It’s about capabilities, not products

Inclusive Economy24 Jun 2014Annemarie van de Vijsel

Kaplinsky admitted that participating in the global economy certainly brings benefits to countries, as the division of labour increases productivity and trade in comparative advantages provides the potential for mutual gain. But, as he already suggested at the start of his lecture, that is not always the case. Not all countries are able to make good use of these opportunities.

In his lecture opening the 14th EADI General Conference in Bonn, Germany, Kaplinsky explained that everything depends on whether a firm has the capacity to generate appropriate rents – either directly during the production process or in economic activities related to the process – and to protect them. Those that can will benefit from participation in the global economy, while those that cannot will be even worse off. They will face a race to the bottom and a fall in income for their employees. Even growth rates can be worse than before.

The more a company’s economic performance depends on global value chains, the more it faces the threat of becoming involved in a competition that leads to relatively low rents in the production sphere. Local companies have less negotiating power to set prices, with the consequence that they will be squeezed by higher demands from larger companies in the value chain, especially to produce more for less. The big question is how can this change? How can global value chains stimulate responsible development?

To answer this question, it is important to understand global value chains better. Today, according to Kaplinsky, more than two-thirds of global trade takes place in these global chains – in international trade in unfinished products, facilitated by direct investments. Therefore, as the title of his lecture suggested, it is ‘not whether, but rather how to participate in the global economy’.

Kaplinsky distinguished two types of global value chains. Most value chains are specialized vertically: different parts of a final product are made in different countries and unfinished products are shipped around the world. In Kaplinsky’s words, “trade is no longer about products, but about capabilities”. You need to establish the capabilities to specialize in the products and services needed within the chains. This specialization causes problems in quantifying the nature of global trade. According to Kaplinsky, 28% of world trade has been counted at least twice in the official statistics, as products are shipped all around the world before assembled into one final product. Regions in which value chains are mainly vertically specialized, he advised, should facilitate international trade, and then specialize in a certain task.

In Africa, however, less than a quarter of the trade is conducted in vertically specialized global value chains. More than three quarters takes place in additive global value chains, the second type of chain referred to by Kaplinsky. Additive value chains start with a natural resource like cocoa, to which value is gradually added as it moves along the chain. Globally, these types of chains only make up less than a quarter of trade organised in value chains.

The ‘strategic policy agenda’ for regions with predominantly additive global value chains is different to the agenda Kaplinsky proposes for vertically specialized value chains. They have to thicken out rather than specialize in a certain task. Creating linkages, especially locally, is also important. And not only within the primary sector (agriculture, mining) but also by adding local value in specialized services and manufacturing specialized machinery, technology or tools for the main companies operating in the additive value chain.

“Africa, and many developing countries, have to think about how to generate appropriate rent and how to maintain it,” Kaplinsky said. “It is not bad to have a large resource sector, but countries have to develop the capacity to profit from participation in the global economy.”

So, Kaplinsky concluded,“industrial policy might be back on the agenda”. But it is not traditional industrialization; it is about creating productive sectors, looking for opportunities and linking them to the market. Understanding the demand side is even more important than creating supply within global value chains. Otherwise companies and the economy will be squeezed too much. To maintain high rents it is important that “all parties in the value chain keep talking to each other. But the question then is, who will conduct the orchestra?”

The Broker reports from the EADI conference ‘Responsible Development in a Polycentric World: Inequality, Citizenship and the Middle Classes’, 23 – 26 June 2014 in Bonn, Germany. The Broker is main media partner during this conference.