‘How developing economies can hedge disruptions in global value chains’

By Femi Adekoya

Economic Affairs Officer, UNCTAD, Piergiuseppe Fortunato

The COVID-19 crisis has amplified profound fault lines in the functioning of global value chains (GVCs), and also exposed the fragility of a model characterized by high interdependencies between

leading firms and suppliers located across several continents, the United Nations Conference on Trade and Development (UNCTAD) has said.

To hedge against the effect of the disruption, UNCTAD advised developing economies to focus on diversification away from traditional tasks and activities, which can be affected by automation.

According to UNCATD, the narrow focus on manufacturing must give way to more emphasis on new sectors like the creative and digital economy sectors, while strengthening regional value chains should be a priority for developing countries to diversify risk, reduce vulnerability, increase resilience and foster industrial development.

Economic Affairs Officer, UNCTAD, Piergiuseppe Fortunato, notes that the persistent uncertainty related to the shift of the epicentre of the pandemic from region to region, and the parallel instability affecting production costs, make it difficult to resume business on a global scale, leading many firms to reduce or stall their production activities.

At the same time, temporary surges of demand for certain critical commodities have not been met by increased supply since, under the current model, dramatic changes in the scale of production might not be easily absorbed after a return to normality.

Long before COVID-19, industry 4.0 technologies were already fostering a reorganization of GVCs involving significant relocation (and re-shoring) of productive activities.

“From a lead firm perspective, industry 4.0, especially automation, unlocks new labour-saving technologies, which could potentially reduce reliance on low-skill labour in manufacturing and therefore reduce the benefits of offshoring.

“Automation also has important implications for the global geography of production, as value chains will become more regional in nature, moving closer to consumer markets where ecosystems are more supportive to business.

“Confronting COVID-19 could accelerate some of these trends. Both automation and reshoring allow for more flexible adjustment to changing demand, mitigating firms’ risks in the event of a pandemic or other external shocks,” Fortunato explained.

The UNCTAD expert noted that supply chain and travel disruptions caused by COVID-19 might undermine economic integration and encourage self-sufficient economic systems, at least in strategic sectors such as medical equipment and drugs, or the production of inputs for assembling sophisticated machines, the final production of which still occurs in high-wage countries.

According to the agency, this tendency is reflected in the growing number of temporary export bans and restrictions on critical goods enacted by numerous countries after the outbreak.

“It does not come as a surprise, therefore, that most analysts concur that the current pandemic will reinforce relocation and reshoring trends.

“With most economies under full or partial lockdown and with trade and investment contracting, the future of offshoring is more uncertain than pre-COVID-19”, UNCTAD added.

The World Trade Organization (WTO) predicts a trade fall of between 13 per cent and 32 per cent, while UNCTAD estimates a foreign direct investment contraction of 30 per cent to 40 per cent during 2020 and 2021.

“In such a complicated and rapidly changing environment, developing countries need to concentrate their efforts around three strategic areas of policy action.

“By identifying and maintaining horizontal and vertical linkages, regional pacts can ensure that small firms cooperate to reduce transaction costs and benefit from economies of scale,” the trade agency urged.