Global Value Chains and Economic Complexity

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# Global Value Chains and Economic Complexity
### Thierry Warin, PhD
### quantum simulations<a style="color:#6f97d0">*</a>

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# Outline

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### outline

1. International Trade

2. Regional Economic Integration

3. Financial Integration

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# Introduction

The new era of globalization that we are observing in this "data"-based day and age requires a new generation of researchers in charge of challenging the old frameworks and models.

We need to rethink our understanding of globalization for we face a new paradigm in globalization.

Data and inference will help do that. Some researchers have started doing it. They are gathered in a "club" called "Economic Complexity."

[[The Atlas of Economic Complexity](https://atlas.cid.harvard.edu/)]

Economic complexity:

- a new look at international trade: the notion of "product space"
  
  - [NEW] using unstructured data to understand the real impacts of international trade regulations (see the last section!)

[[The Growth Lab](https://growthlab.cid.harvard.edu/)]

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# International Trade

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# Economic Complexity: Global Values Chains (GVCs)

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# Economic Complexity: Global Values Chains (GVCs)

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# Economic Complexity: Global Values Chains (GVCs)

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# Why Do Nations Join International Organizations?

* Provide **sets of norms** to operate in the landscape

* Reduces the **probability of conflicts**
  
* Provide an opportunity for **involvement in norms** elaboration and coordination

* Formal channels with **clear rules of the game**
  
  * Provides **legitimate means** for governments to influence the landscape
  
* Manage **substantive operations**

* **Pooling** of resources
 
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# Institutionalizing international trade

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* In 1930, the United States passed a tariff law: **The Smoot-Hawley Act**:

* Tariff rates rose steeply for over** 20,000 imported goods** and **U.S. trade fell sharply**
  
* Initial attempts to reduce tariff rates were undertaken through bilateral trade negotiations **(Reciprocal Trade Agreements Act of 1934)**:

* U.S. offered to lower tariffs on some imports if another country would lower its tariffs on some U.S. exports

**Bilateral negotiations**, however, do not take full advantage of international coordination: Benefits can “spill over” to **countries that have not made any concessions**

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# Idea behind GATT/WTO, IMF, and IBRD/World Bank

* Following the end of WWII, the United States and allies decided that a **prosperous and lasting peace** depends on a **stable international order** based on principles embedded in the United Nations (UN) charter, but also on the creation of a stable liberal international order

* Pillars of the **liberal economic order**:

* The ‘Sisters’: The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBDR) (to become the World Bank)

* An international trading system built on free trade principles to replace protectionism and nationalism.

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# A typology of trade agreements

- Multilateral agreements

- Regional Trade Agreements

- Preferential Trade Agreements: Bilateral and Plurilateral Treaties

- Custom Unions

- Free Trade Areas

- Monetary Unions

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# A typology of trade agreements

- **Modern RTAs**, and not exclusively those linking the most developed economies, tend to go far beyond tariff-cutting exercises. They provide for increasingly complexregulations   governing   intra-trade   (e.g.   with   respect   to   standards,   safeguard provisions,   customs   administration,   etc.)   and   they   often   also   provide   for   a preferential regulatory framework for mutual services trade.The  most  sophisticated  RTAs  go  beyond  traditional  trade  policy  mechanisms,  to include regional rules on investment, competition, environment and labor.

- **Free Trade Area:** Trade within the group is duty free but members set their own tariffs on imports from non-members (e.g. NAFTA).

- **Customs Union:** Members apply a common external tariff (e.g. the European Union).

- **Monetary union:** e.g. the Economic and Montary Union.

- **Preferential Trade Agreement:** Unilateral trade preferences given to a group of countries, normally from Developed to Developing Nations (e.g. ACP)

- **GSP:** Generalized System of Preferences — programs by developed countries granting preferential tariffs to imports from developing countries.

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# A typology of trade agreements

- **Free-rider:**  A casual term used to infer that a country which does not make any trade concessions, profits, nonetheless, from tariff cuts and concessions made by other countries in negotiations under the most-favored-nation principle

- **Rules of origin:**  Laws, regulations and administrative procedures which determine a product’s country of origin. A decision by a customs authority on origin can determine whether a shipment falls within a quota limitation, qualifies for a tariff preference or is affected by an anti-dumping duty. These rules can vary from country to country. See also NTBs (non-tariff barriers, technical and non-techincal).

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# Regional Economic Integration

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# Guiding Principles of GATT/WTO

- Most Favored Nation (MFN)
  + Any preferential treatment offered to one member country must be extended to all other members
  + Members can extend MFN to non-members
- National treatment
- Generalized System of Preferences (GSP)
  + For Less Developed Countries, to give them a chance to develop their economy
- Exceptions for regional arrangements (such as EU, NAFTA):
  + Nested within the WTO: given precedence when recognized

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# WTO and Regional Arrangements

WTO Members are permitted to enter into such arrangements under specific conditions which are spelled out in three sets of rules:

* Paragraphs 4 to 10 of article XXIV of GATT concerning the formation and operation of customs unions and free-trade areas covering trade in goods;
* The Enabling Clause fore preferential trade arrangements in trade in goods between developing country members;
* Article V of GATS to govern the conclusion of RTAs in the area of trade in services for both developed and developing countries.

> “When a WTO member enters into a regional integration arrangement through which it grants more favourable conditions to its trade with other parties to that arrangement than to other WTO members’ trade, it departs from the guiding principle of non- discrimination defined in Article I of GATT, Article II of GATS, and elsewhere.”

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# Theories of regional integration

> Regional economic integration is a process in which two or more countries agree to eliminate economic barriers, with the end goal of enhancing productivity and achieving greater economic interdependence.

#### The first notions

> Regional integration reveals both the renewal of the question of the nation-state in a context of globalization and the diversity of state structures at the global level.

> This renewal of regionalism in the context of globalization has led to an analytical renewal.

Contrary to this concept of the 1950s - archetypal theories of the customs union (Viner, Meade) - regional integration does not only concern trade:

> it concerns **capital flows** and **labour flows**, the establishment of a **common institutional environment** or **policy coordination** allowing **the convergence of economies** and **the anchoring of economic policies**.

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# Theories of regional integration

The analysis of regionalisation is renewed:

- within the framework of **institutional economics** with emphasis on **the role of organisations and rules**,

- the new **economic geography** or

- the **new international economy with imperfect competition** and

- **international political economy**.

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# Theories of regional integration

> The regional space is thus a place for the reconstruction of public and private authorities and the strategies of national and international players in a context of globalisation.

#### New concepts

- Several conceptions emerge:

1. Traditional: state-planned integration (statist approach) versus market integration (liberal approach)

2. New: integration linked to rules (institutional approach), integration induced by asymmetric actors linked to territorial dynamics (geographical approach) and political integration (see table).

| Traditional approaches | New approaches 
|-----------------------------|---------------------------------|
| Liberal approach (1) | Geographic approach (3) | 
| Statist Approach (2) | Institutional Approach (4) | 
| | Political approach (5) |

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# Theories of regional integration

- Trade integration is equated with the liberalization of trade and factors of production; it is analyzed in terms of overall integration.

- Integration means reducing distortions in national policies and bringing national borders closer to the international market.

- Regional integration is a process of disconnection aimed at protecting economies from globalization.

- It involves protection, land use planning policies and the construction of a productive system more or less disconnected from the world price system.

- Productive integration is the result of **internalization relationships within transnational firms or networks**.

- It is provided by conglomerates that deploy their strategies in a regional space. It leads to a regional division of labour.

- Integration is characterized by ** agglomeration and polarization effects**.

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# Theories of regional integration

- Integration is the establishment of a **common system of rules** on the part of public authorities vis-à-vis private players.

- The institutions are waiting for systems that will allow for the convergence of agents' expectations. They stabilize and secure the environment, allowing **credibility**.

- Regional integration translates into **transfers of sovereignty** and conflict prevention objectives.

- The convergence of economic interests is a means of overcoming political rivalries and antagonisms. Transfers of sovereignty and the production of public goods at the regional level are a response to the overflow of States in the context of globalization (creation of a regional currency for example).

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# Theories of regional integration

Regionalization comes in many forms:

- **Economic union**: coordination of economic or social policies

- **Regional cooperation**: cooperation projects set up by stakeholders

- **Market integration**: economic convergence

- **Specific integration/value chains**: international relations within networks or companies

- **Industrial clusters**: agglomeration effects and interconnection infrastructures within transnational territories

- **Institutional integration**: rule-making or transfer of sovereignty with institutional structures

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# Theories of regional integration

### Trends

- The regional space is one of the scales of regulation of the world economy.

- For some, regionalization is a reaction to the unifying and homogenizing trend that accompanies the dynamics of globalization.

- For others, it appears to be a necessary condition for integration into the globalization movement, a means of harmonizing standards and leading to multilateral liberalization and a guarantee against the risk of marginalization.

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# Theories of regional integration

### The question of multilateralism versus bilateralism

Clearly, regionalization raises the question of multilateralism versus bilateralism (again).

- The constitution of a limited number of integrated zones can promote the consensus necessary for multilateralism. Regional agreements are therefore often preconditions for multilateralism (the NAFTA philosophy).

- Another debate concerns the form of multilateralism. Should regional relations be diluted into more or less universal multilateralism or should cooperative multilateralism be implemented?

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# Theories of regional integration

### The different types of regional agreements

#### Features

Regionalization in developing economies is characterized by :

- an intensification of trade flows with the removal of internal barriers (free trade area);

- a common external tariff (customs union); and

- factor mobility (common market).

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# Theories of regional integration

#### In the real world

The actual configurations and processes do not correspond exactly to this typology.

- For example, NAFTA liberalized the movement of capital, but not the movement of labour.

- European Union

- Association of Southeast Asian Nations (ASEAN) [[html](https://en.wikipedia.org/wiki/Association_of_Southeast_Asian_Nations)]

- Common Market for Eastern and Southern Africa (COMESA) [[html](https://en.wikipedia.org/wiki/Common_Market_for_Eastern_and_Southern_Africa)]

- Mercosur [[html](https://en.wikipedia.org/wiki/Mercosur)]

- Commonwealth of Independent States (CIS) [[html](https://en.wikipedia.org/wiki/Commonwealth_of_Independent_States)]

- CPTPP [[html]](https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/about_cptpp-propos_ptpgp.aspx?lang=eng)

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# Evolution of RTAs in the World, 1948-2016

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# Financial Integration

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# Number of Banking and Currency Crises, 1950-2014

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# International Monetary Fund (IMF)

**The Gold Standard (1870-1914)**

* Gold as Common denominator

* Currencies pegged to gold

* Incentivized surpluses in gold

*Excessive printing of currency for war efforts Great depression and competitive devaluation to boost exports*

**Bretton Woods System (1944-1973)**

* US dollars new common denominator, convertible to $35 ounce of gold

* US(then):70% of global GDP, trade surplus, high productivity

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# International Monetary Fund (IMF)

**Post-Bretton Woods (1973 – present)**

* Increase in US money supply by Lyndon Johnson

* US ran trade deficit in 1971, but US obligated to $35 per ounce of gold, so rush on putting gold into foreign central banks

* Other countries increased productivity

* May 1971 Germany allowed its currency to float

* Now: No common denominator; diversity of exchange rates

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# International Monetary Fund (IMF)

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# International Monetary Fund (IMF)

* Financial intermediary between countries:

* Each country contributes funds to a pool through a quota system from which countries with payment imbalances can borrow
  
* Provide loans to stabilize financial systems in difficulties

* E.g. PIGS during financial crisis

>  Works to “foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world”

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# World Bank

* International Financial institution that provides loans to developing countries for capital programs

* Comprises two institutions:

* The International Bank for Reconstruction and Development (IBRD)
  
  * The International Development Association (IDA)
  
* Two main objectives:

* To reduce at 3% the proportion of individuals living with less than $1,25 a day by
2030

* To favor, in each country, income growth for the bottom 40%

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# Membership in the IMF/WB

* Open to any country willing to agree to rules and regulations

* 190 member countries as of 2021

* Membership requires payment of a quota.

* Quota size reflects global importance of country’s economy and political considerations.

The quota:

1. determines voting power

2. serves as part of official reserves 3.determines country’s borrowing power

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# Number of Member Countries, 1945-2015

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# A Weighted Voting System

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# Incidence of IMF Programs, 1945-2015

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# Program Incidence, 1950-2014

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# Lending Volume, 1950-2014

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# IMF Programs Becoming Bigger, 1960-2014

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# Long-Term Effects

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# More Recently...

**Iceland**

* IMF support in 2008 in exchange for austerity measures including a 30% decrease in funding to the health care system

* Refusal of the measures and debt reductions

* Debt repayment as of 2012 and economic growth since then

**Greece**

* IMF support in 2010 in exchange for the privatization of state-owned enterprises and infrastructures, and reduction of the budgets allocated to social programs

* Application of the plan and departure of firms

* New requests for help; was still in a state of crisis in 2015, but improving

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# Total Arrears to the IMF 1984-2014 and Greek Loans

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# The Largest IMF Programs

Source : Reinhart et al. (2016)

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# Evolution of IMF Mission

Source : Reinhart et al. (2016)

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# Challenges

* Surveillance:

* New mission to stabilize the markets
  
  * Could not predict the 2008-2009 crisis
  
* Conditionality

* Conflict between governments and IMF
  
* Crisis management in the case of sovereign debt

* How to determine the solvency of a country
  
* Reforms:

* How to make the IMF impartial