Double-edged sword for poor countries

Kleinderproduktion in Pnom Penh, Kambodscha, für GAP-Kleiderläden in Europa und Nordamerika.
Article as analysis

«Made in the world» – former Director-General of the World Trade Organization (WTO) Pascal Lamy used this slogan in an attempt to make clear that today, most products are manufactured in several countries. Inscriptions and labels like «Made in Bangladesh» or «Made in China» are misleading, as they only give information about where a product was finished or assembled, even if its components have crossed countless borders prior to that. Cross-border intermediate products account for two-thirds of world trade and as much as 70% when it comes to services. Although these global value chains (GVCs) contribute to energy waste and global warming, they are now an integral part of international trade. The question remains as to how the poorest countries can fit into and benefit from this system.

The topic was addressed in a study commissioned by the International Centre for Trade and Sustainable Development (ICSTD), Alliance Sud and the Overseas Development Institute. The central question was: Are GVCs good or bad for the least developed countries? The answer is a mixed one. For some of the authors, the fragmentation of production is in part responsible for placing the poorer countries at the end of the chain, where the simplest and lowest paid work is done. At the other end is marketing, which is controlled by multinational corporations and investors, as every value chain is hierarchical in structure. Other authors disagree, arguing that the fragmentation of production creates new opportunities for the poorest countries, enabling them to become involved in new, modern export sectors by specializing in a limited number of tasks without having to master a production process from beginning to end.

The poorest are still ultimately the losers, for their production is limited to sectors with little potential for generating added value. The base products in which they specialize attract relatively few customers, and this diminishes their power in the production chain; they cannot properly respond to high demand, they lack the logistics for attracting investors, as well as the expertise for influencing negotiations on international trade rules to their benefit. Finally, the poorest countries often trade with the same partners that are their development aid donors, a factor that could well perpetuate the power imbalance.

Cut flowers, textiles…

Yet there are examples showing that least developed countries also benefit from globalized trade. Since the mid-90s, Dutch investors have been producing cut flowers in Ethiopia with the support of Dutch development cooperation. This is admittedly a one-sided dependence, but in the EU, Ethiopia has come to occupy second place – behind Kenya – amongst non-European producers of cut flowers. The donors and Government have also been instrumental in building up this industry through training and compliance with quality standards.

In Cambodia's textile industry, multilateral organizations have focussed their efforts on meeting the standards of the International Labour Organization (ILO). As a result, the country still managed to carve out a niche for itself despite competition from other Asian countries. Yet it was not strong enough to move up the value chain and generate greater added value. Cambodia remains dependent on mainly Asian investors, locked into value chains which are not only very hierarchical, but also strongly buyer-dominated. The only tasks remaining to the country are therefore cutting and sewing.

The picture is different in Lesotho, where there are major differences between Asian (mainly Taiwanese) and South African investors. Both are in the country to take advantage of preferential treatment on the U.S. and South African markets, though the South Africans are of greater benefit to their small African neighbour. For not only does South Africa have tailoring done in Lesotho, its companies have also partly outsourced their more sophisticated management functions to Lesotho as it is cheaper and labour laws are less rigid than in their own country. And because the South African textile industry does not invest elsewhere, it will not be withdrawing its production from Lesotho at the slightest tightening of its laws. But for as long as Lesotho fails to diversify its production, the country remains highly vulnerable to low-cost competition from China, Vietnam, Cambodia and Bangladesh.

…and tourism

Anyone in Europe who books a trip to Tanzania can assume that 40% of the cost (including flights) of a Kilimanjaro excursion, and 55% of that of a safari in the north goes to Tanzania. «Sure, one might object that Tanzanian gets only about half the money spent. But compared with other products such as coffee, that is already substantial. Every tourist dollar spent on a package tour benefits the country and its people three times as much as the dollar paid for a bag of Tanzanian coffee in Europe,» say the authors of the study.

To help the least developed countries move up globalized production chains, their production capacity must be improved first and foremost through knowledge and technology transfer and by improving logistics and transport. And because trading costs are much higher in poor countries than in rich ones, trade facilitation can also play a major role. For the sub-Saharan African countries, harmonizing, simplifying and automating business procedures would have the greatest impact. The current WTO negotiations on trade facilitation could help here, provided that industrialized countries are also ready to provide developing countries with technical and financial assistance in the complex and costly implementation of such measures.