The Global Economic Governance (GEG) Africa programme is a policy research and stakeholder engagement programme to strengthen the influence of pro-poor African coalitions at global economic governance fora.
Monday, 05 September 2016 09:29

SMEs and GVCs in the G-20:Implications for Africa and developing countries

Written by Peter Draper and Chiziwiso Pswarayi
Heads of State attending the G20 Summit in Hangzhou, China Heads of State attending the G20 Summit in Hangzhou, China Photo © Narendra Modi/ Flickr

On 4-5 September, 2016, G-20 leaders will meet in Hangzhou, China. Global macroeconomic and financial developments traditionally dominate the agenda. The global economy remains mired in the economic doldrums, so this year there will be plenty to discuss. Brexit is likely to add further spice.

However, in the wake of the ongoing stagnation of the global economy, economic and social inclusion is becoming a more pressing problem. In the developed world, and particularly in Europe, youth unemployment in the southern and Eastern regions remains high. Economic inclusion has long been a challenge for developing countries, and notably in Africa, our core concern.

Consequently, there is a concerted effort in global economic governance fora to create policies that are more inclusive, particularly for developing countries. Accordingly, the Hangzhou Summit prioritises how Small and Medium Enterprises (SME) in developing countries can be better incorporated into the global value chains (GVCs) operated by large multinational corporations (MNCs).

Therefore GEG Africa, a South African based stakeholder policy and engagement programme, recently released our papers on this issue, following a stakeholder engagement meeting in Pretoria. The papers speak to the limitations and opportunities for African SMEs to be integrated into GVCs.
This agenda is consequential for both SA and Africa. In light of the secular decline in commodity prices, and associated macroeconomic downturn across the continent, diversification out of natural resources into other economic activities has moved sharply back into the frame. Working with MNCs, whilst not the only solution to this longstanding challenge, is almost certainly part of the solution.

In SA the diversification imperative manifests as the ‘beneficiation’ goal, with legislation such as the Minerals and Petroleum Resources Development Act (MPRDA), Protection of Investment Act, and the various iterations of Industrial Policy Action Plans oriented substantially around it. In general the thrust of such legislation is increasingly to constrain the prerogatives of MNCs, using instruments such as local content requirements and designation of ‘strategic sectors’ in the case of the MPRDA.

Outside of SA the opportunities for diversification are sharply constrained, and views on how to relate to MNCs, while generally more favourable, are also mixed.

Clearly perspectives on how to integrate SMEs into GVCs are divergent. Critics regard the agenda as a Trojan horse prescribing developing country trade and investment liberalization for the benefit of Western MNCs, and call it the ‘GVCs narrative’. They advocate domestic and regional policies that would condition MNC investments on transfer of technologies and capabilities, and protect domestic and regional firms from import competition in favour of building regional value chains (RVCs). These views are compounded by the fact that international organizations proffering policy advice in G-20 networks (and beyond), notably the OECD and World Bank, are dominated by developed countries and therefore, in critics’ view, may unduly influence the direction of global agendas in favour of their primary ‘clients’. 

Proponents, by contrast, advocate trade and investment liberalization as the most appropriate policy stance to attract MNC investments. This is seen as necessary since those MNCs can choose from multiple locations to site their investments, and choose which SMEs to integrate into their GVCs. Furthermore, such policy liberalization is regarded as essential to promoting domestic productivity and innovation, which most economists regard as the keys to long-term economic growth and development. Proponents are also deeply sceptical of the capacity of many African governments to engage in the kinds of ‘interventionist’ polices critics advocate, and worry that this could cause serious governance problems. They also point to generally weak private sector capacities across the continent, which sharply constrain the possibilities for RVCs.

It is very unlikely that the Hangzhou Summit will resolve this ideological debate. Were the leaders to tackle it head on, it is likely that they would not have time for discussing anything else. Therefore, we propose that rather than endorsing liberalization or protection/investment conditioning per se, G-20 Leaders should focus on practical issues.

To fully reap the benefits and opportunities that can be created through SMEs’ participation in GVCs, African states, including SA, need to address key constraints that limit SMEs growth as whole, and identify how developed countries can assist them in addressing these challenges. It is important to note that addressing these constraints will also help boost RVCs.

The papers set out three areas of key constraints. First, high transactions costs, including trade finance, logistics, border procedures and import tariffs. These transactions costs make it more difficult for SMEs to competitively participate in GVCs and RVCs alike, so reducing them should be a priority. Some (import tariffs, border procedures) can be addressed domestically and through regional economic integration; others (support for logistics capacity building; trade finance) are amenable to international support, and hence G-20 attention.

Second, deficits related to network services infrastructure, including ICT, transport and energy constraints. There is already huge international attention on this issue, with a variety of institutions such as the much-anticipated New Development Bank, lining up to assist. Besides exhorting multilateral finance institutions to prioritise this issue, which has already been done, it is not obvious what else the G-20 can do in this space.

Third, African SMEs’ capacities to meet the rigorous requirements of GVC management, particularly the private standards MNCs impose. Both MNCs and developed countries can assist African SMEs to upgrade their capacities to meet the rigours of GVC participation. Related to this, the supportive institutional environment that their governments provide – or often don’t – to their domestic SME sector is also amenable to support from developed country governments.

Correctly crafted a G-20 agenda in this space could be transformational. However, it also needs to be at least medium term, given the scale of the challenges the African continent confronts – challenges that moved sharply back into relief once the commodities boom ended and the ‘Africa rising’ discourse accordingly moderated.

However, the main funding sources and still most influential actors in global economic governance, Western democracies, are caught up in short electoral cycles and the anti-incumbency mood has gripped many countries. Furthermore, they have their own fiscal challenges. So there will be continued, and potentially increasing changes to funding priorities. Therefore, while it is to be hoped that this issue will transcend the Chinese G-20 Presidency, it is not guaranteed.

Fortunately, the incoming G-20 Presidency will be taken up by arguably the master country in this space, Germany. Indeed, it is difficult to think of a more appropriate country to take the baton on this issue. Germany’s legendary mittelstand – SME sector – which constitutes the backbone of the country’s global manufacturing success, is a model worth leveraging to the maximum extent. Furthermore, this year’s host, China, is a spectacular development success and will have much to share on this issue.

However, both China and Germany’s development levels and institutional environments are very different to those prevailing in Africa, so adaptation will be required. In this light, as long as the discussions remain focused on practical issues this item, while not likely to grab the headlines, could be consequential.


Peter Draper and Chiziwiso Pswarayi, Managing Director and Intern, Tutwa Consulting Group, for the Global Economic Governance Africa (GEG Africa) Programme. The papers are available at www.gegafrica.org.za. This article was first published in the Business Day.

See all of SAIIA's work on the G-20

G-20 Development Agenda and African Priorities: An Update
The G-20 Tax Agenda and Africa’s Taxation Needs
South Africa’s Foreign Economic Strategies in a Changing Global System
G-20: From Turkey to China, taking stock and looking forward

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