The integration of lower- and middle-income countries (LMICs) into global and regional value and supply chains has significantly contributed to the economic development and poverty reduction of the last 30 years. However, mere integration is insufficient – it matters what countries produce, and how they produce it.
Countries that merely export raw materials and unprocessed commodities have seen slower paths to economic transformation,1 while those that produce and trade higher value-added goods and services – from food products to textiles to complex batteries – have seen more sustained growth rates and higher incomes per capita. UNIDO’s SDG 9 tracker shows that Morocco has almost doubled the share of high-tech manufacturing value added in just 10 years (see Figure 1), landing far above the average for middle-income industrializing countries. Côte d’Ivoire has also made significant advances, almost doubling manufacturing value added per capita in the same period (see Figure 2). These numbers translate into better jobs, higher wages and faster poverty reduction: Côte d’Ivoire’s extreme poverty rate fell below 10% for the first time in 2022.
Aside from what goods countries produce, regulations enforcing higher environmental, social and governance (ESG) standards along supply chains mean it also matters how they are produced. For goods to remain competitive, these standards not only need to be adhered to, but must also be traceable, proven and certified. Producers are increasingly bound by international sustainability regulations – such as the European Union (EU) Corporate Sustainability Due Diligence Directive (CS3D), the EU Deforestation Regulation (EUDR) and the US’ Supply Chain Due Diligence Act – as well as a patchwork of private-sector ESG regimes with limited levels of interoperability.
The complexity and associated costs of sustainability requirements put particular pressure on small and medium-sized enterprises (SMEs) and farms in LMICs. In sub-Saharan Africa, 96% of firms are micro enterprises2 and 80% of farms are considered smallholders.3 This means that most African entities exporting to the EU lack the traceability technology, but also the awareness of new regulations and requirements. The world’s two biggest cocoa producers – Côte d’Ivoire and Ghana – export 63% and 43% of their cocoa to the EU, respectively, but they risk losing market access if companies fail to prove that their supplies are not grown on deforested land.4 The recent decision by the European Commission to delay the enforcement of the EUDR by 12 months gives governments and producers more time to prepare. But this does not reduce the urgency.
Similarly, with 96% of Mozambique’s aluminium exports destined for the EU,5 the country’s key foreign-exchange-earning sector is highly vulnerable to the EU’s Carbon Border Adjustment Mechanism (CBAM), which comes into force on 1 January, 2026. Even if Mozambique’s aluminium industry is mostly powered by hydroelectricity rather than fossil fuels,6 World Bank calculations show that Mozambique’s aluminium is still more carbon-intensive than the EU average, and will therefore be less competitive on the EU market. In fact, the CBAM could cause a 14% fall in aluminium exports from Africa to the EU.7
Focus on improving conditions at the beginning of the supply chain
But in the midst of every crisis lies opportunity. The push towards higher standards can help to focus the efforts of governments, international organizations and multilateral development banks (MDBs) on investments in better jobs and cleaner production. This is the ultimate goal of the regulations, after all. Unfortunately, currently too much emphasis is placed on compliance: a recent study found that Swiss companies spend an average of $300 million annually to comply with the CS3D, of which 50% goes to auditing firms.8 But investments in compliance do not address the root cause of the problem. Couldn’t these funds instead be redirected towards improving conditions in the first mile of the supply chain?
Agricultural productivity reduces pressure on deforestation
In the short term, to mitigate the risks the EUDR poses, the geolocation of farms needs to pick up speed and governments need to collaborate to ensure interoperability of data along the supply chain.
In the long term, however, we need to work towards a significant increase in agricultural productivity. Africa’s crop yields are far below other regions, with Egypt being one of the few exceptions (see Figure 3). Most of Africa’s agricultural growth stems from cultivating additional land, rather than increasing output per hectare: since 2000, the cereal production footprint has grown by 60%, turning ecologically valuable forests into farmland.9 Higher agricultural productivity increases output per hectare and therefore reduces the amount of additional land needed to grow food. Agro-innovation and agro-modernisation measures such as precision irrigation and improved inputs such as fertilizer, seeds and farm equipment could reduce the required expansion of cropland by 38%, enhancing food security, reducing poverty and easing pressure on deforestation.10
Focus on economic transformation and energy transition
Similarly, helping SMEs comply with the CS3D is only a short-term fix to avoid losing market access, but will not automatically improve working conditions or wages. Development cooperation needs to help firms become more productive, move into higher value-added sectors, create formal employment, and pave the way for higher labour standards and social safety nets. Supporting SMEs to upgrade their machinery, increasing the adoption of processing technologies and providing the necessary skills can help firms grow and provide better jobs.
Furthermore, CBAM will have a significant impact on low-income countries exporting energy-intensive goods such as aluminium, cement and fertilizers to the EU. Development partners can help firms in the short-term by providing orientation on the new rules and mechanisms for enforcement, but ultimately, they need to accelerate the energy transition and provide de-risking instruments to encourage private sector investment in clean technologies. This will be particularly important for bridging the bankability gap in industrial decarbonization and the adoption of clean hydrogen.
People, planet, partnership
International organizations and Multilateral Development Banks have a clear mandate to serve both people and the planet. International organisations, with scaled-up support from high-income countries, can provide the tools and technical assistance needed to upgrade and green value chains in countries where it is needed most. MDBs are particularly well placed to mobilize public and private financing and provide de-risking tools so that governments and firms can invest in traceability systems, improve technology adoption, and transition to clean production.
In this way, compliance with ESG regulations need not be a burden, but rather a stimulus for creating better jobs while putting less pressure on the planet.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
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