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Global Value Chains from a Development Perspective

In this column, Aileen Kwa, coordinator of the Trade and Development Programme of the South Centre, writes that the central question for developing countries is not about entering global value chains at any cost.

GENEVA, Aug 6 2013 (IPS) - The current discourse on Global Value Chains by key proponents and also the World Trade Organisation (WTO) secretariat is that developing countries should liberalise – in goods and services – and conclude a trade facilitation agreement.

Some have also suggested that any restrictions on exports should be eliminated (e.g. export taxes on raw materials). According to this discourse, these strategies would help developing countries more deeply integrate into global value chains as they can import more cheaply and thus export more competitively.

The picture on closer examination, however, is not so simple.

Global value chains are not a new concept. They have been a part of trade since colonisation when developing countries were the providers of the raw materials, sent to the developed countries for use in a variety of ways, including in their production of higher-end goods.

It is true that today, these value chains are expanding, simply because of the expansion of transnational corporations across the globe. Lead firms, mostly based in developed countries, and some developing countries, use suppliers from all over the world to carry out their various functions.

Developing countries, however, are differentially placed along global value chains. Some have a share in higher value added sections of the value chains, but most do not.

Not all players can equally gain from their participation in the value chains. It all depends on where a country is lined up in terms of technological capacities, the depth of their manufacturing capacities, how developed their services sectors are, the size of their enterprises, their managerial expertise and their ability to meet the standards of the international markets – to name only a few criteria.

Due to these and other limitations, developing countries could open up, and they could become more integrated, but the quality of their integration may not be of real benefit.

As Rashmi Banga notes in her paper “Measuring Value in Global Value Chains”, countries may be linked to the chains, but they may not be “gainfully” linked to them.

In today’s value chains the value is captured in the design and conceptual stage where having the technology is important, as well as in the final sales and marketing end. However, this is not where most developing countries are located.

Developing countries are generally located in the lower value manufacturing section of the value chain; and even then, this is true for some, not all, developing countries.

Mere liberalisation will not upgrade countries’ technological or services supply-side capacities. Nor will a trade facilitation agreement – expediting the entry of imports through a range of customs procedures (some of which are very costly and administratively intensive) – be a magic bullet in catapulting developing countries into competitiveness on the global scale.

In sum: there are no shortcuts.

In any case, the central question for developing countries is not about entering value chains at any cost. The real question for developing countries is how they can deepen their production capacities, so that they can garner a bigger share of the value added.

To do so, the path of industrial development, agriculture and services development must be undertaken. We need structural transformation in industry if we want our manufacturing capacities to move beyond being assembly lines, increased production capacities in a range of services sectors, and a more vibrant agricultural sector, especially in countries with large rural populations.

The agricultural sector cannot be overlooked or bypassed if a large section of the population is engaged here and depends on agriculture for employment. Just like jobs in manufacturing, people must be provided with fair prices and wages. This is critical to create domestic purchasing power, and to fuel domestic demand and thus the demand for the growth of local industries.

Failure to engage in structural transformation and deepening of production capacities could mean that countries get caught in supplying raw materials and being sites for low value added manufacturing tasks.

Very often, the domestic or regional markets offer better opportunities than global value chains for developing countries in terms of obtaining a larger share of the value added.

Trade policies must be used strategically to support industrial development of key sectors, and should be approached dynamically, changing over time as some industries mature and new ones develop. In that context, across-the-board liberalisation will not help.

In conclusion, the global value chains, as noted by South Africa’s ambassador to the WTO Faisal Ismail, do not provide a framework for helping developing countries develop beyond their current comparative advantages. UNCTADs latest analysis of the value added trade data also shows that more exports do not mean more value-added exports.

The global value chains discourse comes from the place of wanting to further ease the operations, movement and access of transnational corporations across global markets, with real dangers for developing countries’ firms and industries.

The priority for developing countries is building their production capacities. To this end, the flexible and dynamic use of trade policy instruments (tariffs, government regulations) that support industrialisation, agricultural and services development, complemented by fairer trade rules, are necessary.

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