By Stefan Pahl (University of Groningen)

Global Value Chains (GVCs) are seen by many as a possible panacea to economic development. New findings suggest indeed that GVC participation is strongly associated with productivity gains. Yet, there is no evidence in favour of positive employment effects, which is particularly relevant in less developed countries. This evidence calls for a careful assessment under which circumstances GVC participation not only fosters productivity but also job growth.

The enthusiasm about GVCs is essentially based on the premise that trade in GVCs is different from traditional trade because it entails a relational aspect and because it allows for fine-grained specialisation (e.g., World Bank, 2019). Both are associated with productivity opportunities for firms in developing countries. The relational aspect describes that firms engaged in GVCs do not interact in pure market transactions. GVCs imply a joint production setup, such that firms interact repeatedly with firm-to-firm transactions often requiring relationship-specific investments or trade of intangibles. This relational aspect thus might foster learning, especially for firms in developing countries interacting with firms in advanced ones. Fine-grained specialisation means that firms can specialise in specific production stages as opposed to final goods (i.e., whole value chains). Specialisation is associated with efficiency gains, which are likely to be larger if possible at a more fine-grained level. Both channels suggest enhanced productivity through GVC participation. For developing countries, it is also important whether such productivity gains translate into job generation. The positive view on GVCs suggests that those productivity gains coincide with or even cause scale effects that further allow for fast job growth, at least in developing countries.

Yet others argue that GVC participation is associated with reduced job growth because GVC trade fosters falling labour requirements in participating firms (i.e., less workers are needed per unit of production). Namely, trade in GVCs might require that participating firms in developing countries adopt new technologies that are ultimately labour-saving (e.g., Rodrik, 2018). For example, producing for global markets might require more precision and adherence to strict global standards, which cannot be achieved by manual labour such that firms need to substitute away from (unskilled) labour. In other words, firms in GVCs import and learn production technologies that make them more productive but that also reduce demand for unskilled labour. If true, firms that participate in GVCs experience fast productivity growth but generate only little employment. GVCs might be a mixed blessing.

One of the key features of GVC trade is the fragmentation of production. This is also relevant within countries as exporters often source intermediate inputs from other domestic firms (e.g., through outsourcing). Measuring productivity and employment effects therefore not only requires investigating the dynamics in directly trading firms but also in their indirect suppliers. These effects can be sizeable as about two-thirds of all jobs generated by production for exports are nowadays generated by indirect exporters (e.g., Cali et al., 2016).

Combining input-output tables and industry-level statistics, we track labour productivity and employment growth in direct and indirect exporters grouped by 13 (exporting) industries in a set of 57 countries since 1970. We correlate growth over 10-year periods with a measure of GVC participation (the foreign value-added content in exports) at the beginning of the respective period. We illustrate the finding on productivity in Figure 1. We split the sample of exporting industries (i.e., 13 industries in 57 countries in 10-year periods) into a group with high GVC participation and a group with low GVC participation. We graph the distribution of their respective growth rates over 10-year periods in Figure 1. It is evident that the group with high GVC participation experiences on average faster growth rates of labour productivity. Econometric work confirms these descriptive findings. It further highlights particularly strong productivity effects for country-industries further from the productivity frontier. Lower-income countries thus seem to have a particularly strong potential to benefit in terms of productivity, allowing them to catch up to the productivity leader through GVC participation. These findings generalise previous results on productivity gains. Related studies using similar measures of GVC participation typically find positive effects on productivity, while they tend not to measure backward linkages but mostly focus on exporting industries and investigate much smaller sets of countries over a shorter time period (e.g., Constantinescu et al., 2019). Firm-level studies, also typically focussing on direct exporters only, also tend to document that trading firms are more productive than non-traders.

Figure 1: Growth of labour productivity by high and low GVC participation

Yet, there is much less evidence on the employment effects. In a similar setup as for labour productivity, we find no positive correlation between GVC participation and growth of employment in exports. Figure 2 illustrates this by showing the distributions of growth rates of employment split across the groups with high and low GVC participation. Contrary to the result on productivity, it shows that high-participation industries have in fact slower growth of employment in exports than the group with low GVC participation. Also, further econometric work does not suggest a positive association between GVC participation and employment growth. There is some encouraging evidence in that the association is positive and statistically significantly different from zero for the very least productive country-industries. Yet, for the bulk of low-income countries, the effect remains close to zero and even turns significantly negative for productivity levels characteristic for middle-income countries. It appears that GVC participation is not a driver of job growth per se.

Figure 2: Growth of employment by high and low GVC participation

These new findings suggest that GVC participation might indeed be a mixed blessing of fast productivity but limited employment growth. The good news is that productivity gains appear to be pervasive. One can hope that those ultimately translate into higher real wages in the longer run. Yet, GVC participation does not seem to foster job growth on average. This more pessimistic finding on employment, however, does not rule out the possibility that some successful countries have experienced fast job growth through integration into GVCs. Many of those successful countries are located in Asia, such as Vietnam and China. Those examples that deviate positively from our average effect constitute interesting cases to investigate the conditioning factors that allow countries to fully benefit from GVC participation. Several case studies have already suggested potential factors, but it remains important to generalise key policy lessons that foster job growth in conjunction with GVC participation.

References

This post is based on the article “Do Global Value Chains Enhance Economic Upgrading? A Long View.”, by Stefan Pahl (GGDC, University of Groningen) and Marcel P. Timmer (GGDC, University of Groningen), published in Journal of Development Studies (2019). (https://doi.org/10.1080/00220388.2019.1702159)

Cali, M., Francois, J., Hollweg, C. H., Manchin, M., Oberdabernig, D. A., Rojas Romagosa, H. A., Rubinova, S., & Tomberger, P. (2016). The labor content of exports database (World Bank Policy Research Working Paper 7615). Washington, D.C.: The World Bank.

Constantinescu, C., Mattoo, A., & Ruta, M. (2019). Does vertical specialisation increase productivity? The World Economy, 42, 2385–2402.

Pahl, S., & Timmer, M. P. (2019). Do Global Value Chains Enhance Economic Upgrading? A Long View. Journal of Development Studies.

(doi: https://doi.org/10.1080/00220388.2019.1702159)

Rodrik, D. (2018). New technologies, global value chains, and developing economies (National Bureau of Economic Research, Working Paper No. 25164). Cambridge, MA: National Bureau of Economic Research.

World Bank (2019). World Development Report 2020: Trading for Development in the Age of Global Value Chains. Washington, D.C.: The World Bank.

Contributor

Stefan Pahl is a lecturer at the Groningen Growth and Development Centre at the University of Groningen, NL. His research interests are trade, structural change and productivity.