Strengthening the Chains That Helped Pull Asia Out of Poverty

The interconnected global manufacturing system has wide-ranging positive social impacts that are not yet fully understood.
The interconnected global manufacturing system has wide-ranging positive social impacts that are not yet fully understood.

By Bambang Susantono

The global value chains that help drive Asia’s export-driven economic miracle have widespread development impacts. We need to understand them better to maximize the benefits.

Much has been written about the Asian economic miracle of the last few decades, for a good reason. In 1981, nearly 1.5 billion Asians – or about 70% of the region’s total population – were poor. By 2016, the number had fallen to below 10%. As a result, more than a billion people have been lifted out of poverty.

Multiple factors were at play, but a good part of the credit for this phenomenal performance goes to the region’s openness to trade and the expansion of global value chains (GVCs). GVCs can be described as networks of production across different countries that share different stages of the production process through trade. Today, about 70% of international trade involves GVCs, according to the Organisation for Economic Co-operation and Development (OECD).

Manufacturing firms in the automobiles and electronics sectors are prime examples of the GVC integration. For example, it would be difficult to find a mobile phone sourced and produced entirely in one country. The chip, the casing, the screen, and all the other parts are manufactured separately across the countries where they can be most efficiently and profitably produced and then assembled to make the final product through global value chains. This is true of many modern manufactured products, even including the globalized sourcing of raw materials.

Manufacturing has been critically important to developing countries, transforming their economies from subsistence agriculture to higher productivity sectors. Driven by increasing fragmentation of manufacturing production, participation in GVCs allowed many countries to become a part of the global production chain without having to produce a complete, final good. Rather than a country producing and exporting a complete and final product, the production process is now shared across the region with different countries producing certain components of a product – leading to greater opportunities of GVC participation for many developing countries.

From a development perspective, engaging in global value chains can generate myriad social and economic benefits. Engagement in global value chains creates jobs, encourages technology transfers that accelerate a country’s technical progress, and offers opportunities for skills upgrading and investment. GVCs also often lead to greater participation of women in the workforce, improved working conditions, and higher wages due to interactions with better labor standards at international companies. This can also apply to eco-friendly practices that are often demanded by international companies and customers.

The expected benefits of global value chains have spurred infrastructure development, facilitating trade between companies serving these manufacturing pipelines. They have also incentivized governments to focus investments on science, technology and engineering education. These initiatives have long-term positive impacts on society, not just on companies and exporters.

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How can we maximize the economic benefits of global value chains? Unfortunately, there is no simple answer to this question because it would be almost impossible to track all GVCs at the sector and product level, identify all their linkages at different stages of the production process across countries and regions, and capture all potential spillovers.

Rapid progress has been made in data and methods for measuring the GVC linkages. First, the macro approach to measurement employs bilateral trade data to construct global input–output data. These tables help measure trade in value added and price linkages across the countries in GVCs. The micro approach uses firm-level data to document individual firms’ input sourcing decisions, how they are linked in the production process, and how multinational firms organize their production networks across GVCs. These macro- and micro-linkages combine to impact the countries participating in GVCs and create spillovers to their domestic economies. Nevertheless, data showing precisely how GVCs work on both micro and macro levels remains limited.

Researchers at places like my organization, the Asian Development Bank, which provides policy advice based on evidence, continue to work to decipher the full mechanisms. Based on available studies of the region’s GVC engagement, some policy options can be considered.

First, the region’s economies may lower tariffs on imports of intermediates and promote more comprehensive regional trade agreements (RTAs) to remove remaining trade barriers. Open trade policies across the region contribute positively to further GVC integration.

For example, if tariffs are levied on one country, it could have unexpected consequences for another country, or even in the country that levied the tariffs. In most cases, it’s no longer possible to put tariffs on a single product originating from a single country. A tax on one part of a mobile phone will increase the final price of the mobile phone, lower demand and cost jobs in other countries involved in the production of different parts for the phone. Speeding up ongoing trade negotiations for more comprehensive regional trade agreements is another effective way. The Regional Comprehensive Economic Partnership (RCEP) needs to make progress, despite escalating trade tensions between the United States and the People’s Republic of China. RCEP implementation can help lock in trade gains from existing RTAs and promote deeper integration in goods and services trade and investment in ASEAN markets.

Second, the region’s economies need to undertake important structural reforms to enhance the business environment. Investing in quality infrastructure, facilitating access to finance, boosting labor quality, and promoting innovation are all important policy areas to make the economies more efficient, productive, and competitive. The World Economic Forum’s Global Competitiveness Report 2017–2018 identified inadequate supply of infrastructure or access to finance as impediments to doing business in Cambodia, Indonesia, the Lao People’s Democratic Republic, Malaysia, the Philippines, and Viet Nam. Poor infrastructure connectivity hinders a country’s competitiveness globally. Limited access to finance and financial services also creates a problem for most firms, particularly small- and medium-sized enterprises. Moreover, reforms to remove excessive and unnecessary regulations in product, labor, and financial markets are also crucial to improve the business environment.

Third, the region’s economies need to strengthen regional cooperation to enhance infrastructure development and connectivity. The ASEAN Economic Community envisions a seamless regional market which could significantly accelerate GVC integration. But some countries are still struggling to narrow infrastructure gaps and substantially reduce barriers to trade and market integration. In this context, a more concerted effort towards regional integration would involve greater investment in cross-border infrastructure, full elimination of barriers to services trade, and coordination of more concrete regional trade facilitation initiatives. ADB continues to provide support for projects that reinforce infrastructure development and connectivity for deepening GVC integration through the Greater Mekong Subregion Economic Corridor and the Almaty-Bishkek Economic Corridor program.

Achieving the ambitious Sustainable Development Goals is challenging for many countries in Asia and the Pacific. Participation in GVCs can be considered as part of national and regional development strategies to reach these goals.