Emerging Focus: Global Value Chains – Emerging Market Economies Take the Lead

Global value chains (GVCs) are shifting, with emerging market economies (EMEs), particularly those in South Asia, driving growth in the area. Improved production networks where different stages of the production process are located across different countries are benefitting trade, investment and the overall development of these economies. At the same time, greater interdependencies between economies also increase risks and challenges.

Key Points

• GVCs have become increasingly important in global trade and investment policies. With production processes located across different countries or the “emergence of borderless production systems” according to UNCTAD, GVCs link firms, workers and consumers around the world providing an important platform for EMEs to integrate into the global economy;

• EMEs are leading the exponential growth seen in the GVC framework, as they are starting from a low base. This is having important implications on trade, investments and development in these economies. According to UNCTAD’s World Investment Report (WIR) 2013, the share of global value added trade by developing economies grew from about 22.0% in 1990 to 42.0% in 2010 (latest figure available);

• According to the same report, Malaysia had the highest GVC participation rate amongst 25 key EMEs in 2010, at 68.0%. This was followed by South Africa and China (59.0% each), the Philippines, Russia and Saudi Arabia (56.0% each), Thailand (52.0%) and Egypt (50.0%). Larger EMEs like India, Brazil, Argentina and Turkey had relatively low GVC participation rates owing to the nature of their exports;

• GVCs have important development implications for EMEs. They directly contribute towards the overall GDP of respective economies, provide employment opportunities for industrial development and help increase transfer of technology. Real GDP in EMEs grew by an average of 5.5% over the 2007-2012 period (fixed US$ constant terms) compared to the 0.6% real expansion in developed economies;

• GVCs, however, have downside risks and challenges like social and environmental concerns. For example, 17.0% of total emissions in developing economies were “imported” through GVCs in 2010 compared to 8.0% of total emissions in developed economies according to the WIR 2013.

GVC Participation Rate in Selected EMEs: 2010

Source: Euromonitor International from UNCTAD

Note: (1) GVC participation indicates the share of a country’s exports that is part of a multi-stage trade process; it is the foreign value added used in a country’s exports plus the value added supplied to other countries’ exports, divided by total exports. GVC participation growth here is the annual growth of the sum of these two component values (CAGR). (2) 2010 is the latest data available. 

EMEs Drive Growth in GVCs Through Trade and Investments

• EMEs are leading the exponential growth seen in the GVC framework, as they are starting from a low base. According to the WIR 2013, the share of global value added trade by developing economies grew from about 22.0% in 1990 to 42.0% in 2010 (latest figure available). The increasing importance of GVCs in EMEs is reflected in rising trade of intermediate goods which account for about three-fourths of imports in EMEs like China according to the OECD;
• The share of EMEs in global exports and imports has also consistently risen thanks to GVCs in which intermediate goods and services are traded in a fragmented and internationally dispersed production process. In 2012, total exports and imports of goods in EMEs stood at US$6.0 trillion (or 33.3% of global exports) and US$5.6 trillion (or 30.8% of global imports) respectively, up from 27.8% and 24.0% of global exports and imports respectively in 2007;
• Foreign direct investments (FDI) facilitate GVCs as they are an important driver of global trade. In 2012, for the first time on record, developing economies attracted more FDI inflows than developed economies. FDI inflows in 25 key EMEs stood at US$482 billion or 35.6% of global FDI inflows in 2012, up from US$441 billion or 22.1% of global FDI inflows in 2007;
• Emerging Asia dominated GVC participation rates amongst all EMEs. According to the WIR 2013, Malaysia had the highest GVC participation rate amongst 25 key EMEs in 2010, at 68.0%. This was followed by South Africa and China (59.0% each), the Philippines, Russia and Saudi Arabia (56.0%), Thailand (52.0%) and Egypt (50.0%);
• Malaysia’s government has undertaken various measures to promote companies’ participation in GVCs and is positioning itself as a global hub for GVC activities for high technology manufacturing. In 2012, FDI inflows in Malaysia dropped to US$10.1 billion from US$12.2 billion in 2011. However, this figure was still the highest in ASEAN economies;
• Larger EMEs like India, Brazil, Argentina and Turkey had relatively low GVC participation rates owing to the nature of their exports, that is, either natural resources or services exports which do not use intermediates in exports and therefore have less need for imported content. For example, Brazil had the highest services to GDP ratio amongst all emerging and developing economies in 2012 at 68.4%.

FDI Inflows in 25 Key EMEs: 2007-2012

Source: Euromonitor International from UNCTAD

Note: (1) 25 key EMEs include Argentina, Brazil, Chile, China, Colombia, Egypt, Hungary, India, Indonesia, Kazakhstan, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Romania, Russia, Saudi Arabia, South Africa, Thailand, Turkey, the UAE, Ukraine, and Vietnam.(2) Data is in US$ billions and percentage of global total.

Direct Impact on the Development of EMEs

• The GVC framework has become an integral part of many EMEs contributing towards faster GDP growth as EMEs try and catch up with the developed world. They offer revenue opportunities, cost reductions and investment efficiency in EMEs. Real GDP in EMEs grew by an average of 5.5% over the 2007-2012 period (fixed US$ constant terms) despite the global economic crisis of 2008-2009 and significantly higher than the 0.6% real expansion in developed economies;
• For example, China has become the centre of GVCs in manufacturing particularly in labour intensive manufacturing. This has contributed towards the country’s growth and development over the last decade. China is amongst the fastest growing economies in the world, was the second largest economy in the world in 2012 and attracted the second largest FDI inflows globally in the same year;
• GVCs make a direct contribution towards generating employment opportunities –skilled and unskilled – and enhancing productivity growth. The average productivity in EMEs rose from US$17,164 per person employed in 2007 to US$21,500 per person employed in 2012. During this period, China witnessed the fastest growth in productivity in EMEs, up by 127%, followed by Indonesia (80.2%), Vietnam (77.6%) and Egypt (76.6%) in nominal terms;
• Job creation and improvements in employment quality can lead to higher income generation in large populated EMEs further boosting real GDP growth and reducing poverty. The total annual disposable income in EMEs grew by 36.9% over the 2007-2012 period (fixed US$ constant terms). Amongst EMEs, China and Argentina witnessed the highest increase in total annual disposable income during this period, up by over 65.0% in real term terms;
• Knowledge transfer of technologies to local firms can also be beneficial to many EMEs who are involved in low value-added technologies. According to the WIR 2013, if local firms manage to increase productivity and upgrade to activities with higher value added in GVCs, it can offer longer-term development opportunities in EMEs.

Risks and Challenges

• With growing cost pressure on global buyers, GVC related employment could be insecure and lead to poor working conditions in EMEs. For example, many Indonesian workers suffer from exploitative working conditions with below minimum wage payments. In addition, child labour is prevalent at a large scale despite new policy initiatives introduced by the government;
• Increased growth in GVCs in EMEs has led to growing pressure on basic resources like water, energy, and food. Rising consumption of these limited resources in EMEs thanks to GVCs can create shortage of resources and significantly increase the volatility in their prices;
• GVCs also raise environmental concerns for EMEs by having a significant impact on climate change and carbon emissions in EMEs. For example, 17.0% of total emissions in developing economies were “imported” through GVCs in 2010 compared to 8.0% of total emissions in developed economies according to the WIR 2013;
• GVCs lead to a significant amount of double counting in global trade, grossly overestimating value of trade in many economies and presenting a huge challenge to global trade policy. Many believe that while the nature of global trade has evolved, trade policies and regulations have not kept pace with this change;
• The increased connectivity within GVCs has led to greater interdependencies between economies, increasing local and global risks associated with breakdowns in the chains. For example, floods in Thailand at the end of 2011 disrupted global supply chains in the auto industry. Thailand is Asia’s hub for vehicle and auto parts production and exports.

Prospects

• Globalisation is forcing companies across the world to optimise their production processes and restructure their operations through offshoring and outsourcing. GVCs can magnify the benefits of trade and investments in EMEs. According to the WIR 2013, FDI prospects in 2013 are likely to be around 2012 levels with an increase over the 2013-2015 period;
• According to the same report, developing economies will continue to experience strong FDI inflows in the medium term. China is forecast to be the top investor choice for FDI in the 2013-2015 period. EMEs like India, the UAE and Russia are also in the top 15 investment destinations;
• While EMEs are taking the lead in GVC growth, they still remain in the early stages of GVC development. Gaining access and connecting local firms to GVCs remains a key policy challenge for many governments. In addition, increasing participation in GVCs will warrant building strong infrastructural network to reap the benefits of the development potential of this framework.