Trading for Development in the Age of Global Value Chains - Word Development Report 2020

Global value chains (GVCs) powered the surge of international trade after 1990 and now account for almost half of all trade. This shift enabled an unprecedented economic convergence, the age of GVCs, wherein low-income countries grew rapidly and began to catch up with high-income countries.

Since the 2008 global financial crisis, however, the growth of trade has stagnated and the expansion of GVCs has stalled. These trends have only been amplified by the COVID-19 pandemic. Meanwhile, threats to the model of trade-led growth have emerged. Technological change could draw production closer to the consumer and reduce the demand for labor. And trade conflicts among large countries—exacerbated by conflict around COVID-19—could lead to a retrenchment or a segmentation of GVCs.

How can GVCs power sustainable and inclusive economic growth and development? How can countries work together to create deeper reforms and predictable policies that encourage shared and sustained GVC participation? How can the development of GVCs continue amid the COVID-19 crisis?

This MOOC gives participants an opportunity to explore trading for development- how GVCs can further boost inclusive and sustainable economic growth, creating better jobs and reducing poverty. Economists from across the World Bank Group will discuss how GVCs impact a range of development issues. Participants will also benefit from using a global online platform, by networking with peers across the world, experimenting with digital visualizations about GVCs, and experiencing the interconnectedness of global development demands.

Week 1 - GVCs— What are they and what drives country participation?

This module will focus on understanding GVCs and how they work. A GVC breaks up the production process across countries, with firms specializing in a specific task and stages of production rather than producing the whole product. GVC trade offers two features that distinguish it from traditional trade: hyper-specialization and durable firm-to-firm relationships. These features increase technology and knowledge transfer as well as access to capital, which allows firms to raise productivity and income and renders GVC trade more powerful than traditional trade in supporting growth and poverty reduction. GVCs expanded in the 1990s and 2000s, driven by technological advances in transportation, information and communications, and trade liberalization, but that expansion has slowed since the financial crisis of 2008. One reason for the stagnation is lower global economic growth and investment. Another is the lack of major liberalization initiatives in recent years. Factor endowments (labor, capital, and natural resources), geography, market size, and institutions drive a country’s participation in GVCs, and policies play an important role.

Week 2 – What are the effects of GVCs?

This module will focus on understanding GVCs and their consequences for development, as well as their macroeconomic implications. GVCs have contributed more to income growth than traditional trade, primarily due to their productivity-enhancing effects. GVCs also deliver more productive jobs, even though GVC firms themselves tend to be more capital-intensive. As a result of enhanced income growth and employment, GVCs are generally associated with reduced poverty. But how countries participate in GVCs matters for their impact on development. The gains from GVCs may not be distributed equally across and within countries. GVCs also present challenges to the international tax system and compromise domestic revenue mobilization efforts. At the macroeconomic level, GVCs are associated with greater synchronization of economic activity across countries, which can facilitate the propagation of economic shocks around the world. Similarly, GVCs create strong links in price formation, which means that inflation in one country is more likely to spill over to trading partners. In GVC countries, episodes of export growth are linked to episodes of import growth, which reduces the potential for currency devaluation as a policy tool to boost exports and reduce trade imbalances. GVCs also amplify the costs of protectionism for trade and growth, since higher tariffs on imported inputs could disrupt investment and drive firms to reshape entire value chains.

Week 3 – How do GVCs interact with the environment and what are the implications of technology for GVCs?

This module will focus on environmental issues surrounding GVCs, explaining scale, composition, and technique effects. While GVCs are associated with more shipping and more waste in the aggregate than standard trade, GVCs can also promote more efficient production processes and facilitate the production of new, environmentally friendly goods. New digital technologies enhance opportunities for GVC participation, however, they also foster concentration that affects the distribution of gains from participation in GVCs. New production technologies also promoted North-South trade, although the effects are heterogeneous across countries and sectors.

Week 4 – What domestic policies facilitate fruitful participation in GVCs?

This module will focus on domestic policies that facilitate fruitful participation in GVCs, including policies that enhance participation and ensure participation is inclusive and sustainable. The module will examine how proactive policies can be used to shape and upgrade GVC participation, particularly looking at the role of factor endowments and how countries can best exploit their comparative advantage. The module will also explore policies that help developing countries spread the jobs and earning gains from GVC participation across society. Adjustment policies, such as placement services, training, and mobility support can help workers displaced by trade and ensure that GVCs expand to deliver more productive jobs. Policy can also mitigate the negative environmental consequences associated with GVC participation, for example, by promoting the adoption of environmentally friendly technologies. National measures can be complemented by global cooperation on the environment and working conditions, to greater effect.

Week 5 – How can international cooperation help GVCs?

This module will focus on the value of international cooperation on trade and beyond trade in a GVC world. Policy action or inaction in one country can affect producers and consumers in other countries. Increasing pressure on the global trading system, manifested in protectionism and policy uncertainty, puts the benefits of GVC trade and open markets risk. To sustain beneficial trade openness, countries need to deepen traditional trade cooperation to address remaining barriers to trade in goods and services, as well as other measures that distort trade, such as subsidies and the activities of state-owned enterprises. Sustaining openness to trade and GVCs—while also maximizing the benefits—also requires cooperation beyond trade policy on taxes, market regulation, competition policy, and infrastructure. Domestic regulation is insufficient to address international market failures, such as protection of foreign consumer data. Coordination between countries on investment in transport and communication infrastructure can also improve international connectivity.