A business processing center in Riyadh that is run by women.
An e-commerce company that helps farmers develop transport companies to deliver packages to remote, rural areas of China.
An airplane engine designed in Turkey, constructed in North America, and used all over the world.
Each of these innovations emerged from a modern trend in trade – global value chains – that was the subject of discussion Friday at “Transforming World Trade: Global Value Chains and Development,” a flagship event of the Annual Meetings hosted by the World Bank Group and the International Monetary Fund. At issue: what are the implications of this trend for poverty and development?
The panelists included World Bank Group President Jim Yong Kim, World Trade Organization (WTO) Director-General Roberto Azevêdo, General Electric Company Vice Chairman John Rice, and Colombian Minister of Finance and Public Credit Mauricio Cárdenas. Anabel Gonzalez, Senior Director of the World Bank Group’s Trade and Competitiveness Global Practice, moderated the discussion. The vantage points ranged widely, but all panelists seemed to agree: Global value chains hold promise for the poor.
The World Region
A business processing center in Riyadh that is run by women.
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By now, developing countries are exporting parts and components used in some of the most sophisticated products on the planet. With the rise of global value chains (GVCs), workers in these countries are no longer just assembling imported parts for local sale, as has been done for decades. They are now participants in international production networks – in factories that cross borders.
This change is significant for economic development, as we argue in our forthcoming book, “Making Global Value Chains Work for Development.” GVCs will also be the subject of a discussion by World Bank Group President Dr. Jim Yong Kim, World Trade Organization Director-General Roberto Azevêdo, General Electric Vice Chairman John G. Rice, and Colombia Minister of Finance and Public Credit Mauricio Cárdenas -- and moderated by World Bank Trade and Competitiveness Senior Director Anabel González -- on Friday at “Transforming World Trade: Global Value Chains and Development,” a flagship event of the World Bank-IMF Annual Meetings.
International trade has a critical role to play in environmental protection and the effort to mitigate climate change. While it certainly isn’t always framed this way, it is important to realize that increased trade and economic growth are not necessarily incompatible with a cleaner environment and a healthier climate.
If we are going to move away from dirty fossil fuels and inefficient energy processes at a rate necessary to limit the likely devastating results of a warmer planet, then we need enabling policies in place—especially when it comes to trade policy.
That’s why, this week, a group of 14 World Trade Organization (WTO) Members are meeting to begin the second round of negotiations on the Environmental Goods Agreement (EGA)—an effort aimed at liberalizing trade in products that help make our world cleaner and greener.
Summer is almost over and the fall semester is about to begin for young economics students. But this semester could be the start of something much larger at University College London (UCL) and the University of Massachusetts in Boston.
These two schools are among the first to pilot a fundamentally new approach to the way economics is taught in higher education. Others including the University of Sydney, Sciences Po (Paris), and the University of Chile will follow in early 2015.
This new approach is based on the CORE project of the Institute for New Economic Thinking (INET) at the Oxford Martin School, part of a global call for an overhaul of the economics curriculum commonly taught to undergraduates. True to its name, the CORE project has developed a new, interactive core curriculum—all delivered through an online virtual learning environment, and completely open to the public.
One of the core principles of trade economics is that of “comparative advantage.” First described by David Ricardo, the theory says that countries are best off if they specialize in products that they can make relatively more efficiently – with lower opportunity cost – than other countries. If this happens, the theory goes, global welfare will increase. This concept is more difficult than it sounds, however – as Paul Krugman has pointed out quite eloquently – and benefits from illustration.
Basketball genius Michael Jordan stars in one example sometimes used in textbooks and classrooms: If Jordan mows his lawn faster than anyone else in the neighborhood, he has an absolute advantage in lawn mowing. But that doesn’t mean that he should mow his neighbor John Smith’s lawn, because that would come at an opportunity cost: in the same two hours it would take Jordan to cut the grass, he could earn much more by playing basketball or making a commercial.
While it is difficult to measure comparative advantage in world trade, one indicator is something called “Revealed Comparative Advantage” (RCA). This is a measure of how a country’s exports compare to those of a bigger group, such as a region or the rest of the world. For example, if a country’s RCA in wheat is high (typically greater than one), that means wheat makes up a higher share of that country’s total exports than it does of the world’s exports. This suggests that that country is a more efficient wheat-producer than the average country.
But countries don’t always produce the products in which they have a revealed comparative advantage. Sometimes Michael Jordan mows the lawn. Let’s take a look at a couple of examples from this new data visualization tool.
The world’s 45 Least Developed Countries that are not oil producers (non-oil LDCs) are exporting less and less in the global market place. Between 1985 and 2012, the world market share of non-oil LDCs’ exports of goods and services fell from 1.2 percent to 0.8 percent—all while their share in world population rose from 7.5 percent to 9.9 percent.
The 2005 Aid for Trade (AFT) initiative was designed to arrest this decline. Yet, LDCs’ trade costs continue to fall less rapidly than those of their competitors.
Clearly, it’s time to re-evaluate the AFT initiative.
A new e-book does just that, and, contrary to what some may think, concludes that the initiative has been beneficial. But due to a collective failure to clearly articulate its results, the achievements of the AFT initiative are now at risk as development budgets come under increasing pressure.
When economists think about price shocks, they consider how a change in price will affect the supply and demand of a product. But when that product is human – i.e., a worker – interpreting the impact of a price – or wage – shock is no longer cut and dried.
Just consider: If your wage was suddenly cut, would you remain in your current job despite the loss in earnings? Would you quit immediately, or look for a new job while continuing to work? How long could you survive on your lower earnings? Would you be forced to sell your house or other assets? How much money and effort would you invest in finding a better job? Would your personal circumstances allow you to take a better job in a distant location? Would you uproot your family for this job?
I have to confess I am indifferent to soccer. Until last week, I was mostly annoyed by the distraction brought by the current World Cup.
And then things changed a bit. Reading Le Monde, I was intrigued by a graphical representation of a complex network. It just so happened to be a representation of the strategy of the Dutch soccer team. This is a simple and clever representation, which—at least, for me—makes soccer interesting.
Empirical literature confirms the significant contribution that services trade can play in developing economies. High-quality and low-cost services can enhance competitiveness, connect countries to the global economy, and help diversify their exports.
The question is how to foster the development of the services trade in these countries. Research shows that the liberalization of services barriers can increase the performance of manufacturing and agricultural exports, for example, and help boost quality and cut costs, as well as increase service exports.
But liberalization alone is insufficient for successful reform. Services liberalization requires that a country design a careful liberalization process that takes into account its specific conditions. Many countries which have acceded to the WTO and have adopted significant liberalization commitments have not fully reaped the benefits of those reforms. One of the explanations is probably that their process was incomplete. In general, liberalization needs to be complemented by strong and solid regulatory frameworks. Without these conditions in place--- contestable markets, strong regulatory governance, and enforcement capacity--- liberalization will not provide the expected benefits.
Why is it so difficult to create the necessary conditions for successful services trade reforms?
Part of the World Bank’s new vision is to step up its efforts to help fragile and conflict-afflicted states break the vicious cycle of poverty. But this is no easy task.
The destruction of productive assets and the restrictions on the capacity to produce are among the most severe economic impacts of conflicts and fragility. These effects explain why countries in conflict or emerging out of conflict typically have very large trade deficits. The productive sector is often particularly weak by international standards, so exports are low and domestic consumption has to rely on imports. Indeed, five of the ten countries with the largest trade deficit in the world (Timor-Leste, Liberia, the Palestinian territories, Kosovo and Haiti) are considered fragile by the World Bank and other regional development banks (figure 1).
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