The World Bank recently came out with a report underscoring the importance of Global Value Chains (GVCs) and how countries can benefit from being part of them. Given that India has opted out of the RCEP agreement, UDIT MISRA talks to Aaditya Mattoo, Chief Economist for East Asia and Pacific Region, World Bank, and the report’s chief author, to understand how India has performed on the trade front.
What are GVCs and what is their promise?
Global value chains or GVCs essentially break up the production process across countries. GVCs have powered the surge of international trade after 1990 and helped poor countries to grow faster. But this momentum has stalled after the 2008 global financial crisis.
When seen from the prism of GVCs, how has India performed?
Well, India has both underachieved and overachieved. Global value chains (GVCs) drove the increase in international trade after 1990, accounting for more than half of world trade in 2008. India’s GVC trade also increased over this period, as it imported rough diamonds, components and computers, to export jewellery, cars and services. But its GVC linkages are about a quarter less than the global average, peaking at 38 per cent of trade in 2008. So in a way, India’s participation has been a little bit stunted. And when the growth in GVC participation slowed down for the world, it slowed down for India as well.
So, where did India miss out? Why did it not gain as much as the rest of the world?
One interesting piece of evidence is that the big growth boost comes from the first developmental transition, that is from trading in commodities to basic manufacturing. That’s the transition that Bangladesh, Vietnam, and Cambodia are making.
Subsequent transitions — into more advanced manufacturing and sophisticated services —eventually need to happen but typically lead to smaller growth increments.
In India’s case, the story is that it did not fully exploit the benefits of the first transition. It is like getting a double promotion —you never spent enough time fully engaged in basic manufacturing which had the greatest potential for growth and job creation. But precociously jumped into the second stage of advanced goods and services, which brought growth but fewer jobs.
So at one level, you are the envy of the developing world — that India produces such sophisticated products — but the truth is that you (India) are also envying the Vietnams and Bangladeshs of the world that have got the bigger growth bang and the associated bump in job creation.
Is it too late to remedy the underachievement ? Moreover, India keep stressing on services trade, but will that alone cover for it?
The answer to both is ‘no’. It is not too late and services trade alone would not cut it. The challenge is to remedy failings in manufacturing while consolidating achievements in services.
In fact, 90 per cent of the remedy lies with the domestic reform agenda. Just 10 per cent is an international co-operation agenda – though trade negotiations can help spur domestic reform and secure access to foreign markets.
The prescriptions for domestic reform are clear. One, domestic labour market reform can lead to substantial economies of scale and increased GVC participation, especially in the labour-intensive sectors. Second, improved infrastructure like roads and ports and liberalised transport services can help reduce logistics costs – which are three times higher in India than in China and two times higher than in Bangladesh. A day’s delay reduces trade by more than 1 per cent.
Thirdly, India should relax its restrictive goods trade policy, which makes it harder for firms to import-to-export. For example, India imposes high tariffs on imports of yarn and fibre which, in turn, increases the cost of producing clothing.
Finally, reform of higher education is necessary for the Indian services sector to thrive in a world where technology is both disrupting old models and creating new opportunities for trade.
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