Seminar in Selected Topics

8/6/2019 Seminar in Selected Topics

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Globalization and unequalisation: what

can be learned fromValue Chain

Analysis(VCA) By Raphael Kaplinsky



y

Brief background of author

� Prof essorial Fellow at the Institute of Development Studies, University of

Sussex

Research:� Author of numerous books on technology, indust rialization, and globalization.

� These include studies on globalization, indust rial policy, indust rialorganization, global value chains, the international aut omobile sect or,computer-integrated aut omation, computer aided design, the impact of micro

elect ronics on employment and on appropriate technology.

Experience

� He has participated in numerous United Nations and European Union Missions,

providing advice t o a large range of count ries, particularly in indust rial andtechnology policies.



INTRODUCTION

Introduction

for many of the worlds population, growing integration of the worldeconomy has provided the opportunity for substantial income growth.

world dist ribution of globalization is heterogeneous in nature andcomplex

So what are the indicators?

1.H

igher incomes2. Improved availability of better quality and increasinglydiff erentiated products



WHAT IS THE DARK SIDE OF

GLO

BA

LISATION?

1. Growing unequalisation within and bet ween count ries



Hierarchy of levels that have gained

or lost from globalization



� If those who lost from globalization had been conf ined t o non-participants then policy implications would be clear; they would simply be roped in t o become participants as well

The challenge is however more daunting since the losersinclude some very active participants in the global productionand t rade

The author raised 3 central questions about this being:

1. Why has there been so little correspondence bet ween thegeographical spread of economic activity and spreading thegains from participating in global product markets?2. To what extent is it possible t o identif y a casual link bet weenproduct markets?3. What can be done t o arrest the unequalisation tendencies of globalization?



So what are the methodological implications of these three

questions mentioned above?

1. What is the best way t o generate the information required t o

document these developments

2. How can we identif y with policy inst ruments which might perhaps halt or reverse these developments?

It is central contention of this study that value chain analysis provides an important framework to address the aforementioned

issues



Section II will posit a casual relationship bet ween increasing inequality and

the global integration of production and t rade

Section III will outline the cent ral elements of value chain analysis, and how

it diff ers from conventional indust ry analysis, suggesting ways in which t o

augment it with economics and social sciences

Section IV Brief short cases and concluding remarks



Section II

Globalization and unequalisation

In this section the author tries to elaborate further the effects of globalization

and the world economy.

What is globalization?

y Despite the breadth with which the term has been applied, the meaning of

globalization remains elusive as t o def y def inition. Globalization is a term

in heavy current usage but one whose meaning remains obscure, of ten even

among those who invoke it.

y



What is globalization?

Globalisation (or globalization) describes the process by which regional

economies, societies, and cultures have become integrated through a global

net work of political ideas through communication, t ransportation, and t rade.

The term is most closely associated with the term economic globalization: the

integration of national economies int o the international economy through

t rade, foreign direct investment, capital f lows, migration, the spread of

technology, and military presence. (source Wikipedia)



There are many measures t o what globalization is? Of course many of

these measures are not free from imperf ections.

The paper says that one indication of growing integration is theproportion of production which is t raded.



Ma i icators of i e alit wit i a etwee co t ries a t e a sol teers of t ose li i g elow $ / a



What possibly could be the reason for these inequalities?

1. Globalization has bypassed much of the worlds population especially those in

poor count ries.

2. Economic activity is aff ected by the global interchange of goods and services

3. Some people have suff ered in their t rade/ GDP ratios (substantial increase)

e.g. how can we explain how even though t rade has increased in some

count ries there seems t o be a decrease in their relative income shares and

standards of livingsome count ries in the commodities sect ors can be used

as an example .. http://devdata.worldbank.org/TradeVisualizer/



This means that policy makers have t o refocus their attention t o the

mode in which f irms, count ries and regions participate in the process of

global production and exchange

St ructural change should aim wherever possible t o encompass the

t ransition from growing and ext raction of primary commodities t o the

manuf acture of indust rial products.



� An explanation of the declining world terms of t rade can be directly linked

t o Chinas ent ry int o the global markets

� This problem not only aff ects economies but confronts indust rial f irms.

This graph explains how theres increasing activity (more output and more

employment) but f alling economic returns



This poses yet another group of questions:

1. Is it possible t o determine the factors that drive the dist ribution of the gains

of global production and exchange, explaining both why some parties have

gained and some have lost from globalization?

2. How can we use this analysis t o identif y policy levers- relevant at the level of

indust ry, households, f irms, regions and count ries- which may lead t o a diff erent

and more f avorable dist ribution income?

The author attempts t o illust rate how value chain analysis has an important rolet o play in meeting those objectives.



Section III

Contribution of value chain analysis

Many f act ors associated with globalization will aff ect dist ribution of

income returns e.g. macroeconomic disturbances associated with capital

mobility (particularly capital vitality) can have major consequences for the

standards of living of many millions of people e.g. Asian crisis, subprime

crisis



What is the Value Chain Analysis?

this is a concept that was used t o chart the mineral exporting economies in

the 60s and 70s

The value chain according t o Michael Porters book C ompetitive advantage:

C reating and sustaining superior performance (1998) disintegrates a f irm int o

its signif icant relevant activities in order t o understand the behavior of costsand the existing potential sources of diff erentiation by performing these

st rategies more cheaply or better than its competit ors.

Instead of using the concept of costs in analyzing competitive advantage

since f irms may deliberately raise their cost in order t o compound a

premium price the value is used i.e. if the value a f irm commands exceeds the

costs involved in creating the product then it is prof itable.



The value chain displays t otal value and consists of value activities



The term value chain covers both the analytical and heuristiccategories

The value chain is merely a descriptive const ruct at most providing aheuristic framework for the generation of data

This has led t o the search for diff erent nomenclature e.g. the globalcommodity chain which incorporates an international dimension, that focuseson the power of lead f irms and the coordination of global activities and that it explicitly recognizes the importance of organizational learning

However the author pref ers t o use the term value chain in this paper as commodity chains do not satisf y the conditions of a value chain, they havebarriers t o ent ry whereas the search for sustainable growth requiresproducers t o position themselves precisely in non-commodity, high barrier t o ent ry activities



Rece t e elo e ts of t e al e c ai fra ework ha e eg to ro i e a

a al tical st ruct ure which we shall see i t he f ollowi g sli es, ro i i gi orta t i sights i to our co cerns wit h t he eterminants of glo al incomeist ri ution and identif ication of polic le ers to ameliorate towards

une ualisation.

There are t hree important components of value chains which need toe recognized and which t ransf orm a heuristic device to an anal tical tool

namel :

. alue chains are repositories f or rent and t hese rents are dynamic

. ff ectively functioning value chains have some degree of governance

. ff ective value chains arise from systemic as opposed to eff iciency.



There are three key elements of value chain analysis :

1. Barriers to entry and rent:

�

based on the theory of economic rent f irst developed by Ricardo.H

e distinguishedbet ween rent (f act or income paid annually by a f armer t o a landlord andeconomic rent.

� He def ined rent as that portion of the produce of the earth which is paid to the

landlord for the use of the original and indestructible powers of the soil

(Ricardo 1817:33)

� Ricardo highlighted the signif icant role played by the scarcity and showed that economic rent doesnt arise from the diff erential f ertility of the land itself but from unequal access t o the resource.

� Schumpeter developed this idea f urther and showed that scarcity can be

constructed i.e. can arise from purposive actions rather than a consequence

of the bounty of nature.



For Schumpeter the ent repreneur played an important role, in the

carrying out of new combinations (Schumpeter 1961:107)

This shows that economic rent can arise from diff erentialproductivity of f act ors including ent repreneurship and barriers t o ent ry i.e.scarcity

Economic rents may arise not only from natural bounty but also asproducer surpluses that are created by purposive actions

Most economic rent is dynamic in nature and eroded by forces of competition i.e. the process for new combinations t o allow ent repreneurs t o escape the tyranny of the normal rate of prof it and subsequent bidding away

of economic rent by competit ors- f uelling innovation



Fig. COMPETITIVE PRESSURESIN THE VALUE CHAIN

� As more and more count ries have developed their capabilities in indust rialactivities, so have barriers t o ent ry f allen only heightening the competitivepressures have heightened e.g. ent rance of china int o the labor market

COMPETITIVE PRESSURES

MARKETING

COMPETITIVE PRESSURES

DESIGN



2. Governance

Also helps t ransform value chain analysis from a heuristic t o ananalytical approach.

Shows that there are key act ors in the value chain who take

responsibility for the inter-f irm division of labour and for the capacities of particular participants t o upgrade activities.

Its importance is t o show us the key diff erence bet ween the late 19thand early 20th century and the late 20th century were not similar.

Nowadays t rade is more int ricate and complex spanning acrossborders.



Gereff i developed the concept of governance and

distinguished it as is shown above.

Building on the concept of governance Gereff i (1994) madet wo important distinctions in value chain characteristics being:

a) Buyer driven value chain

- Characterized by labour intensive indust ries e.g. developing count ries

b) Producer driven value chain

- Producers take responsibility for assisting in the eff iciencyof both their supplier and cust omers- More likely characterized by foreign direct invest



3. S st ffici c

not her important aspect of A is t hat it moves t he f ocus of attention from point to systematic i.e.(value chain) eff iciency.

Organizations have to realize t hat unless t hey govern t heir valuechains to achieve roader levels of system integration, little more can e done toachieve competitive advantage.

E.g. in an exercise to show how t he points of wasted activit y in t hevalue chain of production and cooling of a tin of coca cola was undertaken

It was shown t hat t he can which in an optimum sit uation took t hreehours to process yet in realit y t he time t hat elapsed in t he production of t hef inal product was days



Efforts have t o be made t o improve eff iciency along the value chain,since it has been realized that in most instances the internal operations whichan organization is directly responsible for only account for a small share of t otalproduct costs.

As value chains become increasingly disarticulated there seems t o becloser links in the chain and this of ten involves enhanced responsibility of governors.



How do these three analytical characteristics of value chains relate

to our concerns with spreading the gains of globalization?

The three analytical elements- dynamic rents, governorshipand systemic eff iciency gains are closely linked

The cent ral driver is the prevalence of competition whichforces down prof its by lowering barriers t o ent ry and which increases as

more producers enter the global t rade causing participants t o searchnew forms of rent

The more powerf ul act ors in the chain will continue t o inducetheir suppliers and cust omers t o change their own operating procedures

they will also search for new suppliers in a bid t o systematically lower barriers t o ent ry in another

These objectives require them t o act as governors although t o varying extents over an increasingly large terrain t o search for systemiceff iciency.



In section 2 we observed that global spread of activities has increased and inter count ry dist ribution has become more complex and generally worsened.

How are these phenomena linked?

Firstly:

Barriers to entry are the determinants of the distribution of rents. Those

who command rents and have ability to create new domains when

barriers to entry fall are the beneficiaries and those who are unable to are

the losers.



Secondly:

The growing areas of rent are increasingly found in the intangible parts

of the value chain

- E.g. the ability of count ries like India and china t o produce goods at low labor costs explains the diminishing terms of t rade of developing count riesmanuf acturing exports.

- Copyrights, brand names have a lif e span of over 70years and produceabsolute and immutable forms of economic rent. Thus explaining the reason

why high income count ries are advocating for intellectual property rights.



The author also shows that the participation in GVC not only affects the inter-

country distribution of income but also affects the intra-country distribution

of income.

This is because the requirements of f inal product in high income marketsinvariably require capabilities which are outside of the reach of poor people andpoor f arms and SME who will consequently suff er.



VC

Amakes it possible t o t race through a particular thread of rent rich activities which are not captured by branch and indust ry analysis

e.g. intangible knowledge

It allows for more sophisticated mapping of input and

out put relationships which are otherwise diff icult t o unravel using t rade

statistics

VCA more accurately identifies the suitable opportunities to

augment incomes in a national context than the national focus on

indust ry studies

e.g. in the context of f alling global product prices, national accounting systemsmay ref lect a growth in activity which might not correspond with theinternational purchasing power of this sect oral activity



What are the implications for disciplinary focus?

Value chain requires information from diff erent sect ors and disciplinese.g. input from management (dynamics of rent), engineering (systemic eff iciency),political science (governance) and sociology (governance). It provides a meeting ground for various disciplines which is an important aspect in globalization.

A number of problems are posed t o most of t raditional economicanalysis. Through the lens of the value chain there is an enhanced ability t o capture the role played by the mobile skills (shortcoming of the Heckscher-Ohlintheorem.)



Understanding the processes whereby barriers to entry are

constructed takes the analysis beyond the domain of much economic analysis

which t reats technological progress as exogenous f ailing t o recognize the ability of f irms t o const ruct the competitive environment in which they operate (f irms willnot be price takers)

Moreover an understanding of the nature and importance of trust

in inter- firm relationships within value chains requires economists t o also

engage with the contingency and sociology of the determinants of social capital

Other disciplines are also forced t o rethink their analytical frameworks by a focus

on value chains



Do these attributes of value chain analysis improve the relevance of

research?

According t o Kaplinsky the primary conclusion we can draw from this isthat this analytical framework provides the potential for identif ying those policy

actions which may inf luence the dist ribution of income

As we have seen value chain analysis covers a range of interconnectedeconomic activities, spanning branches and sect ors providing opportunity for what might be termed joined up policies bet ween diff erent arms of government.



By focusing on the institutional determinants of rent , VCA points t owards inst ruments which inf luence the behavior of individualsgrouped within f irms and other organizations, which shape the dist ribution of returns from production and exchange.

By focusing on the dynamics of rent , VCA points policy t owards the

development of those t raject ories that can sustain incomes over time

Inputs from a range of institutions that are not direct

participants in the value chain directs the focus of policy attention t o thest rengthening of the national system of innovation



S ection IV S ection IV

TheseThese are strong assertions that can make powerful claims for theare strong assertions that can make powerful claims for the

primacy of VCA. But can these assertions be borne out in practice? primacy of VCA. But can these assertions be borne out in practice?

TheThe final section of the paper aims to provide some examples to final section of the paper aims to provide some examples to

support these claims support these claims. .

The three analytical components will be used in the following case studies

i.e. economic rent , governance and systemic eff iciency



Case 1

Canned deciduous fruits

Processed agricultural product, ideal sect or for low income count ries t o venture int o

However the returns accruing t o low income count ries (12.4%) andretailers in the rich count ries 26.7% show unequal dist ribution of income.



a. Major source of rent

- Before EU subsidized deciduous fruit production, major sources of rent werefound in the growing and canning links of the value chain

- Af ter subsidies the EU growers used the t rade policy rents t o cross-subsidize

sales t o third markets e.g. Japan andL

atinA

merica.

- Another source was brand name rent (south African bought brand del monteattempted this), payment of royalties t o a major brand name holder eroded allbrand name rent. the same fruits cost 25% in the South African owners brand

- 2 primary recipients of economic rents are growers and canners in

high income countries



b. Governance

- In the form of legislative governance

- In 1980s the European union subsidized their input side (fruit inputs) andoutput side (tariff protection) squeezing out the t raditional growers

- Similar case in US, f armers and canners were protected by a number of tariff s

and spurious food and drug phyt o-sanitary standards e.g. ref using Greek canned peaches on dubious grounds and forcing the exporters t o cover thecosts of repat riating the fruit t o Europe.

- Judicial governace auditing of these standards, fruit inspections by retailers t o producers, import agents who managed existing markets and sourced for new

markets

- Executive governance- assisting suppliers t o meet the requiredstandards.



c. Systemic efficiency

- Lack of t rust due t o scars of the apartheid era gave rise t o the

surf acing of ineff iciencies bet ween all links in the chain



- The f irms rivalry allowed the buyers t o play one f irm off against the other.

- Rents in the chain are likely t o eroded, with f ew participants sustaining highincome levels.

- In terms of spreading gains from globalization, f uture developments are

likely t o increase the proportion of returns going t o low income count ries.

- Small scale producers in low income count ries are unlikely t o participate as the canned deciduous fruit production is scale intensive andtherefore the production of key inputs is most likely going t o remain in the

hands of large scale producers



Conclusions

The objective of this study was t o:� Cont ribute t o a better understanding of the determinants of inter and

int ra count ry income dist ribution

� Identif ication of policies which might improve the dist ributional outcomeof count ries insertion int o the global economy

� The author argued that a focus on the three elements of the value chain,dynamics of rent, governance and systemic eff iciency are necessary t o turn

a heuristic const ruct int o an analytical t ool



� In section 4 author presented 2 cases which value chains underst ood in

their analytical sense can explain why some parties gained and some lost

from globalization of production and exchange

� Consequently cont ributed t o an explanation rooted in the production and

exchange (rather than in f inance or other spheres of globalization) of why

the growing global spread of economic activity not been equivalent t o

spreading of the gain from this economic activity



Can value chain analysis tell us about the policies which are

required to reverse the malign outcomes?

2 key insights are provided:

1. Global production net works are becoming increasingly more complex

arms length t rading is now limited t o commodities with the lowest returns identif ication of ways in which low income count ries can participate in

GVC



2. The analysis of government relationships which permeate the value chains

� This provides insights int o policy levers which might inf luence the behavior

of key stakeholders in the value chain

� Value chains are not homogenous and opportunities for rent appropriation

by diff erent parties will vary



� However when threatened by competition there are four directions inwhich economic act ors can move; these paths are not mutually exclusive.



� From analysis on the case study you can realize that the f irst t wo steps areunlikely t o realize a greater share of value chain returns.

� They are generally only the necessary conditions for an enhanced spreadof from participating in the global market.

�

The third and fourth steps are likely t o provide greater results.

� However due t o relations of power Shmitz and Knorriga observe withregard t o the foot wear value chain that developed count ries are willing t o assist developing count ries with the 1st 3 and not with the fourth becausethey are reposit ories of economic rents



In the canned fruit case

- Upgrade within link: special assistance can be off ered t o small scalegrowers.

- Upgrade relationship bet ween f irms: improve vertical and horizontalcooperation esp in relation t o participation by SMEs

- Redef ining activities undertaken within links: little scope for additionalaction

- Move t o new links of the chain: maybe possible t o build global or regionalbrand names



What can governments do?

1. Proactively assist the private sector, workers , organizations and other

stakeholders to recognize the opportunities and threats posed by

participating in global value chains

2. Measures can be taken to assist producers to enter these chains

3. Various policy instruments can be used to support the repositioning of

the corporate sector within the value chains

4. Producer rents are not the only form of economic rent which may bolster

the returns to poor countries. The government can be involved in financialintermediation, human resource rents, trade policy rents etc..



Value chain analysis is crucial t o this joined up policy support because it

enables governments t o focus on dynamics of rent, on the pervasive and

complex nature of support which is required t o build institutions & on

managing the integration of individual sect ors int o the global economy

VCA has a role t o play particularly I regard t o those production st ructures

which involve international exchange

It illust rates how critical success f act ors in external markets, allied t o

governance st ructures within individual chains circumscribe the role played by

domestic act ors



In summary i t i s not so much that VCA tells us anything new, for many

of the olicy responses have been incorporated int o corporate and decision

making models, but what it doe s i s t o provide a framework for a joined up series

of responses

Partial analysis and partial responses are likely t o be suboptimal in

relation t o medium and long run positioning of poor producersandcount ries

Positioning and path dependency are critical since participation in the

global economy in itself may not provide a path t o sustainable income growth or

t o an equitable dist ribution of returns.

Seminar in Selected Topics

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