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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.
Many of the benefits of GVCs have to do with the transfer of skills and knowledge. When Toyota makes car parts in Thailand, for example, Thailand imports Toyota technology, managerial and business practices, marketing expertise and more. With the prevalence of GVCs, developing countries can industrialize by joining an already-established GVC, as opposed to building one from scratch, as was done by Japan and the Republic of Korea in the 20th century.
Accordingly, GVCs are on the radar of policymakers in developing countries. And these policymakers are asking questions: How can my country join a GVC? At what point in this-or-that vertically specialized industry is my country suited to enter? And, later: How can my country upgrade its position – add more sophisticated tasks, add more domestic value to the product, engage more domestic firms – in a GVC that is already here?
Unsurprisingly, because GVCs are ultimately built and led by large firms, the answers to these questions relate to business calculations. Essentially, countries must address two main concerns of these private-sector leaders, whose influence spans broad, complex, global networks: how to connect their factories and how to protect their assets. This means that good infrastructure and efficient borders are important, especially as they relate to the predictability, reliability and time sensitivity of trade flows. Slow and unpredictable land transport, for example, hurts Sub-Saharan Africa’s participation in the electronics and other value chains. Strong, well-enforced property rights are also essential to attracting and keeping foreign investors. Firms export valuable, firm-specific technology. It is important that their host countries enforce contracts between private parties.
But these are not the only concerns of policymakers. They do want to attract and maintain GVC investment, but they also want GVCs to help improve their nations’ economic and social well-being. The critical issues for policymakers are ensuring that GVCs are integrated into the economy as a whole – hiring local firms, transferring knowledge and technology, and enabling workers to add more value to the products produced – and ensuring that they are benefitting society through more and better-paid jobs, better living conditions, and social cohesion. In short,
In “Making Global Value Chains Work for Development,” we offer policymakers analytical tools and policy options to engage in a strategic approach to GVCs. We suggest ways in which a country’s leaders can think systematically about how to enter a GVC and then expand participation in a way that advances development goals.
GVCs operate as complex, multi-dimensional networks – hubs and spokes in various directions – that lend themselves to mathematical analysis. We discuss how countries can use quantitative measures of GVC participation to make informed policy choices. Is a country’s position in GVCs central or peripheral? Is the country specialized in tasks closer to final demand, or does it participate in the initial stages of the value chain? These distinctions matter for success in GVC participation and upgrading.
A key concept in understanding how GVCs can generate economic development is that of “value added.” For a GVC to help a country improve its income, it must operate in a way that adds value to the country’s productive factors, including capital and labor. This may be achieved by functional upgrading – labor executing higher value-added tasks – but also by process upgrading –by specializing in the tasks in which the country has comparative advantage and by putting more technology, know-how, and auxiliary services into these tasks.
One example of this is the story of avocados in Chile, as told in a 2009 USAID case study. At the basic level, avocados are just fruit that is harvested and sold with very little profit margin. To achieve better bargaining power and profit margins – and compete on international markets – producers can incorporate procedures and production tasks that increase the quality of the product. In the case of avocados, which are difficult to transport when ripe, this meant controlling the ripening of the fruit so that it happens at the destination.
Another example is the maturation of the aviation industry in Morocco. Over the past decade, in line with the government’s strategy to expand into more advanced manufacturing, leading aviation companies such as Boeing of the United States or Bombardier of Canada have invested in increasingly sophisticated factories in Morocco. This began in 2001 with a small operation that prepared cables for Boeing 737 jetliners. Within two years, workers hit high efficiency rates (70 percent) compared with industry norms, and job openings began attracting highly educated applicants. General Electric, Dassault Aviation and Airbus joined Boeing in using the Moroccan-made cables. Now the parent company of this operation, Safran, produces jet-engine housings, and the country’s aviation industry employs almost 9,000 people and pays 15 percent more than the country’s average monthly wage.
In short, GVCs are at once a complex and important feature of modern trade, and developing countries would be wise to engage strategically with them – in a way that promotes development. Policymakers should be aware of the primary business concerns of GVC firms. But they should also take advantage of the opportunities for economic growth and welfare improvements that GVCs offer across a range of products – from avocados to airplanes.