Risks and opportunities of participation in global value chains

Gary Gereffi , Xubei Luo

The explosion of trade in intermediate goods has created new development opportunities, but many of the jobs at the bottom of global value chains are low-paid, insecure, and dangerous. This column argues that participation in global value chains brings risks as well as opportunities. The gains from ‘moving up the global value chain’ are not equally distributed – large, professional, high-tech firms with diversified export markets, and high-skilled workers with formalised contracts benefit the most.

The African Development Bank, OECD Development Centre, and the United Nations Development Programme became the latest international development organisations to use the global value chain (GVC) framework in examining Africa’s potential integration into GVCs in the 2014 African Economic Outlook: Global Value Chains and Africa’s Industrialisation (AfDB, OECD, and UNDP 2014). Global value chains have become increasingly prominent within the development community, and there has been an active debate about whether the framework is being used to advance neo-liberal or pro-poor development objectives (Dalle et al. 2014). Actually, both arguments are valid. While the explosion of inter-firm trade in intermediate products and ‘trade in tasks’ has indeed transformed the way we think about competitiveness and global trade (Lamy 2013, Timmer et al. 2013), GVC scholars are also advancing a new development agenda by highlighting the risks as well as the opportunities associated with participation in GVCs, and assessing how both economic and social upgrading might occur in developing economies (Gereffi and Luo 2014).

Geographic and organisational concentration of GVCs

Over the last decade, GVCs have become significantly more concentrated, both geographically and organisationally.

Recent evidence from a number of industries, from apparel and automobiles to electronics and even services, indicates that GVCs are often geographically concentrated in a few countries – especially emerging economies with large domestic markets and robust supplier bases, such as China, India, Brazil, and South Africa.

The trend has been intensified by the global recession, as GVC lead firms streamlined their supply chains to focus on fewer, larger, and more capable suppliers strategically located near dynamic nodes of GVCs (Gereffi 2014). For example, in mobile phones, a high-tech consumer product, the five largest exporters – China, South Korea, Hong Kong, Vietnam, and the US – commanded 74% of world exports in 2012, with China alone representing half of the total (Lee and Gereffi 2013). Similarly, over 40% of the world’s apparel exports in 2012 came from China, while the EU’s combined export share was less than half of this amount.

Defining success

As emerging economies expand, local suppliers have an opportunity to play a larger role in GVCs, since they can use their domestic markets as a base to improve their capabilities and strengthen their ties with global lead firms. This should not obscure the fact there are substantial risks involved. International standards for price, quality, and delivery schedules are less forgiving, and firms typically need to have low costs, relatively large-scale production, or a special technological edge to participate in global markets. Since not every enterprise can compete on these terms, only the best can flourish in GVCs.

Furthermore, there is the question of what constitutes success in GVCs. The European Centre for Development Policy Management recently published a volume on value chains and industrialisation, asking whether value chains are, in fact, good news for Africa’s development (ECDPM 2014). If countries only operate at the lowest levels of a GVC – assembling jeans or T-shirts for overseas markets in the apparel value chain, for example – they are not likely to create the expertise, institutions, or consumer markets needed to build and sustain entire industries. Additionally, the trend toward supply chain rationalisation poses big challenges to smaller countries and firms, which face substantial scale and purchasing power limitations. These development concerns have led researchers to expand the GVC framework in search of a broader set of potential upgrading trajectories, with a particular emphasis on linking economic and social upgrading.

Economic and social upgrading

Economic upgrading refers to various ways in which economic actors, including firms, countries and workers, improve their position and outcomes in GVCs.

Typically economic upgrading is viewed as ‘moving up the value chain’ from low-value to relatively high-value activities, with product and process upgrading reflecting increasing levels of technological sophistication and worker skills. But there are exceptions, since technological upgrading is not possible for everyone – it doesn’t necessarily lead to higher market share for countries, larger profits for companies, or better wages and more jobs for workers. Appropriate upgrading trajectories depend greatly on the context, as well as the capabilities of GVC actors. These determine whether economic and social upgrading can be linked.

Social upgrading occurs through improvements within a specific enterprise (or set of enterprises) in the terms of employment, remuneration, worker rights, contractual status, workplace safety, and employee insurance arrangements (Barrientos et al. 2011).

In best-case scenarios, social upgrading accompanies economic upgrading and produces a wide spectrum of benefits for local industry participants. In Uganda, the floriculture industry has expanded into European cut flower markets. At the same time, Ugandan workers have seen the implementation of improved health, sanitary, and childcare standards, the creation of women’s committees, and the rising belief among management that women in the workforce provide a unique and valuable perspective (Evers et al. 2014).

Expansion of global production has been an important source of employment generation – especially in labour-intensive industries such as horticulture in Honduras, tourism in Kenya, and call centers in Egypt (Staritz and Reis 2013). Many of these jobs are filled by women and migrant workers, who provide new income sources for poorer households after previous difficulty in accessing this type of waged work. Where regular employment generates better rights and protection for workers, it can also enhance social upgrading and the quality of work. Rising quality standards in GVCs often result in an upskilling of at least some workers and better employment conditions.

But for many workers, this is not the outcome. Much employment at the lower end of GVCs is insecure and unprotected, and there are major challenges ensuring decent work for more vulnerable workers. Irregular and relatively unskilled jobs – which are low-paying and have limited prospects for upward mobility – are eliminated as easily as they are created. Along with the risk of dismissal or reduction in hours that especially lower-skilled workers face, another significant downside risk accompanying these jobs is the enhanced probability of injury and illness. Unsafe and unsanitary work conditions are frequently associated with low-skilled work, and labour safety regulations are either non-existent or are routinely ignored.

Social downgrading

Rossi’s (2011) case study of garment factories in Morocco led by fashion buyers shows that functional upgrading in GVCs can bring about social upgrading (for regular workers) and downgrading (for irregular workers) simultaneously. On the one hand, factories supplying a finished product and overseeing packaging, storage, and logistics for their buyers offer stable contracts and better social protection to their high-skilled workers to ensure a continuous relationship as well as full compliance with buyers’ codes of conduct. On the other hand, in order to be able to respond quickly to buyers’ frequently changing orders and to operate on short lead times, factories employ irregular workers on casual contracts, especially in the final stages of the production chain (such as packaging and loading) – often imposing excessive overtime as well as discriminating against them in terms of wages and treatment.

In January 2014, union workers in Cambodia’s garment factories went on strike to protest against low wages and dangerous working conditions. That particular incident made news when the police resorted to violence to break up the demonstrations (six people were killed and scores injured), but less-publicised examples of economic and social downgrading can be seen throughout the developing world. A survey of the apparel industries in sub-Saharan African countries revealed widespread deterioration of working conditions and social protections – as well as declining employment and lower wages – in countries such as Madagascar, Lesotho, and Kenya (Goger et al. 2014).

Where do we go from here?

There is a search underway in the current global context for new development models to replace the Washington Consensus. It will need to reflect the greater economic clout of emerging economies, and the relative decline of many advanced industrial countries. Various forms of industrial policy are emerging, but they can’t be a repeat of the import-substitution models of the past. They must take the new realities of GVCs into account, which could well involve hybrid arrangements that include both neo-liberal and developmentalist precepts. For small economies and firms, regional value chains linking neighbouring economies may offer more sustainable growth opportunities and manageable scales than global markets.

All GVC actors can gain from this process, but benefits are not guaranteed. Governments can provide a critical supportive environment by improving infrastructure to help exporters, local communities, and small producers access national and international markets; boosting education and training standards to build a skilled labour force; and adopting and enforcing sensible regulations to lower the uncertainties. Firms benefit most from participation in GVCs if they are relatively large, technologically advanced, professionally managed, and have diversified export markets (both in terms of products and countries). Workers benefit most from GVC participation if their working conditions are relatively formalised (e.g. wages, length of work day and work week, defined benefits) and if they have higher skills (closely correlated with more advanced education) that allow them to carry out better remunerated tasks. Capturing the gains from GVCs requires good institutions and policies, but also strategic collaboration and vision among diverse chain actors.

Disclaimer: The views expressed in this paper are those of the authors and do not reflect the views of the World Bank or its affiliated organisations.

References

African Development Bank, Development Centre of the Organisation for Economic Co-operation and Development,and United Nations Development Programme (2014), African Economic Outlook 2014: Global Value Chains and Africa’s Industrialisation.

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European Centre for Development Policy Management (2014), Great Insights: Value Chains and Industrialisation, 3(5), May.

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Lee, J and G Gereffi (2013), “The co-evolution of concentration in mobile phone global value chains and its impact on social upgrading in developing countries”, Capturing the Gains Working Paper 2013/25, March.

Rossi, A (2011), “Economic and Social Upgrading in Global Production Networks: The Case of the Garment Industry in Morocco”, DPhil dissertation, Institute of Development Studies at Sussex University, Brighton.

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