Updated: September 4, 2012 08:51 IST

Free advice without a mix of caution

K. Subramanian
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Global Value Chains In A Postcrisis World, Editor Olivier Cattanco, Gary Gereffi, and Cornelia Staritz, Published for the World Bank by Academic Foundation, 4772-73/23 Bharat Ram Road, Darya Ganj, New Delhi, 2011, pp. 391, Rs.695.
Global Value Chains In A Postcrisis World, Editor Olivier Cattanco, Gary Gereffi, and Cornelia Staritz, Published for the World Bank by Academic Foundation, 4772-73/23 Bharat Ram Road, Darya Ganj, New Delhi, 2011, pp. 391, Rs.695.

There can be no headier mixture than a combination of ‘global value chains’ (GVCs) with the current economic crisis. When the crisis broke out, what was at stake was the faith in the western capitalist model. The phenomenal rates of growth witnessed in recent decades were captured under the rubric of globalization. Indeed, there were unapologetic votaries of globalisation floating new theories glorifying global trends and advising all, especially the developing countries, to join the party. Sadly, the dream ended with the onset of the crisis. However, there is still hope for the South, say the authors of this book!

Globalisation is neither new nor unknown to the world. Historically, there have been trade and production exchanges or links between countries from time immemorial by sea or land routes. What has changed over time is the modus, the magnitude and the range of products covered in cross border linkages. In the later day context, changes in the chains result from corporate strategies which combine and deploy their productive (technological) prowess to maximise profits globally. This syndrome is now fashionably described as global value chains (GVCs).

The concept sounds exotic and scholars, a legion of them, have been explaining how it drives global corporate growth. Management specialists have studied in depth the formation of chains, the risks attached and how executives should manage them. Economists have their own share of theories. Extensive research was triggered by the concept of “transaction cost” posited by Prof. Ronald Coase who secured a Nobel for his contributions. Indeed, there were concerns over the stability, continuity and robustness of GVCs and their role in promoting international trade even before the crisis. The economic crisis has shaken the faith in the GVCs as catalysts of international trade.

Economists began to witness the flip side of globalisation: the GVCs which were treated as angels chaperoning trade were magnifying its collapse. “The Great Trade Collapse” became the subject matter among governments and researchers. Many viewed it as a retreat from globalisation. The book under review is the result research done under the auspices of the World Bank and bears it imprint!

Many of the papers imbibe the myths promoted by corporate analysts like Goldman Sachs. Though the contributions have all the trappings and appendages of scholarship, the conclusions are tailored to justify myths.

For instance, many of the assumptions about shifts in trade patterns, the rise of the BRICS and the Southern tilt in global balance have been belied by later developments. It is evident that the rise of the South in 2009 or even 2010 was short lived and did not last long. The continuing downturns in the North have dragged down the South after a time lag. The IMF issued warnings about the Emerging Markets losing their shine (Financial Times, July 6, 2012) and the Economist (July 21 2012) warns about “the great slowdown” and how the sticky spell for the emerging world carries warnings for its long term growth.

Part I of the book carries broader themes briefly hinted earlier. The finding is that “crisis has not reversed globalization, but accelerated two long-term trends in the global economy: the consolidation of GVCs and the growing salience of markets in the South.” These conclusions are no longer tenable. The authors fail to take into account the centrality of the role played by China in the Asian trade or the extra-ordinary stimulus injected by it after the crisis and how it lifted the global economy in the early years of the crisis until such time when the EU began to collapse.

The idea that trade elasticity has longer term stability despite its volatility in the early years of the crisis has been elaborately hypothesised by Hubert Escaith et al (Chapter 3). Later data and research on trade behavior confounds this idea. A study done by the WTO (International Supply Chains and Trade Elasticity in Times of Global Crisis, 1 February 2010) suggests differing trade elasticity for countries and concludes, “Overall… we rather tend not to accept the hypothesis that global supply chains explain all by themselves the changes in trade-income elasticity.”

Another idea developed in some papers is that the crisis has led to deepening of supply chains with a Southern slant. It is difficult to accept such an over optimistic view. In fact, this conclusion is not borne out by any of the sectoral studies done in Part III of the book dealing with apparels, automobiles, electronics, etc. These sectors suggest varying degrees of supply integration in those sectors and the limits to emerging economies’ entry into them.

There is an underlying assumption that GVCs have independent lives of their own and developing countries can have a share in it. This is a fallacy. The GVCs are the outcome of corporate strategies interacting with national economic policies. They have been greatly buttressed by the rules enforced by the WTO through trade openness, TRIPS, etc. Developing countries are prevented from adopting indigenisation and phased manufacturing programmes. These limit their ability to enter the GVCs or create independent streams of their own. There is no guarantee that the ongoing GVCs contribute to or enhance the welfare of emerging economies. Negotiations in the WTO to reform the investment regimes are stuck in the mud. Though the sub title of this book is “A Development Perspective,” there is no evidence of the concerns of emerging economies in the context of the dominance of GVCs.

Sadly, the authors of this book shy away from regulatory prescriptions. Rather, they advise the emerging economies to join the corporates in the promotion of GVCs and share the crumbs falling from the table. But, then this is not surprising for a work commissioned by the World Bank.

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