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Global Value Chains and Aid for Trade: How to better address the trade challenges of LDCs

Jodie Keane and Sheila Page

Revised Draft

12 November 2013

Arusha Tanzania

“Unlocking  Export  Competitiveness:  The  Role  of  Trade  Facilitation”  

20 – 21 November 2014

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Table of Contents

Table of Contents ................................................................................................... 2

Abbreviations and Acronyms .................................................................................. 3

List of Tables and Boxes ......................................................................................... 5

Executive Summary ................................................................................................ 6

Introduction ........................................................................................................... 8

1. Overview of Literature on LDCs’ Participation in GVCs ...................................... 9

1.1 Shifting Governance Structures and LDC Trade Opportunities .................... 9

1.2 Internal GVC Governance ......................................................................... 11

1.3 External GVC Governance ......................................................................... 13

1.4 Upgrading in GVCs ................................................................................... 13

2 Case Studies of LDCs Engaging with GVCs ...................................................... 14

2.1 LDC Experiences of Engaging with the Coffee GVC ................................... 15

2.2 LDC Experiences of Engaging with the Horticulture GVC .......................... 18

2.3 LDC Experiences of Engaging with the Textiles and Clothing GVC ............ 20

Cambodia .......................................................................................................... 21

Lesotho ............................................................................................................. 23

Tanzania ........................................................................................................... 25

Vanuatu ............................................................................................................ 26

3 Linking Aid for Trade to Global Value Chains .................................................. 28

3.1 Translating trade analysis into aid needs ................................................. 28

3.2 New Evidence on the Costs of Trading for LDCs and Engaging with GVCs 29

3.3 Review of GVC Related Donor Assistance ................................................. 29

4. Conclusions and Recommendations ............................................................... 32

4.1 Special problems or needs of LDCs in GVCs ............................................. 32

4.2 Are current Aid for Trade programmes identifying and meeting needs? ... 32

4.3 What changes are needed in Aid for Trade? .............................................. 33

References ............................................................................................................ 34

Appendix 1 ........................................................................................................... 40

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Abbreviations and Acronyms ADB Asian Development Bank AfDB African Development Bank ALAFA Apparel Lesotho Alliance to Fight Aids ATC Agreement on Textiles and Clothing AGOA African Growth and Opportunity Act CDDC Commodity Dependent Developing Countries CMB Coffee Marketing Board CtG Capturing the Gains DCCS Duty Credit Certification Scheme DfID Department for International Development EBRD European Bank for Reconstruction and Development EC European Commission ECX Ethiopia Commodity Exchange EHPEA Ethiopian Horticulture Producers and Exporters Association EC European Commission EU European Union FAO Food and Agriculture Organization of the United Nations FDI Foreign Direct Investment GATT General Agreement on Tariffs and Trade GCC Global Commodity Chain GVC Global Value Chain ICA International Coffee Agreement ICAO International Civil Aviation Organisation IDB Inter-American Development Bank IFAD International Fund for Agricultural Development ILO International Labour Organisation IMF International Monetary Fund IMO International Maritime Organisation ITC International Trade Centre ITU International Telecommunications Union LAC Labour Arbitration Council LDC Least Developed Country LNDC Lesotho National Development Corporations MFA Multifibre Arrangement MNE Multinational Enterprises NICs Newly Industrialised Countries OECD Organisation for Economic Cooperation and Development OBM Original Brand Manufacture ODM Original Design Manufacture OEM Original Equipment Manufacture R&D Research and Development RMG Ready Made Garment SACU Southern African Customs Union SME Small and Medium Sized Enterprises SNV Netherlands Development Corporation SPTO South Pacific Tourism Organisation SSA Sub-Saharan Africa TNC Transnational Corporation UCDA Uganda Coffee Development Authority UK United Kingdom UN United Nations UNCTAD United Nations Conference on Trade and Development UNDESA United Nations Department of Economic and Social Affairs

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UNDP United Nations Development Program UNECA United Nations Economic Commission for Africa UNECLAC United Nations Economic Commission for Latin America and the

Caribbean UNESCAP United Nations Economic and Social Commission for Asia and the

Pacific UNECE United Nations Economic Commission for Europe UNEP United Nations Environment Programme UNIDO United Nations Industrial Development Organisation UNWTO World Tourism Organisation US(A) United States (of America) WHO World Health Organisation WTO World Trade Organization

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List of Tables and Boxes  

Table 1: Key Determinants of Global Value Chain Governance .............................. 11 Table 2: Methods of Upgrading in GVCs ............................................................... 14 Table 3: Market Failures Affecting Entry and Participation with GVCs, and Responses ............................................................................................................................ 28 Table 4: Multilateral and Regional Agencies and Bilateral Donors included in UNIDO Guide to Trade Capacity Building .......................................................................... 40

Box 1: Types of GVC Governance ............................... Error! Bookmark not defined.  

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Executive Summary This paper provides a broad overview of how the Least Developed Countries (LDCs) trade within global value chains (GVCs). It explores the ways in which firms located in LDCs could (a) upgrade their position within existing value chains; or (b) access new GVCs. Through this process it identifies some of the major constraints faced by firms in LDCs. We assess the extent to which these challenges have been addressed by donors providing Aid for Trade (AfT) to date. We then discuss how AfT could better address them. In order to set the scene, in the first Section of this paper we discuss how the GVC literature has evolved in recent years. Much attention in the GVC literature has been paid to shifts in the pattern of global trade and qualitative changes in the governance structures of GVCs. Some authors suggest that this presents new challenges for LDCs, others that new opportunities have arisen. We argue that the benefits and/or costs for producers in terms of participating in one type of value chain compared to another are essentially contingent on how the integration process of producers with this type of trade is managed. We draw attention to how at the core of GVC analysis is the notion of governance which determines the organisation of the production and marketing of goods and services globally. We note how external GVC governance structures designed and negotiated by governments to achieve specific outcomes usually remains outside of the modelling sphere of ”which GVC takes what shape and why”. Nevertheless, these structures arguably matter most. This is because they inform the bargaining and negotiating power of domestic producers. Therefore these structures can influence not only relations between firms, but also developmental outcomes more broadly. Further to introducing the GVC literature and its approach to analysis, we then proceed to provide an overview of LDC participation, drawing on available case-study material. We focus on those GVCs that seem to be most representative of LDCs participation in global trade patterns to date, and which are best documented within the GVC literature. This includes the following countries and products: Coffee – Uganda, Tanzania and Ethiopia; Horticulture – Ethiopia; Textiles and clothing – Cambodia and Lesotho; Tourism – Tanzania and Vanuatu in the South Pacific Islands. Our analysis shows that donor interventions to improve the current position of LDC producers within GVCs, as well as take advantage of new trade opportunities, generally focus on the node of production: building productive capacity, with resultant effects on the ability of producers to then subsequently move up the value chain. We show that some of the constraints faced by LDCs in terms of upgrading their current position within GVCs will not necessarily be easy for donors to address. This is because labour and other supply capabilities are low. LDCs often lack the public and private logistical facilities to attract investors. Limited capacity in trade policy capacity creates difficulties in negotiating changes in the external trading environment that can facilitate access to GVCs. These limited governance capabilities have to be taken into account by donors providing AfT. Logistics and transportation services are not separate value chains as conventionally understood. In fact, services such as logistics and transport are integral to LDCs’ connection to external markets and to their participation in value chains (regional or global). Developing logistics and transportation systems may enable LDCs to obtain more functions within a given value chain (e.g. tourism, horticulture or textiles and clothing), and to move towards becoming a full package supplier. Therefore, interventions related to these types of services can assist LDCs in terms of upgrading their position within a given value chain. They may also provide more of a foothold to enable LDCs participation in new types of GVCs, emanating from non-traditional sectors, and regions. The evidence is growing that the costs of trading are a significant barrier for LDCs trying to increase their participation in world markets and enter GVCs.

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It is important to look at the evidence of what obstructs trade by LDCs in order to draw conclusions on whether aid can help and, if so, what types of aid. If the binding barriers are policy restrictions (import barriers, discrimination through regional trading areas, etc.), aid measures cannot have a major impact, and even aid to adjust to changes in policy (the original purpose of the World Trade Organization Aid for Trade initiative) would have a limited role at a time when many trade negotiations are stalled. If the most important constraints on trade are from weaknesses in production (supply side problems), then aid will have a role, but it will not necessarily be directly ‘trade-related’ aid. The importance of looking at a chain, rather than at individual stages of production or products, suggests that approaches to trade capacity building should start from a broad view of how a country is trying to change its trade, and then an assessment of all the obstacles to this. Individual donors with their own priorities, expertise, and legal areas of responsibility, cannot be expected to provide on their own a comprehensive response to the needs identified. But their priorities and modalities must adapt to the way GVCs operate. Since the GVC approach emphasises the importance of relative power in chains, donors must also take account of how aid flows affect power relationships. The trade policy development and market information activities of bilateral donors may create problems because of conflicts of interest. This is because as we show, many donors are advising countries on their trade policies towards and their negotiations with the donor. Overall, the results from this study suggest that LDCs’ participation in GVCs could be better supported by donors in the following ways: • Setting priorities among types of aid after identifying weaknesses in value chains; • Focusing more aid on reducing the costs of trading; • Increasing attention to improving the operation of markets for LDC exports, particularly

those for traditional commodities; • Assessing physical infrastructure needs against potential trading patterns; • Extending sectoral aid beyond nineteenth century types of production such as

agriculture and textiles and clothing; • Shifting types of capacity building where there are high risks of conflict of interest into

the multilateral and regional agencies;

• Increasing capacity development in choosing and negotiating standards to facilitate accessing and upgrading within GVCs.

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Introduction In the handbook developed by Kaplinsky and Morris (2001), a value chain was defined as: the full range of activities which are required to bring a product or service from conception, through the different phases of production (involving a combination of physical transformation and the input of various producer services), delivery to final consumers, and final disposal after use. Global Value Chains (GVCs) are defined in the same way, but with the activities spread across countries. The GVC literature became prominent during the 1990s as product and sector specific studies were published, motivated by the need to better understand how producers engaged with the most recent process of globalization and the implications for the development of productive capacity and capabilities (Cramer, 1999; Daviron, 2002; Dolan et al. 1999; Gereffi, 1999; Kaplinsky and Kaplan, 1998; Navdi and Thoburn, 2004; Ponte, 2002). The GVC literature continues to develop both conceptually (e.g. by giving increased recognition to production networks) and empirically (e.g. by employing more robust research methods, such as survey design).i The results from GVC case-studies so far have shown how upgrading processes are multifaceted, complex and involve changes in business strategy, production structure and technology, policy and the organisation of markets (Bernhardt and Milberg, 2011). A particular advantage of the GVC approach in the current context is that it directs attention to the factors that can affect relationships along the value chain either for the benefit of producers or to their detriment. This includes asymmetries in economic power. Some of these factors can be directly as well as indirectly influenced by policymakers. This means that the GVC approach is particularly useful in terms of identifying areas for policy intervention, and hence for the provision of aid for trade (AfT). Donor interventions could focus on directly facilitating the participation of LDC producers in existing, or new value chains, or on increasing the ability of LDC governments to assist producers in this way. More generally, however because the focus of GVC analysis is on asymmetric markets - those where the degree of market power differs sharply between firms – this suggests that it is important to look at the role of developed country governments in influencing the conditions for LDC trade more broadly (Ismail, 2013). It matters where AfT enters the value chain; this is precisely Because of the nature of asymmetric trading relations, it matters where AfT enters the value chain: without careful management the benefits of AfT may not accrue to the intended parties but rather the lead firms that govern them (Mayer and Milberg, 2013). As will be clear in both the LDC case studies and the description of aid programmes that follow in this report, value chains can be regional, as well as global. An important question therefore for policymakers is whether or not there are special advantages or additional costs to regional rather than global chains, and therefore whether there is a case for greater intervention in regional chains. Assistance provided to the latter may help to bolster economies of scale and scope, and therefore help to bolster market power. We begin this report by briefly providing an overview of GVCs in terms of how they are defined. We then begin to identify some common characteristics of GVCs with regard to their associated governance structures. We discuss recent trends related to the consolidation of global trade more generally, and the implications for LDCs and their upgrading processes within existing GVCs, and the potential for entering new ones. Further to outlining some of the theory associated with GVC analysis, we then proceed to introduce some case studies of how firms located in LDCs participate in GVCs. We draw on those case-studies that are best covered in the existing GVC literature. This includes in relation to traditional agricultural commodities such as coffee; non-traditional goods such as cut flowers; traditional manufactured goods such as textiles and clothing. Finally, we make reference to trade in services by LDCs with a particular focus on tourism.

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For each of these case studies we provide some of the context around LDC participation in the GVC, the associated governance structures of the GVC, the upgrading experiences of LDC firms, and finally the types of donor interventions to date. We take further stock of how donors have taken account of LDCs participation in GVCs in Section Three. Here we provide an overview as to the extent to which donors have recognised the need to look at their trade support in the context of GVCs. We identify the activities which are most likely to be relevant for LDCs in terms of improving their current and future participation in GVCs. In the final Section we summarise what the analysis and case studies identify as the particular challenges faced by LDCs in terms of upgrading within, and accessing, GVCs. We assess the extent to which current AfT programmes are meeting these. Finally, we provide some suggestions as to how existing aid and AfT programmes could be better targeted so as to better support LDCs participation in existing and new GVCs. 1. Overview of Literature on LDCs’ Participation in GVCs Because the extent of the synchronised global trade collapse which occurred during the global financial crisis of 2008/09 was unprecedented, it indicated the extent to which global trade is now coordinated and organised within GVCs. This in turn spurred the interest of policy makers in better understanding both the degree of participation in this type of trade, and firms’ relative position within GVCs. This heightened awareness has subsequently drawn attention to the instruments available to assist firms in the entering and securing their position at various stages of participation within GVCs. This includes identifying potential GVCs; entering them; obtaining a better position within them; and improving outcomes over time. There are some aspects of GVC analysis, however, that are to some extent glossed over within the current discourse and which deserve further attention. This includes with regards to the coercive nature of relations between firms across borders, an aspect which is emphasised by the GVC literature. The approach focuses on the question of how producers (analysed at the levels of both firms and countries) participate in the global economy. It goes beyond firm-specific linkages, aiming to reveal the dynamic flow of economic, organisational and coercive activities between producers within different sectors on a global scale (Kaplinsky and Morris 2001:2). As noted by Gereffi et al. (2005:79); “the evolution of global scale industrial organisation affects not only the fortunes of firms and the structure of industries but also how and why countries advance or fail to advance in the global economy.” At the core of GVC analysis therefore is the notion of governance which determines how the production and marketing of goods and services are organised globally, which in turn reflects economic power and control of economic rents (of which there are different types). Value chain governance matters because it relates to the ability of a stakeholder to determine, control and/or coordinate the activities of other actors in the value added chain (Gereffi and Frederick, 2009).

1.1   Shifting  Governance  Structures  and  LDC  Trade  Opportunities     The increased consolidation of marketing and retailing nodes of GVCs that has occurred in recent years means commonly, large, oligopolistic lead firms from industrialized countries enjoy considerable economic power within their value chains; this means that they are able to capture most of the value created in the chain; buyer-supplier contracts are negotiated and lead firms with a multitude of potential suppliers are in strong positions to dictate the terms of the supply (Mayer and Milberg, 2013: 4). Much attention in the literature has been given to the link between these shifts in the pattern of global trade and qualitative changes in the governance structures of GVCs, which

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seem to have become more hierarchical overtime (Keane, 2012). The degree of fragmentation of global production that has taken place in recent years has now led to the widespread recognition that global trade increasingly involves different countries specialising in particular tasks, rather than exporting final goods. Hence, the production of a final good (or indeed service) can take place across several firms located in different countries with each one undertaking what is better described as ‘a task’ in the overall process.ii Some authors suggest that this presents new challenges for LDCs, whilst others, new opportunities. With particular regard to LDC producers in SSA, Gibbon and Ponte (2005) argue that these shifts have resulted in producers located in these countries trading down rather than up in GVCs. This is through increasing producer specialisation within the lower value added nodes of a given value chain rather than facilitating movement up towards higher value added nodes such as processing, retailing and marketing. This is because the quest by transnational corporations (TNCs) or globally operating retailers for economies of scale at the marketing and retailing nodes of GVCs has resulted in increasingly hierarchical, or even captive, relations between firms operating across borders. Manifested at the global level, this has resulted in the marginalization of SSA in global trade through locking producers into buyer-driven GVCs and inhibiting movement into higher value nodes of production, such as processing and marketing. It is nevertheless also recognised that the increasing fragmentation of production does create new trade opportunities for LDCs. For example, movement into the modern export sector and the production of high value agriculture and ready-made garments (RMG) has been driven by the increasing integration of LDCs into global GVCs. Within the agricultural sector, contract farming is a form of vertical integration between LDC agricultural producers and global buyers (Oya, 2012).iii This means that changes in the nature of supply chains are not solely limited to the manufacturing sector: the slicing up of different stages of production and their relocation across countries - as the pace of globalisation has accelerated - applies across sectors, including agriculture. There are risks involved in participating in high-value GVCs that are not aligned with a country’s overall productive capabilities and economic structure: for such participation to contribute to structural change, linkages must be developed with domestic firms and industry. This challenge has been hotly debated in the case of Cambodia, and its engagement with the textiles and clothing GVC, which is almost entirely foreign-owned - a case study that we discuss in Section Two. The debate has resonance with the debate on how far countries should stray from their overall comparative advantage (Lin and Chang, 2009). It means that the management of integration with GVCs matters.  We try to shed more light on these general lessons by drawing on the experiences of LDCs through the case studies in Section Two. The point to note here, however, is that to date there has been limited success by LDC producers to tap into the modern export sector. Where movement into non-traditional exports has been achieved, it has typically been facilitated by preferential access into developed-country markets.iv This has provided a form of locational advantage to attract investment, and taken the form of outsourcing production: through developing contractual relations between firms across borders; or of offshoring and the relocation of production from one country to another. This means that the external governance of GVCs - the framework negotiated by governments for firms - matters. Greater attention should be paid tohow the external as well as internal GVC governance structures (those negotiated between firms) interact and can affect trading patterns for LDCs and developmental outcomes over time; then how LDC governments can be better assisted in supporting their producers, including through the provision of AfT by donors. We provide a fuller definition and explain some of the differences between internal and external GVC governance in the following sub-sections.

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1.2 Internal GVC Governance  The initial distinction within the GCC literature was between industry-specific governance structures, for example, whether or not structures are buyer or producer-driven (Gereffi and Korzeniewicz, 1994). The automobile industry is a prime example of a producer-driven chain, whereby capital investments are high. Producer-driven chains are costly to enter at the stage of production. In comparison, the manufacture of shoes requires less capital investment but is very costly for firms to enter at the retailing node of the value chain. The key difference therefore between buyer and producer driven types of governance result from who controls the dominant type of economic rent, and where it is situated – either at the node of production or sale. For example, the economic power within a buyer-driven GVC for lead firms - the chain drivers - results from control over the marketing and retailing nodes, from which economies of scale are derived. The apparel GVC is considered to be one of the typical buyer-driven GVCs. In comparison, in a producer-driven GVC, economic rents are derived from proprietary knowledge or technology; this means that the chain drivers are located at the node of production. Within both types of GVC, however, lead firms are able to set the parameters for other participants for example, through sub-contracting arrangements. Further to this initial distinction, the concept of GVC governance was developed into a classification of five levels by Gereffi et al. (2005), each distinguished by the degree of coordination between actors at each stage of production, or value chain node. The degree of explicit coordination ranges across the governance typologies with the highest being associated with ‘hierarchical’ types of governance (see Table 1 overleaf). The typology developed by Gereffi et al. (2005) is derived from a set of value chain case studies. This means that although some general lesson may be drawn, the empirical validity of these types of governance and their applicability to other country case studies is rather more questionable. Nevertheless, we provide some country-specific examples in Box 1. As can be seen from Table 1, the five types of governance identified by Gereffi et al. (2005) are posited to be a function of:

o the complexity of the transaction; o the ability to codify aspects of it; and

o the capabilities of producers.

Table 1: Key Determinants of Global Value Chain Governance

Governance Structure

Complexity (of

transaction)

Codification (of the

transaction)

Capabilities (of producers)

Degree of explicit coordination (required by lead firms working

with suppliers) Market Low High High Low

Modular High High High

Relational High Low High Captive High High Low

Hierarchy High Low Low High Source: Adapted from Gereffi et al. (2005) Box 1: Types of GVC governance

Market governance is typical in GVCs where transactions are relatively simple. Information on product specifications is easily transmitted, and suppliers can make products with minimal input from buyers. These arms-length exchanges require little or no formal cooperation between actors and the cost of switching to new partners is low for both producers and buyers. The central

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governance mechanism is price rather than a powerful lead firm. This type of governance is typically associated with the type of trade carried out in auction houses or other spot markets, or other over-the-counter transactions. This has been the case in the past for many traditional commodity exports such as coffee and cocoa but in some cases (as will be discussed) commodity trade appears closer to a more captive form of governance.

Modular governance occurs when complex transactions are relatively easy to codify. Typically, suppliers in modular chains make products to a customer’s specifications and take full responsibility for process technology using generic machinery that spreads investments across a wide customer base. This keeps switching costs low and limits transaction-specific investments, even though buyer–supplier interactions can be very complex. Information technology and standards for exchanging information are both key to the functioning of modular governance This is typical of the electronics industry and the development of contract manufacturing through outsourcing particular functions overseas by lead firms. The lead firm may provide some inputs, but firms based overseas may also source others, including from other third parties. There are no related examples of GVC governance for LDCs in the literature.

Relational governance occurs when buyers and sellers rely on complex information that is not easily transmitted or learned. This results in frequent interactions and knowledge sharing between parties. Such linkages require trust and generate mutual reliance, which is regulated through reputation, social and spatial proximity, family and ethnic ties, and the like. Despite mutual dependence, lead firms still specify what is needed, and thus have the ability to exert some level of control over suppliers. Relational linkages take time to build, so the costs and difficulties required to switch to a new partner tend to be high. This type of governance, similar to modular governance, is associated with contract manufacturing, but offshore contractors in this case are full package producers; this means they take responsibility for supplying all component parts – rather than being dependent on the lead firm, as in the case of captive governance. Examples of this type of governance include in the case of some garment manufacturers in Madagascar (in relation to lead firms in Mauritius), and Lesotho (lead firms in South Africa).

Captive governance is a feature of chains where small suppliers are dependent on one or a few buyers that often wield a great deal of power. The power asymmetry in captive networks forces suppliers to link to their buyer under conditions set by, and often specific to, that particular buyer. This leads to thick ties and high switching costs for both parties. Since the core competence of the lead firms tends to be in areas outside of production, helping their suppliers upgrade their production capabilities does not encroach on this core competency, but benefits the lead firm by increasing the efficiency of its supply chain. This type of governance is associated with types of trade in which producers are heavily dependent on lead firms in order to trade, for example through the provision of inputs. Contract farming or types of commodity trade may exhibit this tendency. For example, in the case of Ugandan coffee it has been argued that the governance structure exhibits more captive than market-based governance; this is because of low supplier competence in the face of increasingly complex transactions and a transactional dependence on lead firms.

Hierarchical governance describes chains characterised by vertical integration and managerial control within lead firms that develop and manufacture products in-house. This usually occurs when product specifications cannot be codified, products are complex, or highly competent suppliers cannot be found. This type of governance is typically associated with industries where all stages of production are carried out ‘in house’ as production is offshored rather than outsourced overseas. Examples include the relocation of cut flower production and export from glasshouses in the Netherlands to Ethiopia.

Source: Adapted from Gereffi et al. (2005)

Because each of these three determinants can change as an industry evolves and matures, and as firms upgrade, so too can the form of governance. One can see from Table 1 that hierarchical types of GVCs are posited to be those where suppliers’ capabilities may be lowest. In this case, because of low supplier competency in the face of complex transactions, the degree of explicit coordination required by lead firms is highest. This means that, in theory, the scope for supplying firms to learn and upgrade is substantial. However, unless lead firms relinquish some control of their functions, upgrading processes may not be sustained over time. Because upgrading processes cannot be assumed to occur automatically between firms, there is a potential role for the state. One of the main limitations, however, of the typology of internal governance structures

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developed by Gereffi et al. (2005) is that it excludes the role of the state and its influence on these structures, which we discuss in the following sub-section. 1.3 External GVC Governance As already mentioned, the governance structures posited by Gereffi et al. (2005) do not include reference to “external structures”, that is, those aspects of market entry and participation negotiated by governments for private actors. For example, the role of preferential trade regimes is generally glossed over, or at most mentioned briefly in passing in most GVC analysis. This is despite it being one of the main vehicles through which to attract the relocation of modern sector exports. External governance structures arguably matter the most because they affect the bargaining and negotiating power of domestic producers. They can influence not only relations between firms and therefore internal GVC governance structures, but also developmental outcomes more broadly. The relative position of producers within GVCs and the types of barriers to entry that exist may be linked to specific types of economic rent; some of these types of rents may be directly under the control of governments.v In relation to how these external GVC structures may have influenced the textiles and clothing value chain, it could be said that the Multi-Fibre Arrangement (MFA) actually made the private sector captive on both sides to this regime. This is precisely because the global trading regime under the MFA set the terms of engagement, which subsequently forced suppliers to link to their buyers under conditions specific to (or dictated by) the major buyer (developed countries) which has led to thick ties and high switching costs for both parties. Strengthening the bargaining position of producers relative to powerful actors and lead firms operating within GVCs may require more directive, as opposed to facilitative, interventions to be made by governments. That is, interventions cannot be solely limited to correcting market failures, such as coordination failures, but may be required to help create markets and bolster the position of domestic producers within particular types of GVCs. Related interventions could include, for example, facilitating joint venture and learning processes between firms. Government intervention may be required because upgrading processes within GVCs do not occur automatically. Instead, lead firms can be encouraged or required to actively engage with their suppliers, who in turn need to learn. These processes, including skills formation, need to become institutionalised, so that lead firms can subsequently adopt a more hands-off role. As shown by Table 1, this would subsequently entail moving from more hierarchical or captive types of governance to more relational or modular forms, as producer capabilities develop. This process is termed ‘upgrading’, which we discuss in the following sub-section. 1.4 Upgrading in GVCs  GVC analysis has tended to see “upgrading” as a continuum. This is whereby process upgrading is the first initial step. This could result from an LDC producer introducing superior technology so as to increase the efficiency of existing production. Further to increasing efficiency, the next step would be product upgrading. This is whereby the quality of the product is upgraded through using higher-quality material or reduced human error. Functional upgrading entails moving up the value chain, undertaking more and a different set of functions, towards another set (whilst retaining those previously undertaken). An example of functional upgrading is whereby an LDC textile and clothing producer moves from being a mere “taker” of raw material supplied by the lead firm towards sourcing its own material. This means that it can then begin to directly supply end markets, as opposed to relying on its parent company to do so. An example of inter-sectoral upgrading would be if a producer moves from the simple manufacture of textiles and clothing towards

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producing shoes, or motorcycle parts.vi All of these types of upgrading are summarized in Table 2 below, and basically entail the development of producers’ capabilities. In all cases, improvements in producers’ capabilities entail the use of knowledge, skills or technologies. Table 2: Methods of Upgrading in GVCs Process Upgrading

Transforming inputs into outputs more efficiently by re-organising the production system or introducing superior technology. For example, through irrigating land, using pesticides or mechanical picking.

Product Upgrading

Moving into more sophisticated product lines (which can be defined as increasing unit values). This may include through introducing better quality seed supply, or minimizing crop contamination or disease.

Functional Upgrading

Acquiring new functions in the chain (or abandoning existing functions) to increase the overall skill content of activities. Such as the transition from OEM (original equipment manufacture) to ODM (own design manufacture) to OBM (own brand-manufacture). Or becoming a full package supplier, taking responsibility for sourcing inputs as well as directly supplying buyers of lead firms.

Inter-Sectoral upgrading

Using the knowledge acquired in particular chain functions to move into different sectors.

Source: Adapted from Humphrey and Schmitz (2004) The trajectory referred to in Table 2, which is considered to be a vertical one, is heavily influenced by the experience of the East Asian Newly Industrialised Countries (NICs), which moved from Original Equipment Manufacture to Own Brand Manufacturing. However, what was possible at that time,vii in that region, within particular value chains, accessing particular markets, may not necessarily be a completely replicable approach.viii This means that although there may be some lessons that can be learned from the successful harnessing of GVCs for development by the Asian NICs, as well as other emerging economies, strategies may not be totally replicable. Moreover, the proliferation of GVCs that has occurred since the rise of the NICs (and other emerging powers) may mean new opportunities for LDCs to engage with more dynamic forms of trade, emanating from non-traditional sectors, and indeed regions. These may be characterised by different forms of governance compared to those emanating from industrialised ‘core’ countries, with implications for LDC firms upgrading trajectories. The LDC case studies we discuss in the following section show that value chains driven by lead and retailer firms, coming from some of the emerging powers, such as South Africa, have resulted in different LDC upgrading opportunities. 2 Case Studies of LDCs Engaging with GVCs Further to outlining some of the theory and practice of GVC analysis, in this section we introduce some LDC case-studies. We attempt to do this across the spectrum of internal governance structures posited by Gereffi et al. (2005). However, it is important to point out that trade in services are not fully conceptualised within GVC analysis and are not included in the governance typology developed by Gereffi et al. (2005). International tourism is an export because foreigners are bringing money into the country from overseas. We therefore include it as a case study. The LDC countries and GVCs that we focus on include the following: Coffee – Uganda, Tanzania and Ethiopia; Horticulture – Ethiopia; Textiles and clothing – Cambodia and Lesotho; Tourism – Tanzania and Vanuatu. We structure the case studies in the following way: first, we provide a general introduction regarding the context of integration with the

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GVC; second, we discuss the associated governance structures of the GVC, third, we discuss upgrading experiences; finally we provide a brief overview of donor interventions in the GVC to date.

2.1     LDC  Experiences  of  Engaging  with  the  Coffee  GVC   Context  Structural adjustment programs implemented in many sub-Saharan (SSA) LDCs began at around the same time as the demise of the International Coffee Agreement (ICA). The period governed by the ICA (1962-1989), although not without its limitations, is generally recognised as being a success in terms of raising and stabilising prices for coffee traded on international markets. The effect of the post-ICA period on coffee prices, and more importantly on those received by exporting countries, is rather less clear cut. What is much clearer is how markedly corporate strategies have changed as the organisational structure of the coffee GVC has been re-structured in the post-ICA period (Ponte, 2002). These shifts have transformed how world market prices for coffee are both transmitted to and mediated by coffee producing countries. There are some commonalities of experiences across coffee producers. These include the increasing involvement of private traders as parastatals have been dismantled or reformed. More broadly there has been the increasing consolidation of the retailing, roasting as well as trading nodes of the coffee GVC. There are differences however, in terms of how governments have managed the integration process with GVCs. In this section we discuss the experiences of two LDC coffee producers. This includes Uganda which undertook a sweeping liberalisation process in the 1990s and has maintained a light regulatory touch; and Tanzania which undertook some reforms but retained stronger regulatory powers. Governance  The dismantling of marketing boards in Uganda was undertaken in conjunction with the liberalisation of capital markets under a far-reaching economic reform process; licencing requirements for private-sector actors were made minimal; the Coffee Marketing Board (CMB) was closed down and regulatory powers were transferred to the newly-created Uganda Coffee Development Authority (UCDA), which was put in charge of testing export consignments for minimum quality standards and issuing export certificates. Liberalisation meant some direct buying by roasters from local exporters, but overall foreign MNE traders were able to increase their presence and market share in Uganda (Ponte, 2002). Consequently, the export sector has become increasingly concentrated and dominated by five companies, all of which are subsidiaries of multinational trading companies (Newman, 2009). Together with the increased participation on derivative exchanges by international coffee traders affiliated to multinational trading houses, the structural reforms undertaken in Uganda have changed the ways in which prices are determined, and information transmitted to producers (Newman, 2009; Nissanke, 2010). Prior to the liberalisation process, both private and cooperative marketing channels were controlled by the Ugandan coffee marketing board. This meant that coffee was purchased at fixed producer prices, with fixed margins. Price risks were essentially borne by marketing boards which performed a price stabilisation role. Nowadays international coffee exporters within a vertically integrated operation conduct their transactions on a ‘price to be fixed’ basis, making use of hedging instruments in order to maintain purchase prices. Orders for the purchase of coffee futures and options are placed by international traders, the timing of which can depend upon the exporter taking a position on how prices in New York or London are expected to evolve. On the other hand, purchase prices within Uganda are maintained on a daily basis, or long, if world price fluctuations are not too severe (Newman, 2009: 554).

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Upstream actors, such as local traders who supply exporters, rely on spot markets and are therefore exposed to price fluctuations. They have no access to contractual arrangements that can limit their exposure to short-term price movements. Therefore these traders have in turn sought to purchase coffee at low but stable prices so as to maintain their margins, which has resulted in reductions in the farm-gate price of coffee (Newman, 2009). Some links of the Ugandan coffee GVC, such as the exporter–trader nodes which are now dominated by intra-firm trade, have therefore become much tighter since liberalisation. Others have become much looser, with producers becoming increasingly detached from the sale of their product. This suggests that the conventional portrayal of the coffee GVC, as being characterised by a market-based structure of governance, whereby the complexity of the transaction is low, is no longer valid. Arguably the Ugandan coffee GVC now exhibits tendencies more characteristic of a captive value chain; this is because of low supplier competence in the face of increasingly complex transactions and a transactional dependence on lead firms (Keane, 2012). That is to say, the process of reform undertaken in Uganda as part of its liberalisation process has influenced value chain governance structures, but not necessarily in Uganda’s favour. In the case of Tanzania, as a result of liberalisation, and in order to increase market share, MNC exporters have diversified vertically into processing, domestic trade and in some cases even estate production (Ponte, 2002). However, although MNCs are estimated to control more than half of the export market (through direct subsidiaries and other finance arrangements with local companies) cooperative unions still exist and can purchase coffee from auction to export. That is, Tanzania still operates a coffee export auction system (as it did prior to liberalisation). This means that world coffee prices are transmitted through the auction to local marketing actors, but very short-term movements are mitigated by the fact that the auction takes place once a week during the selling season (Newman, 2009). The resultant effect is that green coffee remains the property of individual farmers until the auction. Although farmers still bear the entirety of the risk associated with price variability transmitted through the auction, the payment system means that individual farmers’, as well as cooperatives’, incomes are smoothed with a fixed initial payment on deposit of parchment coffee followed by the differences earned by coffee sales (Newman, 2009). The maintenance of an auction system in Tanzania has some benefits, but criticisms have been levied given that there is little or no competitive bidding: the majority of coffee that passes through the system is simply acquired by the same company that bought it domestically. Because of this, the Tanzanian coffee value chain has been characterised as having a “captive governance” structure using the hierarchy developed by Gereffi (Temu, 2001). This is because of the increased role played by lead firms within the sector. The main difference between the current situation compared to that prior to liberalisation is that private producers may sell directly to private exporters (or even be vertically integrated) and simply pass through the mandatory auction system, as protocol. In the past, cooperative unions used to collectively auction to private buyers/ exporters.

Upgrading  Experiences    There are two main routes for upgrading within the coffee sector for African LDCs. These have been most recently discussed by Stevens et al. (2013) and include the process and product route, and the functional route presented in Table 2.

• The first route involves increasing bargaining power within the chain by enhancing the attractiveness of the output to buyers (for example by moving into fair-trade or speciality coffee). ‘In other words, producing countries maximise the revenues associated with their current position in the GVC’ (UNECA, 2013: 156).

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• The second route involves undertaking domestically more of the steps in coffee processing (for example by roasting, marketing and distribution).

The first route essentially corresponds to process and product upgrading, but entails working with lead firms in the GVC – undertaking tasks that do not necessarily fall within the core competencies of lead firms. The second route involves wresting from the lead firms elements of their core competencies (Stevens et al., 2013).

Process upgrading for commodity exporters of coffee may entail investment in extension services to farmers, capacity building for processing, transport and storage, and domestic quality control systems. It underlies some companies’ success in catering to the top-end market, as they focus on growing practices, bean selection, handling and transport, roasting and packing (Kaplinsky and Fitter, 2004).

It is difficult to ascertain whether or not such processes in the case of Uganda and Tanzania have occurred without more up to date GVC case studies. There is greater available evidence on functional upgrading in the case of Tanzania in recent years, particularly compared to Uganda. The most recent evidence discussed by Stevens et al. (2013) shows that roasted coffee exports in the case of Uganda have been very volatile and marginal compared to unroasted, although there has been some growth since 2007. In comparison, roasted coffee exports from Tanzania reached 320,544 kgs in 2011, a nearly three-fold increase in volumes compared to 2001 (while unroasted volumes have fallen). The unit value of Tanzania’s roasted coffee exports also increased five-fold over the same period. The reasons for these different experiences of functional upgrading – moving from selling unroasted and unprocessed coffee towards roasted and processed coffee – deserves further attention in the GVC literature.

International trade in coffee has traditionally taken place in green bean form because roasted coffee needs to be processed near a consumption point so as to conserve its flavour (Stevens et al. 2013). Even if technical challenges can be overcome, the functional upgrading route ‘requires producing companies to supply within a very short delivery time, and have access to inputs and knowledge to blend different coffee types suitable for packed roasted coffee’ (UNECA, 2013: 157). The available evidence suggests that these constraints have been overcome to a larger extent in Tanzania compared to Uganda; the latter being a landlocked LDC, which suggests that geographical constraints such as distance to end markets are not easily overcome. Notably though, it is not clear to what extent donors have acted so as to relieve these constraints, as we assess in the following sub-section.

Donor  Assistance  In relation to donor assistance for commodity exporters, there is no mention of agriculture or the Common Agricultural Policy in the EU’s most recent communication on trade and development. As discussed by te Velde et al. (2012), this is a major omission. The most recent EU Action Plan on commodities focuses on Commodity Dependent Developing Countries (CDDC) and refers to countries that are particularly exposed to price variability in international agricultural commodity markets and thus share certain development challenges. As argued by Nissanke and Kuleshov (2012), however, a more analytically rigorous approach to identifying CDDCs could provide a sounder basis for identifying countries that require particular assistance in relation to commodity-specific issues. Since the demise of the ICA, donors have generally advocated use of market mechanisms for managing commodity price risks. Institutions such as the World Bank have encouraged primary producers to use market-based and commodity-linked financial hedging instruments by participating in futures and derivative markets as an effective mechanism to manage price risks (Nissanke and Kuleshov 2012). However, the evidence suggests that use of these instruments has proved costly and ineffective. Issues such as high transaction and financial costs, skewed access to information and high technical barriers make it difficult for producers to use these instruments. Since it is has proved difficult in many instances to create a regulatory oversight agency required for liquid, functioning markets in a short timescale, local farmers and traders have been forced to use international intermediaries or

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branches and subsidiaries of TNCs in order to access these instruments which further pushes up the cost of hedging.ix Implementation strategies advocated by donors to date have effectively amounted to market surveys and generic agricultural development recommendations. A focus on competitiveness has not significantly improved outcomes. This point is notable given that GVC analysis takes as its starting point asymmetric trading relations between LDCs and developed countries. A narrow focus on increasing the ‘competitiveness’ of existing commodity exports in world markets ignores the nature of trading relations, how they are governed and how a shift in these structures could subsequently alter the returns for existing products, as well as reduce price risks. This begs the question: are donors missing the point of GVC analysis? As the example of Tanzania shows, supporting domestic marketing institutions may have some beneficial effects for producers through acting as a counterweight and mediator of the power exercised by lead firms, as well as serving to smooth producer incomes. Where domestic marketing institutions have been abolished as in the case of Uganda, price risks seem to be borne disproportionately by producers. 2.2     LDC  Experiences  of  Engaging  with  the  Horticulture  GVC    Context  Despite the challenges of engaging with hierarchical and buyer driven GVCs such as those in horticulture, which are characterised by stringent standards (public and private), Ethiopia’s cut flower industry has recently emerged and successfully penetrated EU markets. Ethiopia started to enter the flower export market in the mid-1990s at the time when the EU market was much more demand driven, and as a result increasingly stringent standards and regulations had been instituted. Despite this, in less than a decade, the country became the fifth largest non-EU flower exporter to the EU market and the second largest exporter from Africa, surpassing all other exporters except Kenya (Gebreeyesus and Sonobe, 2011). This section discusses how this was possible, and what it has meant for LDC firms participating in the horticulture GVC in Ethiopia and their upgrading processes. The trigger factors for the emergence of the flower industry in Ethiopia, as discussed by Gebreeyesus and Iizuka (2010), included a combination of several factors including natural endowment and generous government incentives for all export activities created favourable conditions compared to neighbouring flower exporting countries (e.g. Kenya, Zimbabwe and Uganda). Moreover, because Ethiopia is a LDC, exports enter the EU market on a duty-free, quota-free basis under the Everything But Arms regime (EBA). This means that Ethiopia’s market access is currently perceived to be more “secure” than that of neighbouring (major) horticultural goods exporters such as Kenya. This is because Kenya continues to negotiate with the EU for an Economic Partnership Agreement (which unless signed could result in tariffs being applied in the EU market on some of its major horticulture exports).x Governance  In the typology of GVC governance structures developed by Gereffi et al. (2005) the horticulture GVC is characterised as being hierarchical; this typology is derived from examination of trade between the UK and Kenya. To the best of our knowledge there are no available studies which have defined the governance typology of the Ethiopian cut flower GVC. However, there are some general features which may lead it to be termed hierarchical. This is because the lead firms within it exert a considerable amount of control on their suppliers and there is a high degree of explicit coordination. The industry is characterised by a dominant role of Dutch foreign investment in farms, Dutch trade auctions dominate the export trade, and Dutch development cooperation plays an important role in the development of the sector. In 2011, 90 percent of Ethiopia’s exports of cut flowers (HS060310) were destined to the Netherlands (Stevens et al., 2013).xi The government decided to promote the sector and set five-year targets. It provided a generous support package, identifying three areas for intervention: transport coordination

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(air freight), access to land, and provision of long-term credit. Dutch development cooperation was useful in this respect. Moreover, the government engaged in activities to attract domestic and foreign investors, including Dutch. Entering this market required a multitude of capabilities at firm, sector and national levels, many of which were absent or weak domestically. Gebreeyesus and Sonobe (2011) have explored how capabilities in the Ethiopian flower industry were formed and took shape in an effort to link to the EU market while meeting the complex standards and trading procedures this market requires. They document how after attempts in 2002 by entrepreneurs to enter the market were unsuccessful, producers formed an association called Ethiopian Horticulture Producers and Exporters Association (EHPEA) and started to lobby for government support (see also Embassy of Japan in Ethiopia, 2008). As discussed by the National Federation of Farm, Plantation, Fishery and Agro-Industry Trade Unions of Ethiopia (NFFPFATU, 2010) there are no officially communicated data on the number of licensed projects and operational flower farms, although Mulu and Tetsushi (2009) estimated that there were around 67 operational farms in 2008. According to a recent survey undertaken by the NFFPFATU (2010) the majority of firms are foreign owned. Given that most investors in the sector are Dutch, the EHPEA effectively represents their interests. Nevertheless so as to improve the reputation of the industry in the world market, the EHPEA has developed an industry wide Code of Conduct. The association has also contributed to the industries development by diversifying and expanding market destinations. In this regard, the private sector has taken a lead role through the association, whilst the government has played a more supportive role. Upgrading  Experiences  The main routes towards upgrading in the cut flower GVC include doing things better and faster, therefore upgrading processes. They also include doing things differently, for example, moving from supplying cut flowers towards developing bouquets and a flower “package”. Upgrading products in this way may also mean moving from supplying intermediaries (with cut flower) towards directly supplying retailers and buyers (with bouquets). The available evidence suggests that upgrading has mainly occurred in Ethiopia through the process route.xii Given these processes, Melese and Helmsing (2010) conclude that the endogenisation of the industry in Ethiopia is taking place, as opposed to enclave development. It is generally acknowledged that training and turnover of skilled workers has been the main channel of knowledge diffusion in the sector. It is noted by Gebreeyesus and Sonobe (2011) that in the initial period there was acute shortage of skilled manpower specialised in flower production and marketing, in the domestic market. Hence, most early entrant farms hired expatriates particularly from neighbouring Kenya. Turnover of skilled workers became one of the main channels for the diffusion of knowledge. Poaching of experienced workers increased with the accumulation of some knowledge among the early movers and increased new entry. In 2007, the government, with the support of the Dutch government and the involvement of the industry association, launched a long-term capacity building project. The project includes upgrading one of the state universities (Jimma University) to train specialists in horticulture at undergraduate and postgraduate levels. Efforts also have been made to establish a Horticulture Practical Training Centre that will provide vocational training for all levels of industry employees (two have been established). Because the capacity of the crop Protection Department at the Ministry of Agriculture and Rural Development that is responsible for phytosanitary monitoring, surveillance and certification is considered weak, the government with its partners initiated a capacity building program to strengthen the Ethiopian Phytosanitary service. These activities are examples of attempts to institutionalise the learning experiences drawn from participation in the cut flower value chain. Although Dutch FDI has little direct relationship with domestic Ethiopian farms, and hence has little interest to share technologies, as analysed by Melese and Helmsing (2010) there is

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joint collective action on non-core activities, notably (air and land) transport. The government’s role in helping firms to upgrade has been crucial, particularly in coordinating air transport between exporters. This is in addition to its provision of land and long-term credit at generous terms. However, some of the essential infrastructure and services (for example cool chain and phytosanitary services) remain underdeveloped, and the link between the industry and public R&D is weak (Gebreeyesus and Sonobe, 2011). Although it is clear that interventions made by the government, including working with donors and facilitating inward investment in the sector, has enabled Ethiopia’s entrance into the cut flower industry it is not yet clear if Ethiopian firms have been able to upgrade their relative position over time. For example, Gebreeyesus and Sonobe (2011) test the hypothesis of whether firms mainly engaged in direct sales are: more likely to produce a wider range of varieties; to have farms that are larger in size and more vertically integrated; and to have better human and logistical capabilities. They found all these hypotheses to be supported by the evidence. However, it is not possible to disentangle whether the marked difference in the capabilities between the firms operating through the two marketing channels (direct sales, or those through an intermediary) were present upon entry (and so came through FDI) or have occurred as a deliberate result of efforts to upgrade (which may have involved local firms).

Donor  Assistance  Donors have helped in other capacity building activities such as training (degree programs and practical training centres on horticulture), quality control and certification services (Gebreeyesus and Sonobe, 2011). However, some of the essential infrastructure and services (for example cool chain and phytosanitary services) remain underdeveloped, and the link between the industry and public research and development (R&D) remains weak and require further investment. The conclusion reached by Melese and Helmsing (2010) is that the triple role of the Dutch in Ethiopian floriculture (as investors, an end market and as a donor) goes beyond enclave formation, and is helping to create a win-win situation for both countries. Ethiopia benefits, since the Dutch help to establish a new export industry which generates considerable employment and foreign exchange, but at the same time the Dutch benefit from the three roles: along with the prosperity for the Dutch FDI, the Dutch are building a sustainable, high-quality, supply base for their world-leading flower auctions. The experience of Ethiopia does however suggest some risks related to the distribution of power along the value chain; these must necessarily be mediated by governments, so as to ensure that local firms can benefit from GVC participation both at a point in time, but also over time.

2.3     LDC  Experiences  of  Engaging  with  the  Textiles  and  Clothing  GVC   The textile and clothing (T&C) GVC is one of the most trade-regulated manufacturing activities in the global economy (UNECA, 2013). Because most-favoured-nation (MFN) tariffs are generally quite high, trade preferences (whether non-reciprocal or within a free trade area or customs union) in end markets play an important role in shaping global trade patterns (Ibid). As discussed by Stevens et al. (2013), the introduction of AGOA in 2000 and, especially, the derogation to its rules of origin allowing ‘lesser developed countries’ to use non-originating fabrics in their clothes without losing preferences, provided a major boost to LDCs participation in the T&C GVC.

Under the Lomé and Cotonou Agreements the EU had offered for over three decades duty-free quota-free access to SSA clothing exports, but under rules of origin that limited uptake mainly to knitwear (Stevens et al., 2013). AGOA provided the first major incentive to woven clothing exports from SSA and this led to significant clothing exports by a limited number of ‘lesser developed’ African economies. The EU followed the lead of the US given a similar relaxation of the EU rules of origin requirements on woven clothing under EPAs and the GSP, notably for LDCs.xiii

According to Staritz and Frederick (2011) there are three main groups of foreign companies that can be identified in apparel GVCs:

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• first, brand manufacturers, largely from the United States and Europe, have

established regional and global production networks largely via FDI; • second, faced with quota restrictions, rising labour costs and high demands from

global buyers transnational producers - initially based in East Asia (i.e., Hong Kong, Taiwan and Korea) but more recently also in other Asian countries (i.e., Singapore, Malaysia, China and India) and the Middle East - have developed triangular manufacturing networks;

• third, a group of regionally-based foreign investors that is more diverse and regionally embedded, organise production networks within a region, e.g. South African and Mauritian investors in SSA.

The different types of foreign investors differ with regard to their origin (high-income versus middle-income country), location (regional versus global) and most importantly the degree of integration/internalization versus specialization/externalization with important implications for upgrading prospects for supplier firms. In this section the experiences of two LDCs - Cambodia and Lesotho – are discussed. These two countries have managed and engaged with different types of investors involved with the T&C GVC sector with implications for their firms upgrading experiences. Cambodia     Context  Cambodia was drawn into the buyer-driven garment GVC during the mid-1990s based almost entirely on inward investment creating a new industry (Natsuda et al., 2010). Although Cambodia’s pattern of industrial development – led by a labour intensive industry – is similar to that of neighbouring countries in East Asia, the difference is that it has been pursued without a strong industrial policy in place (Yamagata, 2006). Despite hosting the industry for a decade, local linkages with firms remain limited and over 90 percent of firms are foreign owned (Keane, 2012). It is only recently that the formulation of an industry policy has been seriously considered in Cambodia. Governance  Foreign direct investment was attracted to Cambodia during the early 1990s from other East Asian partners, including Hong Kong, Taiwan and more recently, China, because of the locational advantage conferred to it as a result of the MFA and subsequently the Agreement on Textiles and Clothing (ATC) regime. Other factors included the favourable conditions created for investment within country, such as the permitting of 100 per cent foreign ownership, the ability to import capital goods without duty and other tax incentives. This has meant that Cambodia has become increasingly integrated within the regions’ production network for the T&C GVC. This is where Cambodia is supplied with raw materials (since it has no domestic textile industry), which are then processed (known as ‘cut, make and trim’) and then supplied to an intermediary for final shipment to the destination market. Because of the structure of governance of the garment GVC, parent companies often operate garment factories in other countries too, which means that orders are relatively easy to strategically reallocate (Natsuda et al., 2010). This means that the T&C GVC in the case of Cambodia operates very much in a hierarchical way. Producers in Cambodia have very little ability to exert control over forward linkages; since inputs are imported from parent companies, there are no backward linkages in Cambodia. A low level of domestically owned factories reduces bargaining power, leverage and autonomy in terms of negotiating and attracting orders, since these decisions are made by parent companies located in headquarters outside Cambodia (Natsuda et al., 2010). Government intervention in the sector has been largely limited to responding to the demands of the sector (notably in relation to tax incentives). This means that there has been little discernible change in terms of how the GVC is governed in recent years, based on the available evidence.

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Upgrading  Experiences  As discussed in detail by Stevens et al. (2013), the T&C GVC literature has given much attention to whether different types of buyers are likely to facilitate different types of upgrading (Schmitz and Knorringa, 2000; Navas-Alemán, 2006). However, rather less attention has been paid to how the ownership structure of firms can influence upgrading trajectories, despite shifts in the different types of investor that have emerged in recent years (Kaplinsky and Wamae, 2010). Nevertheless, it is increasingly recognised that the T&C GVC is driven by different types of lead firms, operating within production networks, and feeding into different final markets, with implications for firm-level upgrading processes. As in the case of horticulture, routes towards upgrading firms within the T&C GVC include process and product upgrading, as well as functional upgrading. This latter route involves obtaining more functions within a given value chain. In the case of Cambodia and its participation in the T&C GVC it may mean moving from being a marginal supplier - one that focuses solely on the cut, make and trim (CMT) part of production - towards becoming a full package supplier, and therefore directly supplying retailers.

For example, woven garment production comprises cutting and trimming fabrics and finishing the product. The end product could either be exported directly to the retailer or, if further finishing is required, it may be sent to a brand marketer or sourcing intermediary for further work. Retaining all functions within country is a type of upgrading. This is because this final stage of production may include ironing, packing and adding final labels, including that of prices, so that the final product can then be sent directly to retailers. It means not only obtaining more functions in the GVC, but also taking responsibility for final delivery.

To date, there is rather limited evidence of Cambodia having moved towards becoming a full package supplier (Keane, 2012). There is however some evidence of product, and to some extent process upgrading. A strategy of targeting a higher value niche market, based on marketing the quality attribute of continued adherence to labour standards was pursued by the industry in Cambodia. This was undertaken through the support of the International Labour Organisation (ILO) Better Factories Cambodia (BFC) program. This strategy was pursued in order to secure the future of the industry at a time when Cambodia feared that increased competition would result from the removal of MFA restrictions on large exporters such as China. Cambodia’s National labour law (1997) places a legal obligation on manufacturers to adhere to ILO core labour conventions. However, the BFC program goes beyond these standards.xiv This strategy was pursued after the end of the ATC so as to pursue a higher niche market and secure Cambodia’s position in the post-quota environment. However, as argued by Natsuda et al. (2010), although labour standards in Cambodia are generally deemed to be a positive competitive factor in the Cambodian garment industry - attracting large buyers to source from Cambodia, rather than other suppliers - adherence has not necessarily improved the global position of the industry, in terms of facilitating movement up the value chain. This is because, although Cambodia has targeted a more sophisticated niche market, it has remained at the lowest – CMT – node of the garment value chain, and has been unable to move up into a more secure supplier position, through upgrading and obtaining more functions in the value chain (Gereffi and Frederick, 2010; Keane, 2012). Donor  Interventions  Donor interventions related to the T&C GVC in Cambodia have focused not only on the ability to get intermediate goods in and final products out of Cambodia with ease, through investing in trade facilitation measures including customs reform, but also on upgrading the node of production through improving working conditions. The end result has been the development of skills in this sector and resultant expansion in formal employment opportunities. The development of a skilled formal labour market may have helped to increase the attractiveness of Cambodia as a manufacturing base for other types of light manufacturing, such as electronics.

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There are however concerns related to the ability to institutionalise the learning experiences obtained from engaging with the textiles and clothing industry in Cambodia. There have also been some challenges related to accompanying institutional development. For example, strict adherence to all ILO core conventions, coupled with high worker awareness and weak institutions, has meant that the “freedom to associate” article has been liable to abuse on a partisan basis. This has created problems for some garment firms, with an average of two unions operating per factory (Keane and Ratha, 2009). In some cases, although labour disputes were taken to the Labour Arbitration Council (LAC) and a ruling made, enforcement mechanisms remain weak. The LAC is recognised by the Ministry of Labour, but no commercial court operates at present in Cambodia. Although interventions in the T&C GVC in Cambodia have assisted the bargaining power of workers vis-à-vis their employers, they have not addressed the need for improved negotiating strategies between the state and investors in the sector (and others). Interventions made within the sector in Cambodia to date have effectively amounted to enhancing its marketing potential within existing GVCs. Lesotho     Context    Lesotho’s export success is based on the existence of an apparel-exporting industry pre-AGOA owing to historic links with South Africa and Taiwan and the MFA quota regime (Lall, 2005). In the 1980s, South African firms relocated plants to Lesotho to avoid sanctions on overseas exports by the apartheid regime but these investments were relatively small scale (Gibbon, 2003; Salm et al., 2002). However, the apparel industry only really took off with the coming into being of AGOA in the US market for which Lesotho became eligible in 2000. However, since the end of the MFA and the ATC and therefore the transitional WTO quotas on Chinese exports, the relative attractiveness of Lesotho as a production base has declined. More recently South African investors have re-appeared in Lesotho for reasons beyond preferential market access. This has resulted in the development of a new apparel VC driven by South African retailers, operating under very different dynamics from the US retailer-driven VC in which the Taiwanese firms are integrated (Staritz and Morris, 2011), as we discuss below.      Governance  As has already been mentioned in the case of Cambodia, the T&C GVC is one of the quintessential hierarchical GVCs. This means that the lead firms within it exert considerable control over their suppliers and are often in very powerful positions to dictate prices and quantities. Asian investors in Lesotho are generally considered to have acted in a rather footloose way: relocating to take advantage of preferential market access and leaving once these advantages were eroded. Most of the growth in Lesotho’s T&C exports since 2000 under AGOA came from Asian investors. However, since 2005/6 patterns of investment in the sector have changed. As explored by Staritz and Morris (2011) the more recent re-entry of South African apparel manufacturers into Lesotho has resulted in the emergence of a new apparel value chain, driven by South African retailers operating with different dynamics. Unlike Taiwanese firms, South African investors were not interested in using Lesotho as a production base to take advantage of AGOA for their US exports. Instead, the investment was driven by three motivations: 1. to take advantage of the lower-cost operating environment (labour and overhead cost) in

Lesotho; 2. to escape the rigid and inflexible labour market conditions in South Africa; 3. to gain duty-free market access through the Southern African Customs Union (SACU) to

supply retailers in the South African market.

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The entrenchment of this regional South African VC has been accelerated by the South African government’s imposition of quotas on Chinese apparel imports in 2007 and 2008. Although motivated by a desire to protect domestic South African manufacturers, this policy has led to import diversion as South African retailers have searched for regional suppliers such as Lesotho (but also Swaziland, Mauritius and Madagascar) (Morris and Reed, 2009; Morris et al., 2011; Kaplinsky and Wamae, 2010). This has resulted in what seems to be a more relational type of governance, as opposed to the more hierarchical structure associated with Asian investors, as we discuss in the following sub-section.

Upgrading  Experiences    

South African manufacturers generally own only production plants in Lesotho, with their head offices - and occasionally also further production plants - in South Africa. The production plants in Lesotho also largely perform basic CMT functions with higher value-added functions being performed in the head offices in South Africa. Despite this, some of the firms located in Lesotho do have more decision-making power and even their headquarters locate there, which generally means more productive capabilities residing there. As South African firms do not act globally and generally do not own production plants in other countries, their plants in Lesotho are not as easily substitutable as are plants of transnational producers. Further, South African apparel manufacturers aim to transfer further production as well as some higher value adding pre- and post-production functions (e.g., pattern making, fabric management, logistic coordination), from South Africa to Lesotho. This is as they are pushed out of the South African operating environment by high costs and labour market rigidities, and pulled to Lesotho by the lower operating costs and the proximity of these manufacturing locations to their operations in South Africa. All of this means that there may be new opportunities for Lesotho to functionally upgrade in the future. However, there will be a need to institutionalise learning processes. There are some cases of donors assisting in this objective, as well as with regards to process upgrading, as we discuss below. Donor  Interventions    In a review of Aid for Trade interventions in Lesotho, Bird (2009) finds that overall interventions have helped Lesotho to maximise gains from trade preferences (i.e. AGOA) for inclusive growth and poverty reduction. However, the case study concluded that Lesotho’s textile and apparel industry remained in a precarious position, as attempts to diversify the markets for textile and apparel exports had seen limited success (except in the case of renewed South African interest in the sector). This study found that reliance on the US market had rendered Lesotho’s textile and apparel industry vulnerable to changes in the international trade environment (e.g. removal of AGOA preferences in 2015, falling demand in the US). Despite this, the aid provided to use preferences effectively had other long-term effects; some of which had helped Lesotho to tap into the emerging regional value chain driven by South Africa. Therefore the value chain-specific aid provided has had other supply-side effects. Some of the successful interventions discussed by Bird (2009) included the following: • Trade policy and regulations: Providing negotiations support around the extension of

AGOA and the Southern Africa Customs Union (SACU) Duty Credit Certificate Scheme (DCCS).

• Building productive capacity: This Aid for Trade programme improved the productive capacity of textile and apparel firms in Lesotho mainly through its training programme. It also mitigated declines in productive capacity resulting from high rates of HIV/AIDS in the workforce through the Apparel Lesotho Alliance to Fight AIDS (ALAFA) programme. By focusing and coordinating the Lesotho National Development Corporation’s (LNDC’s)

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investment strategy, it has helped the garment and textile sectors to utilise and maximise existing in-country productive capacity.

• Trade development: Through technical assistance, this Aid for Trade programme has provided support in terms of investment promotion (through targeted trade visits both to the US and to South Africa), market analysis, e-commerce and business support services (e.g. training).

Interventions specifically targeted at upgrading have been directed at the node of production. These include improving productivity or quality directly, through training or investment. Supply-side capacity has been enhanced more generally, as a result of interventions to improve the general health of the workforce and reduce the prevalence of HIV/AIDS in Lesotho. 2.4 Services  Context  As summarised by UNCTAD (2013), LDCs consider tourism an important sector for economic progress and poverty reduction. The actual impact on development, however, depends on how the sector is managed. The development of a tourism strategy needs to ensure that the right regulatory and institutional frameworks are put in place. Its success depends on whether tourism generates employment opportunities, creates linkages – in particular with agriculture and service-providing sectors – and stimulates the development of basic infrastructure through the construction of roads, ports and airport facilities, from which other sectors of the economy can benefit. Along with horticulture and textiles and clothing exports, the development of the tourism sector has formed the basis of export diversification strategies for many LDCs. This section discusses the experiences of Tanzania and Vanuatu in terms of engaging with the tourism GVC and upgrading the position of firms and workers that are engaged with it. These LDCs are positioned very differently within the tourism sector, with different challenges related to connecting with their customers: Vanuatu is landlocked whereas Tanzania is not. As already mentioned, but worth repeating, the concept of GVC governance related to services such as tourism also remains underdeveloped. To the best of our knowledge there are no available GVC studies on the tourism sector in Vanuatu. Tanzania   Context  The term pro-poor tourism entered the mainstream around 2000, the objective being to increase the net benefits for the poor from tourism and to ensure that growth in tourism contributes to (absolute) poverty reduction. The focus of pro-poor tourism interventions varies from one private enterprise seeking to expand economic opportunities for poor neighbours to national programmes enhancing participation by the poor at all levels (Ashley et al., 2001). The value chain approach has been a useful approach used by researchers working with donors to design interventions in the tourism sector so as to improve outcomes for recipient countries. As discussed in detail by Mitchell et al. (2009), adopting the value chain approach towards analysis of the tourism sector is important because it is a significant driver of the economy: in 2008 it is estimated that foreign tourists contributed US$1.1billion of foreign exchange – nearly 33% of all the goods and services sold by Tanzania abroad (Ibid). Despite impressive recent economic performance, however, Tanzania remains an LDC. Governance  Although the Government of Tanzania recognises the potential of tourism to contribute to the growth of the economy and reduce poverty, there are also concerns that the full potential of the sector is not being realised. Moreover, many high-profile stories of extravagant rates of “leakage” (the tourism industry’s term for import content) have resulted in a public perception that there is little benefit from the industry. This is because packages

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are booked overseas with foreign suppliers, using foreign transportation and airline services. The results of value chain analysis carried out in the sector by Mitchell et al. (2009) across two of the main tourist trails – Mount Kilimanjaro and the Northern Safari Circuit - found the following: approximately 38% of a Mount Kilimanjaro climbing holiday package sold in Europe (including flights) accrues within Tanzania. When a tourist’s discretionary spending is included, the in-country share of total package cost rises to over 41%. Out of the total Northern Safari Circuit holiday package sold in Europe (including flights), 53% of expenditure accrues within Tanzania. When a tourist’s discretionary spend is included, the in-country share of total package cost rises to over 56%. Overall, the estimates made by Mitchell et al. (2009) suggest that each US$1 spent on a package holiday to Tanzania in Europe generates about three times the pro-poor impact of US$1 spent on a bag of Tanzanian coffee in Europe. Although critics would interpret the fact that Tanzania is only capturing about half of the GVC in holiday packages sold in Europe as “exploitation”, for other Tanzanian exports such as coffee this would seem substantial. Upgrading  Experiences    Interventions specifically designed to upgrade the relative position of the firms that operate within the mainstream tourism Tanzanian GVC have only been discussed relatively recently. Most of the strategies discussed by Mitchell et al. (2009) correspond to upgrading processes within the sector (e.g. skills of workers), as well as the tourism product (in terms of quality of service). These include

• In relation to the quality and availability of food supplied by local producers to tourist hotels, interventions could include improving farmers’ skills in technical areas (i.e. irrigation, packaging, etc.) and helping them to meet market requirements. Better linking producers with local markets such as tourist hotels would also require better physical and credit infrastructure.

• . Improvements related to training of the labour force could include the use of regulations so as to reduce the number of institutes providing low-quality training, investing in qualified trainers and developing a qualification framework and accreditation system. The remuneration of trainers should be increased to attract more competent staff. Generally, the curriculum could be improved so as to better align it with the needs of the market. Although many hotels are providing in-house training, this should be formalised, improved and integrated within a national accreditation and qualification system. Starting from school aged children, a more positive attitude towards hospitality and tourism could be inculcated amongst the youth.

Donor  Interventions  Donors such as SNV, the Netherlands Development Organisation (operating in Tanzania since 1971), have for several years been working with the government, through the Tanzanian Tourist Board and the Tourist Division to develop policies and practices that enable tourism to contribute significantly to poverty alleviation. This has included the commissioning of value chain analysis designed to determine who benefits from tourism at the destination by, literally, tracing the tourism dollar. The recommendations put forth by Mitchell et al. (2009) for donors suggest a shift in the approach away from supporting cultural tourism projects towards engaging with the mainstream tourism GVC. This is because interventions targeted at cultural tourism projects per se have not always been well integrated into the mainstream tourism GVC, and have subsequently remained peripheral. An approach that focuses on the mainstream tourist GVC would entail enhancing the participation of a range of actors across various nodes of the mainstream tourism value chain, from porters to farmers, to traders of arts and craft. Vanuatu      

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Context  While the pro-poor tourism approach has not been specifically adopted in the Pacific, many governments there have nevertheless pursued the growth of their tourism sector, particularly in response to disappointing returns from investment in agricultural commodities (Scheyvens and Russell, 2009). Despite this pursuit, however, as in the case of Tanzania, there remain concerns regarding the returns from the sector. Whilst it is recognised that undoubtedly tourism has contributed to foreign revenue generation and created thousands of jobs in the region, there remain concerns that:

a) the benefits of tourism do not reach the poorest groups in society; and b) South Pacific countries could secure greater benefits from existing tourism flows if

more attention was paid to strategies such as fostering local ownership (including partnership arrangements) and developing backward linkages.

Governance  The nature of tourism development varies considerably across the region, e.g. with countries in the South Pacific such as Fiji, French Polynesia, Vanuatu, the Cook Islands and Samoa developing it into a major industry. In LDCs such as Vanuatu the tourism industry is foreign-dominated and centred around resort-style development. That is, the industry is governed predominantly by foreign firms and not particularly well integrated with the rest of the economy, at the current time, given the nature of its enclave development. Upgrading  Experiences  Previous strategies to increase participation in the tourism value chain and its resultant poverty impact have centred on alternative tourism development, such as attempting to involve communities directly. This experience is similar to that of Tanzania. These initiatives often failed, however, as a lack of entrepreneurial/business experience among local populations and poor access to credit has inhibited the success of these enterprises. Because of this, it has been concluded there is more potential for delivering benefits to the poor from engaging the larger private sector businesses such as resorts (Scheyvens and Russell, 2009). Donor  Interventions  The South Pacific Tourism Organisation (SPTO) formed in 1986 used to be supported by the European Union. However, it now relies largely on funds from member governments and the private sector (the reasons for this change are not known). It is largely involved in encouraging further investment in the sector and engaging in marketing activities. It remains the region’s key tourism body and provides the following services:

• advising member governments on tourism policy; • facilitating foreign investment; • convening regional meetings for member countries and tourism ministers; • providing a policy platform for the industry; and • developing and coordinating regional marketing.

The support provided by the EU to assist in the development of SPTO has been praised by some since it “brought economies of scale to bear on tourism development and promotion…and provided a wide range of materials and services which would have been beyond the scope of any one individual country” (Sofield, 2003: 187). However, others have criticised the increasingly “industry-first” focus of the SPTO and linked this to a lack of policy ownership as a natural concomitant to aid dependency (Scheyvens and Russell, 2009). The problem in terms of regional strategies to enhance the developmental effect of the tourism GVC in the Pacific is that larger businesses often reside in the larger islands within the region. All landlocked, or small island LDCs face similar challenges in terms of regional initiatives intended to overcome challenges related to their small geographical size. They are at risk unless more integrated strategies can be developed that are marketed on country specificities – which would require LDC companies and governments to have an effective voice within the private sector organisations that represent their businesses and interests.

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3 Linking Aid for Trade to Global Value Chains 3.1 Translating trade analysis into aid needs As the discussion in Section 2 has shown, current donor interventions linked to LDCs participation in current GVCs generally focus on the node of production (process and product upgrading). It is possible to link some of these interventions to AfT categories. Keane (2013) identifies a range of possible market failures in GVCs which can be read as a partial agenda for aid interventions, and translates these into AfT categories (Table 3). With the exception of coordination failures, all others broadly correspond to interventions at the node of production within GVCs. Table 3: Market Failures Affecting Entry and Participation with GVCs, and Responses

Type Examples Responses AfT Category

Coordination Externalities, complementarities

ignored; linkages not exploited; no policy

coherence

Capacity building for industrial

policy

Trade Development; Trade Related

Infrastructure; Building Productive Capacity

Technology: Developing,

adapting and adopting

Incomplete and imperfect

information; network externalities

Promotion of technology transfer and

adoption

Trade Development and Trade Related Infrastructure

Skills formation Externalities, imperfect

information

Coordination and/or subsidies

for training

Building Productive Capacity

Environment: Protection,

conservation, cleaner

technologies

Negative externalities not accounted for

Product and process

standards and regulations

Trade Policy and Regulations

Source: Adapted from te Velde and Morrissey (2005) The difficulty with adopting a market failure approach towards designing within the context of GVC analysis is that the approach takes as its starting point imperfect markets. Overall the results of the case-study analysis suggest that interventions made by donors working with the government in Ethiopia have been most successful in terms of resolving coordination issues; these interventions have included building the capacity of institutions so as to develop vocational skills and training. This has been in addition to support for adherence to product and process standards. This is because interventions have played not only a central role in enabling and expanding participation in the horticulture value chain – which has developed rapidly - but also helping to institutionalise resultant learning processes. The particular challenges for small island states and landlocked LDCs, including Vanuatu, in using regional investments in infrastructure to improve their participation in services GVCs such as tourism are significant. This is because there is now new evidence on the importance of trade costs that affect the level, composition, and direction of trade. We summarise some of this new evidence and how it relates to LDCs participation in current and future GVCs below.

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3.2 New Evidence on the Costs of Trading Work at the World Bank (Arvis et al 2013) has confirmed what has been found in a variety of regional and bilateral trade studies, that trading costs are higher for developing countries than for developed. Worse, they find that the differential is increasing; this effectively means that the disadvantage of developing countries in trade is increasing. The principal problems appear to be in maritime transport and logistics. A study of the effect of the introduction of containers in maritime trade among developed countries (Bernhofen et al 2013) found that it increased bilateral trade flows on average by 320% (over the period of introduction, which is different for different countries). This effect is much larger than the authors (or others) could find from formation of free trade agreements or GATT membership. Looking at land transport, Bonfatti and Poelhekke (2013) have found that transport systems designed to take mining products to ports have a strong and continuing impact on the pattern of a country’s trade. This effect is even in the case of other goods because the existence of transport links creates a lasting cost differential between these routes and others. A careful comparison by Moïsé and Sorescu (2013) of the relationship between trade facilitation indicatorsxv and trade performance indicates what types of changes would have the largest impact on different types of countries. For the low income and Sub-Saharan African categories of countries, the largest impact comes from “harmonisation and simplification of documents” and/or automation of processes.xvi For low income countries, more documents and more time are required to trade. In the case of land-locked countries, not surprisingly, the greatest improvement comes from reforming transit procedures and agreements. They also found that the simple provision of information (ensuring that agreements and customs classifications and procedures are published on websites and easily available) is poorer in low income than in other countries. An important result is that the impact of “comprehensive trade facilitation reform” is greater than the sum of individual effects. The OECD (2013, pp. 231-2) has recently referred to the evidence on trade costs as obstacles to participation in GVCs. It identified these as trade barriers, investment barriers, weaknesses in infrastructure logistics and regulations and poor supply capacity. These results indicate areas where change is likely to have a strong effect on recipients’ trade and development potential; thus where targeted trade capacity building can have an important role. We discuss the extent to which donors are taking these new findings into account in the following section.

3.3 Review of GVC Related Donor Assistance

3.3.1   General  Findings  

The United Nations Industrial Development Organization (UNIDO) has recently updated its Trade Capacity Building Resource Guide (UNIDO, 2013). This now covers multilateral agencies, UN regional commissions, regional development banks, the twenty-four members of the OECD Development Co-operation Directorate (DAC), four other countries which are members of the European Union (EU) and six others which are members of the G20 members.xvii There are still some major donors who refuse to participate, including China and India. Nevertheless, this resource guide provides the best available view of what donors are doing on trade and GVC participation. Analysis of it enables us to examine the extent to which existing trade capacity building programmes are acting to support LDC existing and future participation in GVCs. Overall it is found that fewer than half the multilateral and regional donors discuss value or supply chains in their responses to UNIDO’s Guide. This could be viewed either as a glass

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half full or empty scenario; this is because there was not a specific question on this to donors, and not mentioning supply chains does not necessarily mean that an agency does not take account of them. However, where value chains are most frequently mentioned, it is in the case of the textiles and clothing sector. In fact, the T&C GVC is the only industrial sector frequently mentioned by the multilateral agencies for regional value chains. The United Nations Conference on Trade and Development (UNCTAD), the International Trade Centre (ITC) and the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) have programmes for regional cotton and textile chains. Although tourism, fishing and energy are also mentioned by donors, the most frequently mentioned sector is agriculture. For example, the Asian Development Bank (ADB) has a programme to promote regional supply chains in South Asia in agro-processing and in leather. There is no indication that these priorities are based on the identification of appropriate supply chains and stages of production for individual recipients; or that they meet the need for low income countries to avoid over-dependence on simple commodity production. Generally, an examination of the trade-related assistance provided by donors suggests that there remains a distinctly traditional view of how economic activity takes place. This is despite the shifts in global trading patterns emphasised in Section One of this report. Where value chains are mentioned it is most frequently in relation to the agriculture and textiles and clothing sectors, which suggests a narrow focus on existing productive structures, rather than potential. More bilateral compared to multilateral donors mention value or supply chains in their responses to UNIDO. Nevertheless, it is not clear to what extent an understanding of how GVCs operate has influenced their activities. This includes an awareness of the importance of looking at a country’s potential to enter a range of stages of production. In some cases, reference to value and supply chains seems to simply mean encouraging production for export. Some donors such as Portugal do have integrated programmes for production and marketing, but do not call this a “value chain” approach. Almost all the bilateral DAC donors which have sectoral priorities for assistance (20 out of 24) include agriculture as one (frequently the only) area of interest. Industry (which usually means textiles and clothing, the stereotypical first point of entry to an industrial value chain or a developing country,) trails at six mentions. The sectors covered by bilateral agencies thus seem even more concentrated in traditional areas than those of the multilateral and regional agencies. Only two of the non-DAC donors mention value chains: Argentina and Brazil. Their sectoral priorities also seem traditional: agriculture for both, with fish, textiles and clothing, and tourism added for Argentina. In the case of these countries, however, in contrast to many of the DAC donors, because their own economies have strong agricultural sectors, they have national expertise and experience in this area to offer as donors. There is one rather notable omission from a review of UNIDO’s Resource Guide. This is that the developing country donors included in UNIDO’s Resource Guide do not include many of the Asian countries most active in promoting value chains. This may help explain the lack of attention to chains in other sectors beyond agriculture and textiles and clothing. And the rather narrow focus of donors on traditional sectors of activity rather than stages of production.

3.3.2   Specific  Activities     Here we use a slightly expanded version of the WTO AfT classifications and summarise our review of donor interventions to support LDC participation in GVCs.xviii We do this initially for the following categories: infrastructure, and assistance with trade facilitation. These correspond to the importance of trade costs identified as a major constraint to LDCs participation with GVCs. We then cover the provision of market and trade information,

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strengthening countries’ ability to comply with international standards, and aid for increasing productive capacity. These all correspond to some of the major constraints identified related to upgrading LDCs participation within existing GVCs, and engaging with new ones. Infrastructure: There is no evidence that programmes are actually guided by an assessment of the needs of actual or potential value chains. There is, however, a strong interest in promoting regional links, so that the need to reduce the cost disadvantage of regional trade may be met. Trade facilitation: An examination of donor activities suggest that some donors focus particularly on barriers to regional trade. However, overall interventions in this area seem to be a smaller share of total efforts compared to in the case of infrastructure. Some donors have a comprehensive approach, targeting both regulatory barriers and private logistics, but, particularly among the bilateral donors, the principal focus for trade-related assistance is on improving the efficiency of customs administration. Market and trade information: Bilateral donors are more likely to offer market information than trade information. Although this rarely has an explicit value chain rationale, it is one of the few ways in which donors may be directly involved with private firms, and it may reduce the barriers to entering new markets or value chains. Regulation and standards; building capacity and institutions: Both legal and private standards can be important at every level of production and trade within GVCs. The growing number of transactions which can take place within a given GVC increases the complexity of production relationships. Some of the LDC case-studies discussed in Section One identified the quality of standards and regulations, and ability of producers to meet and adhere to these, as a major determinant of either entering or upgrading within GVCs. Assistance provided by donors under the category of ‘regulation and standards’ generally includes three stages: helping countries to bring their own regulations into conformity with international rules, helping them to improve their legal institutions, and training officials to deal with such rules. This type of aid is often provided by specialist agencies, some of which are either involved with setting the rules or committed to particular positions about the rules. Many of the other agencies, including bilateral donors, also see harmonisation of standards or meeting international standards as objectives in themselves, rather than as elements that could feature within an overall trade strategy.xix A few, however, also include assistance in learning to balance trade-related obligations with other national (or international) interests and in negotiating on rules and standards. This type of assistance can thus affect the external as well as the internal governance of value chains both positively and negatively for LDC producers seeking to enter as well as upgrade within GVCs. Sector specific, supply side interventions: Assisting countries to participate more effectively within as well as enter GVCs could focus on removing obstacles to trade or reducing their costs, but a strategic approach should also consider potential trade and its composition. Within the broad category of sector specific, supply-side interventions, some donors discuss their support in terms of GVCs. UNESCAP helps to identify opportunities for SMEs to participate in regional and GVCs. It also has programmes encouraging technology transfer. The IDB provides general support for the private sector, with a focus on developing GVCs. The United Nations Development Programme (UNDP) supports the development of regional value chains, especially in Africa and Central Asia. In particular, it encourages the production and marketing of sustainable commodities. A review of bilateral donor activities suggests that projects could provide a basis for participation in supply chains, but are not targeted at particular aspects of them.

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Trade policy development: Assistance to trade policy development is generally provided in four areas: design and implementation of trade policy; what donors consider to be the specific developing country issues in trade; support in trade negotiations; and assistance in managing the interactions between trade and other policies. Only UNIDO mentions value chains as a consideration in trade policy. It prepares studies on the policies needed to promote value chains in individual sectors and on industrial governance; this is as part of its programme designed to build the capacity of states to formulate and implement trade policy, as well as improve the quality of their exports. Other multilateral institutions such as the World Bank and UNCTAD provide both advice on trade policy and capacity building for countries to design their own policies. The WTO, ITC, FAO, UNDP, the United Nations Department of Economic and Social Affairs (UNDESA) and UNIDO provide training to officials. The ITC includes training for the private sector. Some of the specialised agencies - including the United Nations Environment Programme (UNEP), the UNWTO, the World Health Organization (WHO), the International Fund for Agricultural Development (IFAD) and the International Labour Organization (ILO) - provide training in their areas of expertise. Some bilateral support includes supporting negotiations with the donor. This general support may improve countries’ ability to influence conditions affecting their trade, but the mixing of trade capacity building with donors’ own trade policies illustrates the risks of asymmetric power in value chains; this also applies to donor support intended to facilitate investment. In both cases, governance capabilities need to be developed prior to negotiations; in practice, this is not always the case. 4. Conclusions and Recommendations  4.1 Special problems or needs of LDCs in GVCs The types of factor which influence the potential for value chains and the types of chain which emerge suggest several areas where LDCs are likely to be at a disadvantage. Their production remains concentrated in lower value added production. Many of the commodities in which they specialise are bought by a limited number of buyers, weakening their power in value chains. Their labour and other supply capabilities are low, and they often lack the public and private logistical facilities which attract investors. They often lack capacity in trade policy making, making it difficult for them to negotiate changes in the external trading environment for value chains. This puts them at risk of changes imposed on them by their trading partners. Their trade and aid are often tied to the same bilateral donors: this interaction increases the power asymmetry in both economic and political relationships. This last weakness makes trade-related aid from bilateral donors a problematic solution for their other needs. There are other needs that also seem to be unmet at the current time. 4.2 Are current Aid for Trade programmes identifying and

meeting needs?  Some multilateral and regional donors identify trade facilitation and physical infrastructure as areas of activity, but these are fewer than half the number engaged in trade policy development and legal and regulatory support (the areas which imply a view that policy matters most) or supply capacity (relevant when internal production costs matter). Among bilateral donors, the numbers offering support to trade facilitation and physical Infrastructure, in contrast, are as high as those for the policy and supply categories. New donors also have high coverage of trade facilitation, which on the face of it could be viewed positively.

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The results across all bilateral donors are, however, less favourable in the detail. Infrastructure and trade facilitation support does focus on the needs of LDCs identified, including road and sea transport and customs administration. And, like the multilateral and regional agencies, many bilateral donors focus particularly on developing regional trading links. However, bilateral donors are even more biased towards agriculture than the multilateral agencies, encouraging countries to remain in low value added goods. Assistance to manufactured exports is largely confined to apparel, and assistance to tourism has been irregular. The trade policy development activities of bilateral donors may create problems. Many are advising countries on their trade policies towards, and their negotiations with, the donor. Some who are investors themselves are advising countries on policies to make treatment of foreign investors more friendly. The Ethiopian horticulture case study in Chapter Two illustrates the close linkages that can occur between a donor and foreign investors. Some other activities which are listed as trade capacity building are also closely related to the interests of the donor country, including some projects which promote development information within the donor and corporate social responsibility in the donors’ foreign investors. There are risks of such activities because of unequal trading relationships. Not only may they fail to encourage market diversification, but donor-recipient relationships may influence the relative power within trade relationships. The multilateral agencies do not have the same direct conflicts of interest, but some have their own policies which are promoted as part of their trade policy capacity building. Activities to encourage and enable countries to participate more effectively in WTO negotiations on trade facilitation and standard setting and in other standards negotiations are increasing. These are likely to reduce LDCs’ disadvantages. The activities of many donors as reported in Sections Two and Three concentrate on improving supply by tackling weaknesses in the skills, organisation, and inputs needed to improve the quality and quantity of what is produced for export. These are clearly useful preparation for trading, but they arguably do not meet either the obstacles to trade which recent research has identified as binding, or the specific problems of entering as well as benefiting from GVC participation, over time. One of the main omissions of existing donor interventions is that they have not yet addressed the need to tackle limitations in LDCs capacity to functionally upgrade: to obtain and undertake a greater number of functions within a given GVC. The reasons for this are not clear. This type of upgrading may require lead firms to relinquish some of their control or at least recognise their trading partners as equally capable to undertake such functions where it makes sense to do so. 4.3 What changes are needed in Aid for Trade?  Overall, the results from this study suggest that LDCs participation in GVCs could be better supported by donors in the following ways: • Setting priorities among types of aid after identifying weaknesses in value chains; • Focusing more aid on reducing the costs of trading, particularly for landlocked and

island states; • Increasing attention to improving the operation of markets for LDC exports, particularly

those for traditional commodities; • Assessing physical infrastructure needs against potential trading patterns; • Extending sectoral aid beyond nineteenth century types of production such as

agriculture and textiles and clothing and recognising new opportunities in services trade as well as different stages of value chain participation;

• Shifting types of capacity building where there are high risks of conflict of interest into the multilateral and regional agencies;

• Increasing capacity development in choosing and negotiating standards to facilitate accessing and upgrading within GVCs.

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Appendix 1 Table 4: Multilateral and Regional Agencies and Bilateral Donors included in UNIDO Guide to Trade Capacity Building

Multilateral agencies DAC members

Food and Agriculture Organization Australia Argentina

International Civil Aviation Organization Austria Brazil

International Fund for Agriculture Belgium Indonesia

International Maritime Organization Canada Mexico

International Labour Organisation Denmark Russia

International Monetary Fund European Commission Turkey

International Telecommunications Union Finland

International Trade Centre France

United Nations Conference on Trade and Development Germany

United Nations Department of Economic and Social Affairs Greece

United Nations Development Programme Ireland

United Nations Environment Programme Italy

United Nations Industrial Development Organization Japan

World Bank Korea

World Health Organization Luxembourg

World Tourism Organization Netherlands

World Trade Organization New Zealand

Norway

Regional agencies Portugal

African Development Bank Spain

Asian Development Bank Sweden

European Bank for Reconstruction and Development Switzerland

Inter-American Development Bank United Kingdom

United Nations Economic Commission for Latin America and the Caribbean

United Nations Economic Commission for Africa

Other European Union members

United Nations Economic Commission for Europe Czech Republic

United Nations Economic and Social Commission for Asia and the Pacific Estonia

    Slovak Republic

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                                                                                                                         i  For example, a recent major research consortium titled ‘Capturing the Gains’ based at Manchester University includes a number of cross country studies across Asia, Latin America, and sub-Saharan Africa., Not all are yet published, but the same methodology is applied across all which will assist in comparative analysis.  ii WTO-IDE (2011). iii More broadly it is a non-equity mode of production. See UNCTAD (2011). iv  For example, preferential market access offered to African producers in the US market, in form of the African Growth and Opportunity Act (AGOA) has induced shifts in production from Asian countries to Africa, as we discuss further in Chapter 2 with reference to Lesotho. An earlier example was the growth of clothing in Mauritius, as well as Lesotho, for the EU market.  v Economic rents such as Schumpeterian (innovation) and non-economic rents, such as rents for learning are each “closely related…each with something to do with information and institutions” (Khan 2000:25). vi See Gereffi (1999), Lee and Chen (2000), Kaplinsky and Morris (2001), Humphrey and Schmitz (2001, 2004). vii As noted by Kaplinsky and Morris (2001). viii However, some of the theoretical advancements of new growth theory, which developed on the basis of the historical upgrading experience of the East Asian NICs are generally recognized as being particularly relevant for late industrialisers, such as learning and developing human capital. ix See Nissanke and Kuleshov (2012: 17) for a much more detailed discussion. x This is because unless an EPA is agreed, Kenya will export under the EU’s Generalised System of Preferences (GSP) regime, and not the EBA regime since it is not an LDC. xi  This is compared to 100 percent of cut flowers (HS060310) from Ethiopia being destined for the UK in 2001. In comparison, in the case of Kenya, in 2001, 62 percent of cut flower exports (HS060310) were destined for the Netherlands; 22 percent to the UK; and 8 percent to Germany; in 2011, 68 percent of cut flower exports were destined for the Netherlands and 14 percent for the UK (see Stevens et al., 2013).  xii See Stevens et al. (2013) for more information. xiii See Stevens et al. (2013) for more information. xiv The US-Cambodia Trade Agreement on Textiles and Apparel, signed in 1999, was put into place because of the dramatic increase in garment exports from Cambodia to the US that occurred during the 1990s, as production moved to take advantage of its preferential market access. It was the first trade agreement of its kind, and made increases in quota allowance for Cambodia contingent on labour standards (monitored by the ILO). xv Using the definitions in current WTO negotiations.  xvi For middle income countries, it comes from “streamlining of procedures” (emphasis in original). xvii Table 4 in the Appendix shows those included in this chapter. xviii Appendix X presents the full results. xix Which can be problematic as the LDC case-study of Cambodia has highlighted.