THE PARTICIPATION OF LDCs IN VALUE CHAINS CURRENT TRENDS AND FUTURE PROSPECTS

Transcription

1 THE PARTICIPATION OF IN VALUE CHAINS CURRENT TRENDS AND FUTURE PROSPECTS

2 The designations employed and the presentation of material in this document do not imply the expression of any opinion whatsoever on the part of the International Trade Centre concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. This document has not formally been edited by the International Trade Centre. ii

3 Contents Executive Summary Introduction current participation in value chains Methodology exports of transformed goods by region... 4 Observations by group Destination of transformed goods exports imports of intermediates by region... 9 Observations by group Origin of intermediates imports Impact of Aid for Trade programmes on future participation in value chains Model specifications Simulation results Special focus sectors Conclusions... 2 Appendix I: LDC regional groups Appendix II: Country-specific results Appendix III: Model specification and data Appendix IV: Detailed model results... 4 List of figures and tables Figure 1: Evolution of exports of transformed goods (excl. oil) 6 Figure 2: Geographical distribution of Asia s transformed goods exports in 211 (excl. oil) 8 Figure 3: Geographical distribution of Africa s transformed goods exports in 211 (excl. oil) 9 Figure 4: Evolution of imports of intermediates (excl. oil) 11 Figure 5: Geographical distribution of Asia s intermediate goods imports in 211 (excl. oil) 13 Figure 6: Geographical distribution of Africa s intermediate goods imports in 211 (excl. oil) 14 Table 1: The importance of raw products in production and exports in 27 (excl. oil) 5 Table 2: The importance of foreign sourcing in intermediate and final consumption by region in 27 (excl. oil) 1 Table 3: Impacts of Aid for Trade programmes on GDP in 225 (excl. oil) 16 Table 4: Impacts of Aid for Trade programmes on production in 225 (excl. oil) 17 Table 5: Impacts of Aid for Trade programmes on exports in 225 (excl. oil) 17 Table 6: Impacts of Aid for Trade programmes on imports in 225 (excl. oil) 18 Table 7: Impacts of Aid for Trade programmes on the production of special focus sectors in 225 (US$ million) 19 iii

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5 Executive Summary Production in least developed countries () is often still concentrated on commodities that require less advanced technologies but that are also more exposed to fluctuating world prices. Especially in, transformed products account for a relatively small share of total production and an even lower share of total exports. At the same time, rely heavily on imports, and in particular, on imports of final goods. All this suggests a relative shortage of transformative industries in as compared to more developed economies. Aid for Trade programmes can have a large impact on the production structure of an economy and may support the formation of processing industries in. The manufacturing sector is likely to benefit most from an improved access to intermediates and to final product markets. Since these programmes do not only help the direct beneficiaries to better integrate into global value chains but facilitate also the market access of their trade partners, emerging and developed economies have a clear incentive to actively contribute. While many Asian have already developed some transformative industries, are catching up. Asia-Pacific and Africa become increasingly important markets for LDC exports The development of transformative industries can be measured directly, or it can be captured through trade indicators such as exports of transformed products and imports of intermediate goods for further processing. Imports of intermediates demonstrate the existence of an industry in the country that will transform them, whereas exports of transformed products demonstrate both the existence of transformative industries and the export-readiness of their production. In this study we make use of available data to measure the existence of transformative industries and assess the development of these industries over the last decade. Asian which have a long tradition of processing cotton in order to produce and export clothing and textile articles have a larger base of transformative industries than their counterparts. Our analysis shows, however, that the export-readiness of transformed goods and the importation of goods that require further local processing have improved particularly in those LDC groups that started off from the lowest level. By concentrating on the transformation of natural resources into semi-processed articles located in Central and Eastern Africa have managed to engage in the exports of relatively more valueadded products. At the same, they have increased their share of imports of intermediates for further processing. On the contrary, the ASEAN and the Pacific Island LDC group are curbing their value chain integration by increasing their dependence on final goods imports and by reducing their share of transformed goods in total exports. In line with the general trend of developing countries gaining importance as markets, Central and Eastern Africa s transformed goods are increasingly directed to Asia-Pacific and to Africa. Asian sell most of their raw products and source most of their intermediates from within the region; transformed goods are, however, still largely destined to developed countries. This reflects that the catching up of Africa s in terms of transformed product exports is paralleled by an orientation towards fast-growing markets. Aid for Trade programmes would benefit but also their trade partners by improving the accessibility of markets Aid for Trade programmes, whether they focus on the improvement of transport logistics or customs procedures, have a large impact on exports and imports. Manufacturing exports benefit most from the improved efficiency of trade, because both access to intermediate goods and to export markets are relevant to those sectors. Central and Eastern exports and thus exports of the two groups that

6 have already been catching up over the last decade will benefit most from such programmes. However, these same groups also import much larger values of manufactured goods than they export, so that Aid for Trade programmes will eventually contribute to reducing their production of manufactured goods. Overall, these programmes remain beneficial for all LDC groups because production of services increases and compensates for possible production losses on the manufacturing side. Other LDC groups identified in the analysis would benefit from an increased production of both manufactured goods and services. Developed regions and emerging regions with close trade linkages to will also benefit from a better efficiency of trade infrastructure through a better access to these markets and resources. In total, if both transport and customs efficiency programmes were conducted together, cumulated world GDP gains from 214 until 225 would reach US$ 25 billion, US$ 95 billion of which benefiting while the remaining US$ 11 billion accruing to other developing in particular in the Asia-Pacific region and to developed countries. These countries have therefore a clear interest in actively supporting the implementation of these programmes. 2

7 1. Introduction In recent years, least developed countries () have experienced a substantial growth of their exports. Yet, a significant part of these exports is still made up of commodities. The reliance on exports of unprocessed natural resources or raw agricultural products bears, however, several risks: not only have commodities been subject to fluctuating world prices in recent years, producers also usually have little bargaining power which leads to small profit margins. Furthermore, changing climate conditions increase the risk of reduced or unpredictable harvests. Producers from are therefore confronted with the challenge of securing the sustainability of their export revenues. Increasing the integration into global supply chains can help to achieve this goal by moving towards activities with higher value addition. Aid for Trade programmes can facilitate this integration by addressing a wide range of issues, from product safety to storage, access to market information or trade negotiation. They can also facilitate these countries access to imported inputs and to export markets. Two main channels are expected to have a strong potential to expand the capacity of to participate in world trade: transport infrastructures and related transport and logistics services, and customs infrastructures and procedures. These programmes are costly to implement and potential impacts are often only felt after a number of years. It is therefore key for beneficiaries and donors to obtain clarity about how their economies will be affected both regarding the changes in the levels of production, imports and exports but also regarding the sector structure. This study assesses participation in value chains in two parts: In the first part, it informs about the status quo and recent trends of participation in value chains. To assess the existence of transformative industries in, it compares the share of intermediates in consumption and the share of raw products in the production of with the same shares of other developing countries from the same region. To study whether these transformative industries integrate into global value chains, we assess the evolution of shares of intermediates in imports and of transformed products in exports over time. Finally, we analyse towards which regions orient their transformed exports and from where they source their intermediate imports. In the second part, the effects of two possible Aid for Trade programmes on production, exports and imports are analysed. Using the Mirage model, we measure the impact of two programmes transport infrastructure and customs efficiency on the production and trade structure of LDC economies. We also evaluate whether the initiatives favour sectors with a higher share of transformed products. In a nutshell, this study finds that Asian are already performing activities that are located at higher levels of the global value chain. Through their specialisation in cotton processing, they import a relatively high share of intermediates and export predominantly transformed products. producers are more concentrated on the production and in particular on the exports of unprocessed natural resources, like metals. By increasingly also engaging in first-level processing stages of these raw materials, Central and Eastern have, however, caught up, not only with respect to Asian but notably also with respect to developing countries in the region. Both LDC groups have significantly shifted the focus to emerging markets as destinations for their exports. The two Aid for Trade scenarios improvements in transport logistics and in customs efficiency would both reinforce existing patterns. They would strengthen the textile and clothing industries in Asian and raise the production of metals in Central and Eastern. Even though the production of other manufactured goods would fall there, the manufactured exports overall would strongly increase. Furthermore, the programmes will support in most cases the development of the services sector. In total, LDC groups would enjoy the largest gains in percentage terms, but other emerging and developed economies would also benefit from the facilitated access to LDC markets. Out of the total cumulated GDP gain until 225, US$ 11 billion would accrue to emerging and developed countries and US$ 95 billion to. This result underlines the incentives of the emerging and developed countries to actively engage in Aid for Trade programmes in order to support to better integrate and to move to higher value-added parts of the global value chain. 3

8 2. current participation in value chains This chapter studies the integration of from different regions into value chains. It assesses their sourcing modes and export patterns in comparison to developing countries of the same region Methodology The aim of this study is to give insights into move higher up the value chain. For this purpose, we combine different data sources. Comprehensive data including input-output matrices are needed to fully understand value chains within countries, but they are not available at world level on a yearly basis. In this study, we rely on the last version of the GTAP database (version 8), which contains data for the year 27. These static analyses of the share of imports in total demand by type of demand (intermediate or final) and of the degree of transformation of production and exports cover also domestic value chains. Since they can only be done for one single year, however, they are complemented by a dynamic analysis of trade flows, which does not cover domestic value chains but can give some insights into dynamic evolutions of intermediate imports and transformed exports. The latter analysis is based on ITC Trade Map data from 21 to On the export side, we make use of an ITC classification that distinguishes raw from semi-processed and processed goods at the 6-digit level of the Harmonized System (HS) classification. Here we assume that all (semi-)processed exports have been transformed within the different LDC groups, hence any increase in export share of transformed goods will be interpreted as a sign of value chain integration. The results on the export side reflect the on-going creation of processing industries in for exporting where the intermediate input may have been sourced inside or outside the country. On the import side, we make use of a classification based on broad economic categories (BEC) that distinguishes between transformed goods, parts, consumption, capital and primary goods. We aggregate all categories except consumption and capital together into intermediate goods before combining them at the HS6-digit level with import data for the. We then claim that everything which is neither a capital good nor used for consumption needs to be further transformed; hence any increase in import share of intermediates will be interpreted as a sign of value chain integration. The results on the import side reflect the on-going creation of assembly industries in built upon imported inputs where the transformed goods may be used inside or outside each country. To summarise, we evaluate move up the value chain using a two-track approach: Increase in the share of transformed goods in total exports: set up of transformative industries relying on domestic or foreign sourced inputs where the transformed goods are used abroad; Increase in the share of intermediate goods in total imports: set up of transformative industries relying on foreign sourced inputs where the transformed goods may be used at home or abroad. Looking at both the share of intermediates in consumption and the share of transformed products in production in one single year on the one hand and transformed exports and intermediate imports over time on the other hand provides us with a broad picture of the status and the evolution of processing industries in. have been grouped by regions. For the trade analyses, six LDC groups are distinguished: ASEAN, South Asia, Pacific Islands in Asia-Pacific and Western, Central and Eastern Africa in Africa. 2 These six groups are compared to those of other developing countries in the same region. Results for individual countries (including Yemen, Lesotho and Haiti which do not fall within these groups) can be found in Appendix II. All calculations exclude oil exports of transformed goods by region To assess the existence of a developed transformative industry operating in these countries, we first characterise the production structure of as compared to other regional groups for the year Even though global shocks or certain policies may affect consumption and imports and production and exports differently, data availability restricts us to assess any resulting changes of integration into value chains from a global perspective. 2 Note that the GTAP database does not allow analysing the Pacific Islands and individual such as Yemen, Lesotho and Haiti. For that reason, all calculations based on the GTAP database distinguish only the five other LDC groups. The composition of regional LDC groups is shown in Appendix I. 4

9 Calculations based on the GTAP database show that a significantly larger share of the production capacity in is dedicated to the production of raw products (oil, coal and gas excluded) as compared to the production capacity in developing countries from the same region or in developed countries (see table 1). These products consist mostly of untransformed food products that are consumed locally. In which typically use less advanced production technologies, the share of food in total production is larger than in more advanced economies. More than one third of Asian production consists of raw products, while this ratio is only 13% in other developing countries in Asia. Among the Asian, the ratio is the lowest for Cambodia, at 26%, and hence much above the ratio of developing countries in Asia. In Africa, production of raw products represents more than one third of total production in as well, but the difference to developing Africa is less significant. To compare, production consists to only 6% on average of raw products in developed countries. Table 1: The importance of raw products in production and exports in 27 (excl. oil) Share of raw products in production (%) Share of raw products in total exports (%) ASEAN South Asian 37 6 Western Central Eastern For comparison: Developing Asia-Pacific 13 3 Developing Africa Developed OECD & EU 6 4 Note: ITC staff calculations based on GTAP data. The composition of LDC groups is defined in Appendix I. While the share of transformed products in production informs about the development of transformative industries within a country, only its capacity to export these product reveals that it is also able to meet standards of international demand. Export data from the GTAP database confirms the gap between and other developing countries in Asia which export a much lower share of raw products. In Africa, the gap between and developing countries appears even larger: more than half of Central Africa s exported products consist of raw products, suggesting that many of its transformed goods are produced for the local market only. The share of Central and Eastern transformed goods in total exports has been growing steadily, thereby gradually catching up with Asian After assessing the static share of raw products in total exports, we look at the dynamic evolution of value chains. To this end, we rely on trade statistics from the ITC Trade Map database. We begin with the assessment of exports of transformed goods. Figure 1 depicts the evolution of exports of transformed goods in value terms (right axis) together with the evolution of the export share of transformed products in total exports (left axis) for six LDC groups. The shares of the three Asian-Pacific LDC groups are compared to the same share of developing countries in Asia-Pacific and the shares of the three LDC groups to the same share of developing countries in Africa (dotted lines). With the exception of Pacific Island, all LDC groups have increased the absolute value of their transformed exports. Yet, the share of transformed goods in total exports has evolved heterogeneously across them. in Central and Eastern Africa have experienced an increase in their share of transformed goods in total exports from 1 to 61% and from 5 to 66%, respectively, between 21 and 211. By contrast, ASEAN and Western have increased their exports of raw products faster than their exports of transformed goods leading to a decline in the share of value-added goods in total exports by 12 and 4 percentage points (pp), respectively. Pacific Island have experienced a sharp decline of their transformed product exports between 22 and 23 causing the share of transformed goods to fall from over 7 to below 4 where it has mostly remained since then. Note that South Asian export with 94% by far the highest share of transformed goods, matching the level of Asia-Pacific s developing countries share (94%) and even slightly surpassing the one of developed OECD and EU countries (93%). Yet, other, particularly in Africa, are gradually catching up. Even 5

10 US$ billion US$ billion US$ billion US$ billion US$ billion US$ billion THE PARTICIPATION OF LDCS IN VALUE CHAINS though developing countries export with 71% still relatively more transformed goods than the three LDC groups, their share has remained stable between 21 and 211. As a consequence, are not only catching up with respect to Asian but also with respect to developing countries in their own region. Figure 1: Evolution of exports of transformed goods (excl. oil) ASEAN South Asian Pacific Island Share of transformed exports in Developing Asia-Pacific (left axis) Share of transformed exports (left axis) Transformed exports (right axis) Western Central Eastern Share of transformed exports in Developing Africa (left axis) Share of transformed exports (left axis) Transformed exports (right axis) Note: ITC staff calculations based on ITC Trade Map data. 6

11 Observations by group Although Central and Eastern have caught up with Asian, the structure of their transformed product exports is very distinct. In Asia, are often engaged in cotton-processing activities, and export fully transformed textile products for final consumption., by contrast, concentrate on the exports of slightly processed natural resources that are available in the region. Hence, the degree of transformation is more limited than in some of the Asian. ASEAN The reduction of the share of transformed exports by almost 2 in ASEAN can mainly be explained by a steep increase in raw exports of precious and semi-precious stones. Exports of this product have been rising at an annual rate of 45% between 21 and 211 and have become the fifth largest exported product of the region. Exports are fully concentrated in Myanmar. During the same period, Cambodia has strongly increased its exports of clothing, a fully transformed product, but this was not sufficient to offset the effect of precious stones exports by Myanmar. South Asia The high share of transformed goods in the structure of exports of South Asian results from exports of apparel by Bangladesh. Exports of these products have been growing at a rapid pace, but so did exports of raw products, eventually leaving South Asia with a similarly high share of transformed goods in their 211 than in their 21 exports. Pacific Islands Fishery and in the case of the Solomon Islands rough wood exports explain the Pacific Islands low share of transformed goods in total exports. Western Africa Western export large values of minerals. While Niger and Guinea export raw minerals, namely Uranium and Aluminium ores, Burkina Faso exports semi-transformed gold. Exports of these products have been growing very fast, yet overall the share of transformed products in exports has remained stable. Central and Eastern Africa In Central and Eastern Africa, the most important transformed export products fall within the category of copper articles (such as cathodes (HS 74311)). The main exporters of this product, the Democratic Republic of the Congo and Zambia, have experienced strong growth rates in recent years, thereby supporting the increase in the share of transformed goods in total exports of the two groups. Eastern Africa has additionally seen an unprecedented export peak of semi-processed aluminium articles in 211. Other (for country-specific graphs, please see Appendix II) Haiti shows a high and stable share of transformed product exports, surpassing the level of developing countries in Latin America. This is largely explained by the economy s concentration on clothing and textile articles. Lesotho has decreased its share of transformed goods because of a massive increase of raw diamond exports, which has become by far the most important export product of the country. Due to its large fishery exports, Yemen s share of transformed products is rather low. Nevertheless, increased exports of plastics waste and wheat bran, both classified as fully processed products, have led to a rising share of transformed goods in total exports from 31% in 21 to 51% in Destination of transformed goods exports Asia-Pacific and Africa are replacing developed countries as markets for transformed product exports Figure 2 shows the geographical distribution of Asia-Pacific s exports of transformed goods. In line with the growing importance of developing countries as consumer markets in general, the Asia-Pacific country groups have shifted their exports of transformed goods away from developed markets and to developing markets (the exception being the Asia-Pacific market that has decreased its share in South Asian 7

12 supply by 2pp). Yet, South Asian and Pacific Island are still strongly reliant on developed OECD and EU markets, followed by ASEAN. Developing countries of the Asia-Pacific region mostly export their transformed products to their own region. Other markets are still of relatively minor importance for Asia- Pacific transformed product exports. Figure 2: Geographical distribution of Asia s transformed goods exports in 211 (excl. oil) ASEAN South Asian Pacific Island (pp) 2 (+8pp) (pp) 2% (+2pp) 2% (+2pp) (pp) (pp) 8% (- 2pp) 6% (+4pp) 2% (+1pp) 1% (+1pp) 1% (pp) 12% (+4pp) (pp) 1% (+1pp) 76% (- 12pp) 84% (-4pp) 85% (- 5pp) Developing Asia-Pacific 6% (+2pp) (pp) 41% (- 13pp) 7% (+4pp) 3% (+1pp) 43% (+5pp) Africa Asia-Pacific Eastern Europe and Western Asia Latin America & Caribbean Developed OECD & EU Other Note: ITC staff calculations based on ITC Trade Map data. Shares are expressed in %, the absolute growth of the shares in percentage points (pp) between 21 and 211. In Africa, the geographical distribution of Western and Eastern exports of transformed products is similar to the one of developing countries (figure 3). Around half of the exports go to developed markets in the OECD and the EU and around one quarter to the continent. 3 Similar to the three Asian LDC groups illustrated above, the past decade was marked by a shift away from developed and towards developing markets, notably in Asia-Pacific and Africa. Western furthermore exported in 211 a significantly larger share of their transformed products to Eastern Europe and Western Asia than they did in 21. The geographical shift has been most pronounced in Central Africa: the collapse of the developed OECD-EU region s share from 88% in 21 to 15% in 211 ( 73pp) has been absorbed by Asia-Pacific (+41pp) and by the continent itself (+34pp). The Democratic Republic of the Congo s exports of copper cathodes has triggered this geographical shift as China s and the Republic of Korea s imports from the country have grown significantly over the past five years. But what is truly behind this geographical shift? Do the countries export structures increasingly fit a particular demand for transformed goods in Africa and in Asia-Pacific or does the economic growth of these regions induce a reorientation of exports in general independent of the specific processing stage? A comparison with raw material exports gives further insights: for Central and Eastern Africa, the overall geographical pattern of raw material exports broadly matches the one of transformed goods exports, and also dynamically, both groups move towards exporting their raw material increasingly to markets in Asia- Pacific and Africa, thus paralleling the trend observed for transformed goods exports. This is different in Western Africa while raw material exports are highly and increasingly oriented towards Asia-Pacific, the group has recently focused on Eastern European and Western Asian markets for its transformed goods exports. In Asia, geographical patterns of raw material and transformed product exports by LDC countries 3 As several countries do not report their trade, this share may actually be underestimated. 8

13 are totally different: while Asian, particularly ASEAN, export the bulk of their raw materials to other developing countries in the Asia-Pacific region, figure 2 shows that most of their transformed products are still exported to developed countries, even though the Asia-Pacific region is emerging as a market for ASEAN and Pacific Island. Figure 3: Geographical distribution of Africa s transformed goods exports in 211 (excl. oil) Western 43% (-14pp) (-2pp) (-pp) 18% (+12pp) 28% (+1pp) 11% (+2pp) Central 1% 15% (-pp) (-73pp) (-1pp) 45% (+41pp) (+pp) 39% (+34pp) Eastern (-pp) 54% (-16pp) (-pp) 24% (+8pp) 19% (+11pp) 3% (-2pp) Developing Africa 48% (-17pp) (-pp) 2% (-pp) 27% (+7pp) 15% (+5pp) 8% (+4pp) Africa Asia-Pacific Eastern Europe and Western Asia Latin America & Caribbean Developed OECD & EU Other Note: ITC staff calculations based on ITC Trade Map data. Shares are expressed in %, the absolute growth of the shares in percentage points (pp) between 21 and imports of intermediates by region Production and exports of transformed goods are just one possible way to integrate into value chains. Countries may also process intermediate inputs without necessarily exporting the transformed goods. To get a more complete picture, table 2 shows the importance of foreign sourcing by type of consumption and by region using the GTAP database. Overall, rely more on imported products than other developing countries in the same region, for both categories of demand: intermediate and final. This can be explained by the combination of smaller economic size and less advanced technologies, which often prevents those countries from producing the full range of products they need. The last column in table 1 shows that import less intermediate goods as a share of their total imports than other developing countries. This may be interpreted as a relative lack of transformative industries in. Due to the absence of some industries, they need to import products that are already fully processed. 9

14 Table 2: The importance of foreign sourcing in intermediate and final consumption by region in 27 (excl. oil) Share of imports in intermediate consumption (%) Share of imports in final demand (%) Share of intermediate consumption in total imports (%) ASEAN South Asian Western Central Eastern For comparison: Developing Asia-Pacific Developing Africa Note: ITC staff calculations based on GTAP data. The composition of LDC groups is defined in Appendix I. in Central Africa and Eastern Africa have also increased their share of imported intermediates for further processing Figure 4 shows the level and the evolution of imports of intermediate goods (as a share of total imports). Overall, ASEAN, South Asian and Eastern are much closer to developing countries of their region than Pacific Island and Central and Western. Nevertheless, Central imports of intermediates have been on the rise over the past 1 years reaching a value of more than US$ 11 billion in 211. This corresponds to an annual growth rate of 21% since 21, increasing the share of intermediates in total imports from 37% to 45%. The group has consequently reduced the gap to developing countries, whose share of intermediates in total imports has remained relatively stable at 56% over the past decade. For the three Asia-Pacific LDC groups, the shares of intermediates in total imports have slightly declined despite the fact that in absolute terms intermediate imports grew by an annual 17% in South Asia, 16% in ASEAN and 2% in the Pacific Islands. The decline on the import side mirrors the results from the export side (figure 2). Taken together, the Asia-Pacific LDC groups appear to have shifted their focus on the production and exports of raw materials that do not require any imported inputs. 1

15 US$ billion US$ billion US$ billion US$ billion US$ billion US$ billion THE PARTICIPATION OF LDCS IN VALUE CHAINS Figure 4: Evolution of imports of intermediates (excl. oil) ASEAN South Asian Pacific Island Share of intermediate imports in Developing Asia-Pacific (left axis) Share of intermediate imports (left axis) Intermediate imports (right axis) Western Central Eastern Share of intermediate imports in Developing Africa (left axis) Share of intermediate imports (left axis) Intermediate imports (right axis) Note: ITC staff calculations based on ITC Trade Map data. Observations by group Despite rather stable or slightly decreasing shares of intermediates in total imports, ASEAN, South Asian and Eastern keep showing much higher shares of intermediates in total imports than the three other groups. In the case of the two Asian LDC groups, this is mainly due to the local clothing and 11

16 textile industries that process cotton imports. In the case of Eastern Africa, wheat and meslin imports lift the share of intermediates to a level that matches the continent s developing economies. ASEAN The share of intermediate imports in ASEAN has fallen from 62% until 55% over the decade (with the major reduction occurring after 27). This is despite the fact that Cambodia increased the imports of knitted or crocheted fabrics the main intermediate import good of the group by an average annual rate of 13% since 27. Motorcycles and shovels and excavators all imported primarily by Myanmar mainly contributed to the decline as they are classified as capital and hence as final goods in the classification used for this study. South Asia The main contributor to the slight decline in the share of intermediate imports is the product special purpose motor vehicles which is classified as a capital good. The imports of this product have risen with an annual rate of 75% since 21 making it the top import product of the group (in fact, Afghanistan accounts for over 97% of all South Asian imports of this product). Bangladesh is the main importer of other important import products of the group, such as cotton, wheat and meslin and palm oil. The imports of these products which require further transformation have, however, grown at lower rates. Pacific Islands Due to the geographic position and the strong fishery industries, the main imported goods of the Pacific Islands are ships and boats. Since the imports of these capital goods grew strongly over the past decade, it is not surprising that the share of intermediates in total imports fell. Western Africa and Central Africa The share of intermediate imports in Western is significantly lower than in developing Africa, which is underlined by the fact that the top five import products by Western are capital goods or goods for consumption that do not require any further processing. The largest imported product is Cargo Vessels, primarily imported by Liberia (with a share in total imports of final products of 18.5%). Similarly, Tankers and Cargo Vessels are also the most imported product of Central. Angola s imports of this capital good have grown with an annual rate of 154% since 21. The import value of other goods that are classified as intermediates, such as structures for scaffolding or electronic boards and panels has increased however as well, thereby raising the share of intermediates in Central imports. Eastern Africa The share of intermediate imports of Eastern is relatively high in comparison with other, matching the level of developing countries. The main imported good is consequently an intermediate good as well: wheat and meslin, imported mainly by Sudan and Tanzania, has experienced high annual import growth rates since 27 (32% and 17% accordingly). Other (for country-specific graphs, please see Appendix II) Haiti has a rather low share of intermediates in total imports but is gradually catching up with the developing countries from the LAC region. While its biggest import good in 21 was rice, Haiti has seen a strong increase in woven cotton imports in 211, meeting the demand stemming from its textile industry. With an intermediate import share fluctuating around 8, Lesotho surpasses developing countries. In fact, the country s top five import products are all intermediates with knitted and crocheted fabrics accounting for a large share. Four out of five of Yemen s largest import products are agricultural goods. While refined sugar and milled rice are final consumption goods, wheat and meslin and maize require further transformation before they can be consumed, hinting towards the existence of agri-food industries in the country. 12

17 2.5. Origin of intermediates imports Asia-Pacific is a major sourcing location for Asian intermediate inputs and it is also an increasingly important supplier for Asian countries source the overwhelming part of their intermediates from within the region; in fact 92% of ASEAN and 7 of South Asian intermediate imports originate in Asia-Pacific (figure 5). The Pacific Islands through their proximity to Australia and New Zealand are still highly reliant on imports from the developed world even though their share has sharply decreased by 31pp between 21 and 211 to the benefit of Asia-Pacific. The OECD and the EU also used to be the biggest suppliers of intermediates to developing Asia-Pacific countries back in 21. In 211, these countries imported, however, the greatest share of their intermediates from the Asia-Pacific region. Figure 5: Geographical distribution of Asia s intermediate goods imports in 211 (excl. oil) (pp) 2% (+1pp) ASEAN 6% (- 3pp) (- pp) 92% (+2pp) (pp) 6% (+3pp) 5% (+3pp) South Asian (pp) 18% (- 4pp) 1% (pp) 7 (- 2pp) Pacific Island (pp) 6 (- 31pp) (pp) 39% (+3pp) (pp) 1% (pp) Developing Asia-Pacific 5% (+3pp) 5% (+2pp) (-pp) 39% (- 1pp) 2% (+1pp) 49% (+4pp) Africa Asia-Pacific Eastern Europe and Western Asia Latin America & Caribbean Developed OECD & EU Other Note: ITC staff calculations based on ITC Trade Map data. Shares are expressed in %, the absolute growth of the shares in percentage points (pp) between 21 and 211. In contrast to Asia, countries are more dependent on intermediate goods imports from the developed world. Central Africa keeps sourcing more than half of its imported intermediates from the developed OECD & EU region despite a decline of 22pp since 21 and despite the fact that it has strongly moved away from developed countries as markets for transformed product exports in recent years. Throughout the four groups, Asia-Pacific has gained importance as a sourcing location for intermediate inputs. The sourcing of final demand by follows a geographical distribution similar to the one observed for intermediate goods imports, but the dynamics are slightly different. In Western and Eastern Africa, final demand imports from Asia-Pacific have generally risen relative to the demand from other suppliers, hence confirming the overall upswing of developing economies in the region. Central Africa, by contrast, has decreased the share of final goods it demands from Asia-Pacific mostly to the benefit of suppliers and to a lesser extent to the benefit of Latin American countries. The shift towards the increased sourcing of intermediates from Asia-Pacific has therefore different origins: while it follows an overall trend in the cases of Western and Eastern Africa, it seems to reflect a sector specialization in the case of Central Africa. In other words, countries are now able to supply Central markets with final demand goods, thus taking advantage of their shorter distance to these often landlocked markets. 13

18 The geographical distribution of ASEAN and South Asian imports of final demand goods is similar to the distribution of intermediate goods imports, except that developed countries are still a relatively more important supplier for final demand goods, especially in South Asian. Figure 6: Geographical distribution of Africa s intermediate goods imports in 211 (excl. oil) Western (-pp) Central (+pp) Eastern (- pp) 2% (-pp) 6% (+1pp) 33% (-2pp) 16% (-pp) 43% (+19pp) 51% (-22pp) 4% (+1pp) 2 (+3pp) 23% (+19pp) 2% (-1pp) 2% (+pp) 11% (+pp) 27% (-12pp) 28% (+2pp) 32% (+9pp) Developing Africa (-pp) 1 (+1pp) 51% (-16pp) 22% (+9pp) 1 (+4pp) Africa Asia-Pacific Eastern Europe and Western Asia Latin America & Caribbean Developed OECD & EU Other 7% (+2pp) Note: ITC staff calculations based on ITC Trade Map data. Shares are expressed in %, the absolute growth of the shares in percentage points (pp). 14

19 3. Impact of Aid for Trade programmes on future participation in value chains Aid for Trade programmes can concentrate on a number of aspects relevant for LDC exporters. They can, for instance, take the form of actions to help goods comply with requirements in external markets. In this section, two possible programmes are considered: one relates to the logistics of products from the production site to the port where goods are shipped to other countries, while the second one deals with customs efficiency. Aid for Trade programme I: Logistics. Infrastructure and transport services in are often less developed than in more advanced economies, so that bringing products from their production site to the port where they can be shipped to other countries, or bringing intermediate products from the port to where they are needed can be a lengthy process. The Doing Business surveys conducted by the World Bank provide information on the average number of days that it takes to transport goods from the port to their final destination within a country and from the production site to the port. We assume that the whole logistical chain is improved, so that this time can be halved as compared to the current situation. Aid for Trade programme II: Trade Facilitation. Customs services in may not have the same efficiency as in more advanced countries. We assume that improvements and modernisation of those services allow cutting the time needed to clear customs for imports and exports with all partners by 5. Only the time spent at customs offices is concerned, no assumption is made regarding pre-shipment procedures. These two scenarios are compared to a status quo scenario where none of these programmes is implemented. Both programmes are implemented within two years, starting in 214. Impacts of these programmes will be measured in 225, i.e. ten years after the completion of the programmes, to capture dynamic benefits obtained through investment channels. The cost of implementing the programmes is supposed to be covered by external funding. To compute projections of the world economy under these alternative assumptions, we rely on a computable general equilibrium model of the world economy, namely the Mirage model Model specifications The Mirage model describes the world economy in an integrated framework with production, demand, and trade. Dynamics are introduced through investment and demographic evolutions. While the evolution of population and labour supply is exogenous, investment is determined by the model. Installed capital cannot change the sector to which it was initially allocated, but investments in the most profitable sectors, combined with depreciation of capital, progressively drive capital towards the most productive sectors. Other production factors are skilled and unskilled labour, land, and natural resources. Each type of labour is assumed to be perfectly mobile across sectors. While this assumption may appear unrealistic at first sight, it is justified by the magnitude of shocks that are considered. Over a ten year period, one fourth of the labour force is renewed, while shocks imply much smaller labour movements from sectors to sectors. Only some sectors need land as a production factor; land is assumed imperfectly mobile across sectors. Finally natural resources, for instance fish stock or iron ores, are specific to their sector. There is no inflation at world level but relative prices are not fixed. Trade costs associated with time, which are essential in our simulation, are modelled as iceberg costs: a fraction of the product is assumed to be lost during the transaction. The percentage of product that is lost is proportional to the number of days taken by the transaction. Daily costs depend on the product that is traded; the source that is used for these daily costs is given in Appendix III. The world is divided into 1 regions and 22 sectors. Most are taken into consideration, except Yemen, Haiti and Lesotho, and in the Pacific Ocean (Kiribati, Samoa, Solomon Islands, Tuvalu and Vanuatu) because the GTAP database on which Mirage is based does not allow isolating them from broader regions comprising larger non-ldc countries. are distributed into five regional groups: ASEAN and South Asian, Western, Central and Eastern. The full detail on groups and sectors is given in the Appendix along with information regarding model specification and data sources. 15

20 3.2. Simulation results As both scenarios assume that some trade is facilitated at no cost, the Aid for Trade programmes lead to positive outcomes for all beneficiaries. Table 3 shows impacts on GDP for all regions considered, in percentage terms and in dollar terms, in 225. Impacts correspond to the difference between a reference scenario without any reduction of trade costs and a simulated scenario where trade costs have been reduced. Even though impacts are in percentage terms much larger for the direct beneficiaries, other developing countries in Asia and Africa and developed OECD & EU countries would also benefit from the programmes. In percentage terms, benefits accruing to are larger because of their small economic size. In dollar terms, developing Asia-Pacific and developed OECD & EU countries as major trading partners of also benefit from the programmes. In total, could benefit from a US$ 6.5 billion annual GDP gain if the trade facilitation programme was implemented, while improving logistics would generate a US$ 7.2 billion gain. The benefit to other countries would be of the same magnitude: US$ 6.6 billion for the trade facilitation programme and US$ 6.7 billion for the transportation and logistics scenario. This should encourage developed and emerging economies to contribute to those programmes. Total benefits for the world would thus augment to US$ 13.1 billion for trade facilitation and US$ 13.9 billion for the logistics programme, only for the year 225. If both programmes were realized together, world GDP gains during the entire period would cumulate to US$ 25 billion (in constant US$ of 27) (US$ 95 billion for and US$ 11 USD for other regions). Table 3: Impacts of Aid for Trade programmes on GDP in 225 (excl. oil) Trade facilitation (%) Transportation and logistics (%) Trade facilitation (in US$ billion) Transportation and logistics (in US$ billion) ASEAN South Asian Western Central Eastern Developing Asia-Pacific Developing Africa Latin America & Caribbean Eastern Europe & Western Asia Developed OECD & EU Note: ITC staff calculations using the Mirage model. Impacts on production are distributed unevenly across sectors, because both Aid for Trade programmes facilitate exports but also imports. Table 4 presents outcomes of both programmes in percentage and dollar terms. Only three sectors are distinguished: primary products, manufactured products and services; a finer level of sector detail is provided in Appendix IV. 16

21 Table 4: Impacts of Aid for Trade programmes on production in 225 (excl. oil) ASEAN South Asian Western Central Eastern Trade Facilitation (%) Trade Facilitation () Logistics (%) Logistics () Primary Manufactured products Services Primary Manufactured products Services Primary Manufactured products Services Primary Manufactured products Services Note: ITC staff calculations using the Mirage model. Looking first at the trade facilitation results, a surprising outcome is that the direction of changes is exactly opposed to the recent trends observed in figure 1. Two LDC groups experience a decrease in their production of manufactured products: Central Africa, and to a lesser extent Eastern Africa. These two groups are precisely the ones for which the share of transformed products in exports has been increasing over the last ten years. This apparent contradiction can be explained with the trade impacts as shown in tables 5 and 6. Table 5: Impacts of Aid for Trade programmes on exports in 225 (excl. oil) ASEAN South Asian Western Central Eastern Trade Facilitation (%) Trade Facilitation () Logistics (%) Logistics () Primary Manufactured products Services Primary Manufactured products Services Primary Manufactured products Services Primary Manufactured products Services Note: ITC staff calculations using the Mirage model. In principle, facilitating trade through improvements of logistics or customs efficiency will favour in particular the sector of manufactured products. This sector benefits from a better access to inputs and markets. By contrast, primary products do not require inputs and benefit therefore mainly from an easier access to markets and services are often consumed locally rather than exported, and hence, affected predominantly through an easier access to inputs. This property is actually confirmed by table 5 for all LDC groups: variations of exports in percentage terms are largest for manufactured products, under both 17