Letter IEDI n. 980–Global Value Chains: Patterns, impacts and challenges, according to the World Bank
In the 2020 edition of the World Development Report, the World Bank estimates that currently about 50% of international trade takes place through global value chains (GVCs), which, according to the Bank, contribute more to the development of countries than other trade flows.
Over a span of 20 years, a nation whose participation in GVCs rises by 1% would be able to increase its per capita income by more than 1%, the World Bank estimates. This is twice the impact of international trade outside the GVCs.
The Bank also considers that, in recent years, GVCs have enhanced global growth, increased job quality and facilitated poverty reduction.
The positive effects, however, are mostly seen in countries that have been able to gradually refine their participation into the GVCs. The report identifies patterns of integration based on fundamentals such as geography, endowment of productive factors, market size and quality of institutions. Four types of GVC participation are highlighted: commodities specialization; limited manufacturing; advanced manufacturing and services; and innovative activities.
Among the countries that managed to improve their integration from 1990 to 2015, the following are particularly noteworthy: the Czech Republic (from limited manufacturing to innovative activities), Argentina and Indonesia (from commodities to limited manufacturing), China, India, Thailand, Turkey, Portugal (from limited to advanced manufacturing and services), Austria, Israel, Italy, Spain (from advanced manufacturing to innovative activities). Brazil, on the other hand, has made no progress and is still an exporter of simple manufactures.
One of the main channels through which GVCs have been beneficial is productivity enhancement. Trade growth across chains has increased the competitiveness of developing countries whose incorporation into international production processes has been profound, such as China, Vietnam and Bangladesh, where poverty has declined significantly.
There are signs, however, that the favorable GVC engine has halted. The report shows that, since the 2008 financial crisis, the expansion of GVCs has remained stable, due to the slowdown in world GDP and the intensification of trade disputes.
The World Bank estimates that if trade tensions escalate, up to 31 million people could fall into poverty, that is, start to receive less than US$ 5.5 a day. As a result, global income would fall by about US$ 1.4 trillion.
Another challenge is the emergence and diffusion of new 4.0 technologies. For example, the Bank believes that advancing robotization in high-income countries could compromise developing countries' export performance. Losses in exports of goods to the OECD due to robotization could range from 29.7% to 53.7% for Mexico, from 17% to 29.7% for China and from 11.5% to 17% for Brazil.
Despite the risks, the World Bank believes that new 4.0 technologies tend to have more positive than negative effects on global income and employment, although they may lead to inequalities.
New production processes can reduce human labor per unit of output, but this should be more than offset by the positive effects of GVCs in other sectors, attracting workers to tasks with greater added value and away from less productive tasks. In this sense, it is likely that new production technologies will continue to boost trade.
Therefore, whether to minimize the adverse effects of new technologies or to reactivate GVCs that have decelerated since 2008, magnifying their positive effects, a collection of public policies is required. The Bank advocates actions that promote the opening up of trade, increase its connectivity with the rest of the world and encourage cooperation between countries.
As GVCs can also lead to an uneven distribution of the gains from trade, the World Bank recommends that countries strengthen their social and environmental protection networks. Some actions in this direction:
• support for training and capacity building and the provision of information to small and medium-sized companies so they can connect to GVCs;
• support for small agricultural producers, with agricultural extension services, risk management instruments, etc.;
• labor market policies to support groups affected by structural changes: facilitate labor mobility and first jobs, strengthen the wage-insurance system (such as Denmark's successful “flexicurity” model); and
• environmental measures, such as pricing environmental degradation, encouraging innovations in “green” goods and production processes, taxing carbon emissions, etc.