Mr. James Zhan, Director, Division on Investment and Enterprise, UNCTAD
These comments came as the Trade and Development Board spent the afternoon looking at investment for development, with a focus on global value chains and development. Among the panellists were government ministers from Myanmar and Tunisia.
Introducing the afternoon's debate, Trade and Development Board President Triyono Wibowo (Indonesia) said: "Today's global economy is characterized by the fragmentation of production processes and the international dispersion of tasks and activities. This had led to the emergence of 'borderless' production systems commonly referred to as global value chains."
"The development contribution of global value chains can be significant," Ambassador Wibowo told the meeting, "but they also carry risks… Sound policies are needed to maximize the benefits."
UNCTAD's World Investment Report 2013, published in June, formed the basis of the discussion.
UNCTAD Deputy Secretary-General Petko Draganov, reviewing the report's findings, said that global foreign direct investment (FDI) had declined during 2012 by 18 per cent. Global FDI flows this year were expected to remain stable at around $1.45 trillion. But there were hopeful signs for the future, based in part on the fact that FDI flows to developing countries continued to be solid, accounting for more than 50 per cent of total FDI for the first time in 2012.
"As macroeconomic conditions improve and investors regain confidence in the medium term, TNCs may convert the record levels of cash holdings they are sitting on into new investments," Mr. Draganov said. Developing countries, if they set up effective policies to encourage FDI, may reap a great deal of that potential bonanza.
James Zhan, Director of UNCTAD's Division on Investment and Enterprise, reviewed the World Investment Report's analysis of global value chains (GVCs). "Climbing the GVC development ladder implies not only increasing GVC participation and increasing domestic value added in exports," he said. "It also means moving into activities that can provide more development value added, and increasing participation in more sophisticated GVCs: going from resource-based activities to low-, medium-, and high-tech activities, to knowledge-based activities such as design, innovation, research and development (R&D), marketing, and branding."
Raising an economy up the value chain requires that governments pay attention to how TNCs invest and what kind of GVC policies are formulated, he said. The contribution to economic growth and national production capacities "can be limited if countries capture only a small share of the value added created in the chain," while the more profit-heavy processing of products takes place elsewhere. "Technology dissemination, skill-building and upgrading are not automatic." There is a risk, Mr. Zhan said, that developing countries will remain "locked into relatively low value-added activities" and that such activities may have negative environmental or social effects depending on working conditions, occupational safety and health, and job security or lack of it.
"Countries need to make a strategic choice on whether or not to promote GVCs," he told the meeting. "They need to carefully weigh the pros and cons and the costs and benefits of proactive policies to promote GVCs." "It is also vital to have GVC-led development strategies that fit specific national situations," Mr. Zhan said.
Kan Zaw, Union Minister for National Planning and Economic Development of Myanmar, said that his country's new government has carried out four significant areas of reform since assuming office 30 months ago: political reform and national reconciliation; economic and social reforms; public administrative reforms; and private sector development reforms. A National Comprehensive Development Plan is being formulated. The country is eager to participate in GVCs and has high expectations, while also realizing that engaging in the process raises potential vulnerabilities.
Social and economic disparities are widening among Member States of the Association of South-East Asian Nations (ASEAN), the Minister said. "The priority is to narrow development gaps through enhanced regional integration and connectivity, while promoting inclusive and sustainable development." He said that Myanmar had carried out a series of trade-facilitation activities with a view to achieving sustainable economic growth, and that it had long valued the role and potential of FDI. Myanmar was currently revising its laws on special economic zones "to facilitate reform platforms that can overcome infrastructure bottlenecks, attract FDI, and lead to increased exports," he said.
Lamine Doghri, Minister of Development and International Cooperation of Tunisia, told the meeting that GVCs were at the heart of current issues relating to investment and trade as engines for economic growth. The global economic crisis and its fallout threatened to have negative impacts on the Tunisian economy, and it was clear that Tunisia and other developing countries had a strong need for policies that would provide investment that served national interests and led to sustainable economic progress. Mr. Doghri said: "A better integration of Tunisia into the regional and global economies, and its effective participation in TNCs, will help the country to advance its productive systems."
The current economic growth rate of the country was about 3 per cent. "We need to do more," the Minister told the meeting. "We hope to add several percentage points to that figure." The first year following the Arab Spring revolution had seen negative growth, but since then the situation had improved. Unemployment remained a problem - currently at just under 16 per cent overall, and around 30 per cent among young people. "Currently there is no choice other than joining global value chains," the Minister said. He added that the Government was eager for information on how to carry out the process effectively, avoid the risks associated with GVCs, and link the national transition to economic changes that would attract investment and create jobs.
Chris Brett, Vice-President of Olam International, said that the firm, which manages supply chains of agricultural raw materials for global value chains, had grown from a startup in 1989 to a company with 21 products and operations in 65 countries. Challenges for developing countries, and the world as a whole, included questions of sustainability: currently there was a growing population, increasing food consumption per capita as incomes rose, a broad dietary shift to protein- and fat-rich diets, rapid urbanization resulting in higher per capita consumption, and a growing use of biofuels, competing - with regard to agricultural land use - with food supplies. In addition, declines were apparent in agricultural productivity, arable land, and water resources. And then there were also challenges related to urbanization and climate change.
Oslam had launched a broad effort to achieve sustainability in its global value chain, incorporating production from 330,000 growers including small-scale farmers, improved efficiencies in shipping, sustainable stewardship of land and agricultural communities, purchasing systems that more efficiently connected smallholder farmers to the firm's global value chain, and efforts to manage processing and policies so that they incorporated the firm's sustainability standard, Mr. Brett said.
John Humphrey, Professor at the United Kingdom's Institute of Development Studies, told the meeting that research had shown that countries with rapidly growing GVC participation achieved faster economic growth than did other countries. Furthermore, GVC participation and a rising import content of goods that were later exported was not harmful to employment creation. Developing countries seeking entry and greater participation in value chains should find businesses that knew how to succeed, attract them, and take steps to channel FDI to them, Professor Humphrey said. They should also bring in experts to provide advice, and should be supportive of the domestic business environment.
Key ingredients for climbing value chains included an educated labour force and effective infrastructure for the movement of goods. Supportive infrastructure meant not only physical facilities, but also institutions and support services, Professor Humphrey said. Developing countries should also enact policies that eased the movement of people and had enough flexibility to take advantage of new opportunities. Entry into value chains "does not guarantee success," he warned; situations could change quickly based on competitive markets and investor choices. He recommended that governments work to develop local supporting industries, and strive to minimize risks by following global trends closely and by diversifying exports.