World economic development: Global Value Chains— India’s effective role

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:

https://openknowledge.worldbank.org/bitstream/handle/10986/32437/9781464814570.pdf?sequence=63&isAllowed=y

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:

• Saddle
• Frame
• Brake
• Wheel
• Pedal and crank

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

Key findings

• Global value chains (GVCs) expanded in the 1990s and 2000s, but that expansion has slowed since the financial crisis of 2008. Some of the reasons attributed are an interesting coincidence. The U.S.A. emerged as a leader in the purchase of garments, and even quotas were imposed on nations to export to the U.S.A. But the results were abrupt stoppage of huge mills producing garments from that country which claims to be the largest producer of cotton with the highest output per acre. India recently entered into a discussion for importing seeds from that country to improve its output. But the huge unemployment in the U.S.A., due to unlimited imports has forced the American government to have a trade embargo with various nations to start new country trade agreements. The U.S.A. has since moved out of global discussions to widen its trade.
• GVCs matter for development. GVC trade exhibits two features that distinguish it from traditional trade: hyper-specialization and durable firm-to-firm relationships.
• All countries participate in GVCs but in different ways. Developed and large emerging countries participate in complex GVCs producing advanced and innovative manufactures and services. By contrast, many countries in Africa, Central Asia, and Latin America still produce commodities for further processing in other countries or engage in limited manufacturing.
• The intensification of GVCs was driven by a handful of regions, sectors, and firms. GVCs grew in the machinery, electronics, and transportation sectors and in the regions specializing in those sectors: East Asia, North America, and Western Europe. Within countries, a few large trading firms dominate GVC trade, supported by foreign direct investment. India as the leader in providing services, particularly soft power as the world giant is always quoted as the best competitor to be beaten by any country. With its largest pool of excellent and young manpower, it is able to place them anywhere at the most competitive price. It has emerged as an eyesore for some politicians in the U.S.A. and in Europe.
• The following statement from the World bank report is true and very revealing.
• “More-complex value chains have stronger regional linkages, although GVCs have expanded both globally and regionally. GVCs in East Asia and Europe are more focused on trade within the region. GVCs in North America depend somewhat more on global partners. Elsewhere, GVC integration has been mostly global and is primarily continuing in that direction.”

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.

Key findings.

• Global value chain (GVC) participation is determined by fundamentals such as factor endowments, market size, geography, and institutional quality, but these fundamentals need not dictate destiny. Choosing the right policies can shape each one of these fundamentals and thus GVC participation. In India, Uttar Pradesh broke its shackles and got new and giant industries moving out of Germany and starting huge production in footwear and related products there. It is also expecting toy industries worth Rs 3000 Crore investments to set up new production in Noida, U.P. This was possible due to its improvement in law and order, simplification of labor laws, and a projection that it has emerged a new center for industrial growth in India. Big industries, now believe U.P., can guide them towards prosperity.

Chapter 3. Consequences for development

Key findings.

• Hyper specialization and durable firm-to-firm relationships promote efficient production and the diffusion of technology, as well as access to capital and inputs along value chains. Banks line up for any unit which will show tie-up with world-class companies for the production of units either for internal consumption or for exports related activities.
• Countries experience the biggest growth spurt during the transition out of commodities into basic manufacturing activities. Sugar, rice, or any export of commodity has been staggering at low prices at the vagaries of international buyers.
• GVCs deliver more productive jobs, primarily through scale effects that result from increased productivity and expanded output. Because they boost income and productive employment, participation in GVCs is associated with reduced poverty.
• The report has extensively covered Vietnam, as a model of conversion from a poor country to one of the largest producer of cell telephone products by sheer conversion to the adoption of high technological nature of mechanization, uplifting the intellectual acumen of its labor by exposure to international standards of excellence, the introduction of the best labor rules/regulations to ensure availability of its output as per laid down agreements with the global purchasing corporates. Continuous supply of power, the work schedule for 24 hours with an expected excellent working environment for industries turned the corner for that country. Unbelievable but true.
• Bangladesh has also emerged as the other enviable partner in meeting world standards in garment production and exports to a large number of importing countries.
• Bangladesh now exports 7 percent of the world’s apparel and footwear— third only to China (which increasingly sources from Bangladesh) and Vietnam. It has introduced tax holidays for units being set up there for exports of garments.
• Fortunately, as narrated earlier, even in India, states who could wake up to international standards are attracting huge investments and big industrial houses. Obviously, all parts of India do not get the benefits of GVCs. Some are laggards.
• Tax issues form another boundary to be scaled down by any government to attract the GVCs. India’s historic slashing down of its tax rates to 17% for new investing Corporates was an eventful instance for refreshing the memory.

What are the macroeconomic implications of GVCs? (Chapter 4)

• Global value chains (GVCs) are associated with greater synchronization of economic activity across countries. When production in one country relies on inputs from another country, then economic activity in the two countries is linked. Can you believe that many Indian manufacturers have established production facilities in Bangladesh due to its attractive export/manufacturing schemes?
• GVCs create strong links in price formation, implying that inflation in one country is more likely to spill over to its direct and indirect trading partners.
• In GVC countries, episodes of export growth are linked to episodes of import growth. This has an immediate resemblance to India’s steps to augment local production and also to replace imports wherever possible. But GVCs have amply proved imports and export linkage can’t be totally avoided. India can never go back to its 1960s policies which were regressive in nature.
• GVCs amplify the costs of protectionism for trade and growth. The back-and-forth movement in tasks and parts across borders means that trade barriers are incurred multiple times. Protectionism is therefore costlier for growth and welfare.
• Trade agreements have the potential to reshape the geography of production. The prevalence of rules of origin as well as the productivity gains associated with a reduction in the price of imported inputs imply that trade agreements have systemic consequences for the allocation of production across countries in GVCs. If Bangladesh offers cheaper cost of production and meets international demands of schedule and quality, how can one force Indian corporates not to go there?

Before concluding my discussions, what do I prophesy for the future?

Conclusions

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.