Global value chains played a big role in lifting millions out of poverty in Asia. For the past few decades, Asia and the Pacific’s robust production of goods and services boosted the region’s growth. However, global value chains also face unprecedented challenges. The coronavirus disease (COVID-19) pandemic severely strained global value chains. Beyond COVID-19, global value chains also face risks from geopolitical tensions and climate change, according to Global Value Chain Development Report 2021: Beyond Production. ADB Economist Elisabetta Gentile joins ADB Insight to discuss the future of global value chains and how pairing social protection policies with global value chains can further secure the region of the benefits of inclusive growth.

Transcript

Nisha Pillai

Hello and welcome to ADB insight.

I'm Nisha Pillai. For the past few decades, the Asia Pacific region has become a central link in the production of goods and services worldwide.

From pharmaceuticals to fashion, IT to automobiles, the region has enjoyed a competitive advantage in so-called ‘global value chains’ and it’s a magnet for companies looking for a competitive edge. 

Its strategic position in these global value chains has turbo boosted Asia’s growth. But today they’re facing unprecedented challenges. COVID has wrought havoc. Economic lockdowns have displaced workers from factory floors and crippled regional production. An ADB report shows that 90% of GVCs have been impacted by a combination of the pandemic and trade tensions. Now with vaccination rates rising, the region’s economies are slowly coming back to life, but struggling to keep with up with the speed of global demand. 

In short, global value chains -- and the Asia-Pacific’s role within those -- are at a critical crossroads. Here to unpack the issues is Elisabetta Gentile - an economist with the ADB.

First of all, Elisabetta, how does ADB see the role of global value chains in driving economic growth and development in the Asia Pacific region?

Elisabetta Gentile

We have estimated that between 2005 and 2015 Asia lifted more than 600 million people out of poverty. And the rise of global value chains has a big role to play. This is really the superpower of global value chains; the fact that thanks to the rapidly decreasing costs of moving goods, moving people, and moving ideas, it has become possible to decentralize the production process to different places in the world, and actually achieve cost-savings in the process, which is the most incredible thing.

I can think of a few important examples in Asia. So, the textile industry in Bangladesh is definitely a great example. You might be wearing a T-shirt made in Bangladesh right now that is made out of cotton grown in the US, which maybe has been taken to Indonesia for processing, and then turned into fabric in the People's Republic of China, and then maybe re-exported to Bangladesh for cutting and for printing, and then from there shipped to stores all over the world all the way to your closet. So, this is the superpower of global value chains.

Nisha Pillai

The pandemic has shaken up virtually every aspect of our economies and societies. In what way, particularly, have GVCs been impacted?

Elisabetta Gentile

Well, I like to refer to the impact of COVID-19 on global value chains as a double whammy. A double whammy because global value chains have been hit hard both when the pandemic started, but also now that we are in the middle of a recovery. At the beginning there were lockdowns all over the world so workers could not go to the office, demand for a lot of products collapsed, whereas demands for other products surged, creating shortages. The most famous example of that would be the shortage of personal protective equipment. 

But now that we are beginning to recover, we are again observing disruptions in global value chains, as there is a massive surge in demand for pretty much anything, which is putting a lot of stress on the existing infrastructure and is also putting producers under stress because they just cannot cope with a very high demand.

Nisha Pillai

So, with COVID having disruptive global value change so significantly, how do you see their future?

Elisabetta Gentile

What I would like to say is, first of all, the global value chains have demonstrated an exceptional amount of resilience throughout this pandemic. And actually they have been part of the success story, because let's not forget that the vaccine supply chain is the reason why we were able to be vaccinated in the first place, and gradually go back to a normal life.

The future of global value chains is what we decide it to be right here right now. So, the decisions that we make today will affect what future global value chains will look like. 

You can decide to go two ways. One way is the talk that we have heard about strategic autonomy and all of that, which means that economies might be tempted to bring back onshore a lot of the production that they had offshored, taking advantage of global value chains. But that would be a mistake. The way to go would be to make sure that we learn from the logistical challenges arising from the pandemic; that we strengthen global value chains, that we provide an environment that is safe, peaceful, stable, secure for global value chains to thrive. You can diversify your suppliers, but that does not necessarily mean that you must go back to producing everything onshore.

Nisha Pillai

Indeed. Now, we used to think of GVCs largely in terms of production, actually making goods. But increasingly, we're seeing a growth in services as well. So, how well placed is the Asia Pacific region in terms of trying to capitalize on that trend?

Elisabetta Gentile

Services are really the new opportunity for Asia and the Pacific, and this has been shown already by economies like India with its ICT revolution, that after all these decades still continues to be a major driver of growth in the country. And the Philippines, with its business process outsourcing industry that has, again, allowed the Philippines to find suitable jobs for its highly educated, English-speaking workforce. So, you are absolutely right that trade in services provides incredible opportunities as digitization increases the amount of services that can be performed without the physical presence of the service provider. But it's important for Asia and the Pacific to seize the opportunities provided by trading services, by having a labor force that has the adequate skills to work in these sectors, and also, very importantly, the ICT infrastructure that is required for trading services to thrive.

Nisha Pillai

Elisabetta we've been talking about the many benefits of GVCs, the economic benefits. But how do we make sure that these benefits are really inclusive?

Elisabetta Gentile

Well, GVCs are by themselves inclusive already. We have already mentioned earlier that specializing in specific tasks along the value chain allows workers that are relatively less skilled to get decent-paying jobs. And this is what gets people out of poverty. It is true though that there is this trend of automation that has been going on for decades, and it's not slowing down. Therefore, we must protect workers from automation possibly displacing them. And we do that by building systems that up-skill, re-skill workers to make sure that they can transition to different occupations when automation takes over certain tasks along the production chain. 

And this is also why we need the social protection systems for workers, unemployment insurance, and all kinds of policies that support workers in their transition from one occupation to another. And, last but not least, governments really need to try and again create an environment of stability, of certainty, an environment where it's easy to be an entrepreneur and it's easy to do business. This is what, at the end of the day, is going to make sure that global value chains stay inclusive.

Nisha Pillai

Some measured advice there. Elisabetta, thank you so much for joining us on ADB Insight.

Elisabetta Gentile

Thank you.

Nisha Pillai

Indeed, thank you to all of you for joining us for this episode. Until the next time, goodbye.

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