Global value chains can help developing countries improve growth outcomes: World Bank

In an era of slowing trade and growth, developing countries can achieve better outcomes for its people through reforms to boost their participation in global value chains, according to a latest World Bank report.

In the report titled “World Development Report 2020: Trading for Development in the Age of Global Value Chains” that was released on Tuesday, the bank argues that these reforms can help developing countries expand from commodity exports to basic manufacturing, while ensuring that economic benefits are shared more widely across society.

“Global value chains have played an important part in the growth, by enabling firms in developing countries to make significant gains in productivity, and by helping them transition from commodity exports to basic manufacturing, World Bank Group Chief Economist Pinelopi Koujianou Goldberg said.

She said that in the age of global value chains, all countries have much to benefit by speeding up reforms that increase commerce and boost growth.

Asserting that countries need trade to develop, and an open, predictable environment that benefits everyone, she said that 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.

Global trade

The global value chains today account for nearly 50 per cent of trade worldwide, the World Bank said in its report. “But their growth has plateaued since the financial crisis of 2008,” it said.

According to the report, creation of the European single market — together with the integration of China, India, and the Soviet Union into the global economy — created a huge new product and labour markets, and so firms could sell the same goods to more people and take advantage of economies of scale, leading to the further deepening of GVCs.

The new supply of cheap labour encouraged profit-seeking companies to either reallocate their production facilities or find local suppliers in low-wage countries, the report said.

“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,” the report added.

A one per cent increase in participation is estimated to boost per capita income levels by more than one per cent — 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, it noted.

Impact on 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, the report said.

Further, 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, it said.

The report notes 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 shows how countries can take the initiative to achieve better outcomes — by choosing from a range options customised for their specific stage of development.

“These options include stronger policies to reduce carbon emissions (like pricing environmental degradation) and to help displaced workers find new jobs,” it said.

The report highlights the steps countries can take to attract GVC investments, even if they have been largely left out of the value chain revolution.

Small steps — such as speeding up customs and reducing border delays — can yield big benefits for countries making the transition from commodity exports to basic manufacturing.

“For many goods traded in global value chains, a day’s delay is equal to imposing a tariff in excess of one per cent. In addition, investments that improve connectivity by modernising communications and roads, railways, and ports can yield large benefits,” it said.

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