|Plastic/Rubber|2.21|3.56|2.90|4.63|1.91|0.43|
|---|---|---|---|---|---|---|
|Mach/Elec ‐ Final|2.65|3.81|3.15|4.95|1.97|0.58|
|Transport ‐ Intermediate|2.58|3.98|3.28|5.10|2.07|0.32|
|Stone/Glass|2.61|4.04|3.35|5.13|2.11|0.28|
|Transport ‐ Final|2.78|4.27|3.55|5.39|2.25|0.32|
|Metals|2.73|4.20|3.48|5.33|2.26|0.29|
|Miscellaneous ‐ Final|2.92|4.43|3.73|5.52|2.41|0.23|

Source: Authors’ calculations Note: Lower scores denote higher similarity. Table is sorted by South Africa (ZAF). Sectors within two standard deviations are highlighted, but this does not imply a certain level of participation in that sector.

# C. How can policy reform extend GVC participation?

Since investments in capabilities over time can shift comparative advantage, we simulate the effects of improvements in the seven policy‐dependent capabilities to illustrate the dynamic nature of sector targets. We first raise all short and long‐term policy variables<sup>16</sup> to the median (Table 10) and then to the 60<sup>th</sup> percentile (Table 11). In the following simulation, if a country’s capabilities are currently lower than the proposed level, they were replaced; otherwise, they stay the same.

Country‐level results need to be interpreted cautiously, as additional analysis would be required to draw any conclusions about the potential for participation in a specific GVC sector. The current simulation provides only directional results. For one, it cannot account for interplay between the capabilities. For example, if physical capital per capita increases, then labor costs will likely increase, productivity effects notwithstanding, but we do not attempt to predict the exact change in a country’s wages.

Not surprisingly, with greater capabilities, more sectors fall into the “comfort zone” of countries. Lesotho, for example, with capabilities at the median, can now participate to a greater extent in footwear – both final assembly and intermediate inputs. Botswana can participate in an additional four sectors. In fact, all four countries aside from South Africa now have the rough set of capabilities necessary for participation in hides/skins, clothing and footwear. Meanwhile, South Africa’s set of achievable sectors do not change from the current state. If all seven policy variables are raised to the 60<sup>th</sup> percentile, an even greater number of sectors come into play. This suggests that there is substantial scope for policy to shape outcomes.

The results point to setting realistic goals for participation in global value chains, however. The transport sector, for example, remains out of reach for all SACU countries except for South Africa even at the 60<sup>th</sup> percentile level of capabilities. Fixed characteristics will also inhibit participation in some sectors when they are important, but they can be overcome in certain cases. Proximity to markets, for example, is important in textiles, and this may restrict SACU countries’ participation in this sector even with enhanced capabilities.

> 16 The seven policy variables are: human capital, physical capital, institutional capital, logistics/connectivity, wage competitiveness, market access and access to inputs.

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