Industrial policy and developmental space: The missing piece in the GVCs debate

Demián Dalle, Verónica Fossati, Federico Lavopa, 13 April 2014

a

A

Global value chains (GVCs) have gained unusual prominence in the research agendas of international organisations and academics devoted to the study of international trade and economics. They have also been in the spotlight of negotiating tables of the main international economic fora held during 2013.

This theoretical framework is far from being a novelty, though. It was first introduced as a way of analysing the international expansion and geographical dispersion of production chains, and has been intensively investigated by specialised researchers since the nineties (G. Gereffi, R. Kaplinksy, T. Sturgeon, J. Humphrey, among others). What does seem to be new is the use of this analytic tool to support an agenda on eminently liberal economic reforms.

Although recent initiatives proposed by different international organisations are of great interest and have proved to be very useful, some of their underlying theoretical assumptions and conclusions are, at least, debatable. The aim of this column, based on a paper recently published at the Argentine Journal of International Economy (Dalle et al. 2013) is to provide a critical view on these conclusions.

One model does not fit all

Over the last years various international organisations have elaborated several documents in relation to GVCs (OECD and WTO 2012, 2013a and b, OECD 2013a, b, c and d, UNCTAD 2013a and b). The theoretical proposal made by these organisations seems to rely on a few basic assumptions, upon which highly optimist views about GVCs effects on economic development are built:

  • Globalisation has a positive impact on productivity due to efficiency improvement as a result of international competition, better access to technology and new knowledge, and greater room for specialisation and economies of scale.
  • Participation in value chains could further increase productivity since it would facilitate access to cheaper or higher quality intermediate inputs.
  • GVCs would also work as a path for developing countries to access international markets of goods and services by focusing on certain activities and processes rather than by establishing a complete value chain.

This conceptual framework provides the basis for a series of concrete public-policy recommendations. In a nutshell, these could be summarised in the idea that, in order to fully benefit from value chains, governments should liberalise as much as possible trade in goods and services and improve business environment through, among other issues, trade facilitation and liberalisation of investment, competition policy, intellectual property, and temporary labour movement. In this way, the links of the chains located, or willing to be located within the territory of a certain country, could get their imported inputs at the lower cost possible, and would thus gain competitiveness in the global market, where they have to sell their ‘made in the world’ final products.

These conclusions are based on a simple reasoning. Tariff reductions on imported inputs will lead to an improvement in external competitiveness of the economy and this, in turn, will result in an increase in exports and, therefore, in income. This argument lies on at least two implicit assumptions which downplay the differences in the productive structures of the different countries and they are only valid in certain special cases, which do not necessarily abound in the real world and, particularly, in the periphery.

  • It is assumed that there exists a high elasticity of exports and, therefore, they respond vigorously to a price change.

This may not be the case in many developing countries, especially in those which exports are largely made up by primary products or natural-resource-based manufactures, which find physical or natural limitations to increase their production.1

  • It is assumed that – even in the case of countries with high price elasticity of exports – the substitution of local suppliers with foreign providers does not lead to a GDP and employment contraction.

If the reduction in the production of domestic intermediate goods is not compensated for by a greater increase in the exports or domestic consumption of final goods, the overall result will be a contraction in the total economic income. Thus, the shrinking effect of the measure may surpass the expansive effect.2

Industrial policy and developmental space: The missing piece in the GVCs debate?

Albeit quite timidly, the ‘liberal’ proponents of integration into GVCs acknowledge that the mere integration of a country’s companies into global value chains does not ensure economic development.3 On the contrary, the success of this strategy will largely depend on the place those companies occupy in GVCs, since this will determine the benefits obtained as a result of being part of the chain.

This place-in-the-chain issue constitutes the key of what was intended by the neo-Schumpeterian authors, who developed the concept of GVCs as a conceptual tool to understand the development opportunities of emerging economies (see for example, Gereffi et al. 2001 and Kaplinsky 2000 and 2004).

The recipe proposed by these authors is the creation of proper incentives so that national companies could go a step forward in the process of climbing up value chains – from basic links to higher value-added links which generate greater revenues. This process is known as ‘upgrading’ (Humphrey and Schmitz 2002, Gereffi and Fernández-Stark 2011, Milberg et al. 2013, Gereffi and Sturgeon 2013).

Against this backdrop, it could be argued that:

  • If, by definition, a development strategy based on integration into GVCs implies importing intermediate inputs so as to manufacture the goods that will be exported, the way to achieve upgrading is through the subsequent local manufacture of those products.
  • This process is not automatic, and it entails some type of government intervention. Thus, while under certain circumstances protectionism is counterproductive, in other cases it becomes necessary (Milberg et al. 2013).

According to the liberal view, the role of the State in accompanying national firms in these upgrading processes would be limited to the typical pro-market recipes – increasing competition to encourage companies to improve their productivity, promoting a dynamic business sector, investing in public goods, and providing the conditions to support private investment in these areas. However, these studies omit a series of issues related to the tools that developing countries have (or do not have) to level the playing field and, therefore, generate or attract higher value-added activities to their territories, such as the role of intellectual property rights, international regulations on investment protection, and tariff structures in developed countries.

With respect to the first of these aspects, it is worth highlighting that the activities in GVCs which offer greater revenues are eminently intangible. In general, they are knowledge and skilled-based activities embedded in organisational systems. This type of knowledge – tacit in nature – is not only protected by important natural barriers to entry (Kaplinsky and Morris 2001), but is also protected ‘artificially’ by intellectual property rights (Kaplinsky 2000 and 2004).

With regard to international disciplines in terms of admission and treatment of foreign investment, the existing tangle of rules on the issue – ranging from the Agreement on Trade-Related Investment Measures (TRIMs) and the mode of service supply through commercial presence of the General Agreement on Trade in Services (GATS) to the chapters on investment in preferential trade agreements and the bilateral investment treaties (BITs) – imposes a series of obligations that prevent developing countries from implementing, among others, policies aimed at selecting the type of investment that will be made in their markets, or from obtaining greater benefits from those investments that are already made.

Likewise, tariff reduction has been much greater in low value-added sectors. In part, this was an explicit objective of initiatives, such as the EU’s Lomé Convention and the establishment of export processing zones, which concentrated in clothing and electronics, both characterised as low value-adding sectors (Milberg 2004). Furthermore, in the case of agricultural products and food, the value added by developing countries which supply industrialised markets has been historically restricted by tariff escalation and non-tariff barriers imposed by developed economies (Bhatia 2013).

Towards a research agenda on the GVC phenomenon from a southern perspective

GVCs seem to be seen as a far-reaching analytical tool and as a mandatory topic in the debates that will be held in the different international economic fora in the next years. However, efforts made so far from the southern hemisphere and, in particular, from Latin America, appear to be insufficient to carry out a critical analysis of the contributions that international think tanks and academics are making.

If we are willing to reject the linear proposal stating that the path to successfully integrate into GVCs depends almost exclusively on trade and investment liberalisation, then we should map the concrete examples of public policies that have been proposed to create the right incentives for national companies to upgrade and determine how accessible these proposals are for developing countries, which usually have budget and normative constraints that limit their room for manoeuvre.

Footnotes

1. For example, in the case of Argentina, Berrettoni and Castresana (2009) estimated, through an econometric study, a low price elasticity of exports.

2. Michelena (forthcoming) carries out a detailed analysis of the macroeconomic effects of a unilateral tariff liberalisation using a general equilibrium model as basis, according to which the results depend on the values that the price elasticity of exports and the replacement rate of inputs may reach.

3. As stated by UNCTAD (2013 b), integration into GVCs is not synonymous with economic development: even though a greater integration into value chains may generate long-term benefits, evidence shows that relatively few developing countries have been able to increase their domestic value-added and to enhance new capabilities and productive capacity only by integrating into GVCs.

References

Berrettoni, Daniel and Sebastián Castresana (2009), “Elasticidades de comercio de la Argentina para el período 1993–2008”, Revista del CEI - Comercio Exterior e Integración, 16, November: 85–97.

Bhatia, Ujal Singh (2013), “The globalization of supply chains: policy challenges for developing countries”, in Deborah K Elms and Patrick Low (eds.), Global value chains in a changing world, Geneva: World Trade Organization: 313–328.

Dalle, Demián, Verónica Fossati, and Federico Lavopa (2013), “Global value chains and development policies: setting the limits of liberal views on integration into the global economy”, Revista Argentina de Economía Internacional, 2.

Gereffi, Gary and Karina Fernández-Stark (2011), “Global Value Chain Analysis: A Primer”, Center on Globalization, Governance & Competitiveness (CGGC), Duke University.

Gereffi, Gary and Timothy Sturgeon (2013), “Global value chain-oriented industrial policy: the role of emerging economies”, in Deborah K Elms and Patrick Low (eds.), Global value chains in a changing world, Geneva: World Trade Organization: 329–360.

Gereffi, Gary, John Humphrey, Raphael Kaplinsky and Timothy Sturgeon (2001), “Introduction: Globalisation, Value Chains and Development”, IDS Bulletin 32.3, Institute of Development Studies.

Humphrey, John and Hubert Schmitz (2002), ‘‘Developing Country Firms in the Global Economy: Governance and Upgrading in Global Value Chains’’, INEF Report No. 61.

Kaplinsky, Raphael (2000), “Globalisation and Unequalisation: What Can Be Learned from Value Chain Analysis?”, Journal of Development Studies, 37(2): 117–146.

Kaplinsky, Raphael (2004), “Spreading the Gains from Globalization: What Can Be Learned from Value-Chain Analysis?”, Problems of Economic Transition, 47(2): 74–115.

Kaplinsky, Raphael and Mike Morris (2001), “A Handbook for Value Chain Research”, International Development Research Centre – IDRC.

Milberg, William (2004), “The changing structure of trade linked to global production systems: What are the policy implications?”, International Labour Review, 143(1–2): 45–90.

Milberg, William, Xiao Jiang and Gary Gereffi (2013), “Industrial Policy in the Era of Vertically Specialized Industrialization”, in Irmgard Nubler, José Manuel Salazar-Xirinachs, and Richard Kozul-Wright (eds.), Industrial Policy for Economic Development: Lessons from Country Experiences, Geneva: ILO-UNCTAD.

OECD (2013a), “Trade Policy Implications of Global Value Chains: Contribution to the Report on Global Value Chains”, Working Party of the Trade Committee, February.

OECD (2013b), “Drawing the Benefits from Global Value Chains – Draft Synthesis Paper”, Directorate for Financial and Enterprise Affairs, Investment Committee. March.

OECD (2013c), “Trade Policy Implications of Global Value Chains”.

OECD (2013d), “Interconnected Economies: Benefiting from Global Value Chains”, Paris: OECD Publishing.

OECD and WTO (2012), “Trade in Value-Added: Concepts, Methodologies and Challenges”.

OECD and WTO (2013a), “OECD-WTO Database on Trade in Value-Added – First Estimates: 16 January 2013”.

OECD and WTO (2013b), “OECD-WTO Database on Trade in Value-Added – May 2013 Release”.

UNCTAD (2013a), “Global Value Chains and Development. Investment and Value Added Trade in the Global Economy. A Preliminary Analysis”, New York & Geneva: United Nations.

UNCTAD (2013b), “World Investment Report 2013. Global Value Chains: Investment and Trade for Development”, New York & Geneva: United Nations.

 

Topics: Development, International trade
Tags: developing economies, GVCs, industrial policy

National Director of the Centre for International Economy, Argentine Foreign Ministry
Centre for International Economy, Argentina
Coordinator of the Master in International Relations and Negotiations at Flacso-Argentina / Universidad de San Andrés