WHAT DOMESTIC POLICIES FACILITATE FRUITFUL PARTICIPATION OF COUNTRIES IN GVCS? - Scientific conference
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WHAT DOMESTIC POLICIES FACILITATE FRUITFUL PARTICIPATION OF COUNTRIES IN GVCS?

26.10.2021 19:47

[Section 10. World economy and international economic relations]

Author: Zvierieva Kateryna, attorney-at-law, graduate student of Kyiv National University of Trade and Economics


Global value chain is the international fragmentation of production. Global value chains (GVCs) enable companies to manufacture and assemble a particular product in more than one country. This process allows for the flow of know-how from high-income countries to low- and middle-income countries.

GVCs have evolved in recent decades, and the economic implications must be rethought for the 21st century. Low- and middle-income countries are no longer simply importing parts for local sales, they are now part of supply chains that cross many borders [1].

Participating in GVCs can help developing countries grow, advance, and create jobs, but governments must have the proper policies in place to engage with GVCs in a positive way. Governments must prioritize their objectives, identify binding constraints, and design policy and regulatory interventions with specific challenges in mind.

At the present day about 50% of global trade belongs to the global value chains. Over many years, GVCs have pushed the countries, which are slowly developing, grow faster, leaving their poverty behind. But there are several factors that may interfere the progress of global value chains to improve life in poor countries: trade conflict and refusal to carry out reforms.

Global value chains can strongly facilitate inclusive and sustainable growth, provide additional jobs and reduce poverty, if poor countries introduce more profound reforms and industrial countries conduct open, foreseeable policies. GVCs resulted in an economic revolution over the past decades, i.e. growth improved, incomes increased, and poverty rates declined. According to estimations, the rise in GVC participation by 1% leads to increasing per capita income levels by over 1% about twice as much as traditional trade. Let’s not forget that approximately 50% of world trade includes global value chains. Nevertheless, there has been a slowdown of GVC increase since 2008, resulted from the fall of global economic growth and the delay of reform introduction [2]. The lack of key trade innovations and growing trade collisions between countries could make it more difficult for the poor countries to earn from global value chains. New technologies, know-hows, such as introducing robots into production process or 3D printing may cause a concern in developing countries. But all that innovations reduce trade, production and communication costs, stimulate development of new products and thus increase efficiency of GVCs [3, 4]. 

Global value chains may remain to be an engine for the global inclusive progress if:

• Developing countries accelerate adoption of required reforms and improve communication;

• Developed economies carry out open and foreseeable policies; 

• The world introduces more social and environmental protection to save the advantages of participation in GVCs [5].

In the era of GVCs, the requirement of wider international cooperation is extremely high. State policy and economic conditions of one country may strongly influence trade associates through industrial links. The advantages from the coordinated policy actions are greater with global value chains than traditional trade, since goods and services cross borders multiple times. All countries worldwide have to cooperate in order to oppose trade distorting policies and to keep markets open. 

National policies are able to improve the country participation in global value chains. In particular, the separation of complex products, such as computers or cars enables the countries to make the production process easier, to focus on simpler tasks. But there is no guarantee a country can participate in GVCs. The factors that define GVC participation are: geography, reform efficiency, market size and institutions. However, the above should not dictate destiny. One should note that the policies are also important. Foreign direct investment policy, for example, can eliminate the lack of capital, technology, and management skills. Liberalization of domestic trade in negotiations on the liberalization of trade abroad can overcome the restrictions of a small domestic market through freeing firms and farms from the restrictions on domestic demand and local resources. Improvement of transportation and communications infrastructure and introduction of competition in these services can eliminate the disadvantage of a remote location. And participation in deep integration agreements can stimulate institutional and political reforms, especially if complemented by technical and financial assistance [6].

Given the analysis of the drivers of different types of GVC participation, there are the policies that facilitate integration into more advanced GVCs. It is important that national policies can and should be adapted to the specific circumstances of countries and to specific forms of participation in GVCs. Raising foreign direct investments is important at all stages of participation. The things required for that are: investor protection, stability, a favorable business climate, investment promotion and openness. There are countries, such as those in Southeast Asia that have received the benefits from foreign investment in goods, still limit foreign investment in services. The others try to attract investment through tax exemptions and subsidies, but they run the risk of confronting their trading partners, and the net benefits may not be positive [7]. However, countries such as Malaysia, Costa Rica and Morocco have raised transformative GVC investments through multinational corporations due to the use of successful investment promotion strategies. Excessive exchange rates and labor restrictions increase the cost of labor, preventing countries with large labor forces from taking advantage of their opportunities. For example, the labor costs in Bangladesh correspond to its per capita income, but in many African countries the cost of labor is more than twice as high. In order to expand the country’s market size and obtain access to the resources needed for production, the countries should connect to markets through trade liberalization. For instance, Peru's large unilateral reduction in tariffs in the 2000s was related to the faster productivity growth, the expansion and the diversification of GVC exports [8].

Trade agreements are expanding market access and have become a crucial catalyst for entry of global value chains into a wide range of countries, such as the Dominican Republic, Lesotho, Honduras, Bangladesh, Madagascar and Mauritius. As the economies of goods and services become increasingly interconnected, reformation of services policies in a range of business services (telecommunications, finance, transportation, etc.) should be part of any GVC strategy. For many products traded in global value chain, the daily delay is equal to the setting of a tariff exceeding 1 percent [8]. Improvement of customs and border procedures, promotion of competition in transport and logistics services, and enhancement of port structure and management can decrease trade costs connected to time and uncertainty, by alleviating the disadvantages of remote location. Since GVCs prosper due to the flexible networks of firms, attention should also be paid to the execution of contracts to ensure the stability and predictability of legal agreements in the network.

It is especially important to protect the intellectual property rights for the innovative and complex value chains. The factors that also can contribute to participation in global value chains are: strengthening national certification and testing capacity to provide compliance with international standards. The approaches to industrial policy, such as tax incentives, subsidies, and domestic content requirements, are likely to adversely change the production patterns in today’s GVC context. Other policies are more promising, especially when they are aimed at market failures: 

• Investing in human capital is required to strengthen domestic potential of the countries to support modernization in value chains. 

• Policies aimed at unblocking restrictions on GVC trading can be effective. 

• Countries can integrate domestic small and medium-sized enterprises (SMEs) with leading firms in GVC – by supporting training and capacity building through providing leading firms with information on supply opportunities. The examples of successful supplier linkage programs are: Kenya and Mozambique in agriculture, Chile and Guinea in mining, and the Czech Republic in the electronics and automotive sectors.

• For countries involved in value chains in agriculture, policies to promote the integration of smallholders are especially important.

In African countries, about 55 % of jobs are concentrated in agriculture, which is the source of over 70 % of the income of the poor. Ensuring benefits for smallholders needs additional support, for example through agricultural expansion services, access to risk management tools (such as insurance) and coordination for scale use through producer organizations [9]. Improvement of the business and investment climate for global value chains on a national scale can be costly and time consuming, prompting many countries to create Special Economic Zones (SEZs) to create islands of excellence. But so far, the results show that a relatively small number of SEZs are successful, and only when they resolve specific market and policy problems. Creating the right environment, even in a limited geographical area, requires careful planning and implementation to ensure the availability of the necessary resources, such as labor, land, water, electricity and telecommunications. Several successful zone programs in countries such as the United Arab Emirates, China, Ethiopia and Panama, as well as the numerous examples of SEZs that have failed to attract investors or develop, offer important lessons on how to use special economic zones for growth [10].

Literature:

1. Bown, Chad P., and Caroline L. Freund. 2019. “Active Labor Market Policies: Lessons from Other Countries for the United States.” PIIE Working Paper 19–2 (January), Peterson Institute for International Economics, Washington, DC. URL: https://www.piie.com/system/files/documents/wp19-2.pdf

2. Xin Li, Bo Meng, Zhi Wang. 2019. Recent patterns of global production and GVC participation URL: https://www.wto.org/english/res_e/booksp_e/gvc_dev_report_2019_e_ch1.pdf

3. Dollar, David, and Aart Kraay. 2002. “Growth Is Good for the Poor.” Journal of Economic Growth 7 (3): 195–225 URL: https://link.springer.com/article/10.1023/A:1020139631000

4. Daria Taglioni How important are Global Value Chains for development? URL: https://www.globalmaritimeforum.org/news/how-important-are-global-value-chains-for-development

5. Farid, Mai, Michael Keen, Michael G. Papaioannou, Ian W.H. Parry, Catherine A. Pattillo, and Anna Ter-Martirosyan. 2016. “After Paris: Fiscal, Macroeconomic, and Financial Implications of Global Climate Change.” URL: https://www.imf.org/external/pubs/ft/sdn/2016/sdn1601.pdf 

6. Investment promotion agencies in the time of Covid-19 URL: https://www.oecd.org/coronavirus/policy-responses/investment-promotion-agencies-in-the-time-of-covid-19-50f79678/

7. Freund, Caroline L., Alen Mulabdic, and Michele Ruta. 2018. “Is 3D Printing a Threat to Global Trade? The Trade Effects You Didn’t Hear About.” Unpublished working paper, World Bank, Washington, DC. URL: https://openknowledge.worldbank.org/bitstream/handle/10986/32453/WPS9024.pdf?sequence=4&isAllowed=y

8. Mario D. Tello. Political Economy Approach of Trade Barriers: The Case of Peruvian’s Trade Liberalization. 2020. URL: https://files.pucp.education/departamento/economia/DDD486.pdf

9. Hollweg, Claire H. 2019. “Firm Compliance and Public Disclosure in Vietnam.” Policy Research Working Paper, World Bank, Washington, DC URL: https://openknowledge.worldbank.org/bitstream/handle/10986/32485/WPS9026.pdf?sequence=4&isAllowed=y

10. Oldenski, Lindsay. 2015. “Reshoring by US Firms: What Do the Data Say?” PIIE Policy Brief 15–14 (September), Peterson Institute for International Economics, Washington, DC. URL: https://www.piie.com/publications/policy-briefs/reshoring-us-firms-what-do-data-say#:~:text=Oldenski%20examines%20the%20most%20recent,of%20a%20widespread%20reshoring%20trend.



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