The World Bank has tasked developing nations to explore the potentials buried in Global Value Chains (GVCs) and be self-reliant, as economic benefits are shared more widely across society.
In its World Development Report 2020, the international lender explained that GVCs have powered an economic transformation, allowing the poorest countries to quickly climb the development ladder. Such chains, according to the report, enable developing countries to specialize and grow wealthier without having to build whole industries from scratch.
Chief Economist, World Bank Group, Pinelopi Koujianou Goldberg, said, “Global value chains have played an important part in growth, by enabling firms in developing countries to make significant gains in productivity, and by helping them transit from commodity exports to basic manufacturing.
“In the age of global value chains, all countries have much to benefit by speeding up reforms that increase commerce and boost growth. Countries need trade to develop, and an open, predictable environment benefits everyone. To ensure sustained social support for trade, policymakers need to ensure that the benefits of global value chains are widely shared among a broad range of groups—especially the poor and women and that the environment is protected.”
The Work Bak report states that, “Today, global value chains account for nearly 50% of trade worldwide. But their growth has plateaued since the financial crisis of 2008,” the report finds. It added that trade frictions have created uncertainties over market access, causing firms to consider delaying investment plans.
“Moreover, the gains from participating in global value chains have not been distributed equally across and within countries. Environmental costs are growing, mainly from higher carbon dioxide emissions due to transportation of intermediate goods across greater distances.”
What are GVCs?
- The era of companies manufacturing things primarily in one country has fizzled out. Today, a single finished product often results from manufacturing and assembly in multiple countries, with each step in the process adding value to the end product.
- Through GVCs, countries trade more than products; they trade know-how and make things together. Imports of goods and services matter as much as exports to successful GVCs.
- GVCs integrate the know-how of lead firms and suppliers of key components along stages of production and in multiple offshore locations. The international, inter-firm flow of know-how is the key distinguishing feature of GVCs.
- Promote productivity and growth: A 1% increase in participation is estimated to boost per capita income levels by more than 1%—about twice as much as standard trade. In Ethiopia, firms participating in global value chains are more than twice as productive as similar firms that participate in standard trade.
- Reduce poverty: Since gains in growth from global value chains are larger than from trade in final products, their impact on poverty reduction is also larger. Regions in Mexico and Vietnam that participated more intensively in global value chains experienced greater reductions in poverty.
- Deliver better jobs: Firms in global value chains draw people into more productive manufacturing and services activities and tend to employ more women, supporting structural transformation in developing countries.
Despite these challenges, the report found that Global Value Chains can continue to be a force for sustainable growth — if developing countries undertake environmental protection measures, particularly efforts to reduce production subsidies and carbon pricing, deeper policy reforms and advanced economies pursue open, predictable policies.
The report showed how countries can take the initiative to achieve better outcomes — by choosing from a range of options customized for their specific stage of development. These options, it said include stronger policies to reduce carbon emissions (like pricing environmental degradation) and to help displaced workers find new jobs.