GVCs can continue to boost growth, create better jobs, and reduce poverty. Provided that developing countries undertake deeper reforms and industrial countries pursue open, predictable policies. International trade expanded rapidly after 1990, powered by the rise of global value chains (GVCs). This expansion enabled an unprecedented con-vergence: poor countries grew faster and began to catch up with richer countries. Poverty fell sharply. These gains were driven by the fragmentation of production across countries and the growth of connections between firms.
Fragmentation of production was the key methodology in the conception, where a production process could be broken down into many subsections and could take place across other neighboring countries, in other words, different companies specialize in specific tasks and do get involved in producing the final product. In this process, raw material with value addition may cross the border of a country and reach another country for value addition, as semi-finished goods, and be assembled as a final product for consumption. It is vital to address required policy changes and enhancements by the authorities, in order to ensure continued participation in global value chains.
Through the concept of product fragmentation, firms operating in developing economies, have access to foreign markets with a lower cost, better productivity, improved management practices, and providing higher-paid better quality jobs, which would ensure faster growth in the economy. Trade growth and global value chain formation have not reached the maximum potential since the financial crisis in 2008; the main reasons behind, could be trading partners such as Europe contributing one-fourth of global output and one-third of global trade, and China the second-largest economy in the world could provide a better contribution to the same.
There are many ways that countries participate in Global Value Chain, where Argentina, Ethiopia, and Indonesia are engaged in simple manufacturing production chains but Algeria, Chile, and Nigeria are engaged in exporting commodities and raw materials required for production processes. It is noteworthy that India and the US are producing more and more services required by complex production processes elsewhere, almost half of the world trade considered to be taking place on Global Value Chain transactions. Few regions, some sectors, and some large multinational firms are efficaciously engaged in Global Value Chain. East Asia, Europe, and North America are providing good examples and account for very large production capacities, in electronics, machinery, and transport equipment manufacturing, well fragmented across countries.
Contributors to GVC development With advance development took place in Information & Communication Technology the manufacturing firms found it easier to contract out and organize much more complex activities at a distance, whilst ensuring excellence of a product.
Lowering transport mainly declining air and sea freight costs also contributed positively to trade and Global Value Chain development. Reliability and Inexpensive cost of communication contributed vastly to the development of the services sector. Trade and Investment liberalization activities taking place in both developed and developing economies are having a positive impact on reducing barriers of trade for goods and services.
There are four different ways that countries participate in the Global Value Chain, namely: 1. Commodity Producing, 2. Limited Manufacturing 3. Advanced Manufacturing and services 4. Innovative activities
As per the world bank report, Countries in the commodities group have a small share of manufacturing exports and limited backward Global Value Chain integration. Argentina, Armenia, Bosnia and Herzegovina, Cambodia, Costa Rica, Cyprus, El Salvador, Ethiopia, Indonesia, Kenya, Nepal, Serbia, South Africa had been in commodities and moved into limited manufacturing in the recent past. Jordan and Lesotho downgraded their status from limited manufacturing to commodities.
Example of Vietnam
Today, Vietnam is providing one of the best examples of Global Value Chain integration. Being the second-largest smartphone exporter, Samsung is producing 40 percent of their phones, and employing 35 percent (over 160,000) of their global staff engagement in Vietnam.
Bangladesh in GVC
Bangladesh can be considered as a very good example of the global value chain participation. Apparel and footwear exports of Bangladesh was approx. one percent of global demand by 1988. Since then the yearly growth they achieved was approx.
Increasing market size through liberalized trade policies Domestic market size and limited local inputs are always a constrain for small countries, negotiating trade liberalizing agreements with other economies may bring in the solution for this aspect. Import and export regulatory measures such as tariffs, quotas may limit the country’s ability to be integrated with the global Value Chain at large. Cross border activity efficiencies should be increased to the maximum level reducing the cost of Import and Export and time taken for such activities.
Employment Vs GVC
Apart from higher overall productivity, firms in developing countries that participate in GVCs tend to be more capital-intensive. Machines can be equipped to deliver the precision needed for the compatibility of parts. They can also deliver the higher-quality out-put demanded by foreign consumers and help firms achieve higher productivity and greater scale. It may therefore make sense for firms to adopt more capital-intensive methods, even those in poor countries with relatively large labor forces.
The costs of accessing capital may also be lower for GVC firms because of the relational dimension of participation. They have easier access to finance, foreign machinery, and training for their operations. In Vietnam, firms that both import and export use more capital inputs per worker than firms that export only or firms that sell exclusively to the domestic market.
According to these observers, rather than contributing to more and better-paying jobs in developing countries, capital-intensive production by GVC. The technology may lead to stagnant or lower overall employment, and the path to development by moving workers from agriculture to manufacturing may be suppressed. Because GVCs boost exports, their overall effects on employment in developing countries have been positive. Even though production is becoming more capital-intensive and less job-intensive, the positive productivity effects at the firm level are (unexpectedly) good for scale and employment.
GVCs support the employment of not just men, but also women. Female employment grew faster than male employment in Vietnamese provinces where GVC participation expanded the most.49 Notably in the apparel and electronics sectors, where assembly of many small parts must be done manually, firms report preferences for female employees because of the high levels of dexterity required. In Ethiopia, women constitute 75 percent of the workforce in the apparel sector,50- 65 percent in Haiti, and 77 percent in Sri Lanka.
In my opinion, through all this, global value chains have emerged as the dominant mode of doing international business. It is important to the growth of productivity, job creation, and reduction of poverty through the increased living stand of people. However, some of the negative effects have been identified in the environmental context, these are associated with the emissions of GHG to the atmosphere through the transportation of goods and services and waste management.
Reference: World Bank Report 2020
Author: Ruwan Nishantha Gamage