Beyond Borders: Global Value Chains (GVCs) Role in Empowering Emerging Economies

The efficacy of Global Value Chains in ameliorating the challenges faced by the developing world has been a subject of inquiry among economists

Jan. 15, 2024, 7:40 p.m. Published in Magazine Issue: VOL. 17, No. 12, January.26,2024 (Magh,12. 2080) Publisher and Editor: Keshab Prasad Poudel Online Register Number: DOI 584/074-75

Global Value Chains (GVCs) represent a central outcome of globalization, originating in prominence during the late 1990s, particularly impactful for developing nations, that is, developing economies must prioritize international trade and foster regional economic integration. The UNCTAD's 2013 delineation defines Global Value Chains as intricate supply chains characterized by dispersed international tasks and activities orchestrated under the guidance of a lead firm. The World Bank's World Development Report 2020 describes GVCs as the fragmentation of production processes across multiple nations and specialized firms, each focused on distinct tasks rather than the holistic production of an entire product. Noteworthy exemplars such as Samsung, a prominent mobile brand, source components from approximately 2500 suppliers worldwide (WDR, 2020), while the iPhone, manufactured through collaboration with nine companies across five nations (Xing, 2020), exemplifies this distributed production model. The report further illustrates this phenomenon with the example of bicycles, showcasing how China assembles parts and components sourced from diverse countries, including Italy, Spain, Vietnam, Japan, Singapore, Malaysia, and France, to produce a complete bicycle.

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(Sources: The World Development Report, By the World Bank, 2020, Page 16)

In contemporary global trade, two distinct paradigms of Global Value Chains prevail Producer-Driven Global Value Chains typified by entities like Toyota and Apple and Buyer-Driven Global Value Chains exemplified by corporate giants such as Walmart, Nike, and GAP. These divergent models collectively encompass a significant portion of the current global trade landscape, accounting for approximately 52 percent, as elucidated in the World Development Report 2020 (WDR, 2020).

In the Asian context, several nations have demonstrated notable success within Global Value Chains. China, notably, stands as a key global assembly hub for information communication technology products, while Thailand has emerged as a burgeoning center for automotive exports in Asia, securing the third position worldwide as a commercial vehicle producer (Xing, 2020). India holds a prominent position in Asia as a global destination for information technology software sourcing, and the Philippines has solidified its status as the region's primary voice (call center) outsourcing destination (Xing, 2020). Additionally, Vietnam has gained recognition for producing mobile parts used in globally esteemed mobile phone brands (Xing, 2020).

The efficacy of Global Value Chains in ameliorating the challenges faced by the developing world has been a subject of inquiry among economists. Extensive research conducted by prominent institutions such as the Bretton Woods Institutions and esteemed economists consistently concludes that Global Value Chains play a pivotal role in augmenting macro and microeconomic landscapes within developing nations. These chains offer a spectrum of advantages, fostering spillover effects that benefit developing countries profoundly. Economists note that their impact encompasses augmenting economic growth, curbing poverty and unemployment, facilitating industrialization, opening avenues for raw material utilization, fostering stronger ties with developed nations, and contributing to environmental safeguarding. Additionally, Global Value Chains serve as a mechanism for mobilizing internal resources and bolstering tax revenue, thereby addressing the persistent fiscal challenges characteristic of the developing world. Moreover, their influence prompts necessary tax reforms in developing countries, aligning their mechanisms and structures with global standards (WBR, 2020;Xing, 2020).

Global Value Chains wield a multifaceted impact on the contemporary world, particularly regarding gender equality. According to findings from the World Bank (2020), IFC (2018), and Xing (2020), these chains play a pivotal role in mitigating the gender gap prevalent in both industrial and social sectors. Global Value Chains contribute significantly to narrowing this divide by fostering employment opportunities for female labor. Simultaneously, they catalyze women's rights regarding property ownership, notably in countries where Global Value chain firms are owned or managed by women. This dual effect, offering employment avenues and bolstering property rights, underscores the positive impact of Global Value Chains on advancing gender equality within societies.

Understanding the mechanics of Global Value Chains (GVCs) is a pivotal and debatable inquiry in the contemporary world. This discourse holds significance as esteemed multilateral institutions like the World Bank and WTO concentrate their efforts on bolstering foundational elements such as the rule of law, fostering an enabling environment, promoting openness, and fostering international cooperation. Central to the efficient operation of GVCs are initiatives aimed at enhancing connectivity through the modernization of communication channels and the development and maintenance of critical infrastructure, including roads, railways, air transport, and ports. These infrastructural components are integral drivers that facilitate the seamless functioning of Global Value Chains by expediting the flow of goods, services, and information across global borders.

Concurrently, the escalating tensions between Western and Eastern powers have spurred a discourse revolving around the dichotomy of 'de-globalization versus globalization 2.0'. This ideological friction has given rise to the amplification of concepts and sentiments rooted in nationalism, protectionism, populism, and individualism, particularly evident in the trajectory of advanced economies. Instances such as the UK's Brexit referendum, the outcome of the 2016 US presidential election, and the US withdrawal from the Trans-Pacific Partnership (TPP) exemplify the burgeoning prominence of these ideologies, reshaping the conventional narrative of globalization into a more fragmented and inward-focused paradigm. The repercussions of such shifts are palpable, notably highlighted by the US-China trade conflict, which is a poignant manifestation of the implications stemming from these prevailing sentiments and slogans.

Meanwhile, China and India assert their influence on the global economy, actively pursuing their positions within international economic frameworks. India, for instance, advocates for a permanent seat at the UN Security Council, while China aims to devalue the role of the US dollar in Asian trade. Moreover, emerging economies are exploring alternative avenues to traditional Bretton Woods institutions, evident in initiatives like the BRICS alliance, the Asian Infrastructure Investment Bank (AIIB), and participation in the Belt and Road Initiative (BRI). This strategic shift is a response to the historical dominance of Western economies through Bretton Woods institutions, limiting the policy autonomy of emerging economies within the global economic landscape. Consequently, this poses a formidable challenge to the Washington Consensus in its efforts to promote the concept of globalization 2.0.

Economists have cautioned that the world economy will encounter trade and financial challenges in the coming years. This anticipated scenario is expected to prompt a dynamic interplay between advanced and emerging economies, characterized by a push and pull strategy, potentially exerting a significant impact on the current trajectory of Global Value Chains. Consequently, a comprehensive, comprehensible, and universally agreed-upon economic policy is imperative to mitigate the adverse repercussions stemming from both the Western-Eastern geopolitical tensions. Crafting and implementing such a policy framework is the most viable way to navigate Global Value Chains’ current phase. Successfully addressing this complex scenario necessitates the collective efforts of leading global entities, including the WTO, the World Bank, and the IMF, and collaboration between advanced and emerging economies. Furthermore, adopting a win-win strategy emerges as a pragmatic approach to safeguard Global Value Chains and orchestrate the recovery of the world economy from the pervasive effects of the COVID-19 crisis.

Nepal currently remains distanced from the intricate networks of both the backward and forward linkages within Global Value Chains. Despite possessing a federal governance structure, a liberalized economy, a robust Foreign Direct Investment (FDI) policy, and the enactment of the Foreign Investment and Technology Transfer Act, which have collectively contributed to elevating its standing on the Doing Business Indexes, Nepal continues to grapple with a persistent trade deficit. Nepal's affiliation with global bodies such as the WTO, the World Bank, and the IMF underscores its commitment to regional economic integration efforts. However, despite these initiatives, Nepal faces ongoing challenges in balancing its trade, thus encountering a perennial trade deficit.

The Government of Nepal keeps on initiating various policy measures to address pressing concerns within the nation's economy. However, several imperative actions remain to be taken to harness the potential benefits of Global Value Chains. These include a concerted focus on establishing a cohesive and enduring economic agenda, fortifying governance structures, curbing corruption, modernizing customs and tax systems, fostering robust economic diplomacy, overhauling fiscal and monetary policies, upholding the rule of law, bolstering accountability and responsibility mechanisms, and embracing digitalization initiatives. The effective implementation of these measures is the linchpin for Nepal to attract and integrate into Global Value Chains. Nevertheless, it's crucial to remember the adage: "A fish rots from the head down," emphasizing the paramount importance of effective leadership and governance as the cornerstone for any systemic change or progress within an economy, Nepal included.

References:

  1. World Bank. (2020). World Development Report 2020: Trading for Development in the Age of Global Value Chains. 1818 H Street NW, Washington, DC 20433. Retrieved from https://www.worldbank.org/en/publication/wdr2020
  2. Xing, Y. (2020). Trade and Industrial Policy under Global Value Chains. Paper presented at the Japan-IMF Macroeconomic Seminar for Asia (JIMS) 2020, organized by the IMF Regional Office Japan and National Graduate Institute for Policy Studies, Tokyo, Japan.
  3. International Finance Corporation. (2018). World Bank Group. Retrieved from https://www.ifc.org/en/home

Mr. Ghimire was a Secretary of the Government of Nepal, and Mr. Lekhak is a Joint Secretary of the Government of Nepal and is currently a Ph.D. (Economics) fellow at Waseda University in Tokyo, Japan.

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