Moving to Competitiveness: A Value Chain Approach Uma Subramanian May 30, 2007 Berlin IFC- The World Bank

2 Sound policies and institutions governing product and factor markets are critical for competitiveness Product market – trade policy, competition, price distortions, licensing, standards, property rights, logistics Factor market – wages, labor market rigidities, capital charges, utility price/quality, land market issues Competitiveness = f (Input Costs, Trans. Costs, Productivity, Market access, e) Results expected:. Jobs created. Share of market. Investment generated

3 How does a Value Chain Analysis Help? The sectoral lens helps trigger a more comprehensive reform process Prioritization is key to being effective: Through benchmarking performance indicators with global competition and best practices, helps identify priorities Gets at priority issues specific to sectors as well as economy wide issues. Provides a concrete data based policy agenda for public and private sector in addition to the more traditional market related agenda.

4 FOB Cost Per T-Shirt FOB Cost Per T-Shirt Import Dependence Labor Cost /T-Shirt Overheads Outbound Logistics Kenya Raw Material Costs ~ 80% ~ 65% $0.80 $2.30 $0.25 $0.16$0.06 Honduras $1.30 High Tariffs: Honduras = 9.5% Kenya = 17.5% Impact of Rules of Origin Exacerbated by location and therefore transportation costs High Cost of Import Logistics Honduras = $ 670 / TEU Kenya = $2325 /TEU Total Import Logistics Time: Honduras = 39 days Kenya = 45 days Lower Wages Offset by Lower Labor Productivity Honduras: $12.00/ labor day Kenya: $9.40/ labor day Honduras: shirts/day Kenya: shirts/day Nominal Interest Rates Honduras: 18.8% Kenya: 12.9% Electricity Charges: Honduras: 3.5 cents/ kwh (IEA) Kenya: 6 cents/ kwh (IEA) Speed to Market: Honduras <15 days Kenya > 30 days High cost of Export Logistics: Honduras = $500/TEU Kenya = $1980/TEU High Incidence of Rejects: Honduras: <1% Kenya: >3% $0.28$0.40 $3.60 Utilities $0.03 $0.05 SOURCEMAKEDELIVER T-Shirt Value Chain: Kenya and Honduras Compared $0.57

5 How does a Value Chain Analysis Help? The sectoral lens helps trigger a more comprehensive reform process Prioritization is key to being effective: Through benchmarking performance indicators with global competition and best practices, helps identify priorities Gets at priority issues specific to sectors as well as economy wide issues. Provides a concrete data based policy agenda for public and private sector in addition to the more traditional market related agenda.

6 Reduce VAT Redemption delays Simplification of import/ export procedures Revise Investment Code to ensure level playing field between SME and large firms Improve land registries; clarify titling/ leasing or user rights Private power provision to rationalize cost and/or enhance performance Private water and sanitation Privatize air/ sea ports Remove tariff distortions on main imported inputs Reduce barriers to entry within sector that facilitate noncompetitive behavior Reduce barriers to Import Licenses Improve enforcement of product standards Policy for attracting FDI (e.g. hotels) Market Positioning Diversification of products and/or markets; Training to increase shop floor productivity Improve capacity of suppliers, TA to improve backward linkages Public Sector Private Sector Industry Specific Economy Wide Action Agenda

7 Thank you!

8 Industry Specific Licensing Product Quality Standards Taxes Trade Logistics CSR (Labor or Env. Standards FDI Promotion Competition Policy Investment Law Land Admin. barriers Trade policy (tariffs, agreements) Infrastructure Labor policy Innovation Governance Land Policy DOWNSTREAM PROJECTS BUSINESS ENABLING ENVIRONMENT/ FIAS WORLD BANK/ IFC Example of Potential Implementation Projects following a Value Chain Project Linkages Firm level/ bus. Assoc. Capacity Building IFC / Facilities Lending Investments