The current crisis should not result in thoughtless reaction. If it was thoughtless globalisation in the past, it should not be thoughtless localisation now.
By Rupa Chanda & Pralok Gupta
A backlash to Global Value Chains (GVCs) seems imminent in the aftermath of Covid-19. There is an emerging view that global integration and dependence on GVCs have made countries more vulnerable to the spread of the disease and to the supply shocks arising from curbs on trade and travel. There are statements that had countries been more self-reliant, they would have been more resilient.
The Covid-19 crisis has certainly exposed the risks of overdependence on a particular country for procurement of raw materials. Even when the virus was limited only to Wuhan, the supply of Active Pharmaceutical Ingredient (API) had become a cause of concern for the Indian pharmaceuticals industry. When the virus started spreading to other countries, including India, heavy dependence on China for personal protective equipment and testing kits affected their ability to test their populations to contain the spread of virus.
It is ironical that the very country where this crisis originated has also become the main source country for the essential supplies needed to control the pandemic. It, thus, seems justified to question the unbridled enthusiasm with GVCs and globalisation that prevailed till recently.
But would this be the right response? Would countries have fared better in terms of growth, employment and poverty alleviation had they taken the path of self-reliance instead of allowing the principles of competitive advantage to play out through trade and investment? India’s experience before 1991 with a more insulated economy certainly does not suggest so. On the contrary, the World Development Report 2019 has noted that regions having active participation in GVCs have seen faster reduction in poverty.
It would not be correct to fault GVCs and dependence on trade for the failure of nations to provide for their health sectors or for the economic impact of this pandemic. A country’s ability to withstand this crisis due to a lower degree of integration should also not be seen as an endorsement of insulation. In this context, there are three important lessons from this crisis.
First, excessive dependence on any particular country in a GVC is not desirable. China’s current dominance in global manufacturing value chains and the constraints this poses for other countries during this pandemic highlights the problem. Even large countries like the US and India, which have domestic manufacturing capabilities, are prone to disruptions in the supply chain as they rely on getting parts and intermediates from other countries.
But this does not mean that countries should create entire forward and backward linkages domestically as it would not be feasible or cost-effective. Instead, the need is to distribute activities across more countries in GVCs. The scope of activities should also be widened where possible at different nodes in these GVCs, as a risk-mitigation strategy. This means trading-off scale economies by involving more players in the value chain with economies of scope, or ‘glocalisation’, i.e. mixing dispersion and local integration strategically.
The second lesson is the importance of domestic preparedness and capacity. Any dispersion strategy is contingent on countries having the capacity to act as additional nodes and engaging in more parts of the value chain. This, in turn, is dependent on their policy and regulatory environment. Countries that invest in infrastructure, skills, standards, ease of doing business and social protection will not only have the capacity to benefit from GVCs, but will also be better placed in times of crisis like the current pandemic.
Third, international coordination, strong multilateral institutions and collective leadership will be even more important in the future. Instead of withdrawing from institutions, the need of the hour is to improve their capacity and to give them more teeth in obliging member nations to abide by existing rules. There is also a need to address unfair and non-transparent trade and investment practices and hidden barriers that distort the outcomes of integration and create an uneven playing field. International platforms such as the G20 summits, international development agencies and institutions such as the WHO and the WTO must put greater thrust on playing by the rules of the game.
The current crisis, in part, reflects the failure to address these issues. Unfortunately, when such enlightened leadership and coordination is most needed, the world seems to be moving in the other direction.
In short, the Covid-19 pandemic is a wake-up call for governments, the private sector and international institutions to shape the future course of global trade and GVCs. The policy question at this juncture is not about whether countries should integrate or not into GVCs, but rather about the kind of global integration they should pursue. How can they calibrate their liberalisation strategies and GVC participation to ensure the desired benefits? How should they support external sector policies with appropriate domestic policies and preparedness to reduce the adverse impact of an external shock such as the current crisis?
The pandemic also poses questions to transnational firms about how much dependence on GVCs as opposed to localisation is desirable and what kinds of GVCs they should build or be a part of in the future.
This crisis should not result in thoughtless reaction. If it was thoughtless globalisation in the past, it shouldn’t be thoughtless localisation now. The risk, however, is that in a post Covid-19 world the discourse on globalisation and GVCs might just get shaped in a black and white manner.
Chanda is RBI Chair professor in Economics, IIM Bangalore; Gupta is associate professor, Centre for WTO Studies, IIFT, Delhi