What are GVCs?

  • Global Value Chains refer to the chain of locations where products are researched & developed, designed, patented or copyrighted, materials sourced, manufactured, finished, packaged, distributed, branded, marketed, and sold.
  • While most countries are involved in GVCs in one way or another, they are not all linked in the same way nor have an equal status vis-a-vis GVCs.
  • The percentage of Domestic Value Added (DVA) in GVCs tilts heavily towards design, patenting/copyrighting, retail and marketing; whereas the DVA for raw materials and manufacturing, which are often based in the global South, can be quite minimal, and dependent on natural resource exploitation and cheap labor.

What are GVCs? (Smiling curve of Stan Shih)

  • Will all players gain from expanding GVCs? Unlikely. Not all players can equally gain from their participation in GVCs.
  • Developing countries could become more integrated in GVCs, but the quality of their integration may not be of real benefit.

GVCs in the WTO?

  • Recently, there is a narrative being developed within the WTO related to discussing GVCs.
  • Thus far, the debate is focused on liberalization. Countries should liberalize goods and services in order to integrate into the GVCs. The “pitch” is that these strategies will help developing countries more deeply integrate into GVCs as they can import more cheaply and thus export more competitively.
  • Organisation for Economic Co-operation and Development (OECD) is a big cheerleader, along with WTO and World Bank…UNCTAD’s

Trade Division is also, but the Globalization and Development Strategies is more circumspect..

GLOBAL VALUE CHAINS: UNPACKING THE ISSUES OF CONCERN FOR DEVELOPING COUNTRIES

  • In an event on GVCs at the South Centre in February 2014, Ambassador Benites of Ecuador indicated that the Fourth Global Review of Aid for Trade (of the WTO) presents GVCs as synonymous to growth and economic development, poverty reduction, capacity building, and global integration, regardless of the capabilities and constraints facing developing countries.
  • Yet, he noted that “the analysis of market liberalization and value chains, does not consider the existing technological gaps between developed and developing countries”, which prevent the latter from effectively benefiting from the advantages of international trade.

Does Integration with GVCs Advance the Development Concerns in Africa?

  1. Does it help address weak domestic productive capacities attendant upon Africa’s continued status of primary commodity export-dependence in the global economy?
  2. Does it help promote structural transformation?
  3. Does it help promote regional integration?
  4. Does it create decent jobs and SMEs?
  5. Does it promote food security?

Does Integration with GVCs Advance the Development Concerns in Africa?

  1. Does it help address weak domestic productive capacities attendant upon Africa’s continued status of primary commodity export-dependence in the global economy?
  • Gaining investment from a multinational firm to locate an aspect of production in an African country can be of use – if the investment is in line with the development strategy (such as auto manufacturing in South Africa) and the investors are not given rights greater than those of citizens (including under Investor-State Dispute Settlement – ISDS – provisions.)
  • However, participating in a GVC does not in and of itself improve domestic productive capacity; it is the education and infrastructure that would be the source of the increased domestic capacity.
  • Countries risk “pigeonholing” themselves in the “lowest rung of the chain” / lowest percentage of value addition, if they rely solely on natural resources extraction and exploitation of cheap labor.

Does Integration with GVCs Advance the Development Concerns in Africa?

  1. Does it help promote structural transformation?
  • GVCs can allow a country to export components when they lack capacity to produce and market the entire product.
  • But GVCs tend to deepen the traditional scheme of international labor division.
  • Transnational firms locate production in countries of origin of raw material or cheaper labor in order to take advantage. But this can damage countries’ sovereign interests to manage their resources for development.
  • Technologically advanced countries can take advantage of GVCs, while less developed countries would less likely be able to benefit from these processes, and will be condemned to continue providing raw material.
  • Technology transfer is overhyped and under-delivered.

Does Integration with GVCs Advance the Development Concerns in Africa?

  1. Does it help promote regional integration?
  • Actually the integration into global value chains could undermine the African strategy of regional integration by linking various countries with developed countries more than with each other.
  • Currently, intra-African trade represents just 12% of African trade, compared to about 55% in Asia and 70% in Europe. With 1 billion potential consumers across the continent, there are opportunities for Africa to improve productivity, scale up value addition and diversify production in a sustainable manner, while removing the barriers to intra-African trade.
  • And GVCs help achieve this how????

Does Integration with GVCs Advance the Development Concerns in Africa?

  1. Does it create decent jobs and SMEs?
  • There could be backward and forward linkages with GVCs, such as use of minerals from artisanal miners; local catering services for workers; local sourcing of parts such as for auto manufacturing.
  • But this is not necessarily guaranteed.
  • If the “advantage” of the African country is cheap labor and natural resources, then it is going to be difficult to ensure high quality employment. The TNC will likely resist efforts at unionization, etc.

Does Integration with GVCs Advance the Development Concerns in Africa?

  1. Does it promote food security?
  • Since most GVCs are geared towards export, is is difficult to see how they could promote food security.
  • In fact there could be a push towards increasing export agriculture rather than food for domestic consumption.

Does Integration with GVCs Advance the Development Concerns in Africa?

  • What are some of the policies that allow African countries to benefit from GVCs? Moving up the value chain requires:

–  Informed producers (ie education and skill development);

–  Technological innovation and research and development;

–  Adequate infrastructure;

–  Development of domestic financial services;

–  Market intelligence;

–  Local content requirements;

–  Domestic linkages through joint ventures and presence of domestic firms;

– Developing services linked to manufacturing like design studios, marketing skills, and branding;

–  Strengthening the domestic private sector;

–  Strong domestic institutions and regulations.

Adapted from: South Bulletin 77, 4 February 2014 | Global Value Chains: Unpacking the Issues of Concern for Developing Countries, comments by Ms. Rashmi Banga from the Division for Africa, Least Developed Countries and Special Programmes at UNCTAD.

Does Integration with GVCs Advance the Development Concerns in Africa?

  • How can developing countries benefit from GVCs?

–   Informed producers (ie education and skill development);

–   Technological innovation and research and development;

–   Adequate infrastructure;

–   Development of domestic financial services;

–   Market intelligence;

–   Local content requirements;

–   Domestic linkages through joint ventures and presence of domestic firms;

–   Developing services linked to manufacturing like design studios, marketing skills, and branding;

–   Strengthening the domestic private sector;

–   Strong domestic institutions and regulations.

  • Most of these policies would benefit the population generally, and SMEs, not just GVC participation.
  • These are NOT the issues being discussed in GVCs at the WTO!
  • Richard Kozul-Wright of UNCTAD explained that the reason for higher benefits accrued by Japan, Korea, and Taiwan compared to Malaysia, Philippines, and Thailand [in GVCs] lies in the active role of the state in using a series of instruments that disciplined their private sector and made sure upgrading, reinvestment, and technological spillover was actually taking place – benefits do not accrue without attendant policies.

Does Integration with GVCs Advance the Development Concerns in Africa?

  • GVCs are a cost reduction strategy for multinational corporations, based on taking advantage of cheap labor and raw materials in developing countries and of globalization policies that reduce tariffs and the cost of trade (NTBs, trade facilitation).
  • UNCTAD estimates that 80 percent of global trade involves transnational corporations, and one third is intra-firm in scope. (This aspect brings in the issue of transfer pricing and the loss of fiscal policy space from illegal tax evasion by TNCs in developing countries.)
  • The benefit to developing countries depends on the attendant policy environment of the country; benefits are not automatic! They should not be viewed as a development policy on their own.

Does Integration with GVCs Advance the Development Concerns in Africa?

  • For GVCs, the issue then is not “whether a country should participate” but “how potential participation could promote the national development policies and strategies.”
  • Whether or not GVCs fit, or how they may fit, into a development strategy – does not indicate that binding deregulatory and liberalization policies across the board are required! GVCs are rather a new package to the same old demands.
  • If a country wants to reduce tariffs on capital goods, etc, it can do so without a binding trade agreement!

Bigger Threat: GVCs as Trojan Horse for Issues of Benefit to Developed Countries

  • GVCs are being discussed now in the WTO, and in particular related to discussions of Small and Medium Enterprises (SMEs) because they are being utilized as a framework in which to bring in new issues from other FTAs:
  1. Competition policy including state owned enterprises
  2. Government procurement
  3. Investment (?!!)
  4. E-commerce
  5. Disciplining export taxes
  6. Sectoral liberalization of goods
  7. Services liberalization
  8. Even Intellectual Property rules?

Presented by : Deborah James Our World Is Not for Sale (OWINFS) network for the Civil Society Strategy Meeting on Advocacy around Africa’s Trade and Development Challenges.

Download full presentation here