Global Value Chain Development Report 2016 Background Paper Conference – Beijing, China, 17 March 2016

Good morning, it is a pleasure to be here and participate in this meeting, attended by so many friends, on global value chains and their impact on development. I will divide my initial remarks into three topics:

• Why worry about GVCs

• The World Bank Group’s work on Global Value Chains

• World Bank Group’s contribution to this conference

Why worry about GVCs?

Borders between economic sectors have become increasingly blurred through the globalization and fragmentation of production. Today, economists focus on specialized tasks along global value chains (GVCs), seeking answers on how best to integrate regions into this dynamic world economy. Patterns of development have changed, and they require expanded perspectives on growth and the development dividends from increasing productivity, upgrading, and organizational change. Understanding how best to participate in GVCs and how to produce at world class standards will become increasingly important to achieve structural transformation and development in the 21st century. Competing successfully and sustainably in GVCs will require becoming hyper-competitive in specific tasks.

Recent analysis has shown that this requires a number of enabling conditions. First, policies targeting investment and trade flows must address infrastructure, connectivity, investment and trade policy. Second, policies must support the business climate and institutions, including financial and labor markets. Third, policies need to target the quality and conditions of input and output factors, which flow through education, skills development, product standards, innovation, and environmental, social, and labor standards.

Early results of cross-country econometric panel analysis, conducted by the World Bank Group show that:

• Countries’ policies are a major factor for economic upgrading through GVC integration. This holds in particular for developing economies, for which results indicate that all areas of policy identified, from those targeting investment and trade flows to policies supporting the business climate and institutions, to those addressing the quality and conditions of input and output factors can act as a mediator for gains from GVC participation.

• However, many areas are equally important for industrialized economies. For instance, the estimates for trade and investment policy show that there is still a lot of idle potential for industrialized economies with restrictive policies in this area. Similar results hold in the fields of infrastructure, financial development, quality and functional standards, and education and innovation.

• Other policy areas exhibit decreasing returns as income grows. We observe for example that improvements in a country’s institutional framework offers proportionally greater benefits for developing economies than for industrialized economies. The same holds for connectivity, an area referring to customs procedures, logistics, and communication services.

The World Bank Group’s work on Global Value Chains

Acknowledging the great potential for development that GVCs entail, the World Bank Group has established a Global Solutions Group, a team of over 180 experts with cross-cutting skillsets, with a specific mandate to improve the development outcomes of programs and projects incorporating Global Value Chains (GVCs). This is one of four thematic Global Solutions Groups housed within the Trade & Competitiveness Global Practice.

The GVC Global Solution Group objective is to develop innovative analysis and approaches to facilitating international development through GVCs, and it seeks to mainstream these tools into project design and implementation. By developing customized country and sector diagnostics, the GVC Global Solution Group can enhance and improve the outcomes and impacts of pro-competitiveness interventions. The GVC Global Solution Group works across all topical areas affecting GVC participation.

The chosen approach is comprehensive and built upon three pillars of action:

• Customizing country diagnostics, including investing in analytical capacity through more and better data

• Targeting interventions to improve firm capabilities, domestic firm competitiveness, and the domestic and international environment for GVC participation

• Leveraging global platforms for sharing lessons and learning

The GVC Global Solution Group operates with an integrated framework for policy intervention, connecting and collaborating with other World Bank Group Global Practices, including teams from the International Finance Corporation (IFC). The GVC Global Solution Group has also established a strong network of partnerships outside the WBG driven by strategic alignment, recognized thought leadership, and complementary expertise. These include other multilateral organizations, academia, research institutes, think tanks, the private sector, other civil society organizations, and development partners.

The World Bank Group’s contribution to this conference

The Global Value Chain Development Report 2016 is an important initiative for stimulating research on the essential and timely questions raised by the emergence of global value chains. The transmission mechanisms leading to technology, productivity and income growth, and the key factors that foster long-term growth from GVC participation, and how these differ across countries, income levels, and world regions are far from being fully understood. The body of research stimulated by this initiative represents an important step forward in this understanding. The World Bank Group is contributing to this effort with three research efforts:

• The first background paper, from Osnago, Rocha and Ruta, studies the relationship between the proliferation of deep trade agreements and production networks using a gravity framework. This analysis is important in three main respects. First, the relationship between deep integration and global supply chains deserves investigation in a world where the nature of trade has changed: new trade involving the exchange of customized inputs, incomplete contracts and costs associated with the search for suitable foreign input suppliers creates new forms of cross-border policy effects compared to a situation where goods are produced in a single location. Second, understanding and comparing the depth and impact of agreements across a large set of countries will also shed some light on the patterns of integration across countries with different levels of income and their engagement in global value chains. Third and last, understanding how deep integration influences trade flows is essential to assess the potential impact of new agreements such as the TPP in the context of global production. The findings of this work indicate that signing deep trade agreements (i.e. agreements that include more provisions) is associated with (up to) 25 percent more trade in parts and components and (up to) 23 percent more foreign value added in gross exports. Moreover, the impact of deep integration on production networks is mainly driven by disciplines such as SPS, TBT, and movement of capital, GATS, TRIPS, competition policies, IPR and investment, which, as the theory suggests, are more relevant for GVCs.

• The second study, from Saez and van der Marel, discusses the role of services trade in GVCs, focusing on three issues: the extent to which countries have integrated services as part of global value chains, both in terms of backward linkages and direct forward linkages; what explains this level of servicification across countries within each agricultural, industry and service sector over time; and how this servicification process has helped countries reach higher levels of domestic value-added. The paper’s findings are the following: (i) servicification is determined by regulatory entry-barriers of services markets as opposed to regulatory conduct barriers; (ii) the level of servicification is also determined by FDI regulations, but not all types have the same effect: equity restrictions emerge as the most important barriers; (iii) in addition countries with higher levels of internet connectivity and upstreamness position undergo a greater servicification process over time ; (iv) yet, servicification  is critical in downstream (close to final demand) production: lowering regulatory entry barriers of services, and in particular lowering regulatory FDI barriers related to foreign key personnel,  greatly enhances domestic value added growth in those downstream sectors which are more servicified.

• The third study, prepared by Boffa, Kuemmirtz, Santoni, Taglioni and Winkler, addresses the question of whether integration in GVCs help countries avoid a “middle income trap”, and more generally, the broader issue of the role that GVC integration may play in supporting countries graduation to higher income levels. The main findings of the research are the following. Expanding and strengthening a country’s GVC participation increases the probability of transitioning to a higher income class. The probability is higher for low and lower-middle income countries. Similarly growth in output per capita is highest for lower income groups. Assessing the impact on GDP growth suggests however that the lack of effect on income growth in high-income countries may be due to unobserved heterogeneity. In fact, once macro-economic conditions and time invariant heterogeneity are controlled for, integration into global production networks is positively correlated with GVC integration also at the higher income levels. Differentiating between intra-industry and inter-industry linkages, it appears that the former have a larger effect for income, possibly due to technology spillovers and other transmission mechanisms enhanced by industry similarity.

Finally, let me conclude with one important consideration. Fully understanding the analytics of GVC participation importantly requires further investment in enhancing the statistical capacity. It is now readily accepted across the international statistical community that a ‘whole of value chain’ approach to GVC policy making requires a similar ‘joined-up’ perspective at the statistical level, that can provide the evidence needed for a holistic perspective; one that fully articulates the role of the different actors involved. Progress is being made in this area by several institutions and by the research community and it should be fostered further. While the World Bank Group intends to leverage existing tools, including the World Bank Group Enterprise Surveys, other World Bank Group surveys, and tools being developed by other institutions, it has also launched a new major initiative to establish a new comprehensive firm survey tool which will delve deeper into the subject of GVC participation, across all areas of relevance: from sourcing practices to export performance and production costs, to technology and skill adoption, to managerial practices, work conditions and standards, providing much needed improvements in the statistical and analytical basis for action in this space. We hope that this tool, over time, will offer an additional mean to understand how to leverage GVC participation for development.

Anabel Gonzalez is the World Bank Group’s Senior Director for Trade & Competitiveness.

The First Conference on Global Value Chains, Trade and Development will be jointly sponsored by the World Bank Group and the Centre for Economic Policy Research. The event will be held at the World Bank Headquarters in Washington, D.C. from 30-31 March 2016.

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Global Value Chains: Brief

Participation in global value chains (GVCs), the international fragmentation of production, can lead to increased job creation and economic growth. In order to reap the gains from value chain participation, countries must put in place the right kind of trade and investment policies. The World Bank Group is helping developing countries catch the GVC wave and realize the benefits GVCs can deliver.

CONTEXT

What are GVCs?

• Companies used to make things primarily in one country. That has all changed. Today, a single finished product often results from manufacturing and assembly in multiple countries, with each step in the process adding value to the end product.

• Through GVCs, countries trade more than products; they trade know-how, and make things together. Imports of goods and services matter as much as exports to successful GVCs.

• GVCs integrate the know-how of lead firms and suppliers of key components along stages of production and in multiple offshore locations. The international, inter-firm flow of know-how is the key distinguishing feature of GVCs.

• How countries engage with GVCs determines how much they benefit from them.

Why are GVCs important for growth?

• GVCs are a powerful driver of productivity growth, job creation, and increased living standards.

• Countries that embrace them grow faster, import skills and technology, and boost employment.

• With GVC-driven development, countries generate growth by moving to higher-value-added tasks and by embedding more technology and know-how in all their agriculture, manufacturing, and services production. GVCs provide countries the opportunity to leap-frog their development process.

Are developing countries part of the new GVC paradigm?

• Some developing countries have fully embarked on the GVC revolution, but they still face challenges in aligning GVCs with their national development strategies.

• Others view GVCs as recreating the core vs. periphery pattern, with the “good” jobs concentrated in the North and “bad” jobs in the South.

• Yet even the most reluctant skeptics recognize that the GVC-driven success of nations like China and India illustrates the significant boost in a country’s competitiveness that can be delivered by combining competitive costs of production with high technology.

• The right strategies can help developing countries maximize their participation in GVCs.

STRATEGY

How does the World Bank Group help countries seize GVC opportunities?

• The World Bank Group Global Practices and Cross-Cutting Solutions areas help client countries design and implement effective, solutions-oriented reforms.

• The Bank Group provides integrated solutions tailored to country needs. Advisory services and financial support – including development policy lending to governments, investment in the private sector, and MIGA guarantees – can cover long-term strategies for deep structural reform or support for more targeted policy interventions addressing shorter-term challenges.

• The Bank Group brings to bear its hands-on local presence, access to lead firms and investment communities, rich data, and world-class analytical capabilities.

What can developing countries do to optimize participation in GVCs?

• Governments need to have a clear vision and mandate to improve coordination among government players, and ensure the involvement of the private sector.

• Opening borders and attracting investment can help jump-start entry in GVCs.

• Countries will derive the greatest benefit by maximizing the absorption potential of the domestic economy and by strengthening its linkages with GVCs.

• Many diverse policy areas affect the success of GVCs. They include, among others, trade policy, logistics and trade facilitation, regulation of business services, investment, business taxation, innovation, industrial development, conformity to international standards, and the wider business environment fostering entrepreneurship.

• Finally, countries should identify measures that will complement their GVC strategies. These include a large swath of dimensions, from investment in education and vocational training to environment and urbanization, from ICT and infrastructure building to labor market mobility.

What role does the World Bank Group’s Trade and Competitiveness Global Practice play?

• As the world of GVC production matures, the need for context-specific assessment and intervention has become more important in answering fundamental questions about GVC participation, sustainability, and the benefits to host countries.

• The Trade and Competitiveness Global Practice (T&C) provides evidence-based policy options to formulate and implement context-specific GVC strategies.

• T&C uses analytical and diagnostics tools and data-gathering to offer solutions in terms of analytical services, lending and investment operations, as well as guarantees customized to specific country needs.