The East Asian experience has
been a notable example of successful regional integration,
and the economies of the region are now negotiating an
ambitious mega-regional trade agreement (Bown,
2017).Other developing regions have established a large
number of sub-regional trade agreements, but progress on
the ground in the form of substantially larger intra-region
trade flows and productive integration has been limited.
As discussed in this paper, a promising strategy to exploit
the benefits of regional integration and support an ambi-
tious development agenda focusing on productive capacity
building and structural transformation centres on the devel-
opment of RVCs. The success of such a strategy, however,
relies on the capacity of developing countries to provide an
environment conducive to RVCs participation and that
would make domestic firms competitive along these chains;
it also relies on ensuring that the benefits of RVCs translate
into a domestic development by activating linkages across
different productive sectors and trickling down to most of
the population. This in turn requires the adoption of a vast
set of strategic policy measures both at the domestic and at
the regional level.
Active cooperation among governments to identify and
prioritize entry points into value chains and exploit regional
complementarities is of crucial importance. This often
requires coordinating policy measures in different domains
to avoid mutual damages; in Southern Africa, for example,
the use of protective measures in Tanzania (on sunflower
oil) and in Zambia (on soya oil) is weakening the potential
for cooperation in agro-processing. Facilitating connections
between firms operating in different countries at different
parts of the chain is equally important; this obviously
implies infrastructural investments to curb physical transport
costs but also easing border restrictions, harmonizing test-
ing and certification systems and developing regional trad-
ing platforms for different commodities to facilitate price
discovery.
In order to maximize the developmental impact of RVCs
participation, however, standard trade facilitation policies
are not enough. Depending on the specificities of the coun-
try (and the chain) under exam, a vast array of policies can
be devised to facilitate the diffusion and the trickling down
of the benefits associated with participation to production
networks. Setting-up rapid development zones or free indus-
trial areas in those regions where natural resources are con-
centrated, for example, would favour private investment,
facilitate resource exploitation and upstream participation to
value chains, and potentially benefits also firms not operat-
ing directly in resource extraction.
Finally, on the consumer’s side, it is particularly important
to mitigate the potential negative impact of price changes
on low-income households. In the SADC area, for example,
the idea to promote small-scale, renewable energy-based
systems that can contribute to electricity security by turning
consumers into self-producers is currently under examina-
tion. But ensuring a fair distribution of benefits will ulti-
mately depend on the degree of inclusiveness of the
Global Policy (2019) 10:1
 Trade and Industrialization
39

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Author Information
Richard Kozul-Wright is Director of the Division of Globalisation and
Development Strategies of the United Nations Conference on Trade and
Development (UNCTAD) and former leading author of the World Eco-
nomic and Social Survey at UNDESA. He has published extensively on a
wide range of development policy issues.
Piergiuseppe Fortunato is an economist at UNCTAD where he is
responsible for projects on structural transformation, industrial policy
and Global Value Chains. He also worked at UNDESA and was an Assis-
tant Professor at the University of Bologna. He has published exten-
sively on economic development and political economics.
Global Policy (2019) 10:1