Global poverty chains instead of global value chains? Perspective from the Latin American region 

By Jessie Hu

Introduction

The last four decades have witnessed a “second golden era” in the international economy characterised by a constant rise in global GDP, the convergence of incomes of the developing and developed world, and improved living standards (Eckes, 2011). Many have attributed these development gains to globalisation, often dubbed “neoliberal globalisation” (Philips, 2020, p. 461) within the international economic context. Propelled by the Washington Consensus, the current macroeconomic regime is  characterised by neoliberal principles including free trade flows of goods and capital, privatisation and deregulation, and the pursuit of a ‘sound economic policy’ (Chang, Grabel and Wade, 2014, p. 15). Amongst the building blocks of neoliberal globalisation, one of its cornerstones is the internationalisation of investment pattern, and production networks exemplified by Global Value Chains (GVCs). These chains have facilitated the interdependence and functional integration of the world economy (Gereffi et al., 2001: 1). This essay will analyse the impact of globalisation on development gains from the perspective of Global Value Chains (GVCs), given their resemblance to globalisation.

The term “development gains” will refer to the improvement in economic development, including economic growth on a state level and enhancement of welfare on an individual level. Focusing on the above mentioned specific dimensions, this essay argues that development gains from GVCs remain constrained. First, this essay will discuss the prevailing debates surrounding GVCs and economic development. Second, it will examine the opportunities for economic development created by GVCs. Finally, this essay will illustrate the limited landscape of development gains in Latin America through a case study of the Shougang Group in Peru. 

Opportunities for Development Gains

Though limited, it is undeniable that GVCs create some opportunities for economic development in their host countries, introducing new revenue streams, technological spillovers, and employment opportunities. To begin, GVCs introduced new revenue streams for host countries. The offshoring of production opens doors to business deals that would otherwise remain unavailable to indigenous firms. These new opportunities also translate to foreign revenue exchange earnings on a country level. For instance, Roy’s (2017) research finds that since the proliferation of GVCs, manufactured exports from low-wage host countries increased by 329% between the years 1990 to 2004 (p. 39). Although the data focuses on the manufacturing sector and does not indicate their ratio to host countries’ total export, the significant increase reflects that participation in GVCs can contribute to host countries’ economic growth by facilitating domestic firms access to marketing networks and boosting host countries’ exports. Furthermore, technological spillovers from GVCs can create positive backward linkages for host countries. Though not guaranteed, multinational corporations (MNCs) can bring advanced technological capabilities, such as production methods, managerial and organisational innovations to host countries (Giuliani and Macchi, 2014, p. 483). Domestic firms can accumulate these capabilities through channels such as imitative domestic engineering, tacit knowledge from workers involved in the production chain, and competitive pressure to adopt technological interventions. The accumulation of technological capabilities can boost productivity, enhance innovation, open gateways to upgrade to more lucrative opportunities in the GVCs, and ultimately contribute to the economic performance of the host countries. On an individual level, GVCs can also create better employment opportunities. For instance, supplier firms in GVCs, such as those in Bangladesh’s garment sector, generated 1.6 million new jobs in the country (Shingal, 2015, p. 10). Furthermore, albeit not in every case, workers in supplier firms tend to earn higher wages than those in non-trade sectors (Nadvi, 2004), and experience improvements in workers’ rights (Kucera, 2002). Therefore, by improving the employment landscape, GVCs can also potentially improve individuals’ welfare. Thus far, when viewed together, GVCs have created space for development gains by boosting the capabilities of the host economy on a broad level and promoting individual human development through improved employment opportunities. 

Constraints of Development Gains

However, MNCs’ rent-seeking behaviour has hindered the possibility of translating these spaces for economic development into progress in host countries. To begin, numerous host countries struggle to make substantial revenues from GVCs due to their struggle in capturing value from GVCs. While MNCs have offshored tangible, low value added activities (such as manufacturing and assembly), they retain control over the key dimension of the value chain - intangible, intellectual work such as brand names, design, and distribution channels (de Medeiros and Trebat, 2017, p. 407). Such a division of activities reflects that MNCs reserve for themselves the segments of the chain where entry barriers are the highest and profits are the greatest. At the same time, while suppliers in host countries operate on razor-thin margins (Ravenhill, 2014, p. 266). Thus, although GVCs create some revenue for domestic firms, the profit margin is slim , and there is uncertainty about the extent to which they can enhance the host country’s export earnings. Second, the spillover effects of GVCs are also limited. Since one of the primary motivations for MNCs to engage in GVCs is to streamline their control over intangible assets, they are intentionally disinclined to ‘leak’ any technological capabilities. Technological transfers often come with a price tag, with MNCs requiring supplier firms to pay licensing fees or royalties for any technology (Oatley, 2018, p. 177). Since these are opaque, internal transactions, MNCs can manipulate the prices at whatever level in their favour. In fact, MNCs often overcharge technology transfers, as evidenced by the case in which Colombia paid $3 billion extra for pharmaceutical imports from MNCs compared to market-based transactions. On the other hand, MNCs also retain tight control over technology and managerial roles, as they are reluctant to hire residents of the host country in positions that would have ample exposure to technological capabilities (ibid. p. 178). The lack of exposure, coupled with MNCs cashing in on technology transfers, undermines the potential for the spillover of technological capabilities and  the empowering economic growth in host countries. Furthermore, MNCs also further squeeze profit from GVCs by pushing down labour costs. MNCs are constantly exerting downward pressure on suppliers to lower input costs in order to increase profit margin (Barrientos, 2019, p. 44), which often translates to a ‘race to the bottom’ of cutting down wages and worker’s rights, as labour costs are seen as one of the few variable costs that suppliers can cut to maintain price competitive. Consequently, workers are often underpaid in supplier firms, sometimes 10 to 30 times lower than counterpart workers in developed countries, and this rate is insufficient to meet their social reproduction needs (Ness, 2015, p. 10). Overexploitation is also common, with workers in supplier firms often suffering from excessive overtime and working in sweatshop conditions (Selwyn, 2015). LeBaron and Gore (2020) further contribute to the critique by highlighting that female workers in supplier firms are particularly vulnerable to such exploitations - such as coercion, threats, verbal and sexual abuse. Therefore, due to MNCs’ capital accumulation strategies, GVCs in fact are global poverty chains (Selwyn, 2015) that obstruct the opportunities for economic development that GVCs could cast for the host country and individuals. 

Case study: Shougang Group in Peru

Starting in the 2000s, as part of China’s ‘going out’ and ‘mutually beneficial South-South cooperation’ strategy, China has been expanding its economic ties with the Latin American region, with trade and investment flows accounting over $50 billion (Fornes and Butt-Philip, 2011). In particular, the rise in Foreign Direct Investments (FDI) and the offshoring of Chinese firms to Latin America have garnered scholarly attention, sparking debates around their influence on developmental gains. Although the impact of Chinese firms varies across countries, industries and even on a project-by-project basis (Myers and Ray, 2019, p. 2). The case of the Chinese steelmaking firm Shougang in Peru - which represents the sector that Chinese firms are most prominent in, namely, mining - demonstrates that the developmental gains are often limited for Latin American host countries. 

Shougang Group is a state-owned enterprise (SOE) specialised in steel manufacturing. It began offshoring its mining activities to Peru after acquiring the iron ore company Hierro Peru in 1992. However, Shougang’s presence in Peru has been subject to numerous criticisms. 

First, Peru struggles to capture a share of the profits. While there is no closure of the distribution of profit, to begin with, the activities that take place in Peru - mineral extraction and manufacturing - are situated at the bottom of the steelmaking value chain, leaving limited space for value-added. Moreover, Shougang’s failure to comply with its investment commitments demonstrates that economic linkages for Peru are further limited. For instance, Shougang had initially promised to invest $150 million during 1992-1995, but it failed to comply with these commitments and only invested $35 million (Sanborn and Chonn, 2018, p. 36). The overpromise of their initial commitments demonstrates that the potential profits and economic linkages are only a fraction of what Peru had initially expected. 

Second, the potential technological spillovers from Shougang to Peru are also limited.  Again, activities at the bottom of the value chain tend to have less technological spillover, as the responsibilities involved are mainly labour-intensive activities, and there is no exposure to more advanced technological capabilities. Moreover, there is anecdotal evidence that Shougang commonly uses outdated machinery more than other firms in the industry, especially in the firm’s early years (ibid. p. 29). Therefore, it is questionable  whether Shougang could generate any significant technological spillovers, let alone substantial backward linkages, to bolster the capacities of the Peruvian economy. 

More prominently, at the heart of the developmental debate lies Shougang’s notorious labour regime. Workers in Shougang receive low wages, earning a rate of 21.4 Peruvian nuevo soles per hour, which is only half of what their counterparts at other mining companies in Peru are paid. Shougang’s division of salary scales between newly hired and experienced workers has further fuelled discontent and tensions among workers at Shougang (Gonzalez-Vicente, 2013, p. 53). Shougang’s disregard for workers’ union’s demands and its failure to address annual collective actions have further exacerbated the deterioration of workers’ welfare. In this light, in addition to limited potential for developmental gains for Peru on a national scale, the Shougang case demonstrates that the presence of Chinese firms can also result in detrimental repercussions on individual development. 

Conclusion

In conclusion, GVCs are far from a ‘win-win’ scenario, with the host countries being the relative ‘losers’, and MNCs being the relative ‘winners’. While GVCs open up some economic development opportunities for the host country, these opportunities need to translate into substantial development gains for the host country. However, it is important to acknowledge that neither should be considered absolute ‘winners’ or ‘losers’.  The gains' distribution heavily favours MNCs, but there are mediating factors that could recalibrate this distribution. Chain governance types can rebalance the distribution by influencing the alignment of power between MNCs and supplier firms (Gereffi et al., 2006). While hierarchical or captive chains have significant power imbalances with supplier firms fully subservient to MNC’s coercive power, market-based and modular chains have more equitable power distribution and give supplier firms more space to negotiate for favourable treatment. Host country institutions, such as the strength of state capacity and civil society, could function as watchdogs, assisting in regulating the behaviour of MNCs and preventing potential exploitation. Nonetheless, while these variables indeed have the potential to leverage the developmental opportunities of GVCs, in empirical terms, hierarchical and captive governance is more prevalent. Moreover, many of the highly involved countries in GVCs are developing nations with weak institutions. Thus, as of now, MNCs remain the relative ‘winners’, while  host countries remain the relative ‘losers’.

References

Aguiar de Medeiros, C., & Trebat, N. (2017). Inequality and Income Distribution in Global Value Chains. Journal of Economic Issues, 51(2), 401–408. https://doi.org/10.1080/00213624.2017.1320916 

Anirudh Shingal. (2015). Labour market effects of integration into GVCs: Review of literature. Swiss Programme for Research on Global Issues for Development Working Paper R4D Working Paper .

Barrientos, S. (2019). Gender and Work in Global Value Chains. Cambridge University Press.

Chang, H.-J., & Grabel, I. (2014). Reclaiming development : an alternative economic policy manual. Zed Books.

Eckes, A. E., & Proquest . (2011). The contemporary global economy : a history since 1980. Wiley-Blackwell.

Fornes, G., & Butt‐Philip, A. (2011). Chinese MNEs and Latin America: a review. International Journal of Emerging Markets, 6(2), 98–117. https://doi.org/10.1108/17468801111119470

Gereffi, G., Humphrey, J., Kaplinsky, R., & Sturgeon, T. J. (2001). Introduction: Globalisation, Value Chains and Development. IDS Bulletin, 32(3), 1–8. https://doi.org/10.1111/j.1759-5436.2001.mp32003001.x

Giuliani, E., & Macchi, C. (2013). Multinational corporations’ economic and human rights impacts on developing countries: a review and research agenda. Cambridge Journal of Economics, 38(2), 479–517. https://doi.org/10.1093/cje/bet060

González-Vicente, R. (2013). Development Dynamics of Chinese Resource-Based Investment in Peru and Ecuador. Latin American Politics and Society, 55(1), 46–72. https://doi.org/10.1111/j.1548-2456.2013.00183.x

Kucera, D. (2002). Core labour standards and foreign direct investment. International Labour Review, 141(1-2), 31–69. https://doi.org/10.1111/j.1564-913x.2002.tb00230.x

LeBaron, G., & Gore, E. (2019). Gender and Forced Labour: Understanding the Links in Global Cocoa Supply Chains. The Journal of Development Studies, 56(6), 1–23. https://doi.org/10.1080/00220388.2019.1657570

Myers, M., & Ray, R. (2019). CHINA IN LATIN AMERICA: MAJOR IMPACTS AND AVENUES FOR CONSTRUCTIVE ENGAGEMENT; A U.S. PERSPECTIVE. https://www.cartercenter.org/resources/pdfs/news/peace_publications/china/china-in-latin-america-june-2019.pdf

Nadvi, K. (2004). Globalisation and Poverty: How can Global Value Chain Research Inform the Policy Debate? IDS Bulletin, 35(1), 20–30. https://doi.org/10.1111/j.1759-5436.2004.tb00105.x

Oatley, T. H. (2019). International political economy (6th ed.). Routledge.

Philips, N. (2019). Global political economy. In Globalization of World Politics: An Introduction to International Relations (pp. 256–271). Oxford University Press.

Ravenhill, J. (2014). Global value chains and development. Review of International Political Economy, 21(1), 264–274. https://doi.org/10.1080/09692290.2013.858366

Roy, S. (2017). Rent and Surplus in the Global Production Network: Identifying “Value Capture” from the South. Agrarian South: Journal of Political Economy, 6(1), 32–52. https://doi.org/10.1177/2277976017721283

Sanborn, C., & Chonn, V. (2015). Chinese Investment in Peru’s Mining Industry: Blessing or Curse? https://www.bu.edu/gdp/files/2017/09/Peru.pdf

Selwyn, B. (2019). Poverty chains and global capitalism. Competition & Change, 23(1), 71–97. https://doi.org/10.1177/1024529418809067