Digital artifact final project
- 1. 1 | P a g e Trading for Development in the Age of Global Value Chains (GVCs) Open Learning Campus, The World Bank Group Digital Artifact Final Project Prince Henry Anim-Owiredu Topic: Global Value Chains (GVCs) and the Export-led Development Model of Developing Countries. Global Value Chains (GVCs) led to an increase in international trade after the 1990s and now accounts for almost half of all international trades. GVCs breaks up the production process across countries with firms specializing in specific tasks or stages of production. Figure 1: Global Supply Chain Source: Business 2 Community Companies used to make things primarily in one country but through GVCs, product parts and components are manufactured and assembled in multiple locations with each step adding value to the end product. This fragmented production of goods and services across national boundaries have been made possible through improvements in information, communication and transportation technology. GVCs have two main features that distinguish it from traditional trade which are hyper-specialization and durable firm-to-firm relationships. These features of GVCs resulted in economic convergence as poor countries began to grow rapidly to catch up with richer countries. GVCs are therefore a great catalyst for economic development by acting as a powerful driver of productivity growth, job creation and increased living standards. Empirical evidence shows GVCs have contributed more to income growth than traditional trade due to its productivity-enhancing effect. GVCs also deliver more productive jobs leading to poverty reduction. International trade and investment flows can be key factors for development and therefore participating in GVCs can support economic growth and structural
- 2. 2 | P a g e change by increasing exports and employment and reducing dependence on agriculture and natural resource production as well as extreme poverty reduction. Empirical evidence supports the picture of GVCs boosting productivity and incomes through hyper-specialization. This is because, breaking up complex products through GVCs allows countries to specialize in specific parts and tasks of production which allows firms and countries to benefit from efficiency gains from a much finer international division of labour and to reap economies of scale. Productivity gains also comes from better access to greater variety of higher-quality or less-costly inputs. Evidence shows that, two-way traders, which is a proxy for GVC participation, are more productive than one-way traders and non-traders that neither export nor import. The increased productivity leads to expansion in firm’s output and exports, and thus an increase in its employment. Thus, GVC generates faster employment growth. GVC firms do not only employ more people, but they also tend to pay better. GVCs therefore leads to increased job creation and increased standards of living. A major concern in developing countries is the effect of increased automation and technological advances on GVC trade and the viability of the export-led development model of developing countries. Figure 2: Automation and Industrial Robots Source: ZDNet Technological advances and Industrial robots are changing global production and supply chains but their effect on GVC trade is largely positive and includes the following: GVCs encourage innovation which reduces the cost of trade thereby boosting trade and job creation. Automation and robotization leads to increased demand for intermediate inputs from developing countries thereby promoting trade, job creation and development through efficiency and economies of scale.
- 3. 3 | P a g e Not all industries can use robots. Robots cannot perform all tasks in all industries. Industrial robots are useful in industries that process hard and heavy materials. Automation anxiety is therefore not justified. New technology thus seems to increase international trade rather than hinder it. Thus, the export-led development model of developing countries is still viable in the face of advances in technology. Although GVCs are powerful drivers of economic growth, they are not without drawbacks which sometimes can be detrimental to economic growth and job creation. How countries participate in GVC matters for their impact on development as the gains from GVC may not be distributed equally across countries. Developing countries which mainly participate in GVCs by exporting agricultural produce and natural resources tend to reap very little reward from GVC participation whilst the chunk of the reward goes to large firms located in developed countries. GVCs also presents challenges to the international tax system which compromise domestic revenue mobilization efforts. The lead firm can engage in profit shifting to areas with low corporate tax rates thereby denying developing countries vital revenues needed for development projects. GVCs also ensure that export growth is linked with import growth thereby reducing the potential for currency devaluation as a policy tool to boost export volume and reduce trade imbalances. Finally, GVCs amplifies the cost of protectionism for trade and growth. GVCs therefore require trade liberalization which can have negative effects on the industrialization efforts of developing countries, and thus on their job creation and standards of living. Unlimited free trade can be a dangerous thing for developing countries. A country must impose import duties on a range of products it produces locally in order to help domestic industries and save jobs. All industrialized countries were able to grow due to barriers to foreign competition. Another concern is the impact of GVCs on the natural resources and environment in developing countries. The environmental impact of GVCs can be classified into three categories: Scale Effects: GVCs lead to increased economic activities through increased production and transportation and hence GVC trade has greater environmental cost than standard trade through increase in carbon dioxide (CO2) emissions and waste from both production and consumption Composition Effects: GVC is associated with worldwide fragmented production and hence production can be easily moved to pollution havens which are countries with weak environmental standards and costs with detrimental environmental effects in these countries. There is also the possibility to move production to countries with abundant natural resources leading to the depletion these natural resources and environmental degradation. Technique Effects: GVCs are important engines of innovation arising from hyper- specialization and durable firm-to-firm relationships, leading to the production environmentally friendly products and production processes. GVCs can thus have a positive effect on the environment. Reference: Trading for Development in the Age of Global Value Chains (GVCs). The World Development Report (2020). International Bank for Reconstruction and Development / The World Bank.