Is Liberalism Functional for Global Value Chains?

Global value chains (GVCs) have gained unusual prominence in the research agendas of international organisations and academics devoted to the study of international trade and economics. They have also been in the spotlight of negotiating tables of the main international economic fora held during 2013.

This theoretical framework is far from being a novelty, though. It was first introduced as a way of analysing the international expansion and geographical dispersion of production chains, and has been intensively investigated since the 1990s. What does seem to be new is the use of this analytic tool to support an agenda on eminently liberal economic reforms.

Although recent initiatives proposed by different international organisations are of great interest and have proved to be very useful, some of their underlying theoretical assumptions and conclusions are, at least, debatable.

Over the last years various international organisations have elaborated several documents in relation to GVCs. The theoretical proposal made by these organisations seems to rely on a few basic assumptions, upon which highly optimistic views about GVCs’ effects on economic development are built.

One assumption is that globalisation has a positive impact on productivity due to efficiency improvement as a result of international competition, better access to technology and new knowledge, and greater room for specialisation and economies of scale.

There is also an assumption that participation in value chains could further increase productivity since it would facilitate access to cheaper or higher quality intermediate inputs. Further, GVCs are assumed to work as a path for developing countries to access international markets of goods and services by focusing on certain activities and processes rather than by establishing a complete value chain.

This thought framework provides the basis for a series of concrete public-policy recommendations. In a nutshell, these could be summarised in the idea that, in order to fully benefit from value chains, governments should liberalise, as much as possible, trade in goods and services and improve the business environment through, among other issues, trade facilitation and liberalisation of investment, competition policy, intellectual property, and temporary labour movement.

In this way, the links of the chains located, or willing to be located within the territory of a certain country, could get their imported inputs at the lowest cost possible, and would thus gain competitiveness in the global market, where they have to sell their ‘made in the world’ final products.

These conclusions are based on a simple reasoning. Tariff reductions on imported inputs will lead to an improvement in external competitiveness of the economy and this, in turn, will result in an increase in exports and, therefore, in income. This argument lies on at least two implicit assumptions which downplay the differences in the productive structures of the different countries and they are only valid in certain special cases, which do not necessarily abound in the real world and, particularly, in the periphery.

It is assumed that there exists a high elasticity of exports and, therefore, they respond vigorously to a price change. But this may not be the case in many developing countries, especially in those which exports are largely made up by primary products or natural-resource-based manufactures, which find physical or natural limitations to increase their production.

Even in the case of countries with high price elasticity of exports, the assumption goes, the substitution of local suppliers with foreign providers does not lead to a GDP and employment contraction. If the reduction in the production of domestic intermediate goods is not compensated for by a greater increase in the exports or domestic consumption of final goods, the overall result will be a contraction in the total economic income. Thus, the shrinking effect of the measure may surpass the expansive effect.

Albeit quite timidly, the ‘liberal’ proponents of integration into GVCs acknowledge that the mere integration of a country’s companies into global value chains does not ensure economic development. On the contrary, the success of this strategy will largely depend on the place those companies occupy in GVCs, since this will determine the benefits obtained as a result of being part of the chain.

This place-in-the-chain issue constitutes the key of what was intended as a tool to understand the development opportunities of emerging economies. The recipe proposed is the creation of proper incentives so that national companies could go a step forward in the process of climbing up value chains – from basic links to higher value-added links which generate greater revenues. This process is known as ‘upgrading’.

Against this backdrop, it could be argued that if, by definition, a development strategy based on integration into GVCs implies importing intermediate inputs so as to manufacture the goods that will be exported, the way to achieve upgrading is through the subsequent local manufacture of those products. However, this process is not automatic, and it entails some type of government intervention. Thus, while under certain circumstances protectionism is counterproductive, in other cases it becomes necessary.

According to the liberal view, the role of the state in accompanying national firms in these upgrading processes would be limited to the typical pro-market recipes – increasing competition to encourage companies to improve their productivity, promoting a dynamic business sector, investing in public goods, and providing the conditions to support private investment in these areas. However, these studies omit a series of issues related to the tools that developing countries have (or do not have) to level the playing field and, therefore, generate or attract higher value-added activities to their territories, such as the role of intellectual property rights, international regulations on investment protection, and tariff structures in developed countries.

With respect to the first of these aspects, it is worth highlighting that the activities in GVCs which offer greater revenues are eminently intangible. In general, they are knowledge and skilled-based activities embedded in organisational systems. This type of knowledge – tacit in nature – is not only protected by important natural barriers to entry, but is also protected ‘artificially’ by intellectual property rights.

The existing tangle of rules on admission and treatment of foreign investment impose a series of obligations that prevent developing countries from implementing policies aimed at selecting the type of investment that will be made in their markets, or from obtaining greater benefits from those investments that are already made. Likewise, tariff reduction has been much greater in low value-added sectors.

In part, this was an explicit objective of initiatives, such as the Europe’s Lomeacute Convention and the establishment of export processing zones, which concentrated in clothing and electronics, both characterised as low value-adding sectors. Furthermore, in the case of agricultural products and food, the value added by developing countries which supply industrialised markets has been historically restricted by tariff escalation and non-tariff barriers imposed by developed economies.

Nonetheless, GVCs seem to be seen as a mandatory topic in the debates that will be held in the different international economic forums in the next years. However, efforts made so far from the southern hemisphere appear to be insufficient to carry out a critical analysis of the contributions.

If we are willing to reject the linear proposal stating that the path to successfully integrate into GVCs depends almost exclusively on trade and investment liberalisation, then we should map the concrete examples of public policies that have been proposed to create the right incentives for national companies to upgrade. We ought to also determine how accessible these proposals are for developing countries, which usually have budget and normative constraints that limit their room for manoeuvre.

Source : Addis Fortune

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