In development studies, the global value chain (GVC) describes the people and activities involved in the production of a good or service and its supply, distribution, and post-sales activities (also known as the supply chain) when activities must be coordinated across geographies.

 

Here is an extract from the World Bank Report on Global Economics.

 

International trade expanded rapidly after 1990, powered by the rise of global value chains (GVCs). This expansion enabled an unprecedented convergence: poor countries grew faster and began to catch up with richer countries. Poverty fell sharply.

 

These gains were driven by the fragmentation of production across countries and the growth of connections between fi rms. Parts and components began crisscrossing the globe as fi rms looked for efficiencies wherever they could find them. 

 

Productivity and incomes rose in countries that became integral to GVCs—Bangladesh, China, and Vietnam, among others. The steepest declines in poverty occurred in precisely those countries.

 

Today, however, it can no longer be taken for granted that trade will remain a force for prosperity. Since the global financial crisis of 2008, the growth of trade has been sluggish, and the expansion of GVCs has slowed. The last decade has seen nothing like the transformative events of the 1990s—the integration of China and Eastern Europe into the global economy and major trade agreements such as the Uruguay Round and the North American Free Trade Agreement (NAFTA).

 

At the same time, two potentially serious threats have emerged to the successful model of labour-intensive, trade-led growth. First, the arrival of labour-saving technologies such as automation and 3D printing could draw production closer to the consumer and reduce the demand for labour at home and abroad. 

 

Second, trade conflict among large countries could lead to a retrenchment or a segmentation of GVCs. What does all this mean for developing countries seeking to link to GVCs, acquire new technologies, and grow? Is there still a path to development through GVCs? 

 

Those are the central questions explored in this Report. It examines the degree to which GVCs have contributed to growth, jobs, and reduced poverty— but also to inequality and environmental degradation. It spells out how national policies can revive trade growth and ensure that GVCs are a force for development rather than divergence. 

 

Finally, it identifies inadequacies in the international trade system that have fomented disagreements among nations and provides a road map to resolving them through greater international cooperation.

 

Th is Report concludes that GVCs can continue to boost growth, create better jobs, and reduce poverty, provided that developing countries undertake deeper reforms and industrial countries pursue open, predictable policies. 

 

Technological change is likely to be more of a boon than a curse for trade and GVCs. The benefits of GVC participation can be widely shared and sustained if all countries enhance social and environmental protection. The expansion of GVCs could stall unless policy predictability is restored

 

GVCs have existed for centuries. But they grew swiftly from 1990 to 2007 as technological advances—in transportation, information, and communications—and lower trade barriers induced manufacturers to extend production processes beyond national borders. 

 

GVC growth was concentrated in machinery, electronics, and transportation, and in the regions specializing in those sectors: East Asia, North America, and Western Europe. Most countries in these regions participate in complex GVCs, producing advanced manufactures and services, and engage in innovative activities. 

 

By contrast, many countries in Africa, Latin America, and Central Asia still produce commodities for further processing in other countries.

 

In recent years, however, trade and GVC growth have slowed. One reason is the decline in overall economic growth, and especially investment. Another reason is the slowing pace and even reversal of trade reforms. Furthermore, the fragmentation of production in the most dynamic regions and sectors has matured. China is producing more at home.

 

In the United States, a booming shale sector reduced oil imports by one-fourth between 2010 and 2015 and slightly reduced the incentives to outsource manufacturing production. Recent increases in protection could also affect the evolution of GVCs. Protectionism could induce reshoring of existing GVCs or their shifts to new locations.

 

Unless policy predictability is restored, any expansion of GVCs is likely to remain on hold. When future access to markets is uncertain, firms have an incentive to delay investment plans until uncertainty is resolved.

 

GVCs boost incomes, create better jobs, and reduce poverty Hyperspecialization enhances efficiency, and durable firm-to-firm relationships promote the diffusion of technology and access to capital and inputs along chains. For example, in Ethiopia firms participating in GVCs are more than twice as productive as similar firms that participate in standard trade.

 

Firms in other developing countries also show significant gains in productivity from GVC participation.

 

A 1 percent increase in GVC participation is estimated to boost per capita income by more than 1 percent, or much more than the 0.2 percent income gain from standard trade. 

 

The biggest growth spurt typically comes when countries transition out of exporting commodities and into exporting basic manufactured products (for example, garments) using imported inputs (for example, textiles), as has happened in Bangladesh, Cambodia, and Vietnam.

 

Eventually, however, these high growth rates cannot be sustained without moving to progressively more sophisticated forms of participation. 

 

But the transitions from limited manufacturing to more advanced manufacturing and services, and finally to innovative activities, become increasingly more demanding in terms of skills, connectivity, and regulatory institutions.

 

GVCs also deliver better jobs, but the relationship with employment is complex. Firms in GVCs tend to be more productive and capital-intensive than other (especially nontrading) firms, and so their production is less job-intensive. However, the enhanced productivity leads to an expansion in firm output and thus to increases in firm employment.

 

As a result, GVCs are associated with structural transformation in developing countries, drawing people out of less productive activities and into more productive manufacturing and services activities. Firms in GVCs are unusual in another respect: across a wide range of countries, they tend to employ more women than non-GVC firms.

 

They contribute therefore to the broader development benefits of higher female employment.

 

Source: World Bank