A telephone from my grandson while building Lego factory sets from his building blocks enquiring about factories/ storage facilities in India since he had seen many in the U.S.A., prompted me to look for global value chains. Moreover, our RBI Governor who is a world reputed economist with myriad solutions to our economic woes also mentioned in his recent speech at CII conference the role of global value chains for the revival of our economy. A study was recently undertaken by World Bank on” Global Value Chains” which easily facilitated the writing of this article.
Let me just refer you to the said world bank study titled” Trading for development in the age of Global Value Chains” from following web address:
Various questions like what are global value chains, their role in the economy, why everyone is talking about these whenever the economy needs more development and do we as a nation really lack behind in developing these and if so, what would happen in near future to make required progress in our dream to reach top three positions in the world economy will be answered in this article.
What is a global value chain? (GVC)
Raw materials Services inputs, Parts and components semi-Finished goods, and finished goods are the normal processes in case of exports, other than getting an order and execution at a later stage.
How do GVCs work?
“Interactions between firms typically involve durable relationships. Economic fundamentals drive countries’ participation in GVCs. But policies matter—to enhance participation and broaden benefits.”
Let us analyze the process to simplify our understanding.
A simple bicycle, supposed to be of easy manufacture and marketing is no more that simple. It consists of the following parts:
Yes, like myself you are in wonder that not one country produces the whole cycle but various functions like getting an order from an importing country, the country to export, various parts produced in various countries and assembled in one country, the paperwork done and all back-office on exports/imports done, the finance to be obtained for all manufacturers, various tax-related queries handled for various individual producers of spare parts and the final cycle emerging to be handed over to the buyer in a showroom constitute the process as cycle manufacture. I have omitted the advertisement and public relations exercises done in this process.
Let us compare the list of countries like Japan, Italy, India, Korea, Singapore, Malaysia, and China who participate in the process of manufacturing as some of the ones connected with bicycles. India’s Hero cycles exports to 70 countries its products. I can’t say from its web site what are the real exports related to bicycles since millions of exports in US $ justify its existence and my days of being an Indian with Indian made products is gone.
Let us base our discussion with “A global value chain (GVC) is the series of stages in the production of a product or service for sale to consumers. Each stage adds value, and at least two stages are in different countries” as the base for our discussion.
Is it that simple as an importer and an exporter?
We may consider backward GVC participation in which a country’s exports embody value-added previously imported from abroad. For example, if the bicycles exported by Taiwan, China, or India use imported intermediates, then its GVC participation is considered backward because the intermediates used in exports are from the previous stage.
Similarly, forward GVC participation is one in which a country’s exports are not fully absorbed in the importing country and instead are embodied in the importing country’s exports to third countries. In the bicycle example, if India sends aluminum tubing to Taiwan, China, where it is further used in the production of the bicycle later exported, then India’s GVC participation is considered forward because the exporter is at the early stage of production of the bicycle.
As a preamble to understand the complex process of international trade, manufacturing, management of human resources, the arrangement of finance locally or from outside countries, managing the legal latitudes provided by the government in any country, free trade restrictions or facilities provided to expand the business, or the whole world economy which also depends upon the political structure of any county have been studied by the world bank, obviously with the cooperation of all its members and the following conclusions arrived at.
I want to touch various conclusions of the World Bank report which is an eye-opener to India which is considered in some places as leader in the provision of services with its worldwide software skills or in some other places as the country which adds values to any exports. I could easily recollect that instead of meeting China whose government directly helped its countries to capture the world market of garments, Indian garments exporters suffered initially, cried for help from Indian government and I too recollect Tirupur, Tamil Nadu, the maximum cluster of garments exports from India used to demand uninterrupted powder and clean water for its exporting activities. India struggled even to provide this simple supply of essential requirements for the production of garments.
Today, Tirupur garment producers in spite of its impediments have widened their net of exports to value-added garments fetching a higher price. Now, I understand that the basic requirements of power, water, and specialized manpower are met at Tirupur.
Now the World Bank leads us.
Chapter 1. The new face of trade
What relevance the above key findings have for Indian aspirations?
Though India started with the establishment of industrial base mostly for its internal use, restricted with its social goals the expansion of its industries, and with the unexpected success of its emergence as a soft power after the introduction of its reforms in the 1990s, it could not provide jobs to its hugely talented young men/women other engineering fields like mechanical engineering, manufacturing or structural engineering which needed growth of traditional industries.
RBI governor mentioned GVC as the new instrument for giant strides to be made by India for replacing China because a large number of industries in China are moving out to other countries due to various reasons.
Chapter 2. Drivers of participation.
Chapter 3. Consequences for development
What are the macroeconomic implications of GVCs? (Chapter 4)
Before concluding my discussions, what do I prophesy for the future?
I simply echo the feelings of Chapter 6 of the report which is simple but very futuristic in its conclusions.
New digital technologies will enhance opportunities for developing countries allowing more developed nations to innovate further and increase productivity. Platform firms like amazon, big basket, or Flipkart may look like creating uneven benefits among business units but recently revised instructions around the world in all countries have started looking at these developments to disperse the benefits uniformly among others too.
There is a strong notion that automation would reduce employment and labor would become redundant. Recent monumental changes in Indian banking disproves this theory and youngsters are getting a lot of benefits other than increased salary. Will the usage of robots disrupt the economy? The increased usage of robots in manufacturing, defense of the nation at enemy borders, or control of unruly mobs within the nation have shown immense positive results. Robots are here to stay and flourish.
But environmental concerns, upgrading the skills of labor or reorientation of education to meet the current/future needs are some areas that need immediate action points.
I am sure with my several decades of development in India, the country thrives under pressure and enjoys the fruits of its labor. The recent economic reforms looking like a demon for unions once are the starting point in India’s bloom now.
Let GVCs disrupt us more for prosperity.
Disclaimer: Obviously, these are my personal views, and just for information purposes, I wrote this article. Taxguru.in has no responsibility for my views. The world bank report has been quoted to give authenticity to my views. They are not at all responsible for my views/arguments. You are requested to read their report for full knowledge.