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Symposium 2014

Proposal - Global Supply Chains and Sustainability: Solution suggestions

The Challenge

The Rada Plaza fire in a clothing manufacturing plant in Bangladesh gave the world a sordid picture of the global supply chain at its worst. The owner of the plant became a poster child for GVC (Globa ...

The Rada Plaza fire in a clothing manufacturing plant in Bangladesh gave the world a sordid picture of the global supply chain at its worst. The owner of the plant became a poster child for GVC (Global Value Chain) players in emerging economies—large country-based companies with resources to gather labor pools of low-skilled, poorly-paid workers who are just grateful for any job, even in the most hellish work environment.

The challenge for this session includes a very long list of questions – as is inevitable when one uses words that are as malleable as ‘sustainable’. A working definition of ‘sustainable’ when used in the context of international economics is ‘good’ (as defined by the writer). Given this, I’ve chosen to tackle one of the specific question in the challenge: “Is participation in global value chains a path towards economic development?”

I’ve recently written a paper for the Asian Development Bank on “Development and future of Factory Asia” that speaks to many of the issues. When I coined the phrase ‘Factory Asia’ in 2006 (Baldwin 2006), I was referring to what would late become known as Global Value Chains. In my recent work with Rikard Forslid, I’ve tried to show that GVC participation has been beneficial to pro-growth exports.

There has been very rapid, but uneven growth of exports from emerging economies. While most the emerging markets’ export grew rapidly, they did so on the back of different trends. Some of these nations – like Brazil and Russia – are achieve high export growth on the back of the booming demand for commodities. Others are doing it via manufactured goods.

Using the new OECD database on value-added trade (i.e. trade flows that show where value was added by tracing the source of value added in intermediate parts and components). This data shows a wide diversity among East Asian (EA) nations . Some nations – such as Brunei, Vietnam, and Cambodia have seen their natural resource based exports account for substantial fractions of their total export growth. For most, however, the key driver was manufactured exports. Only in Hong Kong, Singapore and Japan have service exports played a large role in VA export growth.

The role of commodity exports has been smaller in the emerging markets involved in Factory North America (Mexico), and Factory Europe (Poland, Turkey, etc.). The commonality is that manufacturing exports account for the lion’s share of the growth – often 2/3rd or more.

Causal empiricism suggests that fast growers that relied on manufacturing linked-up to global supply chains to a much larger extent. Consider the prima facie evidence that this link is indeed important for many of the East Asian nations.

The measure of supply-chain trade involvement we use is the share of re-exported intermediates (REI), that is, imported intermediates that are re-exported either as parts and components, or embedded in final goods. The goal is to see if this measure of GVC participation lines up with growth in the domestic value-added contained in exports (from 1995 to 2009).

The 2nd unbundling logic – first presented in Baldwin (2006) – suggests that the correlation between REI and value-added export growth should differ greatly for ‘headquarter economies’ and ‘factories economies’. It should also differ across sectors (since production unbundling has not happen equally in all sectors).

Once we separate the East Asia nations from the others, a positive relationship looks much more plausible. Indeed, this is what the data show – a positive link seems to hold for other nations involved in supply-chain trade (those in Factory North America and Factory Europe). The link is completely missing for G5 nations – the Headquarter economies, and driven by outliers in the large economies outside of Asia for other emerging markets (other EMs).
When we look at sectors – pooling across of nations – the positive association is clear in some sectors but not in others. It is particularly clear in the machinery sectors, Electrical and optical equipment, transportation equipment, and Machinery and equipment not elsewhere classified.

The last cut of the data highlights the growth correlation between supply-chain participation and VA export growth by country group and by sector. Here a couple points stand out. First, China and Vietnam are frequently outliers – with big positive growth in both measures. Second, East Asian nations seem to systematically have more positive links between the two measures than the other nations. This, however, is less true in the classic outsourcing sectors such as textiles and machinery of various sorts. Indeed in transportation, the correlation of the East Asian nation and other factory economies (Other SCTers) is not at all clear.

Policy issues

In my thinking and writing on GVCs and development, three themes emerge.

First, geography is an important determinant of the ease of participating in GVCs. Just as it is easier to set up a supply plant in or near an industrial district, joining a GVC is much easier for nations that are proximate to the headquarter economies in East Asia – Japan, Korea, Taipei,China, Singapore, and Hong Kong, North American – the US, or Europe – Germany. This is nothing more than an assertion that forward and backward linkages matter at the regional level as well as at the national or industrial district level.

The intuition is similarly straightforward. In the main production unbundling sectors – electrical and mechanical machinery – fractionalised production processes involve time-sensitive and shipping-cost sensitive elements. Being nearby other supply-chain traders – both headquarter and factory economies – makes it easier to join a GVC.

The thrust of this point is that the common practice of seeing what China or Thailand or Mexico is doing and then hoping it’ll work in the middle of Africa or South America is a fundamentally flawed analytic strategy. Location matters. Another way to put this is that ‘regional comparative advantage’ matters as well as ‘national comparative advantage’ when it comes to joining an international production network.

Second, size matters. Nations that have over a billion consumers (India and China) can pursue policies that smaller nations cannot. In essence the two giants can leverage their local market as a powerful attraction force for supply chain segments. Again the message is one of caution. China can induce advanced-technology firms to employ and transfer technology since the Chinese market is such a large prize. The same policies in, say, Malaysia are much less likely to bear fruit.

Third, providing assurances to tangible and intangible property rights is likely to be an important element in attracting supply chain production. As such production is necessarily networked, some firm or network of firms must be coordinating the process. Such firms are naturally reluctant to expose their managerial, technical and marketing knowhow to tacit or explicit expropriation, which would facilitate the emergence of new competitors.

 


 

References

Baldwin, Richard (2006). “Managing the Noodle Bowl: The fragility of East Asian Regionalism”, eventually published in Singapore Economic Review, vol. 53, issue 03, April pp 449-478, 2008.

Baldwin, Richard and Rikard Forslid (2013). “The development and future of Factory Asia”, manuscript for ADB, 28 June 2013.