Why Developing Countries Should Leverage On Global Value Chains

Trade plays a vital role in any country’s economic growth and sustainable development. Developing countries have chronically been affected by the lack of value addition in their export products and their inability to diversify their economies. Improving disposable incomes of the masses accelerates growth. Improving the living standards of citizens and lifting them out of poverty is a priority.

Developing countries are faced with several challenges when it comes to international trade and the best example can be illustrated by the meagre level of intra-African trade. Intra – African trade currently stands at a paltry 18 percent compared to Europe’s intra-regional trade standing at a whopping 69 percent. This problem is exacerbated by poor policy formulation and poor governance. Globalization is providing developing countries with a unique opportunity to change the landscape by integrating themselves into global value chains.

Production of export products initially required a country to have several complementary industries within its boundaries to see several components of the product, locally sourced and manufactured, come together to form the good before exportation. Things are changing and the production process is being broken down into several steps and stages that take place in different countries. For example, a number of electronic equipment are designed in the west and assembled in the east, with various components sourced from different countries.

According to research, countries with properly functioning institutions and good infrastructure tend to be more involved in global value chains. Developing countries will only enjoy the benefits of GVCs only by reforming domestic institutions. Reducing corruption, government red-tape, streamlining customs process and curbing other trade costs such as licensing and transport costs will go a long way in supporting this integration.

Developing countries use export processing zones (EPZs) to encourage investments from multinational companies by offering incentives that encourage the flow of foreign investments. Incentives such as cheap labour, tax holidays, improved logistics and customs regulation encourage foreign direct investments which eventually boost the domestic economy. This is the best starting point to improve the integration into global supply chains. Spreading EPZs across the country will boost production through the participation of domestic private firms. The private sector has been known to bolster economic growth and development.

Developing countries are suffering from high costs of trade. This is being made worse by poor infrastructure, weak institutions and unprecedented levels of corruption and poverty. However, strides are being made in the right direction through the establishment of well-functioning institutions and the reduction of government processes through adoption of ICT and automation. Countries in Latin America, Asia and Africa have benefited from several trade agreements over the years. However, deeper integration is necessary for countries in these regions to move up the global supply chain.

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