Building on our recent work on global value chains (GVCs) and their implications for developing countries, I recently coordinated a study on the above subject for the ACP MTS programme. The results were presented in Geneva, in January 2014, at the ACP Ambassadors’ post-Bali strategic reflection meeting, and subsequently at a public seminar hosted by the ITC. Herewith a brief synopsis of our findings.
International trade has changed dramatically since the 1980s. Due to enormous reductions in transportation and communications costs, and world-wide liberalization of trade in goods and – to a lesser extent – services, production processes have been fragmented and value chains have gone global. These global value chains (GVCs) have led to firms increasingly offshoring and outsourcing jobs and tasks, involving both goods and services. International competition no longer takes place only between industries and firms in different countries, but increasingly between workers and their skills. Countries no longer specialize exclusively in goods and services, but more and more in tasks.
These activities occur primarily between developed countries, but also between developed countries and certain developing or emerging economies. African, Caribbean and Pacific countries (ACP), are only integrated in GVCs to a very limited extent. When looking at the group of ACP countries, their huge heterogeneity in terms of geographical characteristics and economic development is immediately apparent. Furthermore, their generally small economic scales, and prevalence of small-scale producers and suppliers, means that plugging into existing value chains coordinated by large, first-tier multinational corporations (MNCs), is rather difficult.
Given these challenges, it is necessary to look at the relevance of regional value chains (RVCs) in contrast to GVCs. Integration at the regional level amongst less demanding partners may offer a viable stepping-stone into subsequent integration into GVCs. These RVCs may become relevant since some of the countries under consideration are very weakly integrated into the world economy. Their local firms and workers can benefit from globalization if they integrate into value chains regionally.
In order to analyze the preparedness and challenges the ACP countries face for plugging into GVC/RVCs, we first grouped them according to their current degree of integration in the world economy. Accordingly, three groups emerge: globally, regionally and weakly integrated ACP countries. On the basis of this distinction, a subsequent data analysis was conducted which compares both the countries’ performances regarding basic trade enabling requirements for value chain participation, and business sophistication requirements for upgrading within value chains. In order to have a general benchmark for the assessment of the performance of the ACP countries we used a set of 8 non-ACP countries (Singapore, Hong Kong, Costa Rica, China, India, Mexico, Vietnam and Iceland).
While the analysis revealed some patterns, it also exposed many differences. However, there is a primary lesson. All measures to enhance integration into GVCs heavily depend on the institutional quality and governance structure in a country. Corruption, poorly defined property rights, weak rule of law and the like, render all measures directed at human capital formation, infrastructure investments, and trade facilitation ineffective. Next, and as agreed by many observers, we stress that infrastructure is a decisive bottleneck to development in many ACP countries. Furthermore, the workforce has to be fit for the requirements of GVCs, which implies a solid knowledge and skill base (stocks) and – more important – the ability to adjust to new challenges (flows). Therefore, education plays a decisive role. Crucially, where skills are not available domestically foreigners can be harnessed to fill the gap, and in the process train locals. Finally, even though market access did not emerge as a major constraint, it is our opinion that governments should minimize political barriers to trade. This includes tariffs, subsidies and other non-tariff barriers.
The classification of the ACP countries according to their current degree of global integration, as applied in this paper, is indicative for basic mutual challenges each group of integration faces. Striving for upgrading opportunities, the basic challenge of the highly integrated ACP countries is increased business sophistication and innovation capacities. For the group of regionally integrated countries, ongoing expansion and improvement of basic infrastructural and institutional requirements is necessary. Finally, the group of weakly integrated countries faces for the most part basic challenges of infrastructure development and improvement of the institutional settings in order to facilitate value chain participation and to ensure adequate responsiveness to stimuli by surrounding growth poles.