Why do countries experience diverging job growth trajectories in GVCs?

Stefan Pahl
Jul 4, 2022
#Trade and FDI
#Sub-saharan Africa
#The Middle East and North Africa

Structural change, a process in which resources are shifted from less to more productive sectors, has historically been a driver of economic growth and development. Structural transformation has been particularly successful in Asia, but more recently also in sub-Saharan Africa (Kruse et al., 2021). One important underlying driver of this trend is said to be a country’s participation in global value chains (GVCs) because they are a vehicle for the transfer of technology and facilitate access to export markets and to more sophisticated inputs, thus increasing the country’s productivity and scale of production (World Bank 2020; Chor et al., 2021). Yet whether increased participation in GVCs leads to higher job creation continues to be debated. A particular concern in this regard is that the production technologies used in GVCs are biased against unskilled labour, i.e. such technologies increase labour productivity but reduce demand for labour. For example, the production technologies used in modern GVCs might require a high degree of precision to maintain quality standards that can only be achieved through capital-intensive, automated production, with little use for the vast unskilled labour force in developing countries (Rodrik, 2018). Recent firm-level evidence from Tanzania and Ethiopia by Diao et al. (2021) confirms that the productivity of large firms—typically engaged in exports and GVCs—does indeed increase over time, but that their contribution to job growth is virtually zero.

Figure 1 illustrates this trend based on a broader set of countries: the growth of the number of jobs in GVCs.1 is not correlated with a rise in productivity in GVC activities. China and Vietnam are well-known examples of countries that successfully coupled rapid productivity growth (value added per job in GVCs) with high job growth. Other countries such as Romania, the Russian Federation and Senegal, on the other hand, experienced fast productivity growth but negative job growth.

Why do countries experience such diverging trajectories? In a recent paper (Pahl et al., 2022)2 , we use an accounting method to answer this question. We decompose the rise in a country’s GVC jobs (jobs associated with the export and consumption of goods abroad) between 2000 and 2014 into three components:

- (i) Growth in demand for GVC products by relevant consumer markets, which depends on the linkages of each country to specific consumer markets through GVCs;
- (ii) Increase of a country’s production activities in GVCs measured by its (value-added) share in GVCs. This describes each country’s contribution to a GVC relative to all other countries in the same GVC;
- (iii) And increase in labour productivity of a country’s GVC production activities.

While the first two components determine the scale of GVC output, the latter stifles the resulting demand for jobs.

Our main finding is that higher labour productivity in GVC production activities coincides with a rising share of value added in GVC activities, implying that as a country’s labour productivity rises, it completes more production stages in GVCs, which is consistent with firm-level evidence (Chor et al., 2021). Hence, Jobs in GVCs are typically generated through simultaneous growth in labour productivity and in countries’ shares of GVC production activities. Yet, notable deviations from this general trend exist.

Job growth trajectories by consumer market specialization and share of GVC production activities
Two key features of GVCs are that they span several countries and that the direct export destination is often not the final consumer market. The significance of such cross-country linkages was highly relevant in the context of the financial crisis of 2008/09 (Bems et al., 2011) and during COVID-19-induced lockdowns. It thus does not come as a surprise that over the longer term, diverging patterns of expenditure growth in consumer markets also had a substantial impact on countries’ job growth trajectories.

Figure 2 shows that Mexico and Bangladesh have benefitted very little from growth in global demand. This is attributable to Mexico’s dependence on North America and Bangladesh’s dependence on exports destined for European textiles consumption; both North America and Europe only grew slowly between 2000 and 2014. Viet Nam, on the other hand, benefitted far more from a rise in global demand due to its diverse linkages. The share of Viet Nam’s GVC jobs depends almost equally on North America, Europe, Asia (including China) and the rest of the world. The three sub-Saharan African countries in our sample, which have a stronger dependence on Africa and Asia and a low dependence on North America, benefitted even more from the increase in demand.

The highest variation, however, arises from increased shares of value added in GVCs, i.e. a country’s value-added share relative to that of all other countries engaged in the same chain. Senegal’s contribution was in fact negative, i.e. the value added of other countries engaged in the same GVCs increased relative to Senegal’s. Workers in those other countries have started earning higher wages or are completing additional production stages in the relevant GVCs, such as adding processing to harvesting activities in agro-food GVCs. Senegal’s value-added share in food GVCs dropped considerably, losing out in both traditional consumer markets in Europe and in fast-growing GVCs in China and India. Viet Nam and Bangladesh, on the other hand, were successful in increasing their share of value added in GVCs. While Bangladesh specialized in relatively slowly growing textiles GVCs for European consumers, it experienced fast job growth due to its ability to capture rising shares in precisely those GVCs. Viet Nam captured rising shares across the board: it entered many new manufacturing activities in GVCs alongside more traditional agricultural activities. For example, its share of value added in textiles destined for the U.S. market quadrupled and Viet Nam made similar advances in electronics GVCs. Such positive developments were not limited to Asia only; Ethiopia also observed strong increases in its value-added shares. While variation was large, it is important to note that the relative shares of value added in GVCs increased in all 25 developing countries included in our sample (with the exception of Senegal) at the cost of more developed countries (i.e. countries in Western Europe, North America and Japan). This finding highlights that developing countries increased their participation in GVCs, although at different speeds. This challenges the notion that China’s success in manufacturing has left little room for other developing countries to integrate in GVCs (Haraguchi et al., 2018).

 

Labour productivity growth and the expansion of GVC production activities typically go hand-in-hand

Labour productivity increased in all countries over time as the labour needed per unit of output in GVC production declined. This increase in labour productivity moderates job growth for a given growth in demand, as illustrated in Figure 2. At the same time, a rise in labour productivity may result in higher wages in the medium- to long run. It may furthermore lead to the capture of larger shares of value added in GVCs as reported in Chor et al. (2021). This relationship is influenced by opposing forces. Over time, countries may follow their (static) comparative advantage by focusing on their most productive stages in the chain, while abandoning less productive (non-core) stages. The offshoring of non-core activities will, ceteris paribus, emerge as a negative correlation between labour productivity growth and the share of value added in GVCs. On the other hand, improved productivity in a country may drive down production costs relative to other countries that are potential competitors in the chain. This will raise demand for the country’s output as lead firms in GVCs substitute inputs with cheaper ones, resulting in a positive correlation between labour productivity and the share of value added in GVCs.

In line with the latter, Figure 3 presents a positive correlation between the two, which is confirmed in further econometric analyses.3 Countries with larger improvements in labour productivity also capture increasing shares of value added in GVCs. This cross-country result is consistent with firm-level evidence from China (Chor et al., 2021). It is important to note, however, that substantial deviations from this general trend are not unusual, which can partly be explained by countries’ specialization in specific kinds of GVCs. Food, textiles and wood GVCs are characterized by a much weaker correlation between labour productivity growth and rising value-added shares in GVCs. The opposite is true for machinery, electrical equipment, motor vehicles and computers. Low-income and least developed countries tend to specialize in the former set of GVCs, which hampers the potential for simultaneous growth in both productivity and jobs. Senegal exemplifies this with its strong specialization in food and textiles, which is associated with limited growth in the share of value added in GVCs and overall negative job growth.

GVCs for job growth in productive activities?
There is great potential for GVCs to foster productivity growth through reallocation into GVC jobs. GVC jobs are more productive and oftentimes experience rapid productivity growth. This type of structural change, however, is not automatic. The paper highlights that jobs in GVCs are typically generated through simultaneous growth in labour productivity and in countries’ shares of GVC production activities, but that not all countries manage to follow this path.

GVC job growth seems to reflect a country’s overall improvement in its production capabilities (Fernandes et al., 2021), such as capability development in auxiliary services, which can be an important lever to foster competitiveness in GVCs (Francois et al., 2015, Liu et al., 2020). Another dimension includes the conditions under which GVC production takes place and which type of GVCs foster productive jobs. Sector-level specialization and end-market patterns have been highlighted in this article, but a better understanding of the dynamics of productivity, scale and the biased nature of technology upgrading in GVCs is needed. This includes further studies on the governance and durability of firm-to-firm relationships and associated flows of inputs, (intangible) knowledge and technologies (Gereffi, Humphrey, and Sturgeon 2005, Antràs 2020) alongside macro analyses.

 

 

A modified version of this blog has been published on UNIDO’s Industrial Analytics Platform: https://iap.unido.org/articles/why-do-countries-experience-diverging-job-growth-trajectories-global-value-chains

Endnote
1Jobs in GVCs are jobs associated with the production of goods that are exported and consumed abroad.

2The paper is complemented by a new dataset on inter-country world input-output tables, including a set of low-income countries, see https://doi.org/10.34894/NJR5EB.

3Please note that these results are only suggestive and do not provide evidence of a causal relationship.

 

References
Antràs, P. (2020). Conceptual aspects of Global Value Chains. World Bank Economic Review, 34(3), 551–574.

Bems, R., Johnson, R. C., & Yi, K. M. (2011). Vertical linkages and the collapse of global trade. American Economic Review, 101(3), 308-12.

Chor, D., Manova, K., &Yu, Z. (2021). Growing like China: Firm performance and global production line position. Journal of International Economics, 130.

Diao, X., Ellis, M., McMillan, M. S., & Rodrik, D. (2021). Africa's manufacturing puzzle: Evidence from Tanzanian and Ethiopian Firms. National Bureau of Economic Research No. w28344.

Fernandes, A. M., Kee, H. L., & Winkler, D. (2021). Determinants of Global Value Chain Participation: Cross-country evidence, World Bank Economic Review, lhab017.

Francois, J., Manchin, M., & Tomberger, P. (2015). Services Linkages and the Value Added Content of Trade. World Economy, 38(11), 1631-1649.

Gereffi, G., Humphrey, J., & Sturgeon, T.. (2005). The governance of global value chains. Review of International Political Economy, 12(1), 78-104.

Haraguchi, N., Cheng, C.F.C., & Smeets, E. (2017). The importance of manufacturing in economic development: Has this changed?. World Development, 93, 293-315.

Kruse, H., Mensah, E., Sen, K., & de Vries, G. (2021). A manufacturing renaissance? Industrialization trends in the developing world. WIDER Working paper No. 2021/28.

Liu, X., Mattoo, A., Wang, Z., & Wei, S.J. (2020). Services development and comparative advantage in manufacturing. Journal of Development Economics, 144,102438.

Pahl, S., Timmer, M.P., Gouma, R., & Woltjer, P.J. forthcoming. Jobs and Productivity Growth in Global Value Chains: New Evidence for Twenty-five Low- and Middle-Income Countries. World Bank Economic Review.

Rodrik, D., (2018). New technologies, global value chains, and developing economies. National Bureau of Economic Research No. w25164.

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

Verhoogen, E. (2022). Firm-Level upgrading in Developing Countries. Forthcoming in Journal of Economic Literature.

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