Written by Klemen Zumer with Paul Anton Kindermann,
Chief Economist of the World Bank (WB), Penny Goldberg, presented an exclusive snapshot of the 2020 World Development Report in the Library Reading Room at the European Parliament on 1 October 2019, discussing the economic challenges and perspectives of global value chains (GVCs) for economic development: what can policy makers do to facilitate sustainable growth through GVCs? This question is particularly pressing in the wake of continuous trade conflicts that dampen expectations for further growth. The high-level event with Penny Goldberg and EP Vice President Pedro Silva Pereira kicked off intensified EPRS cooperation with the World Bank that will spark many follow up initiatives.
GVCs constitute a central layer of today’s unprecedentedly interconnected world economy. In a GVC, countries do not simply trade products. They produce together, as different steps of a single production process are distributed to different locations around the world, and the parts produced in each place are shipped across the globe often crossing borders multiple times. GVCs extend the division of labour to an international scale. In the contemporary world economy, almost all countries participate in GVCs; at different stages of the economic chain, they export raw materials, semi-finished goods, or eventually goods ready for consumption. The steady emergence of these GVCs over four decades has powered an economic revolution that boosted economic growth.
In general, the World Bank finds comprehensive empirical evidence that GVCs facilitate major income growth in manufacturing countries. And in developing countries, GVC firms have contributed to significant poverty reductions. On the other hand, Penny Goldberg identifies two major problems that come as costs of participating in GVCs. First, the economic gains that result from GVCs are distributed unequally across and within countries: participation in GVCs disadvantages unskilled workers, and women and youth are generally placed in lower value-added segments of production. Second, the high transportation costs are a strain on the environment. Thus, policy-makers are called upon to ensure that benefits are shared and the environment protected – e.g. by a carbon tax or stronger regulations on particular industries and polluters. Only then can globalisation ‘work for everyone’.
While these policies are needed urgently, the profound potential of GVCs for further, sustainable economic growth can only be harnessed if the rule-based international trade system is maintained and strengthened. Penny Goldberg warned that the continuation of protectionist measures could push more than 30 million people into poverty and crush global income. In concert with EP Vice President Pereira, she emphasised that international cooperation on trade is critical for the sustainable growth of all countries and suggested several criteria that new deep trade agreements should fulfil – such as stronger rules on subsidies. Vice-President Silva Pereira recalled the problems of trade agreements which lacked public support and came under heavy scrutiny. Here, he said, the EP should, among other things, push for prominent placement of sustainable development chapters in new, comprehensive agreements.
Following a lively question and answer session, Penny Goldberg promised to be back at EPRS soon to discuss the report in more detail.