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Inequality and global value chains | Business

WONDERS SLIM

In the first two decades of the 21st century we have witnessed greater global economic integration. Countries have become more interdependent, with growing fragmentation of production processes on a global scale. The reduction of trade barriers, the opening of new markets and the revolution in information and communication technologies have changed the way of trading, from being a simple exchange of final products —in the manner of Adam Smith— to a constant transaction of investments, technologies, human capital, intermediate goods and services. Global value chains (GVCs) have been dubbed the “central nervous system” of the world economy, in which intermediate inputs cross borders several times before the final product reaches the customer. Among economists there is consensus regarding the improvements in well-being generated from this process, but both the financial crisis of 2008 and the bottlenecks after covid-19 and the war in Ukraine have exposed the dark side of the globalization, that is, the growing influence of GVCs in the transmission of economic disturbances between countries. Moreover, the aforementioned improvements could be poorly distributed, generating tensions between owners of capital and workers, as well as between low-skilled and highly-skilled workers.

There is consensus that GVCs have offered new opportunities for countries to increase their participation in world trade and diversify their exports, improving the productivity of companies through the transfer of knowledge and technology. In addition, with such participation the per capita income increases, as well as employment opportunities. However, this growing integration has coincided with higher levels of inequality within countries, giving rise to a debate on the distributional effects of participation in GVCs with two opposing points of view.

On the one hand, it is argued that such participation can create winners and losers, increasing the income gap between rich and poor within countries. On the other hand, an IMF study claims that GVC trading leads to increased income levels for all. Also, according to Princeton and Chicago professors Gene Grossman and Esteban Rossi-Hansberg, the productivity effect of GVC participation could reduce the wage gap if low-skilled workers who lose their jobs could relocate to more productive activities. Unfortunately, this assumption does not seem to be very realistic in OECD countries, including Spain. In fact, the data indicates that it is the owners of capital and highly qualified workers who have participated the most in these benefits, to the detriment of the less qualified. How to reconcile these views with the empirical evidence? Two recent studies shed some light into the tunnel. An OECD publication shows that participation in GVCs can reduce wage inequality when such participation integrates low-skilled workers and allows them to improve their employment. A second paper, of which I am a co-author, includes updated data to cover the protectionist tendencies that emerged after the financial crisis. The results we found suggest that a higher degree of task offshoring increases the level of inequality in the short run, while it is associated with lower income inequality in the long run. In other words, it takes time for workers who lose their jobs due to offshoring to find new jobs in expanding sectors, when the economy reaches its new equilibrium. Therefore, it is crucial that a long-term adjustment takes place so that the potential negative effect of participation in GVCs on the distribution of income within countries is neutralized and even becomes positive.

What would be the message to extract for policy makers trying to maximize the benefits of participation in GVCs? To promote a more equitable distribution of income, efforts should focus on improving and reorienting the qualification of the workforce. One way to do this would be through up-to-date professional training, secondary and higher education that encourage the development of the skills required for the professions of the future, in the fields of digitization, green energy and artificial intelligence.

Immaculate Martinez-Zarzoso She is a professor at the universities of Göttingen and Jaume I.

He knows in depth all the sides of the coin.

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