Delivering on the Promise of Inclusive Global Value Chains

octobre 23, 2018

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The UN Conference for Trade and Development (UNCTAD) assumes that 80% of current trade is channeled through Global Value Chains (GVCs).[i] Given its importance in trade, policy makers highlighted the tremendous impact GVCs can play for development.[ii] So-called developing countries, in particular, can benefit from increasing their participation in GVCs. The underlying idea is that developing countries do not need to compete with industrialized economies in producing whole goods but can concentrate on specific tasks within a value chain. This concept, known as trade-in-tasks, replaces the prior idea that trade happens in entire goods.[iii]

Value Chains describe all the activities involved in product development – from the very first concept to its end use.[iv] At each stage of the process a certain value is added, taking on different forms such as design, production, marketing, and distribution. In a globalized world, value chains are now geographically dispersed (with a widespread network both in-between and within global firms). Starting in the late 1980s, plummeting costs of transportation and communication paved the way for large-scale offshore activities of – back then – western firms.[v]

Countries such as China, Bangladesh, Turkey or Poland exhibit large-scale economic successes in joining GVCs.[vi] The apparel sector in Turkey, for instance, managed to upgrade its value chain from mainly assembly activities to higher value stages in design and branding.[vii] Upgrading towards higher value stages is mainly rooted in a fruitful combination of private and public-sector initiatives. Such initiatives comprise co-financed vocational training centers or offering marketing support for small and medium-sized enterprises (SMEs).

Yet, for a long time, GVCs were only analyzed from an economic point of view. The underlying neoclassical idea expects that economic upgrading will also trigger social benefits for employees in GVCs. Literature in the last years stressed, however, that this one-sided relationship is too short-sighted.[viii] Reports depicted far-reaching shortcomings on social aspects especially regarding workplace safety.[ix] Infamously, the 2013 Rana Plaza disaster underlined that negligence of social protection at work places has devastating consequences.

Powerful firms, so called lead-firms, may exert excessive power over the value chains they control. In order to cut costs, they can easily foster competition amongst suppliers, with severe consequences on the labor conditions of the employees.[x] Notably low-skilled workers, migrants and women seem to suffer under these circumstances.[xi] The concept of social upgrading looks into the social consequences of GVC participation and differentiates between quantifiable rights (such as wage, working hours, union density) and enabling rights (freedom of association, right to bargain, empowerment).[xii] To yield the benefits of GVC participation and to make it a real partner for development, the following steps need to be assured:

First, research and data collection on the quantifiable social outcomes of GVC participation must advance significantly. Most evidence on the social impact of GVC participation is qualitative, making it difficult to generalize across countries and industries.[xiii] Well-known data bases such as the World Input-Output Database (WIOD) and the OECD-WTO Trade in Value Added (TiVA) database fall substantially short in providing data on countries in the Global South.

The latter, for instance, provides data on the number of employees and labor costs for only twelve middle-income countries (using the World Bank definition). Moreover, these two indicators only capture a small fraction of the comprehensive social upgrading approach. Better data on the social consequences need to be collected at the company level, since core characteristics of value chains are shaped by differences in governance structures that exist within firms and industries.[xiv] These governance structures describe inter alia the power asymmetry between lead firms and suppliers and may have a direct impact on upgrading possibilities for workers within GVCs.

Second, research in different industries suggests that a country’s institutional quality plays a significant role for the social impacts of GVC participation. Institutions may help to protect laborers from exploitation, giving them the means to defend their rights in front of independent courts or providing a minimum wage.[xv] Also, quality institutions are often linked to better educational records of employees and prepare the ground for private sector investment into its workforce.[xvi] Both are essential prerequisites for workers to climb the economic and social ladder.

In Lesotho, for instance, investments in the apparel industry created jobs, but, weak institutions causing limited local capabilities and skills impeded large-scale social benefits.[xvii] International agencies trying to accelerate GVC participation need to assure that this happens in a protective institutional setting for workers.

A caveat when analyzing the institutional quality may be its vague concept. Scientists that deal with business-friendly institutions have a different understanding of it than researchers that include social protection schemes in the institutional definition. It is thus pivotal to critically assess the institutional definition applied.

Third, international organizations need to include insights into social upgrading when advising governments and private partners on making GVCs work for development. Instead of pointing out the economic benefits of participating in GVCs with an emphasis on comparative advantages such as low wages, a bolder approach is required: The social and potentially environmental consequences of any GVC engagement should be the base of any project design.

Initiatives such as Better Work, a collaboration between the International Labour Organization (ILO) and International Finance Corporation (IFC), show that incorporating social standards does not have negative economic consequences for businesses.[xviii] The Better Work initiative encourages firms and countries to comply with higher labor standards by relying on a wide set of policies, such as fostering collaboration between employees, offering financial incentives in case of compliance and disclosure of serious non-compliance.[xix] Evidence has shown that a protective social environment paired with high labor standards has positive effects on the workers’ and the firms’ revenue. Yet, such initiatives are still rare and their insights are not applied across international organizations.[xx], [xxi]

Putting a stronger emphasis on the social consequences of GVC participation and continuously working on its improvement will not only lead to a more inclusive arrangement of international trade, it will – if put in place correctly – also contribute to reaching the Sustainable Development Goals (SDGs).[xxii] Providing sustainable employment opportunities within GVCs, for instance, may well contribute to reducing absolute poverty (SDG 1), and reducing inequality (SDG 10) both within and between countries, whilst leading to sustainable agricultural practices (SDG 2) and helping to reach gender equality (SDG 4).

References

Picture: ibmphoto24

[i]UNCTAD, “Global Value Chains and Development: Investment and Value Added Trade in the Global Economy,” in United Nations Conference on Trade and Development (UNCTAD) Publication. New York and Geneva: United Nations, 2013.

[ii]Daria Taglioni and Deborah Winkler, Making Global Value Chains Work for Development, (World Bank Publications, 2016).

[iii]Gene M. Grossman and Esteban Rossi-Hansberg, “Trading Tasks: A Simple Theory of Offshoring,” The American Economic Review98, no. 5 (2008): 1978–1997.

[iv]Gary Gereffi and Karina Fernandez-Stark, “Global Value Chain Analysis: A Primer,” Duke Center on Globalization, Governance & Competitiveness (Duke CGGC), 2016, https://dukespace.lib.duke.edu/dspace/handle/10161/12488.

[v]Richard Baldwin, “Globalisation: The Great Unbundling (S),” Economic Council of Finland20, no. 3 (2006): 5–47.

[vi]Taglioni and Winkler, Making Global Value Chains Work for Development.

[vii]Karina Fernandez-Stark, Stacey Frederick, and Gary Gereffi, “The Apparel Global Value Chain,” Duke Center on Globalization, Governance & Competitiveness, 2011.

[viii]Stephanie Barrientos et al., “Economic and Social Upgrading in Global Production Networks: Developing a Framework for Analysis,” International Labor Review150, no. 3–4 (2010): 319–340.

[ix]Ibid.

[x]Thomas Bernhardt and William Milberg, “Does Economic Upgrading Generate Social Upgrading? Insights from the Horticulture, Apparel, Mobile Phones and Tourism Sectors,” 2011.

[xi]Joonkoo Lee and Gary Gereffi, “Global Value Chains, Rising Power Firms and Economic and Social Upgrading,” Critical Perspectives on International Business11, no. 3/4 (2015): 319–339.

[xii]Barrientos et al., “Economic and Social Upgrading in Global Production Networks.”

[xiii]William Milberg and Deborah Winkler, “Economic and Social Upgrading in Global

Production Networks: Problems of Theory and Measurement,” International Labour Review150, no. 3–4 (2011): 341–365.

[xiv]Gary Gereffi, John Humphrey, and Timothy Sturgeon, “The Governance of Global Value Chains,” Review of International Political Economy12, no. 1 (2005): 78–104.

[xv]Arianna Rossi, “Does Economic Upgrading Lead to Social Upgrading in Global Production Networks? Evidence from Morocco,” World Development46 (2013): 223–233; Barbara Evers et al., “Global and Regional Supermarkets: Implications for Producers and Workers in Kenyan and Ugandan Horticulture,” Capturing the Gains Working Paper 2014/39,2014. Available at: www. capturingthegains.org/publications/workingpapers/wp_201212.Htm.

[xvi]Cornelia Staritz and Mike Morris, “Local Embeddedness, Upgrading and Skill Development: Global Value Chains and Foreign Direct Investment in Lesotho’s Apparel Industry,” Capturing the Gains Working Paper 20, 2013.

[xvii]Ibid.

[xviii]Drusilla K. Brown, Rajeev H. Dehejia, and Raymond Robertson, “The Impact of Better Work,” 2018. Available at SSRN: https://ssrn.com/abstract=3130946or http://dx.doi.org/10.2139/ssrn.3130946

[xix]Better Work, “Better Work: Our Approach,” 2018, https://betterwork.org/our-work/our-approach/. Accessed: 15thAugust, 2018.

[xx]Carlo Pietrobelli and Cornelia Staritz, “Upgrading, interactive learning, and innovation systems in value chain interventions.” The European Journal of Development Research30, no. 3 (2018): 557-574.

[xxi]John Humphrey and Lizbeth Navas‐Alemán, “Value chains, donor interventions and poverty reduction: A review of donor practice.” IDS Research Reports2010, no. 63 (2010): 1-106.

[xxii]Raphael Kaplinsky, “Inclusive and Sustainable Growth: The SDG Value Chains Nexus.” International Centre for Trade and Sustainable Development (ICTSD),(2016).

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Fabio Thoma

Fabio is member of the Policy Corner and responsible for the strategic direction of our project and organizes events and trainings. He has a particular interest in questions of sustainable development and inclusive growth. He completed a double master’s degree in International Development at Freie University Berlin and Sciences Po Paris. Currently he works as a consultant for the IFC MENA Development Impact Unit.