Notes in Trade and Development

Is there an optimal FVA share good for growth?

The rise of global value chains (GVCs) is one of the most important developments in international trade in the last few decades. Following this, developing economies ranging from Africa to Asia are actively pursuing policies to position themselves to attach their production activities to GVCs. It is now well established that integrating in the GVCs is critical to their economic growth prospects. However, there is a debate on the nature and extent of this engagement and its implications on export performance growth and the dynamic gains from trade. Often, there is a tendency to associate higher crude GVC participation (fva and dva) with increasing growth and development outcomes from trade. This could be misleading, however. For example, a simple look of the gross GVC participation of many African countries is very similar to even the best performing East and South Asian economies with relatively more advanced manufacturing. While a predominant share of the GVC participation for many African countries is driven by their indirect value addition of natural resources to other countries’ exports. This calls for extreme caution in associating higher GVC participation with better performance.

Even if we ignore the natural resource rich economies, there is another debate on what level of FVA content is good r optimal to foster growth and reinforce the dynamic gains that we often associate with exports and trade. Though this could vary across sectors (food, textile, machinery, services, etc.), it poses an important question. Economies such as China and South Korea have clearly defined increasing the FVA content of exports and continuous upgrading as the ultimate goal of their national economic strategies. On the other hand, there is a good amount of literature that highlights the importance of importing intermediate inputs in either productivity or export performance and hence growth of economies. This suggests that there could be some optimal, “not too high, not too low” (with some range) FVA content of exports that is conducive to promote growth and enable reaping the dynamic gains from such trade.

I am working on a very small paper on identifying this optimal FVA content
in exports across sectors by examining the historical trends of FVA content of exports in economies across the development spectrum. This may provide insights into policy for newly developing economies on whether, for example, the share of the FVA content of their textile exports is too high or too low, either to promote gains or restrict the benefits from trade.