Global Value Chain Development Report 2019:
Technological Innovation, Supply Chain Trade, and Workers in a Globalized World
Brief Summary and Relevance to Pakistan
Omer Hussan Bajwa
The Global Value Chains Development Report 2019, a joint publication of World Trade Organization, Institute of Developing Economies and four other institutions, deeply and comprehensively analyses global value chains (GVCs) along with technological and economic factors that are transforming them.
The report, first of all, aptly addresses the criticism that is levelled at the loss of manufacturing jobs in developed countries owing to the growth of GVCs. The effect of GVCs on jobs varies from region to region and individual to individual on the basis of their skill levels. This phenomenon is quite evident in developing countries too. Besides this, many beneficial impacts; for instance, more jobs for women, amelioration of the economic condition, reduction in poverty and high demand of skilled personnel, are associated with integration in GVCs. It has been explained that automation may not affect labour-intensive exports from developing countries in the short run. However, the salvation of developing countries lies in embracing digital technologies as the Internet of Things (IoT), artificial intelligence, Big Data, robotics, cloud computing, and 3D printing, among others, are transforming economies. Currently, sectors with greater intensity of technology are more integrated into the complex GVCs.
Moreover, adoption of digital technologies will enable developing countries to participate in ‘Supply Chain 4.0 and help small and medium enterprises (SMEs) to participate in GVC. However, currently, SMEs, in developing countries, face numerous challenges including lack of e-commerce platforms, limited access to Internet and low levels of skill in digital technology.
Another key concept that has been highlighted in the report is to see trade balance through the lens of value addition. It has been witnessed that developing countries join GVCs at the end of value chains by producing labour-intensive assembly of parts. This thing is responsible for their fewer shares in value addition. Resultantly, they aspire to move up in the value chain. One thing that all developing countries should remember is that if they replace key inputs with inferior domestic versions, there will be fewer exports, as they will lose international market. The domestic, value-added ratio of countries observes as a whole a parabola trajectory where initially it rises and after reaching its peak falls. This phenomenon has been discussed explicitly in the report. Furthermore, the report sheds light on the issues present in GVC measurement.
Applicability on or Relevance to Pakistan
As per Asian Economic Integration Report 2019-20, Pakistan has very low participation in both regional value chains (RVCs) and GVCs. It indicates that large portion of final goods is produced purely domestically. Similarly, as per the first quarterly report of year 2020 of the State Bank of Pakistan, Pakistan’s backward participation in exports has reached only 5.6% in 2015 and, in case of forward participation, 27% of exports are used as inputs in other countries. Most of these exports originate from primary agricultural commodities and low-tech manufacturing sector. In this perspective, the Report has great relevance to Pakistan as it not only highlights different aspects of GVCs and the impact of technology on them, but also gives some policy recommendations to maximize the benefits that a country can get by integrating into the GVCs. Following points categorically substantiate this proposition.
- Burgeoning factory Asia
A significant increase in intra-regional trade activities has been witnessed in Asia between 2000 and 2017. China, Vietnam, India and Bangladesh, in particular, have integrated themselves not only into the RVCs but also in GVCs. The massive increase in trade activities has opened new venues for Pakistan to integrate into both RVCs and GVCs. Trade openness with regional countries will improve competitiveness of Pakistan’s exports, particularly textile products that comprised 68% of total exports.
- China – the new hub of GVCs
By 2017, China has become supply and demand hub in terms of both the magnitude of value-added exports and the number of strong linkages to other countries. Pakistan can capitalize on this opportunity by ensuring in-time completion of China-Pakistan Economic Corridor (CPEC). Construction of nine special economic zones (SEZs) on priority basis, and encouragement of joint ventures with Chinese GVCs are required steps. However, explicit focus on developing production lines and achieving technological and managerial efficiency are sine qua non in this regard.
- Diversification of labour markets and regions
After inclusion in GVCs, the phenomena of labour polarization and regional disparity are evident in those areas where labour market and regional economic activities are not diverse. Labour with low- and medium-level skills are among the most affected. Unfortunately, in Pakistan, a major chunk of labour force falls in this bracket. Training assistance programmes and encouragement of tertiary education in the country are the initiatives the concerned should take at the earliest.
Modularization of product architecture has offered a new entry point to small-scale firms. Pakistan’s insignificant participation in RVCs and GVCs speaks volume about its focus on module formation. Adoption of protectionist policies has been responsible for it. Pakistan’s tariffs on intermediates average 8 percent—four times the average in East Asia—and regulatory and additional duties (para-tariffs) are high. Moreover, protectionist policies hamper the inclusion of technology in the domestic market. Resultantly, Pakistan could not achieve competitiveness and integrate itself in GVCs by achieving competitiveness in any module of product architecture.
- Gone days of techno-nationalism
In today’s world, there are fewer places for champions of domestic technology, or so-called techno-nationalism, as compared to becoming partners in global technology ecosystems. As many products today are already “made in the world,” Pakistan has to focus on becoming a part in the formation of those products.
- New horizon – Supply Chain 4.0
It has been studied that countries with higher internet penetration, greater digital entrepreneurial skills, and more skills in previous generations of supply management practices are likely to have advantages in adopting Supply Chain 4.0 methods. Unfortunately, so far, situation in Pakistan is not very encouraging. As per Inclusive Internet Index 2020, Pakistan has been ranked 76th out of 100 countries and it is at 24th position among 26 Asian countries. According to a study by the United Nations and Business Coalition for Education, only 18% Pakistanis under the age of 24 have the skills required for 21st-century jobs. Therefore, exclusive focus is required. However, picture is not all bleak; mobile phone penetration is very high in Pakistan—actually the highest in South Asia with over 90 percent geographical coverage.
- Easy path for SMEs
Owing to technological development, there is a ray of hope for the SMEs of Pakistan, just like those of the rest the world to become part of GVCs. Admittedly, positive digital effect is greater for SMEs than it is for large firms. In Pakistan, SMEs constitute around 90 percent of all enterprises, employ 80 percent of the non-agricultural labour force, and contribute 40 percent in annual Gross Domestic Product (GDP). Hence, modernization of SMEs will greatly improve Pakistan’s economic condition.
- Inverse relation between domestic value and GDP
Domestic value added to gross export value decreases when a country moves from export of primary products to export of manufactured goods and services via GVCs. However, overall volume of trade and, hence, GPD of the country increases. In many developing countries, including Pakistan, government interventions are made to increase the domestic value as it has been seen in the textile sector of Pakistan. These policies or intervention have proved counter-productive in the long run. In a GVC world, competitive inputs lead to competitive exports. Therefore, Pakistan should not increase its domestic value at the cost of GDP.
Post pandemic world, GVCs and Pakistan
Covid-19 pandemic has shaken the whole edifice of global economy. Likewise, severe disruption in the GVCs has been witnessed across the globe. The dangerous lure of self-sufficiency is taking ground. Pakistan, too, is not safe from the deleterious effects of this pandemic. Eight out of ten largest economies, constituting 40 percent of Pakistan’s export market, are expected to contract at accelerated pace. Pakistan’s exports will have to navigate in these contracting markets. However, there are some opportunities that Pakistan can grab in this changing world. First of all, companies and countries, after witnessing risks of over-reliance on limited supply nodes, will diversify their supply chains. Pakistan can be that alternate venue. Moreover, expected increase in the prices of food commodities will help Pakistan earn more revenue from its exports of food items. Work-from-home model will greatly increase exports of services sector and Pakistan can, and should, exploit this job opportunity.
In a nutshell, the economy of Pakistan is largely introvert as a major portion of its exportable products is produced domestically. However, the current trajectory of the world, taking into account the economic and technological aspects of GVCs, categorically predicts that the soundness of economy of any country depends on its level of integration into the GVCs. In this perspective, Pakistan has to focus on attracting and integrating with MNEs on priority basis, liberalizing its trade policy, enhancing services sector exports, and improving trade logistics.
The author is currently serving as Assistant Director, Pakistan Institute of Trade and Development.
What is Supply Chain 4.0?
“Supply Chain 4.0” is the re-organization of supply chains – design and planning, production, distribution, consumption, and reverse logistics – using technologies that are known as “Industry 4.0”. These technologies, which emerged in the 21st century, are largely implemented by firms that are at the frontier of supply chain management in high-income countries. Though this classification is somewhat artificial, it does in fact capture certain prevailing ideas about what firms need to do, and are doing, in order to maintain competitive supply chains.
While Supply Chain 4.0 involves the deployment of such contemporary tools as the Internet of Things (IoT), big data analytics, autonomous robotics, and the like, it is not really about any of these things. It is about transforming the model of supply chain management from a linear model in which instructions flow from supplier to producer to distributor to consumer, and back, to a more integrated model in which information flows in an omni-directional manner to the supply chain. While lead firms are increasingly analyzing this information through “supply chain control towers,” the end effect of this development could be making the goods economy more responsive to consumer demand.
Patterns of GVC integration
1. Forward integration
Forward integration is defined by the incorporation of a firm’s exports in the production of exports by a third country, in other words, supplying intermediate inputs for other countries’ exports. For example, Malaysia may produce microchips that are included in US-developed iPhone manufactured in China. This is often measured at the country-sector level in terms of overall levels (domestic value added embodied in third-country exports) and in terms of intensity (share of domestic value added embodied in third-country exports).
2. Backward integration
Backward integration is defined by the use of foreign inputs in production that is exported; in other words, buying foreign inputs in order to export. For example, Bangladesh may import textile fabric produced in Pakistan that is used to make clothing exported by Bangladesh. This is often measured at the country-sector level in terms of overall levels (foreign value added in exports) and in terms of intensity (foreign share of total value added in exports).