EU Economy - Participation improves competitiveness, which boosts exports and raises income ..- ECB

Publication - Benefits of global value chain participation

The impact of global value chain participation on current account balances – a global perspective 

Participating in global value chains may improve an economy’s competitiveness and thereby raise its current account balance. Specifically, an economy’s competitiveness may increase as a result of substituting imported for domestically produced intermediate goods. The increase in competitiveness boosts the economy’s exports and raises its income. 

If it is expected that other economies will eventually catch up in terms of competitiveness by also participating in global value chains, the economy’s competitive edge – and thus the rise in income – is only temporary. As a consequence, part of the income gain will be saved, raising the economy’s current account balance. This article provides empirical evidence suggesting that a rise in global value chain participation relative to the rest of the world has a positive impact on an economy’s current account balance. Results from widely used reduced-form current account regression models suggest that economies that participate more in global value chains than their trading partners also display larger current account surpluses or smaller current account deficits. Differences in the extent to which countries participated in global value chains appear to explain a substantial fraction of the current account surpluses that were observed in the run-up to the global financial crisis. 

1 Introduction 

A salient feature of the global economy over the last few decades has been the existence of large and persistent global imbalances. For example, the years prior to the global financial crisis were marked by some emerging market economies, commodity exporters and some advanced economies running large current account surpluses, matched by deficits in particular in the United States. Several studies have shown that part of these global imbalances can be explained by differences in financial market development across economies, in particular by the lack of financial development in emerging market surplus economies.1 At the same time, the debate about the driving forces underlying large and persistent current account surpluses in several advanced economies is still ongoing. Understanding the determinants of external imbalances is critical for academics and policymakers, because such determinants play an important role in the transmission of domestic shocks and policies across borders in an increasingly integrated world.

Another striking feature of the global economy during the last few decades has been the rise of global value chains. The increasing dispersion of stages of production across countries was spurred by a number of factors. The decline in transportation costs amid large wage differences between advanced and emerging market economies made the internationalisation of supply chains profitable. Moreover, advances in information and communication technologies made the complex coordination of production processes at distance possible. 2 A further factor was the adoption of trade-liberalising policies over the past few decades. 

The fragmentation of production chains across countries led to a steady increase in the share of trade accounted for by intermediate goods. This development continued at least until the start of the global financial crisis. Trade in intermediate goods and services now accounts for a very large share of overall trade flows in goods and services.3 The regional dispersion of the research and development underlying the iPod, the manufacturing and assembly of its components as well as its sale and distribution in local markets is a well-known example of global value chain fragmentation. 

Read here full REPORT

Copyright: European Central Bank
Directorate General Communications
Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany
Tel.: +49 69 1344 7455, E-mail: media@ecb.europa.eu
Website: www.ecb.europa.eu

page source http://www.ecb.europa.eu/pub/