More on global value chains

Global value chains is the new buzzword now in international trade. I have blogged about some aspects of it here and here though I am no expert on it.

A new joint OECD-UNCTAD-WTO Report on Global Value Chains reiterates the growing importance of it in today's global economic scenario. the report is titled "Implications of Global Value Chains for Trade, Investment, Development and Jobs".

Some of the highlights of the report are:

 "The growth of global value chains (GVCs) has increased our interdependence: between 30% and 60% of G20    countries’ exports are comprised of imported inputs or are used as inputs by others.

Trade facilitating measures are vital to successful participation in GVCs; trade cost reductions from practical and relatively inexpensive actions could be as high as 16% for some developing countries. 

The role of efficient and competitive services sectors is also crucial: services account for 42% of exports (in value added terms) from G20 economies and more than 50% for some countries. 

 GVCs strengthen the case for multilateral market opening, as barriers between third countries, including various non-tariff measures, upstream or downstream can matter as much as barriers put in place by direct trade partners. 

 Open, transparent and predictable trade and investment policies need a range of flanking policies to ensure benefits from GVCs are inclusive and widespread. In some less developed economies there remains much work to be done to address specific obstacles to effective participation in GVCs.  

Overcoming obstacles to GVC participation can pay big dividends; developing economies with the fastest growing GVC participation have GDP per capita growth rates 2% above average.  

 Multinational Enterprise (MNE) coordinated GVCs account for 80% of global trade. But it is also estimated that the contribution of local firms is very significant (in the range of 40-50% of export value added).  

 GVCs can be an important avenue for developing countries to build productive capacity where local firms can capture a significant share of the value added: but technology dissemination, skill building and upgrading are not automatic and require significant investment.  

Individual countries will want to carefully weigh the costs and benefits of proactive policies, carefully tailored to the country’s specific situation and coherent with its overall development strategy. 

 A structured approach would include embedding GVCs in industrial development policies, in particular creating an environment conducive to trade and investment and building productive capacities in local firms and skills in the local workforce.  

Multilateral co-operation can contribute much to ensuring an overall trade and investment policy climate conducive to sustainable GVC growth, avoiding “beggar thy neighbour” policies, and addressing specific development policy concerns in today’s more interconnected world."

Some food for thought for those working on global value chains, the chalenges of integration and their  relevance to developing countries.

UNCTAD and selection of it's next chief - some issues

While all eyes are on the selection of the next WTO DG (the press conferences at the WTO have been fascinating to me), my attention was brought on the selection of the next Secretary General of the UNCTAD considering the institutional issues that have arisen in UNCTAD in recent times. The Globalization and Development blog raises the issue here. 

In an open letter to the Secretary General of the UN, leading academics and scholars have called upon certain criteria to be followed for selection of the next Secretary General of UNCTAD. 

"We very strongly urge that the next Secretary-General of UNCTAD, in addition to all the necessary experience, knowledge and management abilities, should have in particular the capacity and courage for independent thought. It is this characteristic that has been the distinguishing factor among the eminent persons who have held the post over nearly 50 years of UNCTAD’s existence. 

A demonstrated ability to provide strong and independent leadership to global analysis from a development perspective and to promote fresh thinking on trade and development issues is needed today more than ever. The world clamours for innovative economic thinking that charts a sustainable way out of the current crisis and that contributes to development and poverty reduction. We would regard the capacity to stimulate such thinking and to articulate the resulting policy approaches in the relevant forums as the single most important consideration when sifting among possible candidates in the requisite consultations with member States. The growing weight of developing countries in global matters requires an intellectually outstanding personality as the new leader of UNCTAD."

Interesting lessons for the the WTO DG selection process? Any lessons that one can learn from the points raised in the letter? the focus of most of the candidates for the WTO DG stressed on reworking the Doha round - some would recommend an innovative approach here too. A lot to watch for in the coming months!

Will countries increasingly look inward?

A recurring theme is this blog is the domestic policy space available to countries in the multilateral trading system. How much national autonomy do members have to craft their own domestic development agenda? How much are they constrained by the rule based trading system? opinion is divided on the issue and experts tend to argue that the multilateral trading system epitomised by the various multilateral agreements offer enough space for countries to pursue their respective agendas. How much of this domestic agenda is "protectionism" is another debate. Are these developmental agendas non-discriminatory and justifiable? Are countries looking more and more inward to find solutions to pressing economic problems rather than relying on the multilateral system?

Dani Rodrik, a critique of unhindered globalization, has recently written a brilliant piece in Project Syndicate indicating that in the future countries will increasingly look inward in terms of relying on their internal market instead of global, overseas markets. He, thus, implies that the multilateral trading system will lose its significance as countries will trade more internally than externally thus making the domestic policy debate redundant in a sense.

"Countries that rely excessively on world markets and global finance to fuel their economic growth will also be at a disadvantage. A fragile world economy will not be hospitable to large net foreign borrowers (or large net foreign lenders). Countries with large current-account deficits (such as Turkey) will remain hostage to skittish market sentiment. Those with large surpluses (such as China) will be under increasing pressure – including the threat of retaliation – to rein in their “mercantilist” policies.

Comments

Domestic demand-led growth will be a more reliable strategy than export-led growth. That means that countries with a large domestic market and a prosperous middle class will have an important advantage."

Forecasting that countries with low levels of public debt, reliance on local markets instead of global markets and strong institutions of democracy would do well in the coming years. India, Brazil and South Africa, according to Dani Rodrik, would fit this bill and will be in a better position to address the challenges of an inequitable global order. Are we going to see a reduced interest in the urge for countries to be part of the globalised economy? Is being integrated or taking advantage of the international supply chains going to reduce? Does the strategy to rely more on internal markets signal a legitimate use of protectionist measures for growth and equity? Recent trends of Argentina indicate that countries are looking at inward looking policies to further economic agendas. Will this be a long lasting trend? How would the WTO system react to this? How would the Dispute Settlement mechanism react to this development? Can it be achieved within the ambit of the multilateral trading system?

I read an interesting UNCTAD paper on finance-driven globalisation that echoed a similar view in the context of globalization in financial investments and countries reaction to it. Titled the "Paradox of Finance-Driven Globalization" it has come to the conclusion that countries that have pursued heterodox, innovative, local policies suited to their national conditions have been able to do better than countries that have followed a "liberalised", uninhibited finance-driven globalization model.

"Without going into detailed country profiles,success stories have been able to adopt creative and heterodox policy innovations tailored to local conditions. Many have established a strong investment–export nexus by managing their outward orientation with strategic policies including high (but temporary) tariff and non-tariff barriers, publicly owned development banks, directed credit, domestic content requirements, and capital controls. In addition, some have used targeted industrial policies to diversify their economies, developing a wider range of more productive activities. Such diversification appears to be closely linked to improving employment conditions and to build resilience against adverse shocks."

It appears that this paper reflects the notion that countries should exercise more domestic policy space in the multilateral trading agenda to pursue national goals. How much of this would violate WTO obligations is another issue.  Would using domestic content requirements or increasing protectionist measures be a permitted measure? Where does one draw the line?

Joseph Stiglitz proposes a "Right to Trade"

Joseph Stiglitz  recently spoke about a radical concept of the "Right to Trade" for developing countries that are impacted by the change in trade policies of the developed world.Calling for a change in the multilateral trading rules to incorporate such a concept, it essentially implies that the Right to Trade would be a tool in the hands of the developing world to take advantage of trade to work for the poor.UNCTAD reported it here.

The Commonwealth Secretariat summarized the concept here:

"As part of a pro-development multilateral liberalisation agenda, Prof Stiglitz said it is imperative to install alternative mechanisms to rebalance the global trading system and make trade work for the poor. He proposes that members of the WTO should adopt a general Right to Trade policy operating within the dispute settlement body. 

Under such a mechanism, developing countries would be able to bring an action against any developed country and access remedies. 

“A developing country (or countries) bringing successful actions under the Right to Trade could access a range of remedies, including elimination or change to the offending policy as a result of mediation, bilateral sanctions, and compensation from a multilateral Aid for Trade fund,” he said. 

“Under this arrangement, developing countries should be able to club together to impose joint sanctions where they have been affected by actions of policies of a developed country.”

The proposal works as follows:

"Under such a mechanism, developing countries would be able to bring an action against any advanced country where 3 conditions are met:       

 - a specific group of poor people within a developing country can be identified as being significantly and directly affected by a   specific trade or trade-related policy of an advanced country.        

 - the effect of the policy acts to materially impede the economic development of those poor people.    

    - the impediment operates by restricting the ability of the people to trade, or gain the benefits of trade." 

What implications does this have for the DSM of the WTO? It presupposes that developing countries need special rights under the multilateral system to ensure that trade is beneficial to it's people. It is definitely a radical thought considering that "national" treatment is the underlying philosophy of the WTO as well as the principle that the same rules apply to both the developing and developed worlds. What would constitute "developing" countries n this context? An emerging economy like China too fits this bill. How would the developed economies react to this proposal? He also stated that the Aid for Trade program of the WTO had not worked to the fullest extent possible and that a Global Trade Facility, a fund to be managed in the hands of UNCTAD must ensure that the developing countries are adequately compensated. Another example of the friction between the WTO and UNCTAD? I have written about the UNCTAD-WTO relationship here. Further, how would the proposed arrangement actually work? Would it be as a result of the dispute settlement decisions where developed countries measures are found to be restrictive? What about protectionist measures by developing countries? What about developing countries disputes inter se?

A strikingly out of the box proposal but as suggested by many delegates at the Commonwealth meeting - "the proposals were "radical", "progressive", "mischievous" and "interesting but risky". They added that more work needed to be done to tease out details of how these would work and be enforced."

Time for a radical change? With the Doha round in an impasse, it is difficult to visualize this radical agenda being accepted by the WTO members, by consensus.

The debate around UNCTAD

Amid the controversy of a letter  written by former staff of the UNCTAD, the UNCTAD XIII Conference recently concluded in Doha. It produced what is called the Doha Manar. Stressing on development centred globalisation, the mandate, in the context of the importance of the multilateral trading system, stated:

"Our deliberations at Doha have clustered around four major themes relating to development-centred globalization. Firstly, we agree on the need to enhance the enabling economic environment at all levels in support of inclusive and sustainable growth and development. In this regard, international trade is an engine of economic growth and socio- economic development. The multilateral trading system must remain open, rules-based, transparent, non-discriminatory and inclusive to serve especially as a bulwark against all forms of protectionism. The successful conclusion of the WTO Doha Development Agenda remains crucial. Accession to WTO by developing countries, in particular the least developed countries (LDCs), and countries with economies in transition, enhances the universality of the trading system. A robust and development-oriented multilateral trading system is essential. In addition, the efforts towards appropriate reform and continued improvement of the international financial system are, we recognize, as difficult as they are urgent, and are the shared responsibility of all.

It concluded by placing development of countries as the cornerstone of globalisation:

" Development is a universal concern today, and development-centred globalization is our common cause. We recognize the need to make our common economic life more conducive to progressive structural change, more productive of inclusive and sustainable growth and development, and more effective in fostering broad-based inclusion in a new and more robust social contract. We are also cognizant of the differences in capabilities and resources available to nations in different development circumstances, which mean that nations will have different roles in building our common future. But we must all participate equitably in shaping the global economy to support this new consensus for development-centred globalization."

News reports extensively covered the Conference as well as the salient features of the resolution. The issue of the relevance of UNCTAD and debate around the scope and mandate of the institution was widely reported here , here  and here . The Doha Manar itself, was apparently concluded after a lot of last minute deliberation. As one report put it:

"After intense negotiations, which ended at 05:00 on the last day of the Conference, developing countries managed to get agreement on a text that did not alter fundamentally UNCTAD’s mandate. The crucial paragraph calls for UNCTAD to “continue, as a contribution to the work of the UN, research and analysis on the prospects of, and impact on, developing countries in matters of trade and development, in light of the global economic and financial crisis.” Commenting on this, the participating NGOs stated that “as civil society, we celebrate that this Declaration language gives a clear mandate to UNCTAD to continue its excellent and highly lauded work on the global economic crisis.”

The intense debate  over the mandate of UNCTAD and its role in the context of other multilateral institutions is interesting. Is the UNCTAD more "development" oriented as compared to the IMF, World Bank, OECD or WTO? Does it represent the interests of the developing countries more? Do the other institutions represent a particular ideological position as compared to UNCTAD? Is the language and paradigm of the UNCTAD's world view more critical of trade liberalisation without barriers and without addressing developmental needs than other multilateral institutions? How does one view the rule based multilateral system in the context of UNCTAD's mandate? Are they compiimentary or contradictory? While Doha failed in the context of the WTO, it succeeded in reaching a conclusion in the case of UNCTAD. Is this because the latter was more to do with broad principles of guidance the former negotiations was involved in specific rules that would govern trade? Is it a case of institutional jurisdictional overlap?